How to Execute a Vertical Bull Call Spread on Apple

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 on board 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 their new iPhone 6 on September 9, 2014.

The same play has just started to kick in for the iPhone 7 release this coming September.

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

The great thing about these position is that your risk is defined. You can?t lose anymore 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 expiration value of the options was $5.00 so subtracting the $4.00 cost results in a $1.00 profit.

The total profit on the trade came to:

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

This means that the position earned a 25% profit on your $10,000 investment in 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. 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.

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.

AAPL

BullVertical Bull Call Spreads Are the Way to Go in a Flat to Rising Market

What Happened When Apple Entered the Dow?

Apple holders (AAPL) were ecstatic and even apoplectic when they heard that their beloved company would be joining the Dow Average last year.

The move required thousands of portfolio managers to add Apple to their portfolios, like the $32 billion worth of Dow index managers, whether they wanted to or not. From then on it would be illegal for them not to own Apple.

At the very least it put the fear of Jobs into moneymen everywhere, especially if the Dow is the benchmark they are measured against.

The world?s now second largest listed company replaced tired and flagging AT&T (T), one of my perennial favorite short positions.

The symbolism couldn?t be more evident. A former monopoly with a literally rusting infrastructure is getting booted for iPhones, iPads, iTunes, Apps and the Cloud. Oh, how the mighty have fallen.

AT&T was one of the oldest Dow stocks, joining the closely followed index in 1916. The new listing then had a symbolic move of its own, taking place the year after the first-ever transcontinental telephone call was placed.

Who made that call? Alexander Graham Bell in New York telephoned his former assistant, Thomas Watson, in San Francisco in a replay of the first phone call in history 50 years earlier in 1876, from room to room at their lab. ?Mr. Watson, come here, I want to see you,? the first words ever uttered on a phone line, were repeated once more.

AT&T, or ?Ma Bell? as it was known, lost its listing in 2004 after it merged with SBC Communications. It was reinstated a year later when the new firm?s name was changed back to AT&T.

However, Apple shareholders should be careful what they wish for.

There is not exactly a great track record for share price performance after a company joins the Dow, especially a technology stock.

In 1999, Microsoft (MSFT) fell 43% after becoming a Dow 30 stock, while Intel (INTC) shed 52%. Cisco Systems (CSCO) lost 16% after joining the club in 2009.

The problem is that Apple entered the index after a meteoric 18 month, 130% run up. So the Dow, having missed the rise in Apple on the upside, fully participated on the downside in the stock meltdown that followed.

Apple is the second largest component in the Dow, with a hefty $575 billion market capitalization. This means that future Dow corrections will be bigger and more ferocious than they would have been without Apple and with boring AT&T.

The volatility of the lead index has just gone up, a lot.

I remember too well that the Japanese made a similar blunder in 2000. The government wanted to have a national stock index that reflected the economy of the future, not of the past.

They had watched with great envy America?s NASDAQ hog the global spotlight, soaring from 1,000 to 5,000 in just a couple of years.

So what did these geniuses do? They reconstituted the Nikkei Average from a 90% boring industrial, 10% technology index to a 50/50 weighting. And they did this mere weeks after NASDAQ peaked!

As a result, the Nikkei Average got the stuffing knocked out of it in the dotcom collapse. It fell a stunning 15% in the week just after the reconstitution announcement. It cratered from 21,000 to eventually bottom at 7,200. Without the reconstitution, it would have sold out at 10,000.

Having missed the dotcom boom on the upside, the Nikkei fully participated on the downside. Apple shareholders please take note.

Apple?s rise was amply chronicled by a steady series of Trade Alerts in this newsletter.

You can go back to my 2012 prediction that Apple would soar from $485 to $1,000 (click here). On a split adjusted basis we? already reached $931.

I followed that up with ?Apple is Ready to Explode? in October, 2013 (click here), when the post split share price was back at $70.

Indeed, I have issued more Trade Alerts to buy Apple over the seven-year life of this newsletter than any other single name.

It looks like I will be issuing a lot more Apple Trade Alerts in the near future as well.

AAPL$NIKK
Guess When the Index Reconstitution Took Place?

 

Apple Watch

2015 Trade Alert Review

When is the Mad Hedge Fund Trader a genius, and when is he a complete moron?

That is the question readers have to ask themselves whenever their smart phones ping, and a new Trade Alert flashes on their screens.

I have to confess that I wonder myself sometimes.

So I thought I would run my 2015 numbers to find out when I was a hero, and when I was a goat.

The good news is that I was a hero most of the time, and a goat only occasionally. Here is the cumulative profit and loss for the 100 Trade Alerts that I closed during calendar 2015, listed by asset class.

Profit by Asset Class
Equities +32.90%
Foreign Exchange +8.82%
Energy +0.48%
Precious Metals -1.51%
Volatility -3.14%
Fixed Income -5.63%

The first thing you will notice is that the above numbers total +31.62%, compared to the +38.87% profit that I reported as my 2015 performance.

That?s because we mark all positions to market daily, like a real hedge fund does, including the first and last days of the years. The P&L figures above are for only closed trades, hence the -7.25% shortfall.

All in all, some 71% of my Trade Alerts were profitable last year, less than in 2014, but still beating all competitors. That?s better than a poke in the eye with a sharp stick.

Crucial in 2015 was to stop out of losers quickly. I followed that discipline most of the time, but not always. Sometime you can?t, like when the Dow opens down 1,200 points, which it did in the summer.

Equities were far and away my most successful asset class in 2015, thanks to the tremendous volatility we endured. They accounted for 73 of my Trade Alerts, generating an impressive +32.90% profit.

Some 63% of my equity trades were profitable, with almost all of the losers showing up in the final quarter of the year, when the indexes flip flopped their way to a small annual loss.

The first half of 2015 saw me putting the pedal to the metal with an aggressive ?RISK ON? approach, picking up Apple (AAPL), Gilead Sciences (GILD), Goldman Sachs (GS), Palo Alto Networks (PANW), the Russell 2000 (IWM), and the S&P 500 (SPY).

Then I executed an abrupt about turn, ?selling in May, and going away?. That got me out of the biotech and cyber security sectors at the absolute top.

We even made money on the short side, with positions in trouble QUALCOMM (QCOM) and expiring AT&T (T).

The foreign exchange market was a nice little earner for me, chipping in a +8.52%, with 13 Trade Alerts.

Seeing a coming tidal wave of European quantitative easing, I totally nailed the collapse in the Euro (FXE) against the dollar early in the year. Betting against the Japanese yen (FXY) also helped.

However, in the run up to the Federal Reserve?s first interest rate hike in a decade, foreign currency trading opportunities became few and far between.

Incredibly, I picked up a modest 0.48% trading energy, with only a single trade in Linn Energy (LINE). But my big call here was to avoid the sector like the plague. A lot of fingers were lost catching falling knives, with near weekly calls for the bottom in oil by others.

Mercifully, I only executed one trade in gold (GLD) in 2015, and that one was a loser for -1.51%. But we chopped a lot of wood here putting in a major long-term bottom, and I now think the opportunities in precious metals will be to the upside.

Trading the Volatility Index (VIX) was a nightmare in 2015, and it cost me -3.14%. But I was able to limit my losses by making money selling short those big upward spikes during the fourth quarter through the (XIV).

Fixed income (TLT) was my big loser last year, thanks to a single trade, a short position on the fateful August 24 flash crash. The rest of the eight trades I executed for the year was profitable, and on the short side.

All in all, it was a pretty good year.

What was my best trade of 2015? I made 2.47% with a long position in Apple in April in the run up to a positive earnings report.

And my worst trade of 2015? I got hit with a horrific 5.59% speeding ticket with a short position in the S&P 500 (SPY) during the October melt up which I held on to just a bit too long.

But I lived to fight another day, making all the money back the following month.

After a rocky start, 2016 promises to be another great year. That is, provided you ignore my advice on fixed income. But who knows? It is a different world now, with a fresh array of opportunities.

As of yesterday?s writing, I was up +1.98% on the year, compared to a heart rending plunge in the Dow Average of -10.7%. It was the worst start to trading in market history.

Up small in a market crash? I?ll take that all day long. I bet you will too.

INDU 12-31-15

TLT 12-30-15

GLD 12-31-15

WTIC 12-31-15

FXE 12-31-15

Here is a complete list of every trade I closed last year, sorted in chronological order.

2015 Trade Alert Summary

???
?????

Date

?

Asset

Long/

Profit/

Closed

Position

Class

Short

Loss

?????

1/6/15

(IWM) 2/$103-$118 call spread

equities

long

-4.78%

1/8/15

(FXE) 2/$122-$124 put spread

equities

long

2.01%

1/8/15

(FXE) 2/$120-$122 put spread

equities

long

2.33%

1/8/15

(BAC) 2/$16 calls

equities

long

-1.82%

1/9/15

(GILD) 1/$85-$90 call spread

equities

long

1.36%

1/9/15

(TBT) short Treasury Bond ETF

fixed income

long

-2.51%

1
/12/15

(OXY) 2/$70-$75 call spread

equities

long

-2.66%

1/14/15

(BAC) 2/$15-$16 call spread

equities

long

-1.84%

1/21/15

(BAC) 2/$14-$15 call spread

equities

long

-0.24%

1/29/15

(QCOM) 2/$75-$80 put spread

equities

long

2.13%

2/2/15

(SPY) 2/$189-$194 call spread

equities

long

0.80%

2/2/15

(IWM) 2/$107-$112 callspread

equities

long

1.22%

2/2/15

(LINE) unit

MLP

long

-3.72%

2/4/15

(AA) 2/$17-$18 put spread

equities

long

0.25%

2/6/15

(T) 2/$35-$37 put spread

equities

long

1.20%

2/20/15

(GILD) 2/$87.50-$92.50 call spread

equity

long

1.84%

2/20/15

(SPY) 2/$199-$202 call spread

equity

long

1.96%

2/20/15

(FXY) 2/$84-$87 put spread

foreign exchange

long

1.33%

3/2/15

(IWM) 4/$116-$120 call spread

equity

long

1.67%

3/6/15

(CSCO) 3/$27-$29 call spread

equity

long

0.35%

3/6/15

(SPY) 3/$200-$204 call spread

equity

long

0.52%

3/6/15

(FXE) 4/$112-$115 put spread

foreign exchange

long

2.02%

3/9/15

(GLD) 3/$107-$112 call spread

precious metals

long

-0.59%

4/9/15

(FXE) 4/$109-$112 put spread

foreign exchange

long

1.64%

4/10/15

(IWM) 4/$116-$119 call spread

equity

long

1.64%

4/15/15

(GS) 4/$175-$180 call spread

equity

long

1.40%

4/15/15

(FCX) 5/$16-$17 call spread

equity

long

2.25%

4/23/15

(LEN) 5/$45-$49 call spread

equity

long

-2.81%

4/27/15

(FXY) 6/$82-84 put spread

foreign exchange

long

0.65%

4/28/15

(AAPL) 5/$115-120 call spread

equity

long

2.47%

4/29/15

(FXE) 5/$99-$102 call spread

foreign exchange

long

1.68%

4/30/15

(FCX) 5/$17 calls

equity

long

1.25%

4/30/15

(DXJ) Japan Hedged Equity ETF

equity

long

0.29%

4/30/15

(GOOG) 5/$520-$540 call spread

equity

long

-2.25%

5/1/15

(PANW) 5/$125-$135 call spread

equity

long

1.44%

5/1/15

(IWM) 5/$119-$122 call spread

equity

long

-0.92%

5/6/15

(AAPL) 6/$115-$120 call spread

equity

long

-1.08%

5/12/15

(SPY) 5/$215-$218 put SPREAD

equity

long

1.18%

5/12/15

(SPY) 5/$212-$215 put spread

equity

long

0.67%

5/12/15

(UVXY) Proshares Ultra VIX ETF

volatility

long

1.02%

5/15/15

(DXJ) Japan Hedged Equity ETF

equity

long

0.10%

5/15/15

(GS) 5/$185-$190 call spread

equity

long

1.38%

5/15/15

(SPY) 5/$213-$216 put spread

equity

long

1.79%

5/22/15

(UVXY) Proshares Ultra VIX ETF

volatility

long

-1.70%

6/3/15

(SPY) 6/$202-$207 call spread

equities

long

0.00%

6/5/15

(FXE) 6/$113-$116 put spread

foreign exchange

long

1.29%

6/17/15

(FXY) 7/$83 put

foreign exchange

long

0.95%

6/19/15

(SPY) 6/$201-$204 call spread

equities

long

1.51%

6/19/15

(SPY) 6/$214-$217 put spread

equities

long

0.79%

7/24/15

(FXY) 8/$82-$84 put spread

equity

long

1.65%

7/29/15

(AAPL) 8/$110-$115 call spread

equity

long

1.56%

7/29/15

(SPY) 8/$195-$200 call spread

equity

long

1.58%

8/12/15

(SPY) 8/$214-$217 put spread

equity

long

1.88%

8/13/15

(TLT) 8/$125-$128 put spread

fixed income

long

0.76%

8/17/15

(SPY) 8/$214-$217 put spread

equity

long

1.92%

8/20/15

(SPY) 9/$214-$217 put spread

equity

long

1.36%

8/20/15

(FXE) 9/$112-$115 put spread

foreign exchange

long

0.51%

8/21/15

(IWM) 9/$125-$128 put spread

equity

long

1.00%

8/21/15

(SPY) 9/$215 puts

equity

long

1.62%

8/24/15

(LEN) 9/$50-$52.50 call spread

equity

long

-2.59%

8/24/15

(SPY) 9/$190-$195 call spread

equity

long

-1.61%

8/24/15

(TLT) 9/$128-$131 put spread

fixed income

long

-1.52%

8/24/15

(FXY) 9/$80-$82 put spread

foreign exchange

long

-4.85%

8/28/15

(SPY) 9/$204-$208 put spread

equity

long

-0.70%

9/1/15

(SPY) 9/$207-$210 put spread

equity

long

1.64%

9/3/15

(SPY) 9/$171-$176 call spread

equity

long

1.94%

9/3/15

(XIV) Short Volatility ETN

volatility

long

1.03%

9/8/15

(SPY) 9/$174-$179 call spread

equity

long

0.86%

9/9/15

(SPY) 9/$204-$207 put spread

equity

long

0.74%

9/11/15

(XIV) Short Volatility ETN

volatility

long

0.67%

9/21/15

(HD) 10/$105-$110 call spread

equity

long

0.62%

9/22/15

(SPY) 10/$204-$207 put spread

equity

long

1.19%

9/24/15

(SPY) 10/$203-$206 put spread

equity

long

2.18%

9/25/15

(XIV) Short Volatility ETN

equity

long

0.97%

9/28/15

(SPY) 10/$202-$205 put spread

equity

long

1.33%

9/29/15

(SPY) 10/$201-$204 put spread

equity

long

2.07%

9/30/15

(SPY) 10/$175-$180 call spread

equity

long

0.40%

10/2/15

(XIV) Short Volatility ETN

equity

long

0.47%

10/5/15

(SPY) 10/$198-$201 put spread

equity

long

-5.59%

10/5/15

(SPY) 10/$199-$202 put spread

equity

long

-4.68%

10/7/15

(TSLA) 11/$200-$220 call spread

equity

long

-0.60%

10/7/15

(TLT) 10/$130-$133 put spread

fixed income

long

2.16%

10/20/15

(SPY) 11/$207-$210 put spread

equity

long

-0.72%

10/29/15

(TLT) 11/$128-$133 puts spread

fixed income

long

1.50%

11/3/15

(SPY) 11/$213-$216 put spread

equities

long

-0.12%

11/6/15

(TLT) 11/$125-$128 put spread

fixed income

long

1.00%

11/11/15

(AAPL) 12/$105-$110 call spread

equity

long

-0.17%

11/20/15

(SPY) 12/$185-$190 call spread

equity

long

0.92%

11/23/15

(FXE) 12/$111-$114 put spread

foreign exchange

long

1.33%

11/30/15

(FXY) 12/$82-$84 put spread

foreign exchange

long

1.12%

12/3/15

(TLT) 12/$124-$127 put spread

fixed income

long

1.55%

12/4/15

(XIV)

equity

long

0.84%

12/8/15

(TLT) 1/$112-$115 call spread

fixed income

long

0.81%

12/9/15

(FXE) 12/$108-$111 put spread

foreign exchange

long

-1.70%

12/11/15

(MSFT) 1/$50-$52.50 call spread

equity

long

0.48%

12/11/15

(JPM) 1/$60-$65 call spread

equity

long

-1.51%

12/11/15

(BAC) 1/$15-$16 call spread

equity

long

-0.46%

12/14/15

(FXE) 1/$108-$111 put spread

foreign exchange

long

-1.99%

12/15/15

(XIV) Short Volatility ETF

equity

long

0.58%

John Thomas - BeachWhat a Year!

Bear CrossingLooks Like We?re In New Territory

The 1% and the Bond Market

With the bond market confounding forecasters and prognosticators once again, I thought I?d delve into one of the more mysterious reasons why the bond market keeps going from strength to strength.

To a man, hedge fund traders expected bond prices to take a dive in 2014 and 2015 and for yields to soar. Isn?t that what?s supposed to happen in recovering economies?

Instead, we got the opposite, and yields have plunged, from 3.05% for the ten-year Treasury to as low as 2.80% this week.

There are many important lessons to be learned here. This is not your father?s bond market.

The internal dynamics of the fixed income markets have changed so much in the last three decades that it has become unrecognizable to long term practitioners, like myself.

A big factor has been the takeover of the bond market by the 1%, the richest segment of the US population and, indeed, the global economy. As wealth concentrates at the top, its character changes.

Let me stop here and tell you that the ultra rich are different from you and me, and not just because they have more money.

I have learned this after nearly half-century-long relationships with the planet?s wealthiest families, including the Rockefellers, Rothschilds, DuPonts, Morgans, and Pritzkers, first as important contacts of mine at The Economist, then as clients of mine at Morgan Stanley, then as investors in my hedge fund, and now as subscribers to The Diary of a Mad Hedge Fund Trader.

The wealthier families become the more conservative they get in their investment choices. Their goal shifts from capital appreciation to asset protection.

They lose interest in return on capital and become obsessed with return of capital. This is how the rich stay rich, sometimes for centuries. I have even noticed this among my newly minted billionaire hedge fund buddies.

What this means for the bond market is that they never sell. When they buy a 30-year Treasury bond, it is with the expectation of keeping it for the full 30 years until maturity.

That way they can avoid capital gains taxes and only have to pay taxes on the coupon interest. When they die, spouses get the step up in the cost basis, and then the wealth passes from one generation to the next. Taxes are never paid.

Back in the 1980s, when wealth was more evenly distributed, the top 1% only accounted for 1% of Treasury bond ownership. Today, that figure is closer to 25%.

Add this to the 50% of our national debt that is owned by foreign investors, primarily central banks, who also tend to hold paper for its full life. Central banks don?t pay taxes either.

China and Japan are the biggest holders with around $1 trillion each. This means that 75% or more of bonds are owned by investors who won?t sell. What does that mean for the rest of us? Bond prices that never go down.

With bonds very close to 30-year highs, keeping your bonds has been the right thing to do. I can?t tell you how many investment advisors I know who have distilled their practices down to managing fixed income instruments only.

This involves the entire coupon clipping space, including municipal bonds (MUB), corporates (LQD), junk (JNK), and even emerging market debt (ELD).

This is driven by customer demand, the 1%ers, not from any great insights or epiphanies they achieved on their own.

Of course, there is a certain amount of “driving with your eyes firmly fixed on the rear view mirror” going on here. Maybe the rich will finally sell their bonds once prices fall hard, stay down and then go down some more.

Inflation rearing its ugly head might also do the trick since it is always bad for bond prices as it reduces the purchasing power of money. Selling is certainly what they were doing in the early eighties, when the ten-year yield hit 12%.

Again, the rear view mirror effect, when bond were called ?certificates of wealth confiscation.?

There are other matters to consider with the 1% owning so much of the bond market and keeping it there.

This money is not getting invested in new start ups and creating jobs. It is money that is not being used to engender new economic growth. One of the fantasies of the last election was the claim that the 1% were creating so many jobs. They weren?t, not as long as their money was parked in a risk free bond market.

Instead, it is just stagnating. This is one reason why economic growth is so flaccid this decade and will remain so. This is fine for the 1%, but not so good for the rest of us.

The bottom line here is that while bonds are overbought and due for a pullback, they are not by any means going to crash. We could be living in the 2.60%-3.50% range for the 30-year for quite some time, maybe for years.

That is if the new Federal Reserve governor and my friend, ultra dove Janet Yellen, has anything to say about it. She has only just started and could be with us for another eight years.

Personally, I don?t foresee any appreciable rise in interest rates until we get well into the 2020s, when real inflation finally returns from the dead.

That is when bonds will become the asset class you don?t want to know, whether you?re in the 1% or not.

TLT 1-15-16
TYX 1-15-16

MUB 1-15-16

DraculaBonds Will Stay Up Until Inflation Returns from the Dead

Bidding for the Stars

A few years ago, I went to a charity fund raiser at San Francisco?s priciest jewelry store, Shreve & Co., where the well-heeled men bid for dates with the local high society beauties, dripping in diamonds and Channel No. 5.

Well fueled with champagne, I jumped into a spirited bidding war over one of the Bay Area?s premier hotties, whom shall remain nameless. Suffice to say, she is now married to a tech titan and has a sports stadium named after her.

Obviously, I didn?t work hard enough.

The bids soared to $15,000, $16,000, $17,000.

After all, it was for a good cause. But when it hit $17,750, I suddenly developed lockjaw. Later, the sheepish winner with a severe case of buyer?s remorse came to me and offered his date back to me for $17,000.? I said ?no thanks.? $16,500, $16,000, $16,250?

I passed.

The altitude of the stock market right now reminds me of that evening.

If you rode the S&P 500 (SPX) from 700 to 2,100 and the Dow Average (INDU) from 7,000 to 17,750, why sweat trying to eke out a few more basis points, especially when the risk/reward ratio sucks so badly, as it did then?

I realize that many of you are not hedge fund managers, and that running a prop desk, mutual fund, 401k, pension fund, or day trading account has its own demands.

But let me quote what my favorite Chinese general, Deng Xiaoping, once told me: ?There is a time to fish, and a time to hang your nets out to dry.? If you followed my Trade Alerts this year and are up now 38%, you don?t have to chase every trade.

At least then I?ll have plenty of dry powder for when the window of opportunity reopens for business. So while I?m mending my nets, I?ll be building new lists of trades for you to strap on when the sun, moon, and stars align once again.

INDU 10-30-15

Fishing NetsTime to Mend the Nets

Is This the Big Trade of 2016?

Watching the entire commodity complex collapse in unison this year was nothing less than amazing, with many down 30% or more. And I mean the broader definition of commodity.

It includes the base metals like copper (JJC), (CU), agricultural products (CORN), (SOYB), (DBA), precious metals (GLD), (SLV), and even energy (USO), (KOL).

If you look carefully, you can find commonality in many, but not all, of these.

A slowing China meant that global consumption of bulk commodities would recede to a low ebb. The Chinese stock market crash threw gasoline on the fire.

A bull market in US stocks produced a world clamoring for paper assets at the expense of hard ones.

And of course, the high prices seen in all of these nearly four years ago cured high prices, drawing in new production from untold corners of the earth.

This is how bubbles always end.

What leaves many scratching heads is how widespread the route became. Those clever people who used one commodity to hedge another were left with portfolios of ashes, as everything plunged in lockstep.

The big talk now among my global strategist friends is this: will this year?s dogs become next year?s Cinderellas?

It is easy to imagine how this could happen. For a start, the higher paper stocks rise, the cheaper commodities look. They are now starting to appear like great laggard/diversification plays.

Here is another conundrum.

The world is on track for a global synchronized recovery, with the US. China, Japan and Europe all going ?pedal to the metal? to spur economic growth.

So how is it supposed to do this without using more commodities?

Yes, you can argue, there are big stockpiles to eat through before we see any real price appreciation. But stores can be exhausted in mere months.

This is why I am starting to get interested in the entire commodity space. I have already executed a couple of profitable trades in Freeport McMoRan (FCX) this year– one of the world?s largest copper producers.

And if my old friend, Carl Icahn, is interested, should I be?

I look forward to more visits to the trough.

Higher prices for commodities in 2016 may not turn out to be a fairy tale after all.

DBA 9-9-15

FCX 9-9-15

WTIC 9-9-15

WEAT 9-9-15

CinderellaA Commodity Recovery in 2016 is No Fairy Tale

What?s Really Happening in the Middle East

Long-term observers of financial markets are befuddled, confused, and amazed at their complete lack of interest in the rapidly unfolding events in the Middle East.

It seems that the more horrific the atrocities, the higher stock prices want to climb.

Go figure.

ISIS is in fact accelerating the most important geopolitical event so far in this century, the rapprochement of relations between the U.S. and Iran, which have been in a deep freeze for 40 years.

A serious dialogue has not been held between these two countries since 52 hostages were seized at the American embassy in Tehran in 1979 and held for 444 days.

The Mullahs in Iran can?t help but notice last week?s U.S. air strikes to protect Shiite cities from a Sunni slaughter at the hands of ISIS. Suddenly, our natural enemy in the region has become our natural ally.

The Iranians have even offered to back up our air power with their ground forces, an offer the Obama administration has so far wisely turned down.

Don?t worry about ISIS. Their threat is being wildly overrated by the media.

There is a reason why terrorist groups have never held territory before. That makes them a big fat target for drones, smart bombs, and all the other types of fire that we rain down upon our enemies from above. This may be the first war in history entirely fought by drones on our side. That means it will be cheap, without casualties, and over quickly.

So what will the new treaty and peace between the U.S. and Iran bring us?

So far, Iran has agreed to a freeze on its nuclear enrichment program in exchange for international inspections and the unfreezing of $100 billion of their assets. Secret negotiations are being held intermittently in Geneva, Switzerland (I stopped by to say hello a few weeks ago).

This is unbelievably positive for all asset classes, except energy. This is the cause of the recent collapse of oil prices, which are now 65% off their 2014 high.

The US is now in a tremendously powerful negotiating position. If Iran dumps their nuclear program to our satisfaction, Iran then gets the carrot.

It will rejoin the world economy, unfreeze the rest of its assets and recover $100 billion a year in trade. The country?s banks will be allowed to rejoin U.S. dollar clearing, the $1 trillion a day CHIPS and SWIFT systems, their absence from which has been a deathblow to their international trade.

Its oil exports (USO) can recover from 750,000 barrels a day back to the pre crisis level of 3 million barrels. If it doesn?t then it gets the stick again in six months, resuming their economic freefall.

The geopolitical implications for the U.S. are enormous.? Iran is the last major rogue state hostile to the US in the Middle East, and it is teetering. The final domino of the Arab spring falls squarely at the gates of Tehran.

A friendly, or at least a non-hostile Iran, means we really don?t care what happens in Syria.

Remember that the first real revolution in the region was Iran?s Green Revolution in 2009. That revolt was successfully suppressed with an iron fist by fanatical and pitiless Revolutionary Guards.

The true death toll will never be known, but is thought to be well into the thousands. The antigovernment sentiments that provided the spark never went away and they continue to percolate just under the surface.

At the end of the day, the majority of the Persian population wants to join the relentless tide of globalization. They want to buy iPods and blue jeans, communicate freely through their Facebook pages and Twitter accounts, and have the jobs to pay for it all.

Since 1979, when the Shah was deposed, a succession of extremist, ultraconservative governments ruled by a religious minority, have abjectly failed to cater to these desires

If Iran doesn?t do a deal on nukes soon, it?s economy with sink deeper into the morass in which they currently find themselves. The Iranian ?street? will figure out that if they spill enough of their own blood that regime change is possible and the revolution there will reignite.

The Obama administration is now pulling out all the stops to accelerate the process.

The oil embargo former Secretary of State, Hillary Clinton, organized is steadily tightening the noose, with heating oil and gasoline becoming hard to obtain.

Yes, Russia and China are doing what they can to slow the process. This is what the Ukraine crisis is really all about, an attempt to keep oil prices high, Russia?s biggest earner.

But conducting international trade through the back door is expensive, and prices are rocketing. The unemployment rate is 40%.? The Iranian Rial has collapsed by 50%.

Let?s see how docile these people remain when the air conditioning quits running because of power shortages. Iran is a rotten piece of fruit ready to fall off on its own accord and go splat. The US is doing everything she can to shake the tree.

No military action of any kind is required on America?s part. No shot has been fired. That?s a big deal when the shots cost $10,000 apiece.

The geopolitical payoff of such an event for the U.S. would be almost incalculable. A successful revolution will almost certainly produce a secular, pro-Western regime whose first priority will be to rejoin the international community and use its oil wealth to rebuild an economy now in tatters.

Oil will has completely lost its risk premium, once believed by the oil industry to be $30 a barrel. A looming supply could cause prices to drop to as low as $20 a barrel.

This price drop seen so far amount to a gigantic $2.18 trillion trillion tax cut for not just the US, but the entire global economy as well (92 million barrels a day X 365 days a year X $65).

Almost all funding of terrorist organizations will immediately dry up. I might point out here that this has always been the oil industry?s worst nightmare.

ISIS is a short.

At that point, the US will be without enemies, save for North Korea, and even the Hermit Kingdom could change with a new leader in place. A long Pax Americana will settle over the planet.

The implications for the financial markets will be enormous. The US will reap a peace dividend as large, or larger, than the one we enjoyed after the fall of the Soviet Union in 1992.

As you may recall, that black swan caused the Dow Average to soar from 2,000 to 10,000 in less than eight years, also partly fueled by the technology boom.

A collapse in oil imports will cause the U.S. dollar (UUP) to rocket.? An immediate halving of our defense spending to $400 billion or less and burgeoning new tax revenues would cause the budget deficit to collapse.

With the US government gone as a major new borrower, interest rates across the yield curve will fall further. The national debt completely disappears by the 2030?s (as it almost did during the late 1990?s).

A peace dividend will also cause US GDP growth to reaccelerate from 2% to 4%. Risk assets of every description will soar to multiples of their current levels, including stocks, junk bonds, commodities, precious metals, and food.

The Dow will soar to 30,000 and the S&P 500 (SPY) to 3,500, the Euro collapses to parity, gold rockets to $2,300 an ounce, silver flies to $100 an ounce, copper leaps to $6 a pound, and corn recovers $8 a bushel.

Some 2 million of the armed forces will get dumped on the job market as our manpower requirements shrink to peacetime levels. But a strong economy should be able to soak these well-trained and motivated people right up.

We will enter a new Golden Age, not just at home, but for civilization as a whole.

Wait, you ask, what if Iran develops an atomic bomb and holds the US at bay?

Don?t worry. There is no Iranian nuclear device. There is no real Iranian nuclear program large enough to threaten the United States. The entire concept is an invention of Israeli and American intelligence agencies as a means to put pressure on the regime.

According to them, Iran has been within a month of producing a tactical nuclear weapon for the last 30 years. I’m still waiting.

The head of the miniscule effort they have was assassinated by Israeli intelligence two years ago (a magnetic bomb, placed on a moving car, by a team on a motorcycle, nice!).

If Iran had anything substantial in the works, the Israeli planes would have taken off a long time ago.

Even if Iran had one nuclear weapon, would they really want to attack a country with 6,700, the US?

There is no plan to close the Straits of Hormuz, either. The training exercises in small rubber boats we have seen are done for CNN?s benefit, and comprise no credible threat.

I am a firm believer in the wisdom of markets, and that the marketplace becomes aware of major history changing events well before we mere individual mortals do.

The Dow began a 25-year bull market the day after American forces defeated the Japanese in the Battle of Midway in May of 1942, even though the true outcome of that confrontation was kept top secret for years.

If the advent of a new, docile Iran were going to lead to a global multi-decade economic boom and the end of history, how would the stock markets behave now?

They would remain in a long-term bull market, much like we have seen for the past six years. That?s why 10% corrections have been few and far between.

WTIC 8-21-15

 

UUP 8-21-15

SPY 8-21-15

Nuclear Missile - Ayatollan Ali KhameneiThe Problem is That it?s a Hollow Threat

 

MissileAim This One at the Bears

The Party is Just Getting Started With the Japanese Yen

I?m sorry, but I just don?t believe that we will see a weak dollar potentially going into the first interest rate rise in nine years.

If my friend, Janet, pulls the trigger, then the greenback will become the only currency in the world that is raising rates. Currencies just don?t decline in those circumstances.

In that case, we want to go out and sell short the weakest link in the currency milieu, and that is the Japanese yen.

Even if Janet doesn?t move in September, the prospect will hang over then yen like a Damocles sword.

In addition, the yen is bumping up key chart resistance around ?125. A decisive breakout would clear the way towards ?130, my yearend target for the beleaguered Japanese currency.

A short in the yen is a safe, low risk trade right here in a world gone crazy.

?Oh, how I despise the yen, let me count the ways.?

I?m sure Shakespeare would have come up with a line of iambic pentameter similar to this if he were a foreign exchange trader. I firmly believe that a short position in the yen should be at the core of any hedged portfolio for the next decade.

To remind you why you hate the currency of the land of the rising sun, I?ll refresh your memory with this short list:

* With the world?s structurally weakest major economy, Japan is certain to be the last country to raise interest rates. Interest rate differentials are the greatest driver of foreign exchange rates.
* This is inciting big hedge funds to borrow yen and sell it to finance longs in every other corner of the financial markets.
* Japan has the world?s worst demographic outlook that assures its problems will only get worse. They?re not making enough Japanese any more.
* The sovereign debt crisis in Europe is prompting investors to scan the horizon for the next troubled country. With gross debt well over a nosebleed 280% of GDP, or 140% when you net out inter agency crossholdings, Japan is at the top of the list.
* The Japanese long bond market, with a yield of only 0.36%, is a disaster waiting to happen.
* You have two willing co-conspirators in this trade, the Ministry of Finance and the Bank of Japan, who will move Mount Fuji if they must to get the yen down and bail out the country?s beleaguered exporters.

When the big turn inevitably comes, we?re going to ?130 then ?150, then ?180. That works out to a price of $200 for the (YCS), which last traded at $94.93. But it might take a few years to get there.

If you think this is extreme, let me remind you that when I first went to Japan in the early seventies, the yen was trading at ?305, and had just been revalued from the Peace Treaty Dodge line rate of ?360.

To me the ?125 I see on my screen today is unbelievable. That would then give you a neat 17-year double top.

Japanese Lady-SadIt?s All Over For the Yen

Mad Hedge Fund Trader Hits 31.5% Gain in 2015

Life is good.

Since my last letter to you, I hired a Mercedes and a Moroccan driver, driven the three hours from Tangier to Casablanca, and spent a day touring the architecture of the French colonial art deco center of that storied city.

It turns out that my driver only did his job part time. He was in fact a graduate student in economics studying in Tangier and had a lot to say about his fascinating country?s economy.

Jackpot!

I?ll write up his comments in a future letter, subject to the regular fact checking with the IMF and the World Bank. Until then, we have winnings of a difference sort to discuss.

It has been a pretty prosperous time for followers of the Mad Hedge Fund Trader?s trade alert service as well.

After staying out of the market during a tempestuous, white knuckled month, I finally sense an interim market bottom.

In quick order, I phone Trade Alerts into the head office to buy Apple (AAPL), the S&P 500 (SPY), and to sell short the Japanese yen (FXY), (YCS). I caught a $12 move in (AAPL) and a 4% move in the (SPY).

The yen vaporized, producing a very speedy 16.5% profit, which I quickly seized.

I then sought to protect my gains by adding a new short position in the (SPY) close to the recent highs. To get risk neutral, I then added a short position in Treasury bonds (TLT), (TBT).

The fruit of these labors was to take the Mad Hedge Fund Trader?s performance for 2015 up to a new all time high at 31.54%. July alone was as hot at the Sahara Desert that I recently escaped, up 4.86%.

This brings my performance since inception four years and eight months ago to 184.38%. That annualizes out to 39.5% per year, not bad in this topsy turvey world. It seems like only a Madman can prosper in these hopeless trading conditions.

Some 15 of the last 16 consecutive Trade Alerts, over the past three months, have been profitable. Followers have found themselves in the green every month of 2015, quite substantially so.

Better than a poke in the eye with a sharp stick. And the best is yet to come!

I started out 2015 with the goal of earning 25% for my readers during the first half, and another 25% in the second half. This latest batch of trades puts me right on track for reaching my yearend goal.

I should take these extended research trips more often! My back office tells me that subscriptions have been falling off in North Korea, Mali has been weak of late, and that a strategy luncheon in Bhutan would be welcome any time.

Under promise and over deliver; it has always been a winning business strategy for me.

This is against a backdrop of major market indexes that are nearly unchanged so far this year, despite sudden bursts of volatility and long, Sahara like stretches of boredom.

The key to winning this year has been to put the pedal to the mettle during those brief, but hair raising selloffs, and then take quick profits. They don?t call me ?Mad? for nothing.

When the market is dead, you sit on your hands.

After all, you are trying to pay for your own yacht, not your broker?s.

When the market pays you to stay away, you stay away.

Those who have made the effort to wake up early every morning and read my witty and incisive prose have an impressive row of notches on their bedpost to show for their effort.

My groundbreaking trade mentoring service was first launched in 2010. Thousands of followers now earn a full time living solely from my Trade Alerts, a development of which I am immensely proud.

Some 50% of my clients are over 50 and managing their own retirement funds fleeing the shoddy but expensive services provided by Wall Street. The balance is institutional investors, hedge funds, and professional financial advisors.

The Mad Hedge Fund Trader seeks to level the playing field for the average Joe. Looking at the testimonials that come in every day, I?d say we?ve accomplished that goal.

It has all been a vindication of the trading and investment strategy that I have been preaching to followers for the past eight years.

Quite a few followers were able to move fast enough to cash in on my trading recommendations. To read the plaudits yourself, please go to my testimonials page by clicking here. Our business is booming, so I am plowing profits back in to enhance our added value for you.

Global Trading Dispatch, my highly innovative and successful trade-mentoring program, earned a net return for readers of 40.17% in 2011, 14.87% in 2012, 67.45% in 2013, and 30.3% in 2014.

Our flagship product,?Mad Hedge Fund Trader PRO, costs $4,500 a year. It includes?Global Trading Dispatch?(my trade alert service and daily newsletter).

You get a real-time trading portfolio, an enormous research database, and live biweekly strategy webinars. You also get Bill Davis?s Mad Day Trader service, which provides great intra day market color.

To subscribe, please go to my website, ?www.madhedgefundtrader.com, click on the ?Memberships? located on the second row of tabs.

And now for the rest of the year.

I can?t wait!

TA Performance

John ThomasLetter From Casablanca

Will Gold Coins Suffer the Fate of the $10,000 Bill?

The conspiracy theorists will love this one.

Buried deep in the bowels of the 2,000 page health care bill was a new requirement for gold dealers to file Form 1099’s for all retail sales by individuals over $600. Specifically, the measure can be found in section 9006 of the Patient Protection and Affordability Act of 2010.

For foreign readers unencumbered by such concerns, Internal Revenue Service Form 1099’s are required to report miscellaneous income associated with services rendered by independent contractors and self-employed individuals.

The IRS has long despised the barbaric relic (GLD) as an ideal medium to make invisible large transactions. Don?t you ever wonder what happened to $500, $1,000, $5,000, $10,000, and $100,000 bills?

The $100,000 bill was only used for reserve transfers between banks, and was never seen by the public. The other high denomination bills were last printed in 1945, and withdrawn from circulation in 1969.

Although the Federal Reserve claims on their website that they were withdrawn because of lack of use, the word at the time was that they disappeared to clamp down on money laundering operations by the mafia. In fact, the goal was to flush out income from the rest of us.

Dan Lundgren, a republican from California’s 3rd congressional district, a rural gerrymander east of Sacramento that includes the gold bearing Sierras, has introduced legislation to repeal the requirement, claiming that it places an unaffordable burden on small business.

Even the IRS is doubtful that it can initially deal with the tidal wave of paper that the measure would create.

Currency trivia question of the day: whose picture is engraved on the $10,000 bill? You guessed it, Salmon P. Chase, Abraham Lincoln’s Secretary of the Treasury.

GOLD 7-24-15

GDX 7-27-15

$10,000 BillEver Wonder Where The $10,000 Bill Went?