Mad Hedge Fund Trader

The Market Outlook for the Week Ahead, or Concentration of Wealth at the Top

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As I write this to you, I am flying at 30,000 feet over the red clay of Georgia. The azure blue of the Gulf of Mexico is on the left and the Golden State of California lies straight ahead.

I am returning from a five-day whirlwind tour of Florida, which saw me speak at three Strategy Luncheons and countless private meetings.

It was a blast!

Not only did I learn the local lay of the land, I often pick up some great trading ideas.

I first hitchhiked across the Sunshine State in 1967. Except for a few small towns on the coasts, there was nobody there. The entire inland of the state was covered with small cattle ranches and the odd tourist trap (mermaids, alligator wrestling, snake shows etc).

People thought the extensive freeway system was only built because the state was just 90 miles away from Cuba, then a Cold War flash point (it is officially called the “Dwight D. Eisenhower National System of Interstate and Defense”). Suddenly,  somebody secretly started buying up land around Orlando. The locals thought General Motors (GM) was going to build a car plant there.

Then Walt Disney Corp (DIS) swept in and announced they were building a second Disneyland to cater to the east coast, creating an astonishing 70,000 jobs and the freeways started to fill up (click here for the video).

Today, driving around the state is a dystopian nightmare. The US population has doubled since the first Interstates were built in the 1950s, and the US GDP has increased by ten times, a byproduct of the Interstates. That means ten times more heavy truck traffic which has been mercilessly beating the life out of the roads. In Florida, the population has risen by more than fourfold as well, from 5 million to 22.2 million so you get the picture.

You lurch from one traffic jam to the next, even in the middle of the night. Whatever time Google Maps says it will take to get somewhere, triple it. The only consolation is that the traffic is worse in California.

I loved Key West where a very happy Concierge member made available an 1859 mansion close to the waterfront, restored and modernized down to the studs. By this time of the year, anyone with money has decamped for New England leaving only the retirees and beach bums.

I made the pilgrimage to Earnest Hemmingway’s home where he produced 70% of his published writings in only seven years. Another two boxes of manuscripts were discovered in the basement of his favorite bar last year.

It’s ironic that this state is now known for banning books that include sex and violence. Steinbeck’s work has already hit the dustbin, so old Earnest can’t be far behind.

What’s next? The Bible? It has lots of sex and violence.

As for me, Hemingway’s granddaughter, Mariel, stands out as the only Playboy cover girl I ever dated (April, 1982, I think). She is now happily married with three grown kids.

And yes, I did prove that it is possible to eat Key Lime Pie four days in a row.

As for the stock market last week, there really isn’t much to say. The concentration of wealth at the top continues unabated, as it is in the rest of the country. Stocks are still discounting a soft landing, while commodities, energy, and bonds expect a recession.

Go figure.

The top five stocks continues to suck all the money out of the rest of the market, (AAPL), (GOOGL), (AMZN), (MSFT), and (NVIDIA), the early beneficiaries of AI, accounting for 80% of this year’s market gains. Of the other 495 stocks, 250 are below their 200-day moving averages, meaning they are still in bear markets.

This is what has crushed volatility, taking the ($VIX) from $34 down to $15. The last time volatility was this low was just before the Long Term Capital Management fiasco where it languished around $9 (read Liar’s Poker by my friend Michael Lewis). When LTCB went bust, volatility rocketed to $40 overnight and stayed there for two years.

Options traders made fortunes.

Mad Hedge has nailed every trend this year. We bought tech and Tesla (TSLA) in January when we should have. We shorted ($VIX) every time it approached $30. Then we bought the banking bottom in March (JPM), (BAC), (C) and carried those positions into April.

We’ve been shorting Tesla strangles every month. And now we are 80% in cash waiting for the world to end one more time in Washington DC so we can load the boat with LEAPS and replay the movie one more time.

By the way, Mad Hedge has issued 25 LEAPS over the past year and 24 made money with an average profit of about 300%. Our sole loser has been with Rivian (RIVN), but even it still has 18 months to run. Never own an EV stock during a price war.

So far in May I have managed a modest 2.43% profit. My 2023 year-to-date performance is now at an eye-popping +64.18%. The S&P 500 (SPY) is up only a miniscule +9.00% so far in 2023. My trailing one-year return reached a 15-year high at +113.84% versus +10.87% for the S&P 500.

That brings my 15-year total return to +661.37%. My average annualized return has blasted up to +48.99%, another new high, some 2.74 times the S&P 500 over the same period.

Some 41 of my 44 trades this year have been profitable. My last 22 consecutive trade alerts have been profitable.

I closed out only one trade last week, a long in the (TLT) just short of max profit a day before expiration. That just leaves me with a long in Tesla and a short in Tesla, the “short strangle”. I now have a very rare 80% cash position due to the lack of high return, low risk trades.

There’s a 1,000 Point Drop in the Market Begging to Happen. That’s what happens when the market rallies on a Biden McCarthy debt ceiling deal, which McCarthy’s own party then votes down. After all, it took McCarthy 15 votes to get his job. Just watch volatility, it’s a coming.

Weekly Jobless Claims Fall to 242,000, down from 264,000. It’s a surprise slowdown. The rumor is that last week’s highpoint was the result of a surge in fraudulent online claims in Massachusetts.

NVIDIA Could Rise Fivefold in Ten years, say fund managers. I think that’s a low number. The Silicon Valley company makes the top performing GPU’s in the industry selling up to $60,000 each. (NVDA) is seeing a perfect storm of demand from the convergence of AI and Internet growth. The shares have already tripled off of the October low.

Tesla is Considering an India Factory, as part of its eventual build out to 10 plants worldwide. The country’s 100% import duty on cars has been a major roadblock. India is now pushing a “Made in India” initiative. Good luck getting anything done in India.

Homebuilder Sentiment Up for 10th Straight Month, as it will be for the next decade. There is no easy escape from a demographic wave. New homebuilders have figured out the new model.

India’s Tata to Build iPhones for Apple, in an accelerating diversification away from China. Apple has had too many of its eggs in one basket, especially given the recent political tensions between the US and the Middle Kingdom.

US Dollar Soars to Three Month High, as investors flee to safe haven short term investments. Rapidly worsening economic data is sparking recession fears. Ten consecutive months of falling inflation is another indicator of a slowdown.

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, May 22 there is nothing of note to report.

On Tuesday, May 23 at 4:00 PM EST, the inaugural launch of Mad Hedge Jacquie’s Post takes place. Please click here to attend this strategy webinar. The Federal Reserve Open Market Committee minutes are out at 2:00 PM.

On Wednesday, May 24 at 2:00 PM, the Federal Reserve Open Market Committee minutes are out.

On Thursday, May 25 at 8:30 AM, the Weekly Jobless Claims are announced. The US GDP Q2 second estimate is also published.

On Friday, May 26 at 2:00 PM, the University of Personal Income & Spending and Durable Goods are released.  

As for me, I am reminded of my own summer of 1967, back when I was 15, which may be the subject of a future book and movie.

My family summer vacation that year was on the slopes of Mount Rainier in Washington State. Since it was raining every day, the other kids wanted to go home early.

So my parents left me and my younger brother in the firm hands of Mount Everest veteran Jim Whitaker to summit the 14,411 peak (click here for this story ). The deal was for us to hitchhike back to Los Angeles as soon as we got off the mountain.

In those days, it wasn’t such an unreasonable plan. The Vietnam War was on, and a lot of soldiers were thumbing their way to report to duty. My parents figured that since I was an Eagle Scout, I could take care of myself anywhere.

When we got off the mountain, I looked at the map and saw there was this fascinating-sounding country called “Canada” just to the north. So, it was off to Vancouver. Once there I learned there was a world’s fair going on in Montreal some 2,843 away, so we hit the TransCanada Highway going east.

We ran out of money in Alberta, so we took jobs as ranch hands. There we learned the joys of running down lost cattle on horseback, working all day at a buzz saw, artificially inseminating cows, and eating steak three times a day.

I made friends with the cowboys by reading them their mail, which they were unable to do since they were all illiterate. There were lots of bills due, child support owed, and alimony demands.

In Saskatchewan, the roads ran out of cars, so we hopped a freight train in Manitoba, narrowly missing getting mugged in the rail yard. We camped out in a box car occupied by other rough sorts for three days. There’s nothing like opening the doors and watching the scenery go by with no billboards and the wind blowing through your hair!

When the engineer spotted us on a curve, he stopped the train and invited us to up the engine. There, we slept on the floor, and he even let us take turns driving! That’s how we made it to Ontario, the most mosquito-infested place on the face of the earth.

Our last ride into Montreal offered to let us stay in his boat house as long as we wanted so there we stayed. Thank you, WWII RAF Bomber Command pilot Group Captain John Chenier!

Broke again, we landed jobs at a hamburger stand at Expo 67 in front of the imposing Russian pavilion with the ski jump roof. The pay was $1 an hour and all we could eat.

At the end of the month, Madame Desjardin couldn’t balance her inventory, so she asked how many burgers I was eating a day. I answer 20, and my brother answered 21. “Well, there’s my inventory problem” she replied.

And then there was Suzanne Baribeau, the love of my life. I wonder whatever happened to her?

I had to allow two weeks to hitchhike home in time for school. When we crossed the border at Niagara Falls, we were arrested as draft dodgers as we were too young to have driver’s licenses. It took a long conversation between US Immigration and my dad to convince them we weren’t. It wasn’t the last time my dad had to talk me out of jail.

We developed a system where my parents could keep track of us across the continent. Long-distance calls were then enormously expensive. So, I called home collect and when my dad answered, he asked what city the call was coming from.

When the operator gave him the answer, he said he would NOT accept the call. I remember lots of surprised operators. But the calls were free, and Dad always knew where we were. At least he had a starting point to look for the bodies.

We had to divert around Detroit to avoid the race riots there. We got robbed in North Dakota, where we were in the only car for 50 miles. We made it as far as Seattle with only three days left until high school started.

Finally, my parents had a nervous breakdown. They bought us our first air tickets ever to get back to LA, then quite an investment.

I haven’t stopped traveling since, my tally now tops all 50 states and 135 countries.

And I learned an amazing thing about the United States. Almost everyone in the country is honest, kind, and generous. Virtually every night, our last ride of the day took us home and provided us with an extra bedroom, garage, barn or tool shed to sleep in. The next morning, they fed us a big breakfast and dropped us off at a good spot to catch the next ride.

It was the adventure of a lifetime and I profited enormously from it. As a result, I am a better man.

As for my brother Chris, he died of covid in early 2020 at the age of 65, right at the onset of the pandemic. Unfortunately, he lived very close to the initial Washington State hot spot.

People often ask me what makes me so different from others. I answer, “My parents taught me I could do anything with my life, and I proved them right.”

Good luck and good trading.

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

 

Summit of Mt. Rainier 1967

 

McKinnon Ranch Bassano Alberta 1967

 

American Pavilion Expo 67

 

Hamburger Stand at Expo 67

 

Picking Cherries in Michigan 1967

 

 

 

 

 

 

 

Mad Hedge Fund Trader

How to Execute a Vertical Bull Call Spread

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For those readers looking to improve their trading results and create the unfair advantage they deserve, I have posted a training video on How to Execute a Vertical Bull Call Spread.

This is a matched pair of positions in the options market that will be profitable when the underlying security goes up, sideways, or down a small amount in price over a defined limited period of time.

It is the perfect position to have onboard during markets that have declining or low volatility, much like we experienced in 2014, and will almost certainly see again.

I have strapped on quite a few of these across many asset classes this year, and they are a major reason why I am showing positive performance numbers for 2016.

To understand this trade, I will use the example of an Apple trade, which I executed on July 10, 2014. I then felt very strongly that Apple shares would rally into the release of its new iPhone 6 on September 9, 2014.

The same play kicked in again for the iPhone 12 release last October.

So followers of my Trade Alert service received text messages and emails to add the following position:

Buy the Apple (AAPL) August 2014 $85-$90 in-the-money bull call spread at $4.00 or best

To accomplish this, they had to execute the following trades:

Buy 25 August 2014 (AAPL) $85 calls at...............$9.60

Sell short 25 August 2014 (AAPL) $90 calls at......$5.60

Net Cost:...............................................................$4.00

This gets traders into the position at $4.00, which cost them $10,000 ($4.00 per option X 100 shares per option contract X 25 contracts).

The vertical part of the description of this trade refers to the fact that both options have the same underlying security (AAPL), the same expiration date (August 15, 2014) and only different strike prices ($85 and $90).

The breakeven point can be calculated as follows:

$85.00 - Lower strike price
+$4.00 - Price paid for the vertical call spread
$89.00 - Break even Apple share price

Another way of explaining this is that the call spread you bought for $4.00 is worth $5.00 at expiration on August 15, giving you a total return of 25% in 26 trading days. Not bad!

The great thing about these positions is that your risk is defined. You can't lose any more than the amount of capital you put up, in this case, $10,000.

If Apple goes bankrupt, we get a flash crash, or suffer another 9/11 type event, you will never get a margin call from your broker in the middle of the night asking for more money. This is why hedge funds like spreads so much.

As long as Apple traded at or above $89 on the August 14 expiration date, you would have made a profit on this trade.

As it turns out, my read on Apple shares proved dead-on, and the shares closed at $97.98 on expiration day or a healthy $8.98 above my breakeven point.

The total profit on the trade came to:

($1.00 profit X 100 shares X 25 contracts) = $2,500

This means that the position earned a 25% profit on your $10,000 investment in a little more than a month. Now you know why I like Vertical Bull Call Spreads so much. So do my followers.

Occasionally, these things don't work and wheels fall off. As hard as it may be to believe, I am not infallible.

So, if I'm wrong and I tell you to buy a vertical bull call spread, and the shares fall not a little, but a lot, you will lose money. On those rare occasions when that happens, I'll shoot out a Trade Alert to you with stop-loss instructions before the damage gets out of control.

That stop loss is usually at the lower strike price when there is still a lot of time to run to expiration, as the position still has a lot of time value remaining, and the upper strike price when there are only a few days left until expiration.

The most I have ever lost on paper with one of these vertical bull call spreads was 50% of my capital, or $5,000 on a $10,000 investment. That’s because the trade was with both long and short options which maintain time value, no matter what the market does. I also never put more than 10% of my portfolio into a single position, so the paper loss on the entire capital was only 5%.

But that was on one of the worst days in market history when the Dow Average opened down 1,300 points. As it turned out, I kept my position and ended up making the maximum profit by expiration day.

To watch the video edition of How to Execute a Vertical Bull Call Spread, complete with more detailed instructions on how to execute the position with your own online platform, please click here.

Vertical Bull Call Spreads Are the Way to Go in a Crazily Oversold Market

Mad Hedge Fund Trader

Touching Base With Warren Buffet

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So how does someone with 55 years of investment experience like me learn something new? Listen to someone with 80 years of experience.

It is with great anticipation that I read Warren Buffett’s annual letter to shareholders. Having banged the table for decades that his Berkshire Hathaway (BRK/B) is a “must own” stock, keeping up with the 92-year-old Oracle of Omaha” is essential.

Besides, Warren was one of the founding subscribers to The Diary of a Mad Hedge Fund Trader 15 years ago.

I’ll give you the high points.

Berkshire companies took in a record $30.8 billion in operating profits in 2022, producing a net 3% gain in the share price.

Sounds like a deal to me!

Buffett describes himself as a business picker, not a stock picker. Over time, the great businesses prosper and compound, while the poor ones fail. The flowers bloom and the weeds wither away.

One need look no further than the Dow Average, where NO stocks were able to stay in the index over the last 100 years because of business failures. (Corn Products Refining Company? Woolworth’s? Union Carbide?). This is known as “creative destruction,” which moves capital out of the past and into the future.

“Efficient” markets exist only in textbooks, their day-to-day behavior “baffling” and only understood in retrospect.

In the ultimate act of humility, Buffet confesses to only making a dozen good decisions in his life. Coca Cola (KO) was one of those. His initial investment of $1.3 billion in 1994 is now worth $25 billion and now spins off an annual dividend of $700 million.

American Express (AXP) is the same, the initial 1995 investment of $1.3 billion is now worth $22 billion, paying $302 billion a year in dividends. Over the same time frame, an investment in 30-years bonds yielded nothing.

Warren makes the case for share buybacks, which he regularly executes whenever (BRK/B) trades at a discount. When the share count goes down, the shareholders’ ownership of the businesses goes up. This is how Berkshire created many $100 millionaires over the years.

Buffet also makes his annual case for the “Great American Tailwind.” In Buffet’s 80 years of investing, he has only seen it becalmed occasionally and briefly. Never bet against America.

Buffet started his investing career in April of 1942. Unknown to him, the US was about to win the Battle of Midway. Stocks bottomed and launched a torrid 20-year run, even though the public was unaware of the victory for three more months. It’s proof that markets see things before we mere mortals do.

As for me, I suppose I have to be even more humble than Warren Buffet, for I have only made four good investment decisions in 50 years. I agreed to accept a job offer from The Economist magazine in London, kicking off a half-century of intensive research. I took a big pay cut to go to work for Morgan Stanley (MS), which rewarded me with pre-IPO stock at book value of 25 cents a share. I bought Apple (AAPL) at $2 when Steve Jobs returned to run the company on the edge of bankruptcy. I bought Tesla (TSLA) at a split-adjusted $2.35 a share in 2010, completely buying into Elon Musk’s 30-year vision.

I only have to live another 17 years to see if he was right.

 

 

 

 

It Only Took Four Good Decisions

 

Mad Hedge Fund Trader

The United States Treasury Bond Fund (TLT) February 2024 $100-$105 at-the-money vertical Bull Call debit spread LEAPS

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BUY the United States Treasury Bond Fund (TLT) February 2024 $100-$105 at-the-money vertical Bull Call debit spread LEAPS at $2.50 or best

Opening Trade

3-1-2023

expiration date: February 16, 2024

Number of Contracts = 1 contract

A $10 selloff in the (TLT) is a great entry point for a LEAPS. This is a gift from the US House of Representatives which is threatening to throw the entire government bond market into default by summer.

If you are a trader, default threats are where you BUY bonds.

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 a double in little more than a year. That is the probability that (TLT) shares will rise by only 3.32% over the next 12 months.

The logic behind this LEAPS is fairly simple.

After keeping interest rates too low for too long, then raising them too far too fast, what does the Fed do next? It then lowers interest rates too far too fast. In other words, a mistake-prone Jay Powell will keep on making mistakes. That’s what you get with a Fed chair who only has a degree in political science.

The rate of interest rate rises has been the most rapid in history and is certain to trigger a recession in 2023. When the recession hits, demand for money will dry up and interest rates will collapse. Yields on ten-year US Treasury bonds that bottomed at 0.32% in 2020 and reached a peak of 4.46% in October will easily fall back down to 2.50% by the time this LEAPS matures. That’s where we were last April and will take the (TLT) at least back up to $120.

I am using the very conservative $100-$105 strike price in case bonds continue bouncing along a bottom before turning in a few months. If a double in a year is not enough for you, perhaps you should consider another line of business.

I am therefore buying the United States Treasury Bond Fund (TLT) February 2024 $100-$105 at-the-money vertical Bull Call spread LEAPS at $2.50 or best.

Don’t pay more than $3.00 or you’ll be chasing on a risk/reward basis.

I am going out to only a February 16, 2024 expiration because I think this trade will work fairly quickly with a 2023 recession, even a mild one. 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 Treasury Bond Fund (TLT) February 2024 $100-$105 at-the-money vertical Bull Call spread LEAPS are showing a bid/offer spread of $2.00-$3.00, which is typical. Enter an order for one contract at $2.00, another for $2.10, another for $2.20, 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 (TLT) does NOT rise by 3.32% in 12 months, the value of your investment goes to zero. The way to play this is to buy LEAPS in ten different names. 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.

There is another way to cash in. Let’s say we get half of your double in the next three months which, from these low levels, is entirely possible. Then you could earn half of the maximum potential profit in months. You can decide whether to keep the threefold return or go for the full five-bagger. It’s a nice problem to have.

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 a 3.32% rise in (TLT) shares will generate a 100% profit with this position, such is the wonder of LEAPS. That gives you an implied leverage of 30:1 across the $100-$105 space.

If you want to get more aggressive you can buy the United States Treasury Bond Fund (TLT) February 2024 $115-$120 out-of-the-money vertical Bull Call spread LEAPS for $1.00, giving you a potential profit of 400%. I can do this trade and sleep at night. I’m not so sure about you.

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 (TLT) will not fall below $105  by the January 17, 2024 options expiration in 12 months.

Here are the specific trades you need to execute this position:

Buy 1 February 2024 (TLT) $100 calls at………….………$7.00

Sell short 1 February 2024 (TLT) $105 calls at….………$4.50

Net Cost:………………………….………..........………….….....$2.50

Potential Profit: $5.00 - $2.50 = $2.50

(1 X 100 X $2.50) = $250 or 100% in 12 months.

 

 

 

 

 

To see how to enter this trade in your online platform, please look at the order ticket below, which I pulled from 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.

Mad Hedge Fund Trader

The 15-Year Anniversary of the Mad Hedge Fund Trader

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The Diary of a Mad Hedge Fund Trader is now celebrating its 15th year of publication.

During this time, I have religiously pumped out 3,000 words a day, or 15 newsletters a week, of original, independent-minded, hard-hitting, and often wickedly funny research.

I spent my life as a war correspondent, Marine Corps combat pilot, Wall Street trader, and hedge fund manager, and if you can’t laugh after that, something is wrong with you.

I’ve been covering stocks, bonds, commodities, foreign exchange, energy, precious metals, real estate, and even agricultural products.

You’ve been kept up on my travels around the world and listened in on my conversations with those who drive the financial markets.

I also occasionally opine on politics, but only when it has a direct market impact, such as with the recent administration's economic and trade policies. There is no profit in taking a side.

The site now contains over 20 million words, or 30 times the length of Tolstoy’s epic War and Peace.

Unfortunately, it feels like I have written on every possible topic at least 100 times over.

So, I am reaching out to you, the reader, to suggest new areas of research that I may have missed until now that you believe justify further investigation.

Please send any and all ideas directly to me at support@madhedgefundtrader.com, and put “RESEARCH IDEA” in the subject line.

The great thing about running an online business is that I can evolve it to meet your needs on a daily basis.

Many of the new products and services that I have introduced since 2008 have come at your suggestion. That has enabled me to improve the product’s quality, to your benefit. Notice how rapidly my trade alert performance is going up, now annualizing at +47% a year.

This originally started out as a daily email to my hedge fund investors giving them an update on fast market-moving events. That was at a time when the financial markets were in free fall, and the end of the world seemed near.

Here’s a good trading rule of thumb: Usually, the world doesn’t end. History doesn’t repeat itself, but it certainly rhymes.

The daily emails gave me the scalability that I so desperately needed. Today’s global mega enterprise grew from there. Today, the Diary of a Mad Hedge Fund Trader and its Global Trading Dispatch is read in over 140 countries by 30,000 followers. The Mad Hedge Technology Letter and the Mad Hedge Biotech & Healthcare Letter also have substantial followings. And Mad Hedge Hot Tips is one of the most widely-read publications in the financial industry.

I’m weak in distribution in North Korea and Mali, in both cases due to the lack of electricity. But that may change.

One can only hope.

If you want to read my first pitiful attempt at a post, please click here for my February 1, 2008 post at
https://www.madhedgefundtrader.com/february-1-2008/

It urged readers to buy gold at $950 (it soared to $1,975), and buy the Euro at $1.50 (it went to $1.60).

Now you know why this letter has become so outrageously popular.

Unfortunately, I also recommended that they sell bonds short. I wasn’t wrong on that one, just early, about eight years too early.

I always get asked how long will I keep doing this?

I am already collecting Social Security, so that deadline came and went. My old friend and early Mad hedge subscriber, Warren Buffet is still working at 92, so that seems like a realistic goal.

Hiking ten miles a day with a 50-pound pack, my doctor tells me I should live forever. He says he spends all day trying to convince his other patients to be like me, and the only one who actually does it is me.

The harsh truth is that I don’t know how to NOT work. Never tried it, never will.

The fact is that thousands of subscribers love me for what I do, pay for me to travel around the world first class to the most exotic destinations, eat in the best restaurants, fly the rarest historical aircraft, then say thank you. I even get presents (keep those pounds of fudge and bottles of bourbon coming!).

Given the absolute blast I have doing this job, I would be Mad to actually retire.

Take a look at the testimonials I get only on an almost daily basis and you’ll see why this business is so hard to walk away from (click here).  

In the end, you are going to have to pry my cold dead fingers off of this keyboard to get me to give up.

Fiat Lux (let there be light).

 

 

 

Mad Hedge Fund Trader

The Market Outlook for the Week Ahead, or Making a Silk Purse from a Sow’s Ear

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Call this the Dr. Jekyll and Mr. Hyde market.

On the up days, we see the kindly ministrations of Dr. Jekyll.

On the down days, we suffer from the evil hand of Mr. Hyde.

To say that traders are confused would be an understatement. Many seasoned pros have told me that this is one of the most difficult markets they have ever seen.

Fridays have been particularly treacherous when weekly options expire. Some 56% of all options trading now takes place with expirations of five days or less. Trading before 4:00 PM sees billions of dollars of hot money trying to force closing prices just in or out of the money for key at-the-money strike prices.

What is especially disturbing is that some 80% of the gain in the S&P 500 (SPY) this year has been in just seven names, Meta, (META), Alphabet (GOOGL), Microsoft (MSFT), Apple (AAPL), Amazon (AMZN), Netflix (NFLX) and Tesla (TSLA). Most other stocks went nowhere….or down. That much concentration means that any rallies lack confidence and will fail….for now.

Remember these names because when we finally do get a real upside breakout, they will be the leaders. You can take that to the bank.

Thanks to turmoil in the House of Representatives intent on a national default, bonds have given up 70 of the 120-basis point drop in yields since October. That deprives us of one of our biggest money makers of 2022, our long bond trades.

That means were are also seeing the automatic flip side of the bond trade, a strong US Dollar (UUP), and weak precious metals, (GLD) and (SLV), and emerging markets (EEM).

This too shall end.

If it was excess liquidity that caused stocks to rocket for 13 years, then maybe we should be focusing on what little liquidity is left. That would be the font of government money pouring into infrastructure and alternative energy plays.

Some $370 billion I know available for investment in ESG, would most of it going into the battery industry for the burgeoning electric vehicle industry. Even foreign firms like Finland’s Neste is moving to the US to cash in on federal munificence, converting an old US oil refinery to produce diesel fuel out of animal and vegetable fat (click here for the link).

Probably the best bet here is in California-based Enphase Energy (ENPH), which makes a 40% gross profit margins on microinverters for solar panels and has just seen a 42% dive in its share price. That makes (ENPH) a BUY. Hint: solar stocks always follow the price of oil to which it is tied, which has lately been down.

Some nimble and aggressive trading managed to push me back in the green for February, taking me up +0.93% on the month. That’s a dramatic improvement of +5.48% from a week ago.

You might even call it making a silk purse from a sow’s ear.

My 2023 year-to-date performance is still at the top at +23.28%. The S&P 500 (SPY) is up +4.32% so far in 2023. My trailing one-year return maintains a sky-high +86.58% versus -12.97% for the S&P 500.

That brings my 15-year total return to +620.47%, some 2.78 times the S&P 500 (SPX) over the same period. My average annualized return has recovered to +46.83%, still the highest in the industry.

Last week, I piled on a Tesla (TSLA) March $155-$260 short strangle betting that the stock can stay within a $95 range for 19 trading days. I also added a deep in-the-money long in the bond market for the first time in six weeks. Both positions turned immediately profitable.

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!

Q4 GDP Dips, from 3.9% to 2.7% in the October-December quarter. Consumption took a dive, which is amazing over the holidays. This is nowhere near a recession.

Fed Minutes Show More Hikes to Come, with the emphasis on the plural. That could take the overnight borrowing rate to a 5.40% high. It certainly pees on the parade for the falling interest rates crowd.

The Tail is Wagging the Dog, with short, dated options, often same-day expiration dominating trading every Friday. Billions of dollars are battling around key strike prices attempting to force expirations in or out of the money. No place for the little guy. Better to take Fridays off.

Netflix Slashes Prices in 30 countries, taking the stock down a modest 3%. (NFLX) is still the leader in the sector with 231 million subscribers, followed by Amazon (200 million), Disney Plus (162 million, HBO Max (95 million, Peacock (18 million), and Hulu 47 million). Buy (NFLX) and (AMZN) on dips.

Individual 401k’s Lost 23% in 2022, according to a study from Fidelity. High inflation is shrinking the remaining purchasing power even faster. A rising number of workers are also borrowing against their 401k’s to make ends meet. Such loans can go up to 50% of the principal. Better start making up the losses or you’ll be spending your golden years working at Taco Bell.

Apple to Add Glucose Monitor on its Watches, to aid diabetic clients. Some 38 million Americans have diabetes and given the obesity epidemic that figure is certain to rise. It highlights Big Tech’s move into the low-hanging fruit in health care.

Existing Home Sales Dive 0.7% in January, to a 4 million annualized rate, the weakest since October 2010. That makes 12 consecutive months of falling sales. The Median Home Price sold rose to $359,000. An imminent national debt crisis and spiking interest rates is not a great environment in which to sell your home.

Biden Ukraine Visit Tanks Gas and Oil Prices, cutting Russia’s chances of a win and eventually leading to a flood of oil on the market. Biden’s visit is sending the message to Putin that there’s no chance of a win here. Energy is hitting two-year lows across the board. Only energy stocks are staying high. Energy is getting so cheap it might be worth a trade.

Germany Accelerates Move Towards Alternatives, permanently cutting all ties with Russia energy. Europe’s biggest economy, and the fourth largest in the world, hopes to get 80% of its electricity from solar and wind by 2030. Hydrogen is also entering the picture. Other countries will follow.

On Monday, February 27 at 8:30 AM EST, US Durable Goods are out.

On Tuesday, February 28 at 9:00 AM, the S&P Case Shiller National Home Price Index for December is released.

On Wednesday, March 1 at 10:00 AM, the ISM Manufacturing PMI is printed.

On Thursday, March 2 at 8:30 AM, the Weekly Jobless Claims are announced.

On Friday, March 3 at 8:30 AM, the ISM Non-Manufacturing PMI. At 2:00 the Baker Hughes Oil Rig Count is out.

As for me, I usually get a request to fund some charity about once a day. I ignore them because they usually enrich the fundraisers more than the potential beneficiaries. But one request seemed to hit all my soft spots at once.

Would I be interested in financing the refit of the USS Potomac (AG-25), Franklin Delano Roosevelt’s presidential yacht?

I had just sold my oil and gas business for an outrageous profit and had some free time on my hands so I said, “Hell Yes,” but only if I get to drive. The trick was to raise the necessary $5 million without it costing me any money.

To say that the Potomac had fallen on hard times was an understatement.

When Roosevelt entered the White House in 1932, he inherited the presidential yacht of Herbert Hoover, the USS Sequoia. But the Sequoia was entirely made of wood, which Roosevelt had a lifelong fear of. When he was a young child, he nearly perished when a wooden ship caught fire and sank, he was passed to a lifeboat by a devoted nanny.

Roosevelt settled on the 165-foot USS Electra, launched from the Manitowoc Shipyard in Wisconsin, whose lines he greatly admired. The government had ordered 34 of these cutters to fight rum runners across the Great Lakes during Prohibition. Deliveries began just as the ban on alcohol ended.

Some $60,000 was poured into the ship to bring it up to presidential standards and it was made wheelchair accessible with an elevator, which FDR operated himself with ropes. The ship became the “floating White House,” and numerous political deals were hammered out on its decks. Some noted guests included King George VI of England, Queen Elisabeth, and Winston Churchill.

During WWII Roosevelt hosted his weekly “fireside chats” on the ship’s short-wave radio. The concern was that the Germans would attempt to block transmissions if broadcast came from the White House.

After Roosevelt’s death, the Potamac was decommissioned and sold off by Harry Truman, who favored the much more substantial 243-foot USS Williamsburg. The Potamac became a Dept of Fisheries enforcement boat until 1960 and then was used as a ferry to Puerto Rico until 1962.

An attempt was made to sail it through the Panama Canal to the 1962 World’s Fair in Seattle, but it broke down on the way in Long Beach, CA. In 1964 Elvis Presley bought the Potomac so it could be auctioned off to raise money for St. Jude Children’s Research Hospital. It sold for $65,000. It then disappeared from maritime registration in 1970. At one point there was an attempt to turn it into a floating disco.

In 1980 a US Coast Guard cutter spotted a suspicious radar return 20 miles off the coast of San Francisco. It turned out to be the Potomac loaded to the gunnels with bales of illicit marijuana from Mexico. The Coast Guard seized the ship and towed it to the Treasure Island naval base under the Bay Bridge. By now the 50-year-old ship was leaking badly. The marijuana bales soaked up the seawater and the ship became so heavy it sank at its moorings.

Then a long rescue effort began. Not wanting to get blamed for the sinking of a presidential yacht on its watch the Navy raised the Potomac at its own expense, about $10 million, putting its heavy lift crane to use. It was then sold to the City of Oakland, Ca for a paltry $15,000.

The troubled ship was placed on a barge and floated upriver to Stockton, CA, which had a large but underutilized unionized maritime repair business. The government subsidies started raining down from the skies and a down-to-the-rivets restoration began. Two rebuilt WWII tugboat engines replaced the old, exhausted ones. A nationwide search was launched to recover artifacts from FDR’s time on the ship. The Potomac returned to the seas in 1993.

I came on the scene in 2007 when the ship was due for a second refit. The foundation that now owned the ship needed $5 million. So, I did a deal with National Public Radio for free advertising in exchange for a few hundred dinner cruise tickets. NPR then held a contest to auction off tickets and kept the cash (what was the name of FDR’s dog? Fala!).

I also negotiated landing rights at the Pier One San Francisco Ferry Terminal, which involved negotiating with a half dozen unions, unheard of in San Francisco maritime circles. Every cruise sold out over two years, selling 2,500 tickets. To keep everyone well-lubricated I became the largest Bay Area buyer of wine for those years. I still have a free T-shirt from every winery in Napa Valley.

It turned out to be the most successful fundraiser in the history of NPR and the Potomac. We easily got the $5 million and then some. The ship received a new coat of white paint, new rigging, modern navigation gear, and more period artifacts. I obtained my captain’s license and learned how to command a former coast guard cutter.

It was a win-win-win.

I was trained by a retired US Navy nuclear submarine commander, who was a real expert at navigating a now thin-hulled 73-year-old ship in San Francisco’s crowded bay waters. We were only licensed to cruise up to the Golden Gate bridge and not beyond, as the ship was so old.

The inaugural cruise was the social event of the year in San Francisco with everyone wearing period Depression-era dress. It was attended by FDR’s grandson, James Roosevelt III, a Bay area attorney who was a dead ringer for his grandfather. I mercilessly grilled him for unpublished historical anecdotes. A handful of still-living Roosevelt cabinet members also came, as well as many WWII veterans.

As we approached the Golden Gate Bridge, some poor soul jumped off and the Coast Guard asked us to perform search and rescue until they could get a ship on station. No body was ever found. It certainly made for an eventful first cruise.

Of the original 34 cutters constructed only four remain. The other three make up the Circle Line tour boats that sail around Manhattan several times a day.

Last summer I boarded the Potomac for the first time in 14 years for a pleasant afternoon cruise with some guests from Australia. Some of the older crew recognized me and saluted. In the cabin, I noticed a brass urn oddly out of place. It contained the ashes of the sub-commander who had trained me all those years ago.

Good Luck and Good Trading,

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

 

 

Captain Thomas at the Helm

 

 

 

 

 

 

 

 

 

Mad Hedge Fund Trader

February 22 Biweekly Strategy Webinar Q&A

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Below please find the subscribers’ Q&A for the February 22 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Silicon Valley in California.

 

Q: Will Russia use nuclear weapons on Ukraine?

A: No, they won’t. If you’re trying to take over a country, you don’t exactly want to drop atomic bombs on it first and render it useless. If they do, Ukraine will retaliate in kind with the nukes they have. Most of the nuclear weapons the old Soviet Union had were assembled in Ukraine and the machinery is still there. We know Ukraine has four nuclear power plants and hundreds of tons of fuel so they have uranium. You only need to increase the purity from 80% to 93% and then convert it to plutonium to get weapons-grade and you only need 20 pounds to make a small bomb. At the very least, they could build a dirty truck bomb and make Moscow uninhabitable for 100 years. If the Russians did explode a nuke, the fallout cloud would blow back on them the next day, China in three days, the US in 10 days, and back on Russia again in two weeks. If Ukraine doesn’t remember how to make nuclear weapons, they can just ask me. I do have “Nuclear Test Site” on my resume.

Q: What would be the impact on the markets of a government debt default?

A: Bonds would collapse, causing interest rates to spike, and taking down stocks big time. Higher interest rates would crash the real estate market. You also can’t do real estate closings during a shutdown because Fannie Mae and Freddie Mac aren’t there to buy the debt. Commodities would fall sharply on recession fears. Even gold and silver do poorly on a massive liquidity squeeze. Government payments would cease, including Social Security, Medicare, and military salaries. Air traffic control would stop unless they are happy to work for free. The only place to hide is cash under your mattress since US Treasury bills and commercial banks will also be at risk. This is what the House Republicans are risking. It really depends on how long the shutdown lasts. Every time Georgia representative Marjorie Taylor Greene shouted “liar” at the State of the Union address you could see bond prices ticking down. She is one of the people who has to agree to a rise in the debt ceiling and she didn’t inspire a lot of confidence in bondholders. All that said, a $10 dip is a good place to buy the (TLT).

Q: Would you buy Boeing up here?

A: I loved Boeing at $100 and we did a could trades down there. At $220 not so much. It’s more than doubled off the October low and all the best-case scenarios have happened. The 737 MAX, which crashed twice due to an AI issue, got back in the air. The 787 Dreamliner is selling well. The company now has a two-year order backlog. And Air India followed up with the biggest aircraft order in history, some 450 planes over ten years. If Boeing dips $50 that would be another story because I think it hits a new all-time high at $450 in a couple of years. By the way, I took a 737 MAX on my flight back from Hawaii last weekend and the crew loved it. There are no screens on the seats. Instead, they broadcast the 800 greatest movies of all time on free WIFI.

Q: How do we know if your trade alert is for the stock, the ETF, or another underlying position?

A: Look at the ticker symbol—it always tells you exactly which security we are working in.

Q: With Bullard signaling a 50 basis-point rate hike, will the S&P (SPY) go down in the near term and how much?

A: Well Bullard is only one guy out of nine, so he doesn’t have the final say. It really depends on what Jay Powell wants. And if the data continues hot and inflation keeps rising, we will get a 50 basis point rise, and that should take the index down 10% from the recent high, or give up half of its recent year-to-date gains, so that’s a good rule of thumb. As long as we’re waiting for bad news, (which we won’t get until March 22) the markets will do nothing until then.

Q: What do you think about Crown Castle International (CCI), the cell tower company, taking a big hit with the bond market?

A: It pretty much moves in sync with the bond market, which has just dropped 10 points, so you probably want to be buying or doubling up on (CCI) right here, because it will be the first thing to recover once we see a negotiated increase in the debt ceiling which has to happen before the summer. The 5G buildout continues unabated.

Q: Would you recommend buying Tesla (TSLA) shares again?

A: Yes, but at least $50 lower, which we may get. Or at least $50 off the $217 top. I think Tesla goes to $1,000 sometime in the next couple of years and so does Elon Musk. All of the factors that could drive the stock that high are in progress. I know it’s happening over there, and that’s easily a $1,000 stock once their current breakthroughs go mass-market.

Q: Any interest in Iron Condors?

A: It is the same as Strangles, with more limited risk with four legs, a call spread and a put spread because you stop out your losses at much lower levels. But they are very trading-intensive, commission-intensive trades, and it’s really too much for most beginners to handle. However, if you’re a professional, you might consider doing iron condors on these positions. Iron Condors also max profits when nothing moves, and lately, no move is a pretty rare event. We’re going to get it for the next couple of months, but don’t count on that being a frequent trade.

Q: Any iShares 20 Plus Year Treasury Bond ETF (TLT) LEAPS to buy now?

A: Yes I've been kind of sitting on my hands waiting to see if this bottom here holds at 99 before I put out LEAPS, but we’re so close it really almost makes no difference. And if I were to do a LEAPS here it probably would be the $100-$105 one-year out. That might get you about a 100% profit in a year. That’s a very safe LEAPS, and I’ll get the numbers out when I get a chance.

Q: What’s your opinion on Home Depot (HD)?

A: I like it for the long term. Clearly, their disastrous earnings report shows that the economy for home repair is not as strong as we thought it was, so it may go lower first. I would hold off until we get a real capitulation selloff in those stocks.

Q: Are gold and silver possible candidates for LEAPS?

A: Yes, especially in view of the recent correction in these metals. And we did put these out last October at the market bottom. I probably will be updating that sometime in the next few weeks.

Q: How much longer will the Ukraine/Russia war last?

A: The general consensus among the military now is that this goes on for several more years, and both sides will just keep pouring troops into the meat grinder until they get exhausted.

Q: Any way to play Platinum (PPLT) or Palladium (PALL)?

A: Yes, there are ETFs on each of them.

Q: Any thoughts on the crypto industry?

A: I have given up on the crypto industry because it has been shown that so many of these trading platforms were stealing from their customers. Once you lose the confidence of a customer on trust, you never get it back in the financial industry. Also, crypto was interesting a couple of years ago when it was going up and everything else in the world was too expensive, but now you have all the best stocks trading not far from multi-year lows, and that makes quality stocks much more attractive than a crypto where you really don't know what’s going to happen. Crypto could be another Nikkei, which after 32 years still hasn’t reached its old highs. That is unless it gets taken over by big banks like (JPM) and regains respectability that way.

Q: Any thoughts on investing in the AI trend?

A: AI has suddenly become what crypto was 2 years ago, and what 3D printing was 15 years ago. It’s just the theme of the day, and something to promote. There are no pure AI plays. Basically, all companies have been using it for 10 or 15 years, it’s not a new thing. In fact, AI is already in every aspect of your life, you just might not know it yet. NVIDIA (NVDA) is probably the purest AI play out there whose chips everyone needs to execute AI. Beyond that, the biggest AI users are Apple (AAPL), Alphabet (GOOGL), Meta (META), and Amazon (AMZN). When Amazon makes ten more recommendations on books you might like or movies you might watch, that is AI.

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 or TECHNOLOGY LETTER, then WEBINARS, and all the webinars from the last 12 years are there in all their glory.

Good Luck and Stay Healthy,

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

 

With Medal of Honor Winner Colonel Mitchel Paige

 

 

 

 

 

 

 

 

 

Mad Hedge Fund Trader

The Mad Hedge Traders & Investors Summit is on for June 14-16.

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The Mad Hedge Traders & Investors Summit is on for June 14-16. A collection of the 27 best traders and managers in the world, or eight a day, each giving an educational webinar. Back-to-back one-hour presentations are followed by an interactive Q&A. It’s a smorgasbord of trading strategies, so pick the one that is right for you. Covering all stocks, bonds, commodities, foreign exchange, precious metals, energy, bitcoin, and real estate. It’s the best look at the rest of 2022’s money-making opportunities you will get anywhere. Oh, and you will have a chance to win $100,000 in prizes. To view the schedule and speakers and to register NOW, click here.

 

Mad Hedge Fund Trader

The Market Outlook for the Week Ahead, or Putin’s Dead End

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The current consensus for market strategists is that volatility will remain high.

Please pinch me because I think I died and went to heaven. For every time the Volatility Index (VIX) tops $30, I make another 10%-15% for my followers.

The bulk of market players are now obsessing whether we are entering a recession or not, as if their investment faith depended on it.

Recession, resmession.

As long as I can keep making a 65.40% trailing one-year return, while the Dow Average is off -4.2% during the same time period, I could care less what the economy is actually going to do.

After an impressive 380-point, 10% rally in the S&P 500, it now looks like the stock market is failing once again. Best case, we revisit this year’s low at 3,800. Worst case, we break to new lows at 3,600. The very worst case, we break below 3,500 and wish you had never heard of the stock market.

If you are a trader, there is a fantastic opportunity here to buy low, sell high, and retire early. If you are disciplined, you still have a ton of cash left over from the end of 2021 (I was 100% cash) and will be cherry-picking on the big down days.

It's really very simple. The longer you have been doing this, the easier it gets and the more money you will make. After 52 years of practice, I can do this in my sleep.

As the bear market worsens, we are seeing old asset classes return from the dead like the revived dinosaurs of Jurassic Park. Call convertible bonds are the velociraptors of the bunch.

Take the main junk bond ETF like the iShares iBoxx High Yield Corporate Bond Fund (HYG) and the SPDR Barclays High Yield Bond Fund (JNK), which have seen yields double from 3% to over 6% in only six months.

If you are willing to take on more risk, individual busted convertible bonds yield infinitely more. You know all the names. Peloton (PTON) converts are paying a 10.4% yield to maturity, Wayfair (W) 11.0%, MicroStrategy (MSTR) 13.1%, Redfin (RDFN) 14.5%, and Beyond Meat (BYND) 19.5%. Buy ten of these and even if one goes under, you still earn a decent double-digit return.

Having run a convertible bond trading desk for ten years, I can tell you that the risk/reward balance for many individuals with this investment class is just right.

As my summer military duty approaches, information about the Ukraine War is pouring into me. I will share with you what I can, what has been declassified for the war is still a major factor in your investment outcomes. I have been able to use my “top secret” status for 50 years,= to your benefit.

The amazing thing is that in this modern age, information goes from “top secret” to declassified in only a day. It is a new strategy used by the current administration that is working incredibly well. Information is more valuable shared than locked up.

I have been getting a lot of questions from readers as to why Vladimir Putin committed such a disastrous error by invading Ukraine as he is considered a smart guy. My initial response was that he surrounded himself with “yes” men who only told him what he wanted to hear, leading to terrible outcomes, which I have seen happen many times.

The costs of the war for Putin have so far been enormous; 50,000 casualties, 1,000 tanks, 1,300 armored vehicles, banishment from the western economy, the loss of $1 trillion in foreign held assets, and the decline of the national GDP from $1.5 trillion to $1 trillion.

The costs are about to substantially rise. The US is now sending over its most advanced artillery systems, the MRLS, or Multiple Rocket Launch System, which can hit any target within 300 miles with an accuracy of one meter. All you have to do is dial in the latitude and longitude of the target and it never misses. This one weapon will certainly bring the war to a stalemate and consign it to page three of the newspapers.

But after doing a ton more research, my view has evolved. Putin has in fact launched a Resource War against the entire rest of the world. The result has been to boost the price of practically everything Russia produces, including oil ($123 billion), refined petroleum products ($63 billion), iron & steel ($28 billion), coal ($17 billion), fertilizer ($13 billion), wood ($12 billion), wheat ($9 billion), aluminium ($8 billion), platinum, palladium, uranium.

There is also the inflation angle. While the US benefits from many of these high prices as well, they have raised the US inflation rate from 5% to 8.3%. That damages the election prospects of Biden and the Democrats. High inflation improves the election of prospects of a former president who Putin seems to vastly prefer for whatever reason.

After covering Russia for 50 years, flying their front-line fighters, springing a wife out of jail in Moscow, I can tell you that everything there is a chess game, and they play a very long game.

Nonfarm Payroll Report comes in at 390,000, better than expected. Leisure & Hospitality led the gains with 84,000, and Professional & Business Services by 75,000. Manufacturing fell to only 18,000, largely because of a shortage of workers. The Headline Unemployment Rate remained the same at 3.6%. Average hourly earnings rose by an inflationary 5.2% YOY. The U6 “discouraged worker” rate rose back to 7.1%.

Weekly Jobless Claims jump 19,000 to 200,000, a two-month high, according to the Department of Labor. Compensation for American workers has hit a 30-year high. New York showed the largest increase followed by Illinois.

OPEC+ raises oil output to meet surging energy demand caused by the Ukraine War. Up 648,000 barrels a month for July and August. They could easily do a lot more. The cartel is aiming for the pre-pandemic 10 million barrels a day. No dent in prices at the pump yet.

Hedge Funds were slaughtered in May, with the flagship Tiger Global Fund down a massive 14%. Gee, Mad Hedge Fund Trader was UP 11% in May and am up 44% on the year. Maybe there’s something in the water here at Lake Tahoe. Or, maybe it’s the “Mad” that is giving me my edge?

S&P Case Shiller National Home Price Index tops 20.6%, a new all-time high. Tampa (34.8%), Miami (32.4%), and Phoenix (32.0%) lead the gains. Incredible as it may seem, price rises are accelerating. But expect that to cool off once current prices start feeding into the index.

Home Listings soar, with homes for sale up 9% YOY as homeowners fear missing getting out at the top. New listings have doubled in a year, according to Redfin. Outrageous over-market bids have definitely ended in California. So far, no hint of price drops….yet.

A Ford (F) Electric Pickup can power your house for ten days, but only if you live in a tiny house. Ford is the first company to introduce bidirectional charging that lets your home run off the vehicle’s 1,300-pound lithium-ion battery. All you need is a $3,895 hardware upgrade from Sunrun. The range is 320 miles, not as much as the latest Tesla Model X (TSLA). Good luck getting one. Ford isn’t taking any new orders until it fills the 200,000 it already has. Expect Tesla to copy the move.

The Fed may overshoot on raising interest rates if Fed governor Christopher Waller has his way. That’s because going too tight may be necessary to break the back of inflation. That’s what happened in 1980, when Fed Funds hit 17%, and ten-year bond yields hit 15.84%. My first home mortgage interest rate for a coop in Manhattan back then was 17%.

China Covid Cases fade, prompting a big Bitcoin rally. This could be the impetus for a sudden global economic recovery that will deliver a big US stock market rally. Good thing I loaded the boat with tech stocks two weeks ago.

The Fed Minutes were not so horrible, downplaying the risk of a full 1% rate rise, triggering a 1,000-point rally in the Dow. With five up days in a row this is starting to look like THE bottom. Is this the light at the end of the tunnel?

NVIDIA (NVDA) rips, surprising to the upside on almost every front, sending the stock up $30, or 18.75%. Mad Hedge followers bought (NVDA) last week. This is one of the best run companies in the world. I expect the shares to rise from the current $178.51 to $1,000 in five years. Buy (NVDA) on dips.

Q1 GDP dives 1.5%, in its final read. It’s the worst quarter since the pandemic began during Q2 2022. Weekly Jobless Claims dropped 8,000 to 210,000.

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 historically cheap, oil peaking out soon, and technology hyperaccelerating, 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 some of the greatest market volatility seen since 1987, my June month-to-date performance recovered to +2.49%.

My 2022 year-to-date performance exploded to 44.36%, a new all-time high. The Dow Average is down -9.37% 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 65.40%.

That brings my 14-year total return to 556.92%, some 2.37 times the S&P 500 (SPX) over the same period and a new all-time high. My average annualized return has ratcheted up to 43.97%, easily the highest in the industry.

We need to keep an eye on the number of US Coronavirus cases at 84.7 million, up 300,000 in a week and deaths topping 1,000,000 and have only increased by 2,000 in the past week. You can find the data here.

On Monday, June 6 is the 78th anniversary of the D-Day invasion of Normandy. All of the veterans I knew have long since passed. I’ll miss the memorial this year.

On Tuesday, June 7 at 8:30 AM, the US Balance of Trade for April is released.

On Wednesday, June 8 at 10:30 AM, US Crude Inventories are published.

On Thursday, June 9 at 8:30 AM, Weekly Jobless Claims are out.

On Friday, June 10 at 8:30 AM, the blockbuster US Core Inflation Rate is announced. More importantly, the new dinosaur movie, Jurassic World: Dominion, is released. At 2:00 the Baker Hughes Oil Rig Count are out.

As for me, this is not my first Russian invasion.

Early in the morning of August 20, 1968, I was dead asleep at my budget hotel off of Prague’s Wenceslas Square when I was suddenly awoken by a burst of machine gun fire. I looked out the window and found the square filled with T-54 Russian tanks, trucks, and troops.

The Soviet Union was not happy with the liberal, pro-western leaning of the Alexander Dubcek government so they invaded Czechoslovakia with 500,000 troops and overthrew the government.

I ran downstairs and joined a protest demonstration that was rapidly forming in front of Radio Prague trying to prevent the Russians from seizing the national broadcast radio station. At one point, I was interviewed by a reporter from the BBC carrying this hulking great tape recorder over his shoulder, as I was the only one who spoke English.

It seemed wise to hightail it out of the country, post haste, as it was just a matter of time before I would be arrested. The US ambassador to Czechoslovakia, Shirley Temple Black (yes, THE Shirley Temple), organized a train to get all of the Americans out of the country.

I heard about it too late and missed the train.

All borders with the west were closed and domestic trains shut down, so the only way to get out of the country was to hitch hike to Hungary where the border was still open.

This proved amazingly easy as I placed a small American flag on my backpack. I was in Bratislava just across the Danube from Austria in no time. I figured worst case, I could always swim it, as I had earned both, the Boy Scout Swimming, and Lifesaving merit badges.

Then I was picked up by a guy driving a 1949 Plymouth who loved Americans because he had a brother living in New York City. He insisted on taking me out to dinner. As we dined, he introduced me to an old Czech custom, drinking an entire bottle of vodka before an important event, like crossing an international border.

Being 16 years old, I was not used to this amount of high-octane 40 proof rocket fuel and I was shortly drunk out of my mind. After that, my memory is somewhat hazy.

My driver, also wildly drunk, raced up to the border and screeched to a halt. I staggered through Czech passport control which duly stamped my passport. I then lurched another 50 yards to Hungary, which amazingly let me in. Apparently, there is no restriction on entering the country drunk out of your mind. Such is Eastern Europe.

I walked another 100 yards into Hungary and started to feel woozy. So, I stumbled into a wheat field and passed out.

Sometime in the middle of the night, I felt someone kicking me. Two Hungarian border guards had discovered me. They demanded my documents. I said I had no idea what they were talking about. Finally, after their third demand, they loaded their machine guns, pointed them at my forehead, and demanded my documents for the third time.

I said, “Oh, you want my documents!”

I produced my passport, When they got to the page that showed my age they both started laughing.

They picked me and my backpack up and dragged me back to the road. While crossing some railroad tracks, they dropped me, and my knee hit a rail. But since I was numb, I didn’t feel a thing.

When we got to the road, I saw an endless stream of Russian army trucks pouring into Czechoslovakia. They flagged down one of them. I was grabbed by two Russian soldiers and hauled into the truck with my pack thrown on top of me. The truck made a U-turn and drove back into Hungary.

I contemplated my surroundings. There were 16 Russian Army soldiers in full battle dress holding AK-47s between their legs and two German Shepherds all looking at me quizzically. Then I suddenly felt the urge to throw up. As I assessed that this was a life and death situation, I made every effort to restrain myself.

We drove five miles into the country and then stopped at a small church. They carried me out of the truck and dumped me and my pack behind the building. Then they drove off. 

The next morning, I woke up with the worst headache of my life. My knee bled throughout the night and hurt like hell. I still have the scar. Even so, in my enfeebled condition, I realized that I had just had one close call.

I hitch-hiked on to Budapest, then to Romania, where I heard that the beaches were filled with beautiful women. My Italian let me get by passably in the local language.

It all turned out to be true.

Stay Healthy,

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

 

One More Off to College

 

If You Don’t Like the Price, Don’t Use it

 

 

 

 

 

 

 

 

 

Mad Hedge Fund Trader

June 1 Biweekly Strategy Webinar Q&A

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Below please find subscribers’ Q&A for the June 1 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Silicon Valley.

Q: What are the 3 best stocks to own for the end of the year?

A: Apple (AAPL), Alphabet Inc. (GOOGL), and Microsoft (MSFT). Those you want to buy on meltdown days, kind of like today. Make sure you scale into these—so maybe buy 20% on every down-500-point Dow day. Eventually, you’ll end up with a pretty decent position at a market low in a stock that will double in 3-5 years.

Q: Why these three stocks?

A: Lots of reasons: They’re huge, they’re safe, two out of three pay dividends, Alphabet is about to split, and they have huge moats so nobody can get into their sectors. They have near monopolies in what they do, and they have immense cash on the balance sheet. These are the kind of stocks that portfolio managers dream about. And watch what rallied the hardest in the last dead cat bounce we had—it was these three names. That tells you that they will lead any long-term bull market in the future. These are the stocks that people want to own.

Q: What will bring your predicted second half-bull market in the stock market?

A: Inflation drops from 8% to 4%. That will happen for a couple of reasons. The year-on-year comparisons become highly favorable starting from next month when inflation started to take off a year ago. Inflation numbers are going to be climbing the wall of worry from here on out. That could get us down to 4% by the end of the year. The second reason is the Ukraine War either ends or becomes a stalemate and is no longer a factor in the global markets, and we’ve had time to replace all the Russian oil and Ukrainian wheat. 

Q: Are banks positioned to benefit from the coming rally?

A: Absolutely. I think big tech and banks will be the top-performing stock sectors for the next five years because inflation will go away, recession fears will go expire, and credit quality will improve, but interest rates will remain 300 basis points higher than they were during the pandemic. Buy (JPM), (BAC), and (C) on dips.

Q: What will be the worst performing sector?

A: Energy—anything energy-related will get absolutely slaughtered, which is why I don't want to touch it with a ten-foot pole right now. That includes oil companies, exploration companies, E&P companies, and master limited partnerships, as well as coal and other natural gas stocks. So, if you’re long these names don’t forget to sit down when the music stops playing. You could get your head handed to you at the end.

Q: Can we make lower lows?

A: Yes, that’s entirely possible. Market moves are basically random when you get down to these levels— down more than 20%. And on all future downturns, I would be spending your cash going back into the market expecting a second half rally.

Q: What about green energy?

A: Unfortunately, green energy is very tied to old energy because $120 oil makes green companies much more competitive from a cost point of view. So, I’m not going to go piling into green companies right here, especially if I think oil is topping out in the near future. Buying green energy companies here is the same as buying oil at $120 a barrel.

Q: What is the best way to play the declining US dollar?

A: Buy the iShares MSCI Emerging Markets ETF (EEM). Also, the Aussie dollar (FXA) and the Canadian Dollar (FXC), which benefit tremendously from commodity prices, which will rise for another decade in a global economic recovery.

Q: Why will energy be the worst sector?

A: If you end the war in the Ukraine or you replace Russian oil, either by finding new sources of oil, getting other producers to increase production which they can do (including the US), or by accelerating the move to alternatives, then you move oil back to pre-invasion prices which were about $70 a barrel or $50 lower than they are here.

Q: Best way to hedge a falling market?

A: Do what I'm doing: keep a balanced portfolio of longs and shorts, that way you always have something that’s going up. And if you do it through the options, you have time decay working for you on both sides of the equation. If you want to go outright, buy outright puts on individual stocks because they had double the moves of the indexes. And go to my short selling school which you can find by going to my website at https://www.madhedgefundtrader.com. There’s actually 12 different ways to benefit from falling markets.

Q: How deep in the money can we go on our call spreads?

A: Wait for the Volatility Index (VIX) to go over $30, and then go 15-20% in the money. And yes, you only make 10, 15, or 20% on those positions in a month but then you put together ten of them and that adds up to quite a lot of money. You want to find the position that has the greatest probability of happening—i.e. something that’s 20% in the money. Do that when the market has just dropped 20%, which it already has, and then you have a position that has a minuscule chance of losing money.

Q: How much longer do you see this current bear market bounce lasting?

A: Until yesterday.

Q: What's your favorite commodity ETF?

A: My favorite commodity stock is Freeport McMoRan (FCX), the world’s largest copper producer. Rather than pay the extra management fees for an ETF, I prefer just to go straight to the source and buy (FCX).

Q: When do you think the Fed will pivot to dovish or neutral?

A: This summer. It’s just a question of whether it’s the July or the September meeting.

Q: When you say “buy on dips”, what does that mean? 1%, 3%, 5%?

A: Well in this market, a dip would be a retest of the previous lows which is going to be down 10% or 15% on the major positions in your portfolio. If you’re day trading, a dip is only 1%, so it really depends on your timeframe and your risk tolerance. That’s why I always tell people to scale by doing everything in incremental pieces—20%, 25%, and so on. You never know what the market’s actually going to do on a short-term basis. Randomness can’t be predicted.

Q: If you plan to enter a LEAPS on Apple, what strikes would you do?

A: Well, first of all, I want to see if Apple drops all the way to $125, which is a lot of people’s downside target. If it did, then I would do the $125/$135 call spread two years out, and that will probably double. And if it starts a long term up trend, then I’ll keep rolling up the strike prices. If, say, Apple goes to $125, you put your LEAPS on. If the stock rises to 150, then take profits on the $125/$135 and roll into the $150/$160. That’s how you can get like 1,000% returns like we got on Tesla (TESLA) a few years ago. You just keep rolling up your strike prices on every weak day and maintain your leverage.

Q: When do we bet the farms on Editas Medicine Inc. (EDIT) and Crispr (CRSP) Therapeutics?

A: Never. These are small, highly speculative companies which will make money someday, but if the someday is in five years and you’re betting the farm with a LEAPS, you lose the farm. It's going to take a long time for these smaller biotech stocks to come back. If you want to play biotech, go with the big ones like Amgen. It takes a long time to convert cutting-edge technology into profits. The big companies already have a stable of reliable money-making drugs on hand.

Q: Salesforce Inc. (CRM) is up big on earnings—what should I do with the stock?

A: Buy the dips. It’s still way, way below its all-time highs, so use the weekdays to accumulate Salesforce for the long term. It’s one of the best cloud plays out there.

Q: What do you think about NVIDIA Corporation (NVDA)?

A: I absolutely love it. It rallied 20% off the bottom. Use any other additional weak days like today to increase your position. This stock someday is worth $1,000, up from today’s $195.

Q: Do you like SPACS?

A: No, I hate them and think they’re a rip-off. And a lot of them have become totally illiquid and untradable, so you have no choice but for them to shut down and return their money if they have any left. I’ve hated SPACS from day one and people are now getting their comeuppance on these.

Q: What do you think about the weakness in Coinbase Global Inc. (COIN) down here?

A: It’s just going down with all the other high-risk, speculative, meme stock type plays, which include all of the crypto plays like Bitcoin. I would avoid all of those. You want to buy quality at the discount now, and you want to buy the Cadillacs at Volkswagen prices and leave the speculative plays for the next generation, Gen Z, who are already highly interested in stocks.

Q: What is your favorite non-US country to invest in?

A: Australia, because you get a double play there on the currency, which should go up 30% from here, and they will benefit from a global commodity boom which continues for another ten years. They pretty much sell a lot of the major commodities like iron ore, wheat, sheep, and so on. It’s also a really nice country to visit. The only negative with Australia are the sharks.

Q: Biotech takeover targets?

A: Well (EDIT) and (CRSP) would be two of them. Things in the sector are so cheap that they are all potential takeover targets. M&A (Mergers and Acquisitions) will be a major play in the biotech sector for the foreseeable future.

Q: Should we sell short the defense industry here?

A: No, even if the war ends tomorrow, you might get some profit-taking, but the fact is that long term military spending is increasing permanently. The peace dividend now has to be paid back, and that is great for all the defense companies, so I would not be shorting them. If anything, I’d be buying on dips. Buy Lockheed Martin (LMT), Raytheon (RTX), who make the Javelin antitank missile for which there is now a two-year order backlog. You can also throw in General Dynamics (GD) for good measure which builds nuclear submarines and the Stryker armored vehicle.

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 12 years are there in all their glory.

Good Luck and Stay Healthy,

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

 

Keep Those Defense Plays

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