If you are worried about the Israel-Iraq war causing a third oil shock and sending your portfolio to the junk yard, you can rest easy.

Only a few Israeli attacks targeted Iranian oil facilities. It helps that there is a global oil glut and widespread tax-subsidized overproduction. The Strait of Hormuz remains open, which I used to regularly fly over to watch the last tanker war back in the 1980s.

Last year, Iran produced 3.3 million barrels a day, nearly all of which went to China. Are we really sweating over China’s oil supply? But the American price of gasoline will rise, nonetheless. The US oil industry never wastes a war. At my local Chevron station, the price has already risen to $5.09 a gallon, up a buck on the week. It seems that gas station owners read the newspapers, too.

For now, it’s buy oil, sell equities. I had already written trade alerts to buy ExxonMobile (XOM) and Occidental Petroleum (OXY), but the Israelis beat me to the punch by a day. Up 40% on the year, I have no need to chase dubious and late trades.

If anyone doubted that insider trading was going on these days, look no further than the oil futures market, which began a dramatic rise on Monday and accelerated every day as rumors of an impending attack spread. Whether these are Israeli speculators or the home-grown variety is anyone’s guess.

Texas tea is now an impressive $17, or 30% off the May bottom. And it was climbing a wall of short positions in oil all the way, making the ascent even easier. There has been no actual disruption of supplies….yet. It is pure speculation that has taken oil prices northward.

If this does broaden out to a wider regional war, there will be consequences. Oil prices will soar to $100 or better. It will deepen the recession in the US, cause inflation to catch on fire, and send the S&P 500 back to 4,800 or lower. During the last oil shock in 1979, the US entered a three-year recession, inflation rose to 14%, and stocks fell 30%.

China will be the worst affected, which imports almost all of its oil. The US has, in fact, been weaning itself off Middle Eastern oil for decades and actually became energy independent on paper in 2015. However, specific Saudi oil types paired with matched US refiners will be hit, so there will be some disruption. A big recurring factor will be shipping insurance, which in the past has risen by 400% on these occasions.

Saudi Arabia now has a 746-mile East-West pipeline built in 1982 just for this contingency. It can carry 5 million barrels a day and 4 million barrels a day of excess production capacity to fill it. We didn’t have this during the last oil shock in 1979.

And in any case, the US is far less reliant on crude than it used to be. Barrels of oil per unit of GDP have been falling for 25 years. A new Lincoln Continental gets 25 miles per gallon instead of just eight.

A new Middle Eastern war DID renew the bid for gold and prompted me to double up my long position once again. I was looking at the gold and oil markets Friday morning and thought, “Gee, do I really want to buy oil up here”? The barbarous relic won out.

Emerging market central banks have been buying a massive 1,000 metric tonnes a year of the yellow metal as a US dollar alternative, and they are bound to continue. And gold loves uncertainty, which we have gobs of these days. It is the new “feel-good” investment.

The timing of the Israeli attack was interesting from another point of view. Ridiculously overbought stocks were just starting to roll over and were searching for a reason to fall. It’s now buy oil and sell equities. Is it possible that Tel Aviv has a technical analyst on staff?

If they don’t, they should.

With uncertainty reigning supreme and rising by the day, it’s looking like we may be stuck in a range for the rest of the year, from $5,500 for the ($SPX) on the low side to $6,500 on the high side. If we are lucky, we might get low single-digit returns for the year. It’s not the two back-to-back 20% years we saw in 2023-2024. But bull markets don’t live forever. The tough row to hoe is that’s all we might get for the next four years.

With the Volatility Index now well under $20, the easy money has been made this year. I increasingly feel like we are having to take increasing amounts of risk to achieve ever smaller returns. So I am going to shrink my book down to a minimum with the June 20 option expiration on Friday this week. After that, I’ll be waiting for the slow pitches to come to me.

By the way, the best way to strike out Babe Ruth was with a slow pitch (a great baseball player for you foreigners).

It was a good week for the Mad Hedge Fund Trader. My June performance raced up to +11.20%, taking us to new all-time highs on all metrics. That takes us to a year-to-date profit of +40.89%. My trailing one-year return exploded to a record +98.01%. That takes my average annualized return to +51.69%, the first time I‘ve hit the $51 handle ever, and my performance since inception to +792.18%.

It has been another tumultuous week. I took profits in long positions in (TSLA) and “RISK OFF” positions in (QQQ), (TLT), and (GLD). I added a new long in (BA) and rolled forward my “RISK OFF” position in (GLD) up and out. Some 17 of my last 18 positions have been profitable.

Some 63 of my 70 round trips in 2023, or 90%, were profitable. Some 74 of 94 trades were profitable in 2024, and several of those losses were really break-even. That is a success rate of +78.72%.

Try beating that anywhere.

Israel Attack on Iran Knocks Stocks, but not much. At the worst, the Dow Average was down 700 points. The big surprise was that bonds sold off as well in the wake of a successful 30-year auction yesterday. The weakness will continue as long as Israel continues to attack.

The First Half of 2025 is a Write-Off, with zero return on stocks. Of the 500 stocks in the S&P, 279 are up and 231 are up more than the Index. That is, unless you are a European or Japanese investor, where US stocks are still down 20% because of the collapse of the US dollar (FXY), (FXE), (FXB). Whole sectors of the US economy have been demolished, along with their stocks, including retailers, big pharma, energy, oil service, health care, utilities, railroads, overnight delivery, and consumer discretionary.

Oil prices Get a Rare Boost from the Israel Attack, up 8%. The U.S. said on Wednesday that personnel were being moved out of the Middle East because “it could be a dangerous place”, as the Iran nuclear talks stalled. Clearly, the US had advance notice of the attack. Non-essential personnel were sent home from the Baghdad embassy. Inflation is expected to accelerate in the coming months, prompted by America’s trade war.

Government Spending Hit a New All-Time High in May. Increased spending on Medicare and Homeland Security was a big factor. After running a short-lived surplus in April thanks to tax season receipts, the deficit totaled just more than $316 billion for the month, taking the year-to-date total to $1.36 trillion. The defect is now 14% higher than a year ago.

Tariff Revenues Hit New All-Time High, at $23 billion in May, up 60% YOY. US customs duties climbed to a record in May, helping shrink the budget deficit for the month, while doubts remain about the persistence of the inflows as the administration negotiates with trading partners and faces a judicial challenge over its levies.

The Core Inflation Rate Comes in Light, up 0.1% MOM in May to 2.4%. Food prices were up 0.3%. The report from the Labor Department on Wednesday also showed underlying price pressures muted last month. Economists say inflation has been slow to respond to sweeping tariffs, as most retailers are still selling merchandise accumulated before the import duties took effect. Next month’s report for June should show the first impact of tariffs.

Assets held in crypto funds hit a record high in May, as easing trade tensions lifted risk appetite and some investors used the digital currencies to hedge against market volatility and diversify from their U.S. holdings. Morningstar data on 294 crypto funds shows they attracted $7.05 billion in net inflows last month, the highest since December, bringing total assets under management to a record $167 billion.

Boeing (BA) heads into the Paris Air Show after booking 300 new orders and rolling out 38 new 737 MAX jets, a production rate it has been working to reach for more than a year. The company also delivered 45 aircraft last month. It was the sixth-highest monthly order tally in Boeing’s history, according to company data.

The orders included the largest widebody jet deal in Boeing’s history. A massive Qatar Airways order accounted for 130 Boeing 787s and 30 Boeing 777Xs, plus options for another 50 of the long-haul aircraft. It looks like the turnaround is here.

Market Volatility is Collapsing, with the Volatility Index ($VIX) down to the $16 handle, predicting a flat summer for equities. Implied volatilities for options are also in free fall, with Tesla options down from 85% to 55% over the weekend. That would give stocks a zero return for the year through September for 2025. Good thing we coined it when volatility was at extremes.

Administration Proposes 20% Withholding Tax on Foreign Corporations doing business in the US. The House Bill, known as Section 899, would allow the U.S. to add a new tax of up to 20% on foreigners with U.S. investments, including multinational companies operating in the U.S..  Some analysts call the provision a “revenge tax” due to its wording. It would apply to foreign entities if their home country imposes “unfair foreign taxes” against U.S. companies, which is virtually everyone. I can’t think of a better way to scare foreign investment away from the US.

Tesla is the Worst-Performing Large-Cap Stock this Year, suffering a $380 billion capital loss. Elon Musk’s personal hit was $75 billion. You can thank declining electric vehicle demand, Musk’s political controversies over his ties to far-right groups, and a very public feud with the president.  I made a killing covering my Tesla shorts. I then used triple-digit option implied volatility to go cautiously long through $100 extremely deep in-the-money spreads. Tesla isn’t going to zero.

My Ten-Year View – A Reassessment

On Monday, June 16, at 8:30 AM, the New York Empire State Manufacturing Index is printed.

On Tuesday, June 17, at 7:30 AM, the Retail Sales are announced.

On Wednesday, June 18, at 1:00 PM, we get the Fed Interest Rate Decision. We also get the Housing Starts and Building Permits, and Weekly Jobless Claims.

On Thursday, June 19, is a National Holiday, Juneteenth, and all financial markets are closed. This is the first time Juneteenth is a national holiday.

On Friday, June 20, at 7:30 AM, we get the Philadelphia Fed Manufacturing Index. At 1:00 PM, the Baker Hughes Rig Count is published.

As for me, during the late 1980s, the demand for Japanese bonds with attached equity warrants was absolutely exploding.

Japan was Number One, the engine of technological innovation. Everyone in the world owned a Sony Walkman. They were trouncing the United States with 45% of its car market.

The most conservative estimate for the Nikkei Average for the end of 1990 was 50,000, or up 27%. The high end was at 100,000. Why not? After all, the Nikkei had just risen tenfold in ten years, and the Japanese yen had tripled in value.

In 1989, my last full year at Morgan Stanley, the Japanese warrant trading desk accounted for 80% of the firm’s total equity division profits.

The deals were coming hot and heavy. Since Morgan Stanley had the largest Japanese warrant trading operation in London, a creation of my own, we were invited to join so many deals that the firm ran out of staff to attend the signings.

Since I was the head of trading, I thought it odd that the head of investment banking wanted to speak to me. It turned out that Morgan Stanley was co-managing two monster $3 billion bond deals on the same day. Could I handle the second one? Our commission for the underwritings was $10 million for each deal!

I thought, why not? Better to see how the other half lived. So, I said “yes.”

The attorneys showed up minutes later. I was given a power of attorney to sign on behalf of the entire firm and commit our capital to the underwriting $3 billion, five-year bond issue for the Industrial Bank of Japan. The deal was especially attractive as the bonds carried attached put options on the Nikkei, which institutional investors could buy to hedge their Japanese stock portfolios.

Since the Industrial Bank of Japan thought the stock market would never see a substantial fall, they happily sold short the put options. Only the Industrial Bank of Japan could have pulled this off, as it was one of the largest and highest-rated banks in Japan. I knew the CEO well.

It turned out that there was a lot more to a deal signing than I thought, as it was done in the traditional British style. We met at the lead manager’s office in the City of London in an elegant wood-paneled private dining room filled with classic 18th-century furniture.

First, there was a strong gin and tonic which you could have lit with a match. A five-course meal accompanied by a 1977 deep Pouilly-Fusé white and a 1952 Bordeaux red with authority. I had my choice of elegant desserts. Sherry and a 50-year-old port followed, along with Cuban cigars, which was a problem since I had just quit smoking (my wife recently bore twins).

The British were used to these practices. Any American banker would have been left staggering, as drinking during business hours back then was illegal in New York.

Then out came the paperwork. I signed with my usual flourish, and the rest of the managers followed. The Industrial Bank of Japan provided the Dom Perignon as they were about to receive $3 billion in cash the following week.

Then an unpleasant thought arose in the back of my mind. Morgan Stanley assumed the complete liability for their share of the deal. But did I just incur a massive personal liability as well?

Then I thought, naw, why pee on someone’s parade? Morgan Stanley’s been doing this for 50 years. Certainly, they knew what they were doing.

Besides, the Japanese stock market is going up forever, right? No harm, no foul. In any case, I left Morgan Stanley to start my own hedge fund a few months later.

Some seven months later, one of the greatest stock market crashes of all time began. The Nikkei fell 50% in six months and 85% in 20 years. Some 32 years later, the Nikkei still hasn’t recovered its old high.

For a few years, that little voice in the back of my mind recurred. The bonds issued by the Industrial Bank of Japan fell by half in months due to rocketing credit concerns. The IBJ’s naked short position in the Nikkei puts completely blew up, costing the bank $10 billion. The Bank almost went bankrupt. It was one of the worst-timed deals in the history of finance. The investors were burned big time.

Did I ever hear about the deal I signed again? Did process servers show up at my front door in London with a giant lawsuit? Did Scotland Yard chase me down with an arrest warrant?

Nope, nothing, nada, bupkis. I never heard a peep from anyone. It turns out you CAN lose $12 billion worth of other people’s money and face absolutely no consequences whatsoever.

Welcome to Wall Street.

Still, when the five-year maturity of the bonds passed, I breathed a sigh of relief.

My hedge fund got involved in buying Japanese equity warrants, selling short the underlying stock, creating massive short positions with a risk-free 40% guaranteed return. My investors loved the 1,000% profit I eventually brought in doing this.

Unlike most managers, I insisted on physical delivery of the warrant certificates, as the creditworthiness of anyone still left in the business was highly suspect. Other managers who took physical delivery used their warrants to wallpaper their bathrooms (really).

They all expired worthless. I made fortunes shorting the stock, and still have the warrants today by the thousands (see photo below).

In September 2000, the Industrial Bank of Japan, with its shares down 90%, merged with the Dai-Ichi Kangyō Bank and Fuji Bank to form the Mizuho Financial Group. It was a last-ditch effort to save the Japanese financial system after ten years of recession.

Morgan Stanley shut down their worldwide Japanese equity warrant trading desk, losing about $20 million and laying off 200. Some staff were outright abandoned as far away as Hong Kong. Morgan Stanley was not a good firm for running large losses, as I expected.

I learned a valuable trading lesson. The greater the certainty that people have that an investment will succeed, the more likely its failure. Think of it as Chaos Theory with a turbocharger.

But we sure had a good time while the Japanese equity warrant boom lasted.

Good Luck and Good Trading,

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