“Warren and I hated railroad stocks for decades, but the world changed and finally the country had four huge railroads of vital importance to the American economy. We were slow to recognize the change, but better late than never,” said Warren Buffet partner, the 99-year-old Charlie Munger.
Global Market Comments
March 9, 2023
Fiat Lux
Featured Trade:
(THE MAD HEDGE TRADERS & INVESTORS SUMMIT IS ON MARCH 14-16)
(Trade Alert - (UNG) – BUY LEAPS)
CLICK HERE to download today's position sheet.
BUY the United States Natural Gas Fund (UNG) January 2025 $14-$15 deep out-of-the-money vertical Bull Call debit spread LEAPS at $0.25 or best
Opening Trade
3-9-2023
expiration date: January 17, 2025
Number of Contracts = 1 contract
Natural gas has just given up half of its recent gain today and is now down 14%. Forecasts of mild spring weather and falling demand are the reasons. So, I am diving back in.
Natural gas at one point fell some 80% since it peaked in June of 2022. It is now down so much that you have to buy it even if you hate it.
The much-predicted nuclear winter in Europe never showed. Instead, the continent enjoyed one of the warmest winters on record, with some ski resorts completely devoid of snow. To save Europe’s bacon, the US government ordered the diversion of dozens of natural gas carriers from China to Europe. The Middle East also ramped up its gas exports.
Now, we have recession fears. Storage in both Europe and the US is near all-time highs.
What happens next is that Covid burns out in China, allowing the economy to recover and sending the demand for natural gas through the roof. The Freeport McMoRan’s export facility in Quintana, TX that blew up a few months ago is coming back on stream.
That screeching sound you hear is natural gas wells being shut down, which happens every time we approach the $2.00 price in gas. That is sowing the seeds of the next shortage. That sets up an easy double for gas from here. While gas may not yet have hit its final bottom, it is close enough to do a trade here.
While the chance of winning a real lottery is something like a million to one, this one is more like 10:1 in your favor. And the payoff is 300% in little less than two years. That is the probability that (UNG) shares will rise over the next 23 months.
I have been through a half dozen energy cycles in my lifetime, and I can see another one starting up.
I am therefore buying the United States Natural Gas Fund (UNG) January 2025 $14-$15 deep out-of-the-money vertical Bull Call debit spread LEAPS at $0.25 or best.
Don’t pay more than $0.50 or you’ll be chasing on a risk/reward basis.
I think all carbon energy sources eventually go to zero over the next 20 years as they are replaced by alternatives, but we will have several doubles in price on the way there. This is one of those doubles.
But don’t ask me. I only drilled for natural gas in Texas and Colorado for five years in the late 1990s using a revolutionary new technology called “fracking.” I moved on after making a fortune, buying gas for $2 and selling it on for $6 or $7.
To learn more about the United States Natural Gas Fund (UNG), please click here.
Please note that these options are illiquid, and it may take some work to get in or out. Executing these trades is more an art than a science.
Let’s say the United States Natural Gas Fund (UNG) January 2025 $14-$15 deep out-of-the-money vertical Bull Call debit spread LEAPS are showing a bid/offer spread of $0.10-$0.90, which is typical.
Enter an order for one contract at $0.10, another for $0.20, another for $0.30, and so on. Eventually, you will enter a price that gets filled immediately. That is the real price. Then enter an order for your full position at that real price.
A lot of people ask me about the appropriate size. Remember, if the (UNG) does NOT rise by 85.9% in 23 months, the value of your investment goes to zero.
If by chance (UNG) rises quickly, which it might, you don’t have to wait the full two years. You can take profits at any time.
The way to play this is to buy LEAPS in ten different companies. If one out of ten increases ten times, you break even. If two of ten work, you double your money, and if only three of ten work you triple your money.
You never should have a position that is so big that you can’t sleep at night, or worse, need to call John Thomas asking if you should sell at a market bottom.
Keep in mind that (UNG) has a substantial “contango” of 35% to overcome. That means the futures one year out are selling at a 35% discount. So, gas has to rise by 35% in a year for you just to break even. The contango covers gas storage charges and the cost of carry for borrowed money.
Notice that the day-to-day volatility of LEAPS prices is miniscule since the time value is so great. This means that the day-to-day moves in your P&L will be small. It also means you can buy your position over the course of a month just entering new orders every day. I know this can be tedious but getting screwed by overpaying for a position is even more tedious.
Look at the math below and you will see that an 85.9% rise in (UNG) shares to $15 will generate a 300% profit with this position, such is the wonder of LEAPS. That gives you an implied leverage of 3.5:1 across the $14-$15 space.
I have done the math here for a single contract. You can adjust your size accordingly.
If you want to get much more aggressive on the natural gas trade, you can buy the ProShares Ultra Natural Gas ETF (BOIL), a 2X long leveraged ETF. Keep in mind that 2X ETFs have much higher costs, wider dealing spreads, and greater tracking error. This is really designed for short-term or even day trading. (BOIL) is down a staggering 97% from its June high.
Only use a limit order. DO NOT USE MARKET ORDERS UNDER ANY CIRCUMSTANCES. Just enter a limit order and work it.
This is a bet that the (UNG) will not fall below $15 by the January 17, 2025 options expiration in 23 months.
Here are the specific trades you need to execute this position:
Buy 1 January 2025 (UNG) $14 call at………….………$2.60
Sell short 1 January 2025 (UNG) $15 call at….………$2.35
Net Cost:………………………….………..………….....….....$0.25
Potential Profit: $1.00 - $0.25 = $0.75
(1 X 100 X $0.75) = $75, or 300% in 23 months
To see how to enter this trade in your online platform, please look at the order ticket below, which I pulled off of Interactive Brokers.
If you are uncertain on how to execute an options spread, please watch my training video on “How to Execute a Vertical Bull Call Debit Spread” by clicking here.
The best execution can be had by placing your bid for the entire spread in the middle market and waiting for the market to come to you. The difference between the bid and the offer on these deep in-the-money spread trades can be enormous.
Don’t execute the legs individually or you will end up losing much of your profit. Spread pricing can be very volatile on expiration months farther out.
“Bull markets do best when you’ve got a wall of worries, what I’m worrying about is nobody is worried anymore,” said super bull Ed Yardeni.
Global Market Comments
March 8, 2023
Fiat Lux
Featured Trade:
(INVESTING IN A STATE SPONSOR OF TERRORISM),
(AFK), (GAF), (EZA)
CLICK HERE to download today's position sheet.
With the US dollar about to peak out and resume a decade-long plunge, it’s time to think outside the box.
How about a country whose leaders have stolen $400 billion in the last decade and have seen 300 foreign workers kidnapped?
Another country lost four wars in the last 40 years.
Still interested?
How about a country that suffers one of the world’s highest AIDs rates, endures regular insurrections where all of the Westerners get massacred and racked up 5 million dead in a continuous civil war?
Then, Africa is the place for you, the world’s largest source of gold, diamonds, chocolate, and cobalt! The countries above are Libya, Nigeria, Egypt, and the Congo.
Below the radar of the investment community since the colonial days, the Dark Continent has recently been attracting the attention of large hedge funds and private equity firms.
Goldman Sachs has set up Emerging Capital Partners, which has already invested billions there. China sees the writing on the wall and has launched a latter-day colonization effort, taking a 20% equity stake in South Africa’s Standard Bank, the largest on the continent. There are now thought to be over one million Chinese agricultural workers in Africa.
The angle here is that all of the terrible headlines above are in the price, that prices are very low, and the perceived risk is much greater than actual risk.
Price earnings multiples are low single digits, cash flows are huge, and returns of capital within two years are not unheard of. These numbers remind me of those found in Japan during the fifties, right after it lost WWII.
The reality is that Africa’s 900 million have unlimited demand for almost everything, and there is scant supply, with many firms enjoying local monopolies. The big plays are your classic early emerging market targets, like banking, telecommunications, electric power, and other infrastructure.
For example, in the last decade, the number of telephones has soared from 350,000 to 10 million. It’s like the early days of investing in China in the seventies when the adventurous only played when they could double their money in two years because the risks were so high.
This is definitely not for day traders. If you are willing to give up a lot of short term liquidity for a high long term return, then look at the Market Vectors Africa Index ETF (AFK), which has 29% of its holdings in South Africa and 20% in Nigeria. There is also the SPDR S&P Emerging Middle East & Africa ETF (GAF). For more of a rifle shot, entertain the iShares MSCI South Africa Index Fund (EZA). Don’t rush out and buy these today. Instead, wait for emerging markets to come back in vogue. I will send you a trade alert when this is going to happen.
Global Market Comments
March 7, 2023
Fiat Lux
Featured Trade:
(A NOTE ON ASSIGNED OPTIONS OR OPTIONS CALLED AWAY),
(TLT), (TSLA)
CLICK HERE to download today's position sheet.
Since we have a hefty 50% weighting in long bond options, it’s time to review how to handle options called away.
The higher the yield on a security, the greater the call away risk. With ten-year US Treasury yields now at 4.00%, the call away risk is heightened.
Let’s say you call away an option the day before the ETF goes ex-dividend. That enables you to collect an entire quarter’s 88 basis point payout in a day. A measly 88 basis points may not be much for you, but it is a lot for a highly leveraged hedge fund.
That places the March expirations at greatest risk of a call away when dividends are paid out. While our longest expiration is currently February 17, it’s still best to become fluent in the call away process now.
In the run-up to every options expiration, which is the third Friday of every month, there is a possibility that any short options positions you have may get assigned or called away.
The first notice you may get of options called away is a shocking out-of-the-blue margin call of $1 million or more.
If that happens, there is only one thing to do: fall down on your knees and thank your lucky stars. You have just made the maximum possible profit for your position instantly.
Most of you have short option positions, although you may not realize it. For when you buy an in-the-money vertical option spread, it contains two elements: a long option and a short option.
The short options, which are owned by somebody else, can get “assigned,” or “called away” at any time, as it is owned by a third party, the one you initially sold the put option to when you initiated the position.
You have to be careful here because the inexperienced can blow their newfound windfall if they take the wrong action, so here’s how to handle it correctly. I’ll use a previous trade as an example.
Let’s say you get an email from your broker telling you that your call options have been assigned away. I’ll use the example of the Microsoft (MSFT) December 2019 $134-$137 in-the-money vertical BULL CALL spread.
For what the broker had done in effect is allow you to get out of your call spread position at the maximum profit point 8 days before the December 20 expiration date. In other words, what you bought for $4.50 last week is now $5.00!
All have to do is call your broker and instruct them to exercise your long position in your (MSFT) December $134 calls to close out your short position in the (MSFT) December $137 calls.
This is a perfectly hedged position, with both options having the same expiration date, the same amount of contracts in the same stock, so there is no risk. The name, number of shares, and number of contracts are all identical, so you have no exposure at all.
Calls are a right to buy shares at a fixed price before a fixed date, and one option contract is exercisable into 100 shares.
To say it another way, you bought the (MSFT) at $134 and sold it at $137, paid $2.60 for the right to do so, so your profit is 40 cents, or ($0.40 X 100 shares X 38 contracts) = $1,520. Not bad for an 18-day limited risk play.
Sounds like a good trade to me.
Weird stuff like this happens in the run-up to options expirations like we have coming.
A call owner may need to buy a long (MSFT) position after the stock market close, and exercising his long December $134 call is the only way to execute it.
Adequate shares may not be available in the market, or maybe a limit order didn’t get done by the market close.
There are also thousands of algorithms out there which may arrive at some twisted logic that the puts need to be exercised.
Many require a rebalancing of hedges at the close every day which can be achieved through option exercises.
And yes, options even get exercised by accident. There are still a few humans left in this market to blow it by writing shoddy algorithms.
And here’s another possible outcome in this process.
Your broker will call you to notify you of an option called away, and then give you the wrong advice on what to do about it. They’ll tell you to take delivery of your long stock and then post additional margin to cover the risk.
Either that or you can just sell your shares on the following Monday and take on a ton of risk over the weekend. This generates a boatload of commission for the brokers but impoverishes you.
There may not even be an evil motive behind the bad advice. Brokers are not investing a lot in training staff these days because as soon as someone learns something useful, they take a job elsewhere for more money. It doesn’t pay. In fact, I think I’m the last one they really did train.
Avarice could have been an explanation here but I think stupidity and poor training and low wages are much more likely.
Brokers have so many legal ways to steal money that they don’t need to resort to the illegal kind.
This exercise process is now fully automated at most brokers but it never hurts to follow up with a phone call if you get an exercise notice. Mistakes do happen.
Some may also send you a link to a video of what to do about all this.
If any of you are the slightest bit worried or confused by all of this, come out of your position RIGHT NOW at a small profit! You should never be worried or confused about any position tying up YOUR money.
Professionals do these things all day long and exercises become second nature, just another cost of doing business.
If you do this long enough, eventually you get hit. I bet you don’t.
Global Market Comments
March 6, 2023
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or A WEEK WITH JOHN THOMAS)
(SPY), (TLT), (TSLA), (NVDA), (WEAT)
CLICK HERE to download today's position sheet.
In 1942, after the First Marine Division won the battle of Guadalcanal and my Uncle Mitch won his Medal of Honor, they were shipped to Melbourne, Australia for six months of rest and relaxation.
Since their uniforms were in rags and many men were barefoot, they were handed scratchy WWI surplus wool uniforms. That’s all the Aussies had, as their army was off fighting Rommel in North Africa.
All 8,000 men lived in the Melbourne Cricket Ground, and the government delivered a truckload of beer barrels every day. Whenever the men went outside, they were invited by local families off the street to have dinner. After four months, they were fat and happy.
Then one day, they were placed on a train with full battle gear, taken 50 miles out of town, and told to walk back with no food and a canteen of water. They were retraining for the next battle, which would be in New Guinea.
When economic data flip-flops, so does the market.
The red-hot January Nonfarm Report with the Unemployment Rate at a 50-year low of 3.5% gave the bulls every reason to buy stock. So stocks can’t fall.
But a strong jobs market means the Fed will keep interest rates higher for longer gives plenty of fodder for the bears. So stocks can’t rise.
My Mad Hedge Market Timing Index is equally confused at 55. You can’t get any closer to 50, which means you should do absolutely nothing.
Notice that the S&P 500 (SPY) bounced off the 200-day moving average at $390.95 to the penny and rallied, a perfect symptom of this disease. When the fundamentals are confused, technicals win.
At this late age, the only one I take orders from is named Mr. Market. Ignore his instructions at your own peril and expense. Everyone else can get lost.
That leaves us nothing to do but to wait for the next events of market consequence, the March 14 CPI and the December 22 Fed interest rate decision. We might as well twiddle our thumbs and watch the clock until then.
So I will stick to my market-neutral strategy as long as I must take in enough money to keep the lights on. I keep doing this knowing full well that the last time I do will lose money.
This could go on for months.
In the meantime, I will keep researching the long term, which continues to look better and better. The dross ends in months. It’s the next decade we need to focus on now.
It's time to polish our armor, sharpen our weapons, and get back in shape, just as the First Marine Division did 81 years ago.
Remember that we are in the “what’s next” business. Whatever you buy now has to be discounting the following coming trends:
Falling interest rates
A weak dollar
Rising commodity prices
Rising energy prices
Reaccelerating tech earnings
A new boom in real estate
Precious metals going to record highs
Strong emerging markets
A Ukraine win leading to global peace
America’s principal adversary is rendered impotent
A second peace dividend ensues
Every trade alert I send you this year will be taking of one or more of these trends. It’s just a matter of time before they begin if they haven’t already.
We had a really great last two days of February, pushing me back in the green for February, taking me up +3.41% on the month. March has so far come in at +0.80%.
My 2023 year-to-date performance is still at the top at +26.56%. The S&P 500 (SPY) is up +6.36% so far in 2023. My trailing one-year return maintains a sky-high +85.51% versus -5.66% for the S&P 500.
That brings my 15-year total return to +623.75%, some 2.72 times the S&P 500 (SPX) over the same period. My average annualized return has recovered to +47.37%, still the highest in the industry.
Nothing Happens Until March 14, at 8:30 AM EST when the next big inflation read, the Core CPI comes out. It’s all about inflation right now. Look for a flat line until then. That’s why it’s a good time to run short strangles and own lots of cash. A dollar at a market bottom is worth $10 at a market top.
S&P Case Shiller Gains 5.7% in December, YOY according to its National Home Price Index. That’s a quarter of the gains seen a year ago. Miami (15.9%), Tampa (13.9%), and Atlanta (10.4%) showed the biggest gains. High mortgage interest rates are still a big drag and will continue for another six months.
Pending Home Sales Soar 8.7% in January on a signed contract basis. It is the second straight month of gains and the biggest in 2 ½ years. See what a 1.5% drop in mortgage rates can do? While rates are back up now it shows how much demand is building up in the residential real estate market. I think this market explodes to the upside by yearend.
Mortgage Rates Jump to 6.65%, snuffing out the green shoots that briefly appeared in January. Mortgages are still maintaining an unprecedented 200 basis point premium to 30-year Treasury bond rates, which should disappear by yearend. The seeds of the next housing boom are germinating.
Tesla Tanks Semiconductor Shares, after Elon Musk announced that he plans to cut silicon carbide chips by 75%. Improved new designs will also slash the number of chips needed for EVs, whose supply and prices are notoriously volatile. New chip designs will appear in the $25,000 model 2 due out in 2025.
Ark’s Dirty Little Secret. Cathy Woods’ ARK Innovation Fund (ARKK) is one of the top-performing funds so far in 2023, up 24%. But strip out the performance of Tesla (TSLA) and the five-year return has been precisely zero. Good thing (TSLA) is up 110% this year. Maybe its cheaper just to buy (TSLA) and skip the dross and high management fees at Ark? Elon Musk thinks it’s going to $1,000 a share and so do I. Oh, and they just dropped the price of their top end Model X by $20,000.
Stellantis (STLA) Buys a Copper Mine, taking a 14.2% stake in Argentina’s McEwen Copper mine. Gee, do you think the owner of the Chrysler brand is going into EVs? They also laid off 2,000 because with 80% fewer parts EVs require far less workers. Buy Copper and Freeport McMoRan (FCX) on dips. The global copper shortage is imminent.
China Manufacturing PMI Hits 11-Year High, at 52.6 in a surprising comeback from the end of covid lockdowns. The news hit the bond market, worried about rising inflation prospects. Supply chain problems in the US should ease as a result.
Wheat Prices Crash, seeing a 6% dive in February. What always follows a food shortage? A food glut, as farmers overplant to cash in on generous government subsidies, creating a bumper crop. It’s only a 100-year cycle. Prices will stay low as long as Ukraine can keep exporting.
My Ten-Year View
When we come out the other side of the recession, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. The economy decarbonizing and technology hyper accelerating, creating enormous investment opportunities. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The new America will be far more efficient and profitable than the old.
Dow 240,000 here we come!
On Monday, March 6 at 7:00 AM EST, US Factory Orders are out.
On Tuesday, March 7 January 31 at 7:00 AM EST, the Federal Reserve Governor Jerome Powell testifies in front of congress.
On Wednesday, March 8 at 7:00 AM EST, the JOLTS Job Opening Report is released.
On Thursday, March 9 at 8:30 AM EST, the Weekly Jobless Claims are announced.
On Friday, March 10 at 8:30 AM EST, the Nonfarm Payroll Report for February is released.
As for me, while I was in Hawaii the other week, I took the opportunity to meet up with my old friend, David, who reminded me of the week to end all week 25 years ago.
I first met David at a Tokyo karate dojo in 1974 when he was 16 and his dad was the Associated Press Bureau Chief.
As we were about the same size, Higaona Sensei paired is off as sparing partners. But to fight, David had to take off his glasses. It wasn’t long before I saw my front teeth flying across the room and skittering across the teak floorboards.
I next met David at Morgan Stanley when I was a London director, and he was a junior trader in Tokyo. After that, I took off to start my own hedge fund.
When Morgan ordered him to meet with their traders in Zurich, Switzerland, I saw the perfect excuse for an adventure. Starting in London, we first dropped off our wives for a week of shopping in Paris, flying my twin Cessna 340.
I used my old trick of getting permission to fly over the center of Paris so I could waggle my wings at the tourists as we passed the top of the Eiffel Tower.
In Zurich, I got in a fight with the tower because they ordered me into a parking stand that was still under construction. I left David to his meetings, thus enabling us to bill the entire trip to Morgan Stanley, aviation fuel, five-star hotels, three-star restaurants, and all. If you did that today at (MS) you’d probably get fired.
I then flew off to pick up a couple of cases of first-growth French wines from the owners in Bordeaux to kill time.
When I picked up David the next day, we headed south. It was a clear day, so I thought it might be a good time to visit the Matterhorn summit. As we circled, the day’s successful climbers waved their ice axes. Then it was up the Rhone River Valley, threading an Alpine valley.
When I realized that I couldn’t climb fast enough to escape the valley, I executed a quick Immelman turn. You’re never supposed to do this in a twin because there is a risk of entering a flat spin (watch the Top Gun movie to see what this is).
But I had my British Aerobatics license, my Swiss Alpine license, plenty of speed, and an oversupply of confidence, so I figured we’d be OK. I performed the first half of a loop, then at the top, I flipped the plane 180 degrees, thus righting it and heading in the opposite direction. But I think we singed the rear ends of a few mountain goats on the way.
Needless to say, this caught David’s attention.
When I popped out of the top of the Alps, I was immediately intercepted by a Mirage fighter from the Swiss Air Force. I was now in military air space. He took a few runs at me at just under Mach 1, using me for target practice. Once I was identified he went on off his merry way.
Now I was lost.
All the maneuvering put me too low to intercept any European navigational aids. So we just looked out the window. Eventually, we noticed that to roof tiles of the city below us were red, which meant we had to be over Italy. I correctly identified it as Bolzano. From there I calculated a direct track to the airfield at St. Moritz in Switzerland.
We stayed at the legendary Badrutt’s Palace Hotel. The next day, we took a cable car to the highest peak. While American ski resorts offer cheeseburgers or pizza, Swiss ones have Michelin Three Star Restaurants. We enjoyed the meal of a lifetime.
When the Tokyo stock market crashed, Morgan Stanley let go of most of its Tokyo staff. David landed on his feet, taking over as the head of trading at Lehman Brothers. He later moved on to a hedge fund, cashing in its Lehman stock well before he went under.
David later retired to the North Share of Oahu in Hawaii, and I visit whenever I’m in town. He is very proud of his tropical fruit orchard. When the 50-foot waves crash at nearby Waimea Bay, the ground shakes.
Whenever I see David, he reminds me of our “lost week” over the Alps. It was the most exciting week of his life. And I always respond, “But David, every week is like that for me.”
When I visit Bolzano this summer to research the battles there in WWI in which my great uncle perished, I’ll ask the residents if they noticed a lost airplane overhead 25 years ago.
Good Luck and Good Trading
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
The First Marine Division in the Melbourne Cricket Ground in 1942
Higaona Sensei in 1974
Badrutt’s Palace Hotel in St. Moritz
Refueling my Cessna 340 in 1988
