Diary Archives - Mad Hedge Fund Trader

February 2 Biweekly Strategy Webinar Q&A

Below please find subscribers’ Q&A for the February 2 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Incline Village, Nevada.

Q: Thoughts on Palantir Technologies Inc. (PLTR)?

A: Well, we got out of this last summer at $28 because the CEO said he didn’t care what the share price does, and when you say that, the market tends to trash your stock. But Palantir is also in a whole sector of small, non-money-making, expensive stocks that have just been absolutely slaughtered. And of course, PayPal (PYPL) takes the prize for that today, down 25% and 60% from the top. So, we’re giving up on that whole sector until proven otherwise. Until then, these things will just keep getting cheaper.

Q: Given the weakness in January, do you think we still have to wait until the second half of the year for a viable bottom?

A: Definitely, maybe. If things are going to happen, they are going to happen fast; we got the January selloff, but that’s nowhere near a major selloff of 20%. And the fact is, the economy is still great so that’s why this is a correction, not a bear market. At some point, you want to buy into this, but definitely not yet; I think we take another run at the lows again sometime this month. We just have to let all the shorts come out and take their profits so they can reestablish again.

Q: Why are bank stocks struggling?

A: A lot of the interest rate rises that we’re getting now were already discounted last year—banks had a great year last year—so they were front running that move, which is finally happening. To get more moves out of banks, you’re going to have to get more interest rate rises, which we will get eventually. We still like the banks long term, we still like financials of every description, but they are taking a break, especially on the “sell everything” index days. A lot of the recent selling was index selling—banks have a heavy weighting in the index, about 15%. So, they will go down, but they will also be the ones that come back the fastest. We’re seeing that in some of the financials already, like Berkshire Hathaway (BRKB) and Morgan Stanley (MS) which are both close to all-time highs now.

Q: What about the situation with Russia and Ukraine?

A: It’s all for show. This is a situation where both the US and Russia need a war, or threat of a war, because the leaders of both countries have flagging popularity. Wars solve those problems—that’s why we have so many of them by the United States. We’ve been at war essentially for most of the last 40 years, ever since Ronald Reagan came in.

Q: I didn’t exit my big tech positions before the crash, should I just hang onto them at this point?

A: The big ones—yes. The Apples (AAPL), the Googles (GOOGL), the Amazons (AMZN) —they’re only going to drop about 20% at the most, maybe 25%, and then they’ll go to new highs, probably before the end of the year. If you’re good enough to get out and get back in again on a 20% move, go for it. But most people can’t do that unless they’re glued to their screens all day long. So, if you have stock, keep the stock; if you have options, get out of the options, because there the time decay will wipe you out before a turnaround can happen. This is not an options environment, unless you’re playing on the short side in the front month, which is what we’re doing.

Q: When you send out the trade alerts, I have a hard time getting them executed. How do you advise?

A: Move the strike price, go out in maturity, and you can get our prices at slightly higher risk. Or, just leave it and, quite often, people’s limit orders get done at the end of the day when the algorithms have to dump their positions at the close because they’re not allowed to carry overnight positions. Also, even if you get half of my trade alerts, you’re doing pretty good—we’re running at a 23% rate in 6 weeks, or 200% annualized. And remember, when I send out a trade alert, you’re not the only one trying to get in there, so you can even go onto a similar security. If I recommend Alphabet (GOOGL), consider going over to Microsoft (MSFT), because they all tend to move together as a group.

Q: I am sitting on a 16% profit in the ProShares Ultra Technology (ROM), which you recommended. Should I take the money and run, and get back in at a lower price?

A: Yes, this is just a short covering rally in a longer-term correction, and you make the money on the volume. You win games by hitting lots of signals, not hanging on to a few home runs where people usually strike out.

Q: You said inflation will be short lived, so why would there be 9 interest rates after the initial 4?

A: It’s going to take us 8 interest rates just to get us back to the long-term average interest rate. Remember the last 2% is totally artificial and only happened because there was a financial crisis 13 years ago. So, to normalize rates you really need to get overnight rates back up to about 3.0%. And that means 12 interest rate hikes. If you don’t do that, you risk inflation going from controllable to uncontrollable, and that is the death of the Fed. So, that’s why I expect a lot more interest rate rises.

Q: Will the tension between Russia and the Ukraine affect the market?

A: No, it hasn’t so far and I don’t expect it to. Although, it’s hard to imagine going through all of this and not seeing a shot fired. When that one shot gets fired, then maybe you get a down-500-point day, which it then makes back the next day.

Q: Anything to do with Alphabet (GOOGL) announcing its 20 to one split?

A: No, it’s too late. We had a trade alert out on a Google 20 call spread which we actually took profits on this morning. So, nice win for the Mad Hedge Technology Letter there. There’s nothing to do with these splits, it’s not like they’re going to un-announce it, this isn’t a risk-arbitrage situation where there’s always an antitrust risk hovering over the deal that may crash it. This is pretty much a done deal and doesn’t even happen until July 1. People think bringing the share price from $3,000 down to $150 makes it available for a lot more potential retail buyers, which it does. It also makes call spreads on the options a lot cheaper too. When we put out these alerts, we can only do one or two contracts, even tying up $10,000—divide that by 20 and all of a sudden your cheapest Google call spread cost $500 instead of $10,000.

Q: Can you speak about the liquidity on your strikes? Sometimes we’re trading against strikes that have no open interest.

A: Whenever you put in an order for one strike, even if there’s nothing outstanding on that strike, algorithms will arbitrage against that strike—where your order is—against all the other strikes on the whole options chain. So, don’t worry if you have limited open interest or no open interest on our trade alerts. They will get done, and it may get done by some algorithm or some market maker taking more of another strike, that’s how these things get done. It’s all thanks to the magic of computers.

Q: Do you have thoughts about Freeport-McMoRan (FCX)? I have some profitable LEAP positions open.

A: It’ll go higher, keep them. And I like the whole commodity space, which means iron ore (BHP), copper, steel (X), etc.

Q: Would you trade Barclays iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX) at this point?

A: No, because we’re dead in the middle of the recent range. That’s a horrible place to enter—you only enter (VXX) on extremes on the upsides and the downside.

Q: What should I do about Airbnb (ABNB) at this price? They’ve been profitable for 2-3 years, with revenues rising.

A: I think Airbnb is one of the best run companies in the world, and I expect their earnings to keep growing like crazy, especially once we get out of the pandemic. I am also a very frequent Airbnb user, having stayed in Airbnb’s in at least 10 countries, so I’m a big fan of them. The stock just got dragged down by the small tech bust but it will come back. This is a “throwing the baby out with the bathwater” situation.

Q: Are there any good LEAPS candidates now?

A: I’m not doing any LEAPS until we reach the final cataclysmic selloff of the correction. Otherwise, the time value will run against you enormously; I’d rather wait for better prices.

Q: Do you see a cataclysmic selloff?

A: Yes, I do. Maybe in a few more weeks, and maybe next week if we get a really hot 8%+ inflation rate—that would really kill the market.

Q: What will tell you if inflation is ending or slowing labor?

A: Labor is 70% of the inflation calculation. So, when these huge pay awards slow down, that's when inflation slows down. By the way, a lot of pay increases that are happening now are catch-up from the last 40 years of no pay increases for American workers in real inflation adjusted terms. So, a lot of this is catch-up—once that’s done, you can forget about inflation. Also, the long-term pressure of technology on prices is downwards, so allow that to reignite deflation, and that will be your bigger issue over the long term.

Q: What should I do about Editas Medicine Inc (EDIT) or CRSPR Therapeutics AG (CRSP)?

A: Don’t touch the sector, it’s out of favor. Let this thing die a slow death. When they come up with profitable products, that’s when the sector recovers. So far, everything they have works in labs but there are no mass-produced Crispr products, they’re trying for mass production on sickle cell anemia and a couple of other things, but still very early days in CRSPR technology.

Q: When will this recording be posted?

A: In two hours, it will be posted on the website. Go to “My Account” and you’ll find the last 13 years of recorded webinars.

Q: What do you mean by “stand aside from Foreign Exchange”?

A: The volatility in the foreign exchange market is just so low compared to equities and bonds, it’s not worth trading right now. When you can trade everything in the world—foreign exchange is at the bottom of the list. If I see a good entry point, I’ll do a trade; but do I trade Tesla (TSLA) with a volatility of 100%, or foreign exchange with a volatility of 5%? Those are the choices.

Q: Should I do any short plays in oil (USO)?

A: Generally, you don’t want to short any commodity unless you're a professional; I say that having been short beef futures when Mad Cow Disease hit in 2003 and you had three limit-up days in a row in the futures market. That happens in the commodity areas—liquidity is so poor compared to stocks and bonds that if you get caught in one of these one-way moves, you can’t get out. So that is the risk; and I’ve known people who have gone bust trading oil both long and short, so this is for professionals only. With stocks you get vastly more data and information than you do in the commodity markets where industry insiders have a much bigger advantage.

To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in to www.madhedgefundtrader.com, go to MY ACCOUNT, click on GLOBAL TRADING DISPATCH, then WEBINARS, and all the webinars from the last ten years are there in all their glory.

Good Luck and Stay Healthy!

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

The Aga Sophia Mosque in Istanbul

February 3, 2022

Diary, Newsletter, Summary

Global Market Comments
February 3, 2022
Fiat Lux

Featured Trades:

(WATCH OUT FOR THE COMING COPPER SHOCK)
(FCX), ($COPPER)

February 2, 2022

Diary, Newsletter, Summary

Global Market Comments
February 2, 2022
Fiat Lux

Featured Trades:

(A NOTE ON OPTIONS CALLED AWAY)
(TLT)

February 1, 2022

Diary, Newsletter, Summary

Global Market Comments
February 1, 2022
Fiat Lux

Featured Trades:

(A NEW THEORY OF THE AMERICAN ECONOMY)

A New Theory of the American Economy

Diary, Newsletter

The US economy is currently recovering at double the rate of past recoveries. No one has ever seen anything like this before.

Sometimes a trader can turn wildly bullish, not really understanding why. He is just responding the market price action. Often the reasons why don’t become obvious for months, or even years after the event.

This is one of those times.

A year ago you could come up with all kinds of theories as to why stocks should rise in two years: valuation, QE, ultra-low interest rates, lack of alternatives, end of the pandemic. But they were just that: theories.

However, the price action was indicating that the biggest bull markets of all time were underway. That is exactly what we got.

Now, we are slowly starting to understand why.

It turns out, the American economy coming out of the pandemic is very different from the one that went in. The end result is that stock prices will rise faster to greater levels than ever imagined possible.

I am looking for another 15% gain in the (SPX) from current levels to over $5,000 by the end of this year, and $36,000 by 2030. If I’m wrong, we’ll get $36,000 by 2025.

There is an abundance of reasons why.

US corporations are now immensely more profitable and productive than only two years ago. All of the cost savings taken as emergency measures in 2020 will become permanent.

Perhaps one-third of all employees sent home to work will stay there forever. Workers who don’t have to commute are happier and work cheaper. And we didn’t really like them anyway.

As we reopen, some big tech companies are asking workers back to the head office only two days a week. You’ll have a Monday/Wednesday shift, a Tuesday/Thursday shift, and nobody comes to the office on Friday. This drops office expenses by half, a huge overhead item for many firms.

So will commercial real estate crash? No. Hypergrowth will refill that space in a year or two and they’ll sublease until then. Most big tech companies own their own office buildings in any case.

Legacy bank branches were cut by half and those remaining are chronically understaffed. Legacy banks have been trying to figure out how to unload these expensive branch networks for years. The pandemic just did it for them.

Customer support has virtually ceased to exist. Want to call Interactive Brokers with a question about your account? Expect to remain on hold for 2 ½ hours, as I did last week.

Business travel is now the equivalent of flying in a private jet. A friend of mine had to fly to New York and was required to fill out an 11-page form detailing the necessity of an in-person meeting. The cost savings will be enormous.

While costs are plunging, revenues are soaring. The pandemic hyper-accelerated the development of new technologies allowing us to be inundated with countless new products and services.

Zoom (ZM) is a perfect example. No one heard of it in 2019 except a handful of Bay Area tech nerds like me. Now, it is a daily factor in most people’s lives. Some people, like me, join a dozen Zoom calls a day, from staff meetings to customer calls to Boy Scout meetings. Mad Hedge followers already know that this has led to a 12X move in the (ZM) share prices. (ZM) in San Jose is hiring as fast as it can.

Another effect of the pandemic has been to digitize the global economy far faster than once imagined possible. This is not a bad thing when you live in the digital capital of the world. Unlike a store accepting cash, you can’t catch a virus from a digital transaction. This is important not just in this pandemic, but the next one and the one after that.

Exploding digitization also automatically leads to vastly accelerated globalization. Another friend of mine runs an online business in Australia but, after a decade, was only able to attract local interest. Suddenly, his business doubled. An analysis of the new subscriber addresses showed that all the new customers came from China. It turns out that there are a lot of Chinese surfing the net to kill time as well.

By default, America has evolved into a disease-free economy in a mere 12 months. The telling statistic here is that the Rite-Aid drug store chain saw earnings crash because no one catches the flu of a cold anymore. These viruses can get through a mask or survive hand sanitizers either.

Of course, I would be remiss not to mention massive government spending and Federal Reserve quantitative easing. Cassandras worry about a shut-off of the money spigot when inflation returns and an ensuing market crash.

Here’s a news flash for you: Inflation is temporary at best.

The end effect of accelerating technology is to drive prices ever downward, especially the cost of labor. When Treasury Secretary Janet Yellen (I can’t believe I’m saying that!) says she won’t want interest rates rises until she sees the whites of inflation’s eyes, she means inflation is NEVER coming back. Deflation will be the greater challenge, as it has been for the last 40 years.

That means the US government could keep stimulating until the headline Unemployment Rate returns to 3.0%, with no consequences whatsoever.

If this sounds like a Goldilocks scenario, it is. Enjoy your bull market.

The Goldilocks Economy is Here

February 1, 2022 - Quote of the Day

Diary, Newsletter, Quote of the Day

“Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years.” – Said Legendary U.S. Investors Warren Buffet

January 31, 2022

Diary, Newsletter, Summary

Global Market Comments
January 31, 2022
Fiat Lux

Featured Trades:

(TESTIMONIAL),
(MARKET OUTLOOK FOR THE WEEK AHEAD, or DEATH OF THE FED PUT),
(SPY), (TLT), (TBT), (MSFT), (AAPL), (TSLA), (BRKB)

Testimonial

Diary, Newsletter, Testimonials

I am Ari, the son of Ed, who had a subscription to your service for the past several years.

Unfortunately, my dad passed last week, and we had a beautiful memorial service for him. I spoke of his interest in the stock market and how he also introduced me to the financial markets and the world of stocks and investing.

As we are getting the estate and other affairs in order, we have not logged into your service for the past several months. I was wondering if you might be able to transfer the remaining subscription time and possibly add any more time, as he did not use the service to utilize the information.

I always enjoy your presentations and remember watching a debate between you and Harry Dent several years ago, sitting next to my dad and watching on the computer. Harry of course seems to be a perma-bear and was arguing against the roaring 20's thesis...

At any rate, I wanted to reach out and let you know that of all the newsletters, I think my dad enjoyed yours the most. Thanks, and I look forward to being in touch and carrying on the subscription.

Best regards,
Ari

Crossing Iceland

The Market Outlook for the Week Ahead, or Death of the Fed Put

Diary, Newsletter

That great wellspring of your personal wealth for the last 13 years, the Fed put, is no more.

No longer can you count on an endless expansion of the money supply to boost the value of your share and real estate portfolios.

In fact, since our central bank embarked on an endless effort to restore the economy during the 2008 financial crisis, the Fed balance sheet has ballooned from $400 million to $9 trillion. And it is still expanding, although at a much smaller rate.

Long time Fed watchers like myself, will tell you that the Fed is always slow, behind the curve, and is often responding to data a year late. We have an hour late and dollar short central bank.

That is certainly true with this cycle when it took 12 months for the Open Market Committee to notice that a decade-plus of zero interest rates had caused inflation to explode to 6.9%.

But just as we have to reinvent ourselves every day with a constantly evolving stock market, so does the Fed with its interest rates policy. As a result, this new interest rate cycle will be like no others.

There can be no doubt that the Fed is taking away the punch bowl. Overnight, the futures market is gone from discounting three-quarter point interest rate hikes to six. That means a rate increase at every meeting for the rest of 2022.

Quantitative easing has been thrown into the dustbin of history as well. Fed Bond buying will taper down from $120 billion in December to zero by March. The big guess now is how soon quantitative tightening will start.

In the meantime, the glass has gone from half full to half-empty for the stock market. That means selling every rally rather than buying every dip. It’s a new World.

Since the beginning of the year, I have been playing roulette. Except for that numbers one through 35 are colored black and I have only been betting black. That is the percentage of trade alerts that have been profitable so far in 2022. And you know what? I am going to keep on playing!

I’ll tell you how all this ends. Eventually, big technology prices will drop 20% and earnings will rise by 30%, producing a 50% valuation haircut. That will be enough of a bargain to draw back even the most cautious of investors. But that is still months off.

Ukraine? You’re worried about the Ukraine? Last week Biden moved the USS Harry S. Truman into the Black Sea. Other US carriers are close by. That puts a massive air counterstrike against a Russian tank invasion a phone call away.

The last time this contest played out was during the first Iraq War. Russian supplied forces lost 5,000 tanks and we lost one (he parked on a ridgeline). Putin may like chess, but he doesn’t play Russian roulette. This is all just a ploy to get oil prices high, on which Russia relies on for 70% of government revenues.

By the end of this year, the supply chain will be restored, inflation tamed, the economy will be booming, we will be at full employment, and big technology earnings will be at new records. Higher share prices are a bet I am more than willing to make, especially with 35:1 ods in my favor.

The Dow Dives Nearly $4,000 points in 14 days, in the mother of all corrections. And while the market has discounted the next four quarter-point rate hikes, it hasn’t even thought about the eight after that. Yes, overnight rates may peak at 3.25% in three years. In addition, my friends at the Fed are considering taking $3 trillion in liquidity out of the system by the end of 2023. US earnings growth will more than cover this but it may take months for markets to figure that out. That makes H1 all about preserving capital and then swinging for the fences in H2. In the meantime, make volatility your friend and not your enemy.

Don’t Buy this Dip, says Morgan Stanley. We are in for more punishment, especially in non-earning technology stocks. Too many investors missed the top and are still looking to get out. Growth is dead. But it won’t be as bad as the 2000 Dotcom bust. At a certain point, sellers will get exhausted.

The Fed Leaves Rates Unchanged but says rates will rise soon and signaled the end of quantitative easing in March. No mention was made of quantitative tightening. The economy is still very strong, but omicron is a concern. The universal feeling is that the Fed is a year late in its unfolding tightening, prompting runaway inflation. The was little market reaction as the comments were largely expected. The Volatility Index is back down to $27.

Apple Blows it Away with Q4 revenues of an eye-popping $124 billion, up 11% YOY. Some $27 billion in dividends and share buybacks was returned to shareholders. iPhone sales were up 9.2% YOY and 57% of the total. The bottom may not be in yet for this bear move but I see the shares at $250 by next year, powered by the rollout of new product lines and services. Taking profits on my short-term long right here.

Mortgage Interest Rates Hit 22-Month High, with the 30-year fixed hitting 3.56%. So far, no effect on the housing market, which is hotter than ever. But homebuilder stocks like (LEN), (KBH), and (TOL) have been getting hit hard.

S&P Case Shiller Rockets 18.8%, in November with its National Home Price Index. Phoenix 32.2%, Tampa (29%), and Miami (26.6%) were the big gainers. The real estate boom is years away from a peak.

New Home Sales Skyrocket to an eye-popping 811,000 in December, up 11.7% YOY. Median sales prices jump to $377,700, up 3% YOY. Inventories further shrink to six months. Builders can’t build them fast enough, thanks to labor and supply chain shortages. With a 50-basis point rise in mortgage rates, next month’s report may be a different story.

Oil Could Hit $100 in a Day if Russia attacks the Ukraine. Inventories are already short from lack of investment and Europe is facing a Russian engineered energy squeeze. A Chinese economic recovery, the world’s largest importer, could make matters worse. Watch (USO).

Caterpillar Announces Robust Earnings, but the stock sells off anyway. Total 2021 profits came to $505 million, up 72% from 2020. Enormous construction demand is a major boost, as well as ongoing commodity and agricultural booms. Buy (CAT) on dips as a major pro-cyclical play.

My Ten-Year View

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

With the pandemic-driven meltdown on Friday, my January month-to-date performance rocketed to 12.05%. My 2022 year-to-date performance ended at 12.05%. The Dow Average is down -5.2% so far in 2022.

With 26 trade alerts issued so far in January, there was too much going on to describe here.

That brings my 12-year total return to 524.61%, some 2.00 times the S&P 500 (SPX) over the same period. My 12-year average annualized return has ratcheted up to 43.19%, easily the highest in the industry.

We need to keep an eye on the number of US Coronavirus cases at 74 million and rising quickly and deaths topping 884,000, which you can find here.

On Monday, January 31 at 6:45 AM, the Chicago PMI for January is out.

On Tuesday, February 1 at 7:00 AM, the JOLTS Job Openings for December are announced.

On Wednesday, February 2 at 8:30 AM, the ADP private jobs figures for December are released.

On Thursday, February 3 at 8:30 AM the Weekly Jobless Claims are disclosed. At 7:00 AM the ISM Non-Manufacturing PMI is printed.

On Friday, February 4 at 8:30 AM the January Nonfarm Payroll Report is released. At 2:00 PM, the Baker Hughes Oil Rig Count is out.

As for me, those of you who have followed me for a long time will not be surprised to learn that I once made a living as a male model in Japan.

I took fairly conservative gigs, a TV commercial for Mazda Motors, a testimonial for Mitsubishi television sets, and print ads for Toyota. The X-rated requests I passed on to my friends at the karate school.

Then the casting call went out for the tallest, meanest-looking foreigner in Japan.

They picked me.

Koikei Potato Chips was unique among competing brands in Tokyo in that they were sprinkled with seaweed flakes. I couldn’t stand them.

The script set me in a boxing ring beating the daylights out of a small Japanese competitor. I knocked him flat. Then a Japanese girl rushed up to the ring and fed the downed man Koikei Potato Chips. Instantly, he jumped up and won the fight.

In the last scene, the Japanese man is seen sitting on top of me with two black eyes eating more potato chips. Oh, and the whole thing was set in a 19^th century format so I was wearing tights the entire time.

I took my 10,000 yen home and considered it a good day’s work.

Ten years later, I was touring Japan as a director of Morgan Stanley with some of the firm’s largest clients. We stopped for lunch at a rural restaurant with a TV on the wall. Suddenly, one of the clients asked, “Hey John, isn’t that you on the TV?”

It was my Koike Potato Chip commercial. After ten years, they were still running it. Who knew? I was never so embarrassed. When the final scene came, everyone burst into laughter. I feebly explained my need for spare cash a decade earlier, but no one paid attention.

I continued with my tour of Japan but somehow the customer reaction was just not the same.

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