“I don’t know what’s going to happen next quarter and I don’t care,” said Jamie Diamond, CEO of JP Morgan Chase Bank.
Global Market Comments
April 25, 2023
Fiat Lux
Featured Trade:
(THURSDAY, JULY 6 NEW YORK STRATEGY LUNCHEON)
(A BUY WRITE PRIMER), (AAPL)
CLICK HERE to download today's position sheet.
Global Market Comments
April 24, 2023
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or GOOD COP, BAD COP)
CLICK HERE to download today's position sheet.
When Netflix (NFLX) announced surprise subscriber growth, triggering a monster 10% pop in the stock, we got the good cop.
When Goldman Sachs (GS) revealed the true cost of their disastrous foray into the retail market, taking the stock 10% we got the bad cop.
Good cop.
Bad cop.
Good cop.
Bad cop.
No wonder the stock market is confused, trapped in the narrowest trading range in recent memory, and taking the Volatility Index ($VIX) down to a subterranean $15.
Welcome to the Q1 earnings season, which is turning out better than expected, but which is befuddling nonetheless. And it may be months before the markets breakout, not until we get an actual interest rate CUT from the Federal Reserve.
The economic data is now steadily weakening across the board. Yet, stocks won’t crash because institutional investors are holding stocks for the end of the year, not for the end of the day. We are so close to the end of this bear market that it is not worth selling, incurring tax liabilities, then buying back in.
As a result, option-implied volatilities are falling off a cliff. (NVDA) plunged from 60% to 40%, while Tesla absolutely cratered from 100% to 50%, including 10% on Friday alone. That’s why most Mad Hedge followers were unable to get into my (TSLA) short strangle unless they moved the strike prices by $10 quickly. This will be the big one that got away.
I never saw the market enter May with a worse setup than this one. It has “SELL” written all over it. That’s why I have flipped from a fantastically aggressive 100% long position in financials to a market neutral 40% long, 40% short trading book.
But I doubt we will fall more than 10%.
If you are a long-term investor, you might as well take a long cruise, as I am planning to do this summer.
My big bet-the-ranch long in banks and brokers turned out to be the trade of the decade and paid off huge. We are now looking at an incredible +10.52% profit so far in April. My 2023 year-to-date performance is now at an eye-popping +57.14%. The S&P 500 (SPY) is up only a miniscule +11.05% so far in 2023. My trailing one-year return maintains a sky-high +112.63% versus -8.21% for the S&P 500.
That brings my 15-year total return to +654.33%, some 2.77 times the S&P 500 (SPY) over the same period. My average annualized return has blasted up to +49.07%, another new high.
I executed a boatload of trades last week. As April long positions reached max profit in (C), (FCX), (TSLA), (BAC), (IBKR), (MS), and (BRK/B), I rolled the cash into new May positions. Those include longs in the (TLT), (BA), and (TSLA), and shorts in the (SPY), (QQQ), and (TSLA) for a net market neutral position.
The Fed is Looking for “One and Done” with the next 25-basis rate hike on May 3. The regional banking crisis and slowing economic data are doing its work for it.
Cash is Pouring into Money Market Funds, as fears of a stock market correction mount. Yields on 90-day T-bills reached 5.175%, a 16-year high. It’s the 5th week in a row of inflows.
Earnings Season Sees Best Start in a Decade, with 90% beating estimates, albeit low ones. Only 10% (SPY) companies have reported so far with (JPM), out biggest long, leading the charge. Consensus (SPY) earnings are currently $220 a share giving a moderate price/earnings multiple of 18.77X.
Bank of America Rips, on a great earnings report. Customers increased spending by 8% in Q1 according to credit card transactions. The bank expects a mild recession in the second half of this year.
Space X Starship Explodes on Takeoff, setting back Elon Musk’s efforts to colonize Mars. The largest rocket ever built flew 50 miles before self-destructing. It’s clear from watching the video the gyroscope failed, causing the rocket to flip over. The launch was made from the company’s Boca Chica facility. The 400-foot rocket is expected to carry a staggering 100 tons into space.
Tesla Earnings Disappoint, taking the profit margin down to a two-year low. It’s all about market share now, spending profits to maintain global dominance in EVs. The company still made $2.5 billion in Q1. The shares dropped $18 on the news. Tesla still makes money selling EVs while the competition is losing billions.
Existing Home Sales Slide in March, down 2.4% to a 4.44 million annual rate. Some 28% of sales were above the asking price. Inventories remain extremely short at 980,000.
Goldman Sachs (GS) Bombs with an earnings shortfall, including a $470 billion write-off on their Marcus loans. The retreat from retail banking is proving costly. Q1 Revenues fell from $12.79 billion
Chile Nationalizes the Lithium Industry, sending (SQM) and (ALB) into a tailspin. The official reason is to make the industry more efficient. The real reason is so the government can skim off more profits in this exploding industry. Chile is the world’s second largest producer of lithium essential for EV batteries.
Weekly Jobless Claims Hit One-Year High at 239,000, a gain of 11,000. The Fed’s stiff medicine is finally starting to work.
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, April 24 at 7:30 AM EST the Dallas Fed Manufacturing Index is out.
On Tuesday, April 25 at 6:00 AM, the S&P Case Shiller National Home Price Index is announced.
On Wednesday, April 26 at 11:00 AM, the US Durable Goods Orders are printed.
On Thursday, April 27 at 8:30 AM EST, the Weekly Jobless Claims are announced. We also get an update on Q1 US GDP.
On Friday, April 28 at 8:30 AM, the Personal Income & Spending is released.
As for me, someone commented that I walk kind of funny the other day, and the memories flooded back.
In 1975, The Economist magazine in London heard rumors that a large part of the population was getting slaughtered in Cambodia. We expected this to happen after the fall of Vietnam, but not in the Land of the Khmers, historically a kind and gentle people. So my editor, Peter Martin, sent me to check it out.
Hooking up with a right-wing guerrilla group financed by the CIA was the easy part. Humping 100 miles in 100-degree heat wasn’t. Carrying 20-pound cans of ammo only made the work harder.
We eventually came to a large village made of palm fronds that was completely deserted. Then my guide said, “Over here.” He took me to a nearby cave. Inside were the bodies of over 1,000 women, children, and old men contorted in tortured shapes that had been there for months.
I’ll never forget that smell.
With evidence and plenty of pictures in hand, we started the trek back. Suddenly, there was a large explosion and the man 20 yards in front of me vaporized. He had stepped on a land mine. Then the machine gun fire opened up.
It was an ambush.
I picked up an M-16 to return fire, but it was bent, bloody, and unusable. I picked up a second assault rifle and fired until it was empty. Then everything suddenly went black. A mortar shell had landed nearby.
I woke up days chained to a palm tree, covered in shrapnel wounds, a prisoner of the Khmer Rouge. Maggots infested my wounds, but I remembered from my Tropical Diseases class at UCLA that I should leave them alone because they only ate dead flesh and would prevent gangreen. That class saved my life. Good thing I got an “A”.
I was given a bowl of rice a day to eat, which I had to gum because it was full of small pebbles and might break my teeth. Farmers loaded their crops with these so the greater weight could increase their income. I spent my time pulling shrapnel out of my legs with a crude pair of pliers.
Two weeks later, the American who set up the trip for me showed up with cases of claymore mines, rifles, ammunition, and antibiotics. My chains we cut and I began the long walk back to Thailand.
It’s nice to learn your true value.
Back in Bangkok, I saw a doctor who attended to the 50-caliber bullet that grazed my right hip. One inch to the right and I wouldn’t be writing this today. It was too old to sew up so he decided to clean it instead. “This won’t hurt a bit,” he said as he poured in hydrogen peroxide and scrubbed it with a stiff plastic brush.
It was the greatest pain of my life. Tears rolled down my face.
But you know what? The Economist got their story and the world found out about the Great Cambodian Genocide, where 3 million died. There is a museum in Phnom Penh devoted to it today.
So, if you want to know why I walk funny, be prepared for a long story. I still set off metal detectors.
Doing Research in Asia
Good Luck and Good Trading,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
“When you come to a fork in the road, take it,” said famed New York Yankees baseball manager Yogi Berra.
Global Market Comments
April 21, 2023
Fiat Lux
Featured Trade:
(THURSDAY, MAY 18, 2023 TAMPA, FLORIDA STRATEGY LUNCHEON)
(SOME BASIC TRICKS FOR TRADING OPTIONS)
CLICK HERE to download today's position sheet.
I have spent the past 15 years teaching investors how to trade options. This is more important than ever now that the hedging of options accounts for more than 50% of all stock market daily volume. See yesterday’s research piece about “Buy Writes.”
Those who get it make millions, and this year in particular seems to have produced a bumper crop of new fortunes.
It’s really not all that hard, as I know many who are complete dummies on all other matters but earn a decent living trading options. All they need is to follow a few valuable rules that have stood the test of time.
I could add to this list as I possess additional skills and experience that other options traders lack, but the ten tips below are a great start.
After practicing for 55 years, it starts to get easy.
Needless to say, following the Mad Hedge Fund Trader is crucial in best obtaining the correct timing in implementing these rules.
1) Have an investment thesis. Know why you are doing what you are about to do. Focus on events like earnings reports or product launches and try to figure out how the underlying stock might react. Aim not where the puck is, but where it is about to go.
2) Use your research on the stock to decide whether you will buy or sell a call or put option. Don’t delude yourself into thinking you have an educated view of options contracts until you have traded for a while and understand how the stock and options markets work with each other.
3) Focus on options that expire in three months or less. The sweet spot for many investors is about 30 to 45 days, which is enough time to benefit from accelerated time decay (more on that later) and for your stock thesis to work itself out without paying top dollar.
4) Before you buy or sell options, divide the contract’s implied volatility by 16. This will tell you what the options market thinks the stock will do each day through expiration. If the call has an 80% volatility, the call is priced as if the stock will move 5% each day until expiration. If you think the stock will move more, buy the contract, If, you think it will move less, sell the contract. The Rule of 16 is a powerful tool.
5) Good trading is about understanding events and how they are packed into your expiration. Understand everything that could happen to move the stock during your chosen expiration cycle, such as earnings reports, and anything that could move the entire market, like Federal Reserve meetings, elections, and economic reports.
6) Options contracts lose a little value each day. Time decay, or “theta,” is a powerful force that can be monetized by options sales. It’s also the reason that many investors try to trade options that expire in under a month. No one wants to pay a time premium, which you can think of as the inventory carrying cost for owning options. Get time decay right and it’s like having a rich uncle write you a check every day.
7) If you are thematically confident about a stock but unsure of the timeline, many institutions buy options that expire in a year or more to rent exposure to the stock, otherwise known as LEAPS (Long-Term Equity Anticipation Securities). If the stock goes up, the call goes up. If the trade fails, options always cost less than the associated stock, which means that options, when well used, help investors limit risk and enhance returns.
8) Don’t be a pig. If you make 50% or more on your initial trades, take profits. If you make 100% or more, definitely take profits. If you are so convinced that the market is wrong and you are right, take out your initial invested capital so you are playing with house money.
9) Be afraid of excess leverage. One options contract represents 100 shares of stock. Don’t trade 10 contracts if you cannot afford to cover 1,000 shares of stock. All beginners should trade one contract at a time until they develop some mastery of basic trading rules. Never trade “naked” contracts that aren’t covered by cash or stock.
10) Simplicity is everything. Avoid strategies with many moving parts. Many seasoned options traders focus on hitting singles and doubles, creating significant income for themselves. Master buying a call and put and selling a call and put, and then consider spread strategies. Complicated strategies like iron condors and butterflies sound great, but usually make more money for the brokers than you.
When in doubt, remember: Bad investors think of ways to make money. Good investors think of ways to not lose money. The goal is to pay for your own yacht, not your broker’s.
It’s Just a Matter of Learning a Few Tricks
“It’s not always the troops that storm the beaches who are the right ones to set up the government,” said Steve Vassallo from Foundation Capital about the resignation of founder Travis Kalanick from Uber.
Global Market Comments
April 20, 2023
Fiat Lux
Featured Trade:
(HAS AI REPLACED THE BLOCKCHAIN CRAZE?)
(TSLA), (META), (GOOGL), (MSFT), (NVDA), (BBAI), (BZFD), (AI), (RTX), (BKR), (LPSN)
CLICK HERE to download today's position sheet.
Artificial Intelligence (AI) has become a crowd-pleaser and is taking oxygen away from crypto and blockchain.
What has initiated this trend?
Sam Altman and Open AI’s ChatGPT.
Altman wanted to create a non-profit that would use AI technology for the greater good of humanity. His mission was backed by Tesla’s Elon Musk and LinkedIn co-founder Reid Hoffman, thereby ensuring the success of its genesis.
Upon its launch, in just one week, one million users quickly signed up.
ChatGPT can create persuasive marketing messages, ad copy, and complex computer programs.
Altman’s venture may be even considered a challenge to the most established tech giants, such as Google (GOOGL). At a $29 billion valuation, Chat GPT is grabbing attention. Venture capital firms are already in negotiations to acquire a stake in OpenAI.
Despite the NASDAQ’s decline, OpenAI has achieved unprecedented success and a remarkable valuation.
Is ChatGPT only for the sophisticated investor?
No, you can invest in this space via a publicly traded fund that has indirect exposure to ChatGPT. Deep pockets are not necessary.
Microsoft (MSFT) has recently made a $13 billion investment in Open AI, which will cement the tech giant’s partnership. This new alliance will provide critical funding to OpenAI and enable could computing power to run increasingly complex models. Microsoft plans to use OpenAI’s technology in a variety of products, including Bing’s search engine and Microsoft Design.
Nvidia Corporation (NVDA) plays a pivotal role in the tech industry. It is best known for its production of top-end graphics chips, which serve as an important source for AI software models, but its role in the technology space may evolve rapidly as it expands into the developing AI industry.
Although we are in the early stages of the AI movement, many businesses have already grabbed AI and strapped it to their core business. It has become a growing trend and is making those businesses a ton of money. AI is growing far faster than anyone realized and the impact on corporate earnings will be enormous.
BigBear.ai Holdings Inc. (BBAI) has seen its share price increase fivefold because of its use of AI to assist clients in data analysis.
A media company called BuzzFeed Inc. (BZFD), saw its stock price increase more than 300% in just two days after announcing its plan to integrate AI-based content into its “core business.”
C3.ai Inc. (AI) is one of the top-performing software makers, with a 77% rally last month, driven by customers like Raytheon Technologies Corp (RTX) and Baker Hughes Co (BKR).
Another company, LivePerson Inc (LPSN), is attracting much notice with its plans to integrate generative capabilities from OpenAI, causing its shares to surge by as much as 19%.
Baidu (BIDU) also has plans to launch its own version of Chat GPT, but its stock price isn’t impressed yet.
ChatGPT offers impressive advances in the field of AI, which can be helpful in performing various personal and professional tasks. Growth and innovation in this area is certain.
AI technology is powerful, useful, and beneficial for our modern society if used responsibly.
Investment in this area should be done thoughtfully and after much careful research. Microsoft (MSFT) and Nvidia (NVDA) would be excellent choices to start your investment in this space.
