Global Market Comments
July 26, 2021
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or GETTING INTO STUDIO 54),
(AAPL), (AMZN), (TSLA), (GOOGL), (FB), (NVDA), (TLT)
During the heyday of my Morgan Stanley career in the 1980s, back when I had an unlimited expense account, a favorite place to take clients was Studio 54.
The place was full of rock stars, the music was piercing, and strange things were happening in dark corners. It was all the perfect adventure for the impressible visitor from the sedentary Midwest.
Studio 54 was notoriously difficult to get into. There were these hefty doormen dressed in black with big gold chains who did the vetting. If you were famous or a free-spending investment banker, the red ropes were cast aside, and you glided right in. $100 tips spoke volumes too. The hoi polloi could only watch with envy, even after spending hours in line.
The stock market has become a lot like Studio 54. It’s not letting you in. I had ten trade alerts lined up to get into the market on Friday and Monday. I only got off four. After a scant 3.2% decline, stocks turned around so fast it made your head spin. There are strange things happening in dark corners too.
Next week is the first time in a decade when the top five tech companies report earnings. If history is any guide, they will sell off sharply on the reports, form a base in August, then begin their yearend ramp up. This is why I have been hanging on to my short positions.
I continue to belie that the major miss by the markets is how much they are underestimating tech earnings. Maybe they have fully discounted 2021 earnings, but what about 2022-2030?
Let me give you the example of Apple alone. 5G wireless technology is rolling out now which is improving performance by ten times. What about 6G, 7G, and 8G? The cumulative performance gains of a decade of technological improvement is 10,000 times at zero cost!
Do you think Apple will buy more of its own stock in anticipation of this? Do you think everyone else will too?
You bet!
The “Delta” Correction lasted a day, with deaths in some states up 100% in a week. It is a pandemic of the unvaccinated and of children. The stock market was already ripe for a 5% correction. That’s what happens when you double in 16 months. The bond market at a 1.10% yield thinks the recovery is over and we’re going below 1.00% for the ten year.
Facebook is killing people, says Biden, through enabling the spread of vaccine information. Right-wing website says the vaccine causes sterility, alters your DNA, and enables the government to track your location. (FB) says members have the right to lie to each other. This isn’t going away. (FB) shares hit a new all-time high, taking its market cap into the trillion-dollar club.
That was the shortest recession in history in 2020, lasting only two months. Straight down and then straight up, making it the shortest recession in history. But what two months it was, with an eye-popping 22 million jobs disappearing in March and April. We have since made more than half back.
The month-end selloff is back in play, with the 800-point bounce behind us. That’s when big tech reports. With trillions of dollars struggling to get into the market on any dip, a two-day, 3.2% correction is all we are going to get. I managed to strap on stock longs and bond shorts yesterday, but even I got left on the sidelines with my other trade alerts.
Bitcoin breaks $30,000, then bounces back up. It seems to be an inflation/rising interest rate play which does poorly when ten-year yields hit 1.12%. It’s almost trading 1:1 with Freeport McMoRan (FCX). That has to mean we’re soon entering “BUY” territory.
Rents are soaring, up 6.6% in May YOY, according to data collection firm Corelogic. It’s the biggest gain since 2005. Single-family homes, about half of the rental market, are leading the charge. Phoenix is delivering the biggest increases, up 14% YOY, followed by Dallas and Atlanta. What a great time to own!
Share buybacks are turbocharging this market, which could reach an eye-popping record $1 trillion in 2021 and another $550 billion in dividends. Q2 has already seen $350 billion in buybacks. Apple (AAPL) is leading the charge with a monster $250 billion in cash. Alphabet (GOOGL), Microsoft (MSFT), and Berkshire Hathaway (BRKB) follow. Even companies that have never bought the stock before may enter the fray, like Netflix (NFLX), which is a cash flow cow. My yearend target of an S&P 500 at 4,750, up 9.2% from here, is now looking totally attainable.
Existing Home Sales are up 1.4% in June to 5.86 million units, less than expected. Inventories are down 18.8% YOY to 1.25 million units to a 2.6-month supply. The Northeast was the leader, up 2.8%. Median home prices are still soaring to $363,000 and up an eye-popping 23.4% YOY. Sales of homes priced over $1 million are up 147%. No typo here. Some 14% of homes are now sold to investors, while 23% were to all-cash buyers.
GM recalls 69,000 bolts over recharging fire risk. The Ev's use will be severely restricted until fixed, citing “rare manufacturing defects.” Bolts use imported Korean batteries from LG. It’s what happens when you move into a new technology a decade late and rush to catch up. GM will never catch (TSLA). Avoid (GM) and buy (TSLA).
My Ten Year View
When we come out the other side of pandemic, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 240,000 here we come!
My Mad Hedge Global Trading Dispatch profit suffered a -1.65% loss so far in July. My 2021 year-to-date performance appreciated to 66.95%. The Dow Average is up 14.57% so far in 2021.
Two of my positions, a long in (JPM) and a short in the (TLT) did great. But I really took it on the nose with my short positions in the (SPY) when the market melted up on Friday. That should turn out OK when all five big tech companies report this week, which historically marks a market top. That leaves me 60% in cash. I’m keeping positions small as long as we are at extreme overbought conditions.
That brings my 11-year total return to 489.50%, some 2.00 times the S&P 500 (SPX) over the same period. My 12-year average annualized return now stands at an unbelievable 42.25%, easily the highest in the industry.
My trailing one-year return exploded to positively eye-popping 104.96%. I truly have to pinch myself when I see numbers like this. I bet many of you are making the biggest money of your long lives.
We need to keep an eye on the number of US Coronavirus cases at 34.4 million and rising quickly and deaths topping 611,000, which you can find here. Some 34.1 million Americans have contracted Covid-19.
The coming week will be a weak one on the data front.
On Monday, July 26 at 11:00 AM, New Homes Sales for June are released. Alphabet (GOOGL), Tesla (TSLA), and Amazon (AMZN) report.
On Tuesday, July 27 at 10:00 AM, the S&P Case Shiller National Home Price Index for May is published. Apple (AAPL) reports.
On Wednesday, July 28 at 9:30 AM, the Wholesale Price Index for June is disclosed. Facebook (FB) and Microsoft (MSFT) report.
On Thursday, July 29 at 8:30 AM, we get Weekly Jobless Claims. We also learn the first look at Q2 US GDP, which should be a blockbuster.
On Friday, July 30 at 8:30 PM, we get Personal Income & Spending for June.
As for me, when I was shopping for a Norwegian Fiord cruise for next summer, each stop was familiar to me because a close friend had blown up bridges in every one of them.
During the 1970s at the height of the Cold War, my late wife Kyoko flew a monthly round trip from Moscow to Tokyo as a British Airways stewardess. As she was checking out of her Moscow hote, someone rushed at her and threw a bundled typed manuscript that hit her in the chest.
Seconds later, a half dozen KGB agents dog-piled on top of her. It turned out that a dissident was trying to get Kyoko to smuggle a banned book to the West and she was arrested as a co-conspirator and bundled away to Lubyanka Prison.
I learned of this when the senior KGB agent for Japan contacted me, who had attended my wedding the year before. He said he could get her released, but only if I turned over a top-secret CIA analysis of the Russian oil industry.
At a loss for what to do, I went to the US Embassy to meet with ambassador Mike Mansfield, who as The Economist correspondent in Tokyo I knew well. He said he couldn’t help me as Kyoko was a Japanese national, but he knew someone who could. Then in walked William Colby, head of the CIA.
Colby was a legend in intelligence circles. After leading the French resistance with the OSS, he was parachuted into Norway with orders to disable the railway system. Hiding in the mountains during the day, he led a team of Norwegian freedom fighters who laid waste to the entire rail system from Tromso all the way down to Oslo. He thus bottled up 300,000 German troops, preventing them from retreating home to defend themselves from an allied invasion.
During Vietnam, Colby became notorious for running the Phoenix assassination program.
I asked Colby what to do about the Soviet request. He replied, “give it to them.” Taken aback, I asked how. He replied, “I’ll give you a copy.” Mansfield was my witness so I could never be arrested for being a turncoat. Copy in hand, I turned it over to my KGB friend and Kyoko was released the next day and put on the next flight out of the country. She never took a Moscow flight again.
I learned that the report predicted that the Russian oil industry, its largest source of foreign exchange, was on the verge of collapse. Only massive investment in modern western drilling technology could save it. This prompted Russia to sign deals with American oil service companies worth hundreds of millions of dollars.
Ten years later, I ran into Colby at a Washington event and I reminded him of the incident. He confided in me, “You know that report was completely fake, don’t you?” I was stunned. The goal was to drive the Soviet Union to the bargaining table to dial down the Cold War. I was the unwitting middleman. It worked. That was Bill, always playing the long game.
After Colby retired, he campaigned for nuclear disarmament and gun control. He died in a canoe accident in the lake in from of his Maryland home in 1996.
Nobody believed it for a second.
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
July 23, 2021
Fiat Lux
Featured Trade:
(INDUSTRIES YOU WILL NEVER HEAR FROM ME ABOUT)
(AMZN), (DIS), (FB), (MSFT), (VIX)
Global Market Comments
July 22, 2021
Fiat Lux
Featured Trade:
(HOW DID THOSE TECH LEAPS WORK OUT?)
(AAPL), (AMZN), (MSFT)
A month ago, I sent you a research piece about the merits of long-term LEAPS in the major technology stocks (click here for the link).
They included:
Amazon (AMZN) January 2022 $3,200-$3,400 vertical bull call spread
Microsoft (MSFT) January 2022 $240-$270 vertical bull call spread
Apple (AAPL) January 2022 $120-$130 vertical bull call spread
So, how did those work out? Here is the stock performance and the LEAPS performance for each position:
Amazon (AMZN) stock +11.40% LEAPS +26.79%
Microsoft (MSFT) stock +7.69% LEAPS +35.38%
Apple (AAPL) stock +13.38% LEAPS +30.92%
In other words, the LEAPS outperformed the stock to the upside by anywhere from 2.5X to 5X. All three positions are now deep-in-the-money. As long as the stocks close at or above the upper strike prices by the January 16, 20222 option expiration day, they will all produce profits of 100% or more in only seven months!
It goes to confirm the strategy that I have been vociferously arguing in recent months, that LEAPS offer far and away the best risk/reward of any investment in current market conditions. Whenever I have a payday, I pour the money straight into my retirement funds and into the most attractive LEAPS.
The liquidity for long-dated options is not that great. That is why entering limit orders in LEAPS only, as opposed to market orders, is crucial.
These are really for your buy-and-forget investment portfolio, defined benefit plan, 401k, or IRA.
Like all options contracts, LEAPS give its owner the right to exercise the option to buy or sell 100 shares of stock at a set price for a given time.
LEAPS have been around since 1990, and trade on the Chicago Board Options Exchange (CBOE).
To participate, you need an options account with a brokerage house, an easy process that mainly involves acknowledging the risk disclosures that no one ever reads.
If LEAPS expire "out-of-the-money" on expiration day, you can lose all the money you spent on the premium to buy it. There's no toughing it out waiting for a recovery, as with actual shares of stock. Poof, and your money is gone.
Note that a LEAPS owner does not vote proxies or receive dividends because the underlying stock is owned by the seller, or "writer," of the LEAPS contract until the LEAPS owner exercises.
Despite the Wild West image of options, LEAPS are actually ideal for the right type of conservative investor.
They offer vastly more margin and more efficient use of capital than traditional broker margin accounts. And you don’t have to pay the usurious interest rates that margin accounts usually charge.
And for a moderate increase in risk, they present hugely outsized profit opportunities.
For the right investor, they are the ideal instrument.
So, let’s get on with my specific math for the (AMZN) LEAPS to discover its inner beauty.
By now, you should all know what vertical bull call spreads are. If you don’t, then please click this link for my quickie video tutorial (you must be logged in to your account). Warning: I have aged since I made this video.
A month ago, Amazon closed at $3,346.83.
The cautious investor should have bought the (AMZN) January 2022 $3,200-$3,400 vertical bull call debit spread for $102. One contract gets you a $10,000 exposure. This is a bet that (AMZN) shares will close at $3,400 or higher by the January 22, 2022, option expiration, some 1.6% higher.
Sounds like a total no-brainer, doesn’t it?
Here are the specific trades you needed to execute this position:
expiration date: January 21, 2022
Portfolio weighting: 10%
Number of Contracts = 1 contract
Buy 1 January 2022 (AMZN) $3,200 call at………..….……$374.00
Sell short 1 January 2022 (AMZN) $3,400 call at…………$272.00
Net Cost:………………………….………..………….............….....$102.00
Potential Profit: $200.00 - $102.00 = $98.00
(1 X 100 X $98.00) = $9,800 or 96.07% in six months.
In other words, your $10,200 investment turned into $19,800 with an almost sure bet giving you a profit of 96.07%.
Why do a vertical bull call debit spread instead of just buying the January 2022 (AMZN) $3,400 calls outright?
You need a much bigger upside move to make money on this trade. (AMZN) would have to rise all the way to $3,674 to break even on the calls, and all the way up to $3,772 to match the profit of the call spread.
While I think it is possible that (AMZN) could rise that much by January, it is vastly more probable that (AMZN) will be over $3,400 by then. That is what hedge funds do all day long, and that is to find the most probable trade out there and then leverage up like crazy.
Remember, one call option gives you the right to buy 100 shares. That means over $3,400 your call spread that cost $10,200 will enable you to control 100 shares of Amazon worth $340,000. The potential upside leverage over $3,400 is 33.33X!
By paying only $102 for the spread instead of $274.00 for an outright call-only position, you can increase your size by 2.68 times, from 1 to 3 contracts for the same $10,200 commitment. That triples your upside leverage on the most probable move in (AMZN), the one above $3,400. That increases the upside leverage over $3,400 to an impressive 100X compared to the outright call buy.
How could this trade go wrong?
There is only one thing. We get a new variant on Covid-19 that overcomes the existing vaccines and brings a fourth wave in the pandemic.
In this case, (AMZN) doesn’t rise above $3,400 but crashes down to the $1,700 low we saw during the 2020 pandemic. We go back into recession. Both of the above positions go to zero. But if we get a fourth wave, you are going to have much bigger problems than your options positions.
So there it is. You pay your money and take your chances. That's why the potential returns on these simple trades are so incredibly high.
If you are interested in getting a more dedicated LEAPS service from the Mad Hedge Fund Trader, you might consider our Concierge service, which costs $10,000 a year and is by application only. If interested, please email support@madhedgefundtrader.com and put Concierge candidate in the subject line.
Enjoy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Tech LEAPS are the Way to Go
“Language does not provide the means for us to describe the destruction before us,” said Chancellor Angela Merkel about the damage from the climate change-induced flooding in Germany.
Global Market Comments
July 21, 2021
Fiat Lux
Featured Trade:
(AN INSIDER’S GUIDE TO THE NEXT DECADE OF TECH INVESTMENT),
(AMZN), (AAPL), (NFLX), (AMD), (INTC), (TSLA), (GOOG), (FB)
Global Market Comments
July 20, 2021
Fiat Lux
Featured Trade:
(SHOPPING FOR FIRE INSURANCE IN A HURRICANE)
(VIX), (VXX), (XIV)
(THE ABCs OF THE VIX)
(VIX), (VXX), (SVXY)
Global Market Comments
July 19, 2021
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE DELTA CORRECTION IS HERE)
(AMZN), (AAPL), (FB), (MSFT), (TAN), (FSLR)
Right now, the fate of your investment portfolio, and indeed your life, is in the hands of a minority of anti vaxers in the Midwest.
If the surge in the delta variant burns out in weeks or a month, the current market correction won’t extend any more than 5% and you should be loading the boat with big tech stocks like (AMZN), (AAPL), (FB), and (MSFT).
The delta variant is becoming a big deal, with unvaccinated states like Arkansas (35% vaccination rate) and Missouri (40% rate) driving the resurgence. It is essentially an epidemic of the unvaccinated.
Unless checked, it could lead to a broader stock market selloff in August. Los Angeles brought back the indoor mask mandate on Saturday, although compliance is near zero. San Francisco may be close behind.
Everyone in my company worldwide is now vaccinated, with Australia last to get one. I’ll be first in line for the Pfizer booster out in the fall. Delta is twice as contagious, more fatal, with more permanent side effects than earlier variants. And it’s killing more kids.
But it’s not the delta you have to worry about. If a future epsilon or zeta variant emerges, that can overcome our current vaccines, bred in the Midwest, the economy would shut down again and you can kiss your bull market goodbye. That would lead to a 1918 style finish to this pandemic, the fatality rate would go up to 50%, and millions more would die.
I’ll stick to the optimistic case….for now.
Even if we get a new variant, we now have the infrastructure in place to sequence the DNA of a new strain in a day and have 100 million doses in the freezer in two months. But it could be a close-run thing.
If you want to stick with your long portfolio in the face of millions dying here is the argument.
The Fed is unable to stimulate the economy any further through interest rate cuts or more QE. It is like pushing on a string. Companies can’t hire the labor they need to increase production or obtain the parts to make things.
This ends in August when workers get their free childcare back in the form of the public school system. The ending of Covid benefits will also light a fire under them. This will lead to a collapse in the unemployment rate and a further rise in GDP from the current ballistic 7.0% rate. This will allow the Fed to raise rates, but not enough to hurt stocks, especially techs.
This is your Goldilocks scenario for H2.
Driving down from Lake Tahoe to Long Beach to pick up my kids from Scout Camp, I passed two huge wildfires. Half the vehicles on the road (US 395) were fire trucks and crews moving in from other states. It’s like being at war.
So, you might ask the question of when will Climate Change affect the stock market? The answer is that Climate Change is actually great for stocks. Money gets spent to put fires out, then trillions of dollars get spent to rebuild with insurance claims.
The biggest impact of climate change is the decarbonization of our energy infrastructure, out of fossil fuels and into alternatives. Solar will soar from 20% to 70% of total electric power output in a decade while nuclear stays at 20% and hydroelectric at 10%. Coal and oil completely disappear. This will enable a large cut in our total energy bill.
Yes, I know oil has rallied lately. I’m sure American Leather had rallied on the way to zero, the only Dow stock to ever completely disappear. It was wiped out by the transition from horses to cars, eliminating 97% of the demand for leather. (The horse population went from 120 million to only 3.8 million today).
There are ways to play this today. Solar growth will be massive, so you have to look at the Invesco Solar ETF (TAN) and First Solar (FSLR).
Here is the next market top, at least for the short term. That’s because, for the last year, stocks have a nasty habit of selling off after quarterly earnings reports, which are just around the corner. Announcement dates for the FANGS are below. For the short term, you want to sell days before the reports. For the long term, you want to keep them, as I expect all to double or more in the next three years.
Facebook (FB) is July 28, 2021
Alphabet (GOOGL) - Jul 25, 2021
Apple (AAPL) Jul 27, 2021
Amazon (AMZN) Jul 26, 2021
Netflix (NFLX) Jul 20, 2021
Microsoft (MSFT) - Jul 28, 2021
China’s economy is slowing, with the post-Covid bounce over. It just provided $154 billion in stimulus for its economy and cut bank reserve requirements by 50 basis points. If they slow there, we could slow here, especially for big exporters to China in the ags.
Core CPI jumps to 5.4%, the biggest gain in 13 years. Excluding food and energy, it’s the biggest print since 1991. The Fed is holding its breath that these large numbers are temporary. Used car and truck prices accounted for a third of the gain for the second month in a row. That is certainly not sustainable, or I’m going into the used car business. Tech took off like a rocket on the news.
Producer prices show biggest gain since 2008, the is index up a hot 1.0% in June against 0.8% in May. PPI is up 7.3% YOY. Higher commodity and labor costs against shrinking inventories were the big issues. Inflationary pressures are here, but for how long?
Senate agrees to $3.5 trillion spending plan, providing great news for stocks and terrible news for bonds. No Republican support is required. This is in addition to the $579 billion infrastructure deal reach with opposition support. It’s enough dosh to keep this stock market percolating for years. Buy FANGS on dips.
Any tightening is a ways off, says Fed governor Jerome Powell in his congressional testimony, sending bonds soaring. The comment was in response to the superheated 5.4% CPI print on Tuesday. The $120 billion a month in Fed bond buying continues. Big tech loved it and continued with its non-stop rally. The rocket fuel for share prices continues unabated.
The four biggest US banks deliver spectacular earnings, posting a combined $33 billion in profits, triggering the predictable selloff. That is $9 billion above analyst forecasts, which seem to be a permanent lagging indicator. Consumer spending is exceeding pre-pandemic levels, credit quality is soaring, and credit card spending is through the roof. Buy (JPM), (BAC), and (V) on dips.
US retail sales come rocketing back, with customers spending those stimulus checks hand over fist. The 0.6% gain in June came on the heels of a 1.7% drop in May. Vaccinations are driving buyers back into the stores. Electronics stores, clothing, and restaurants saw the biggest increases.
Bank of America lowers US GDP from 7.0% to 6.5%, still the whitest hot numbers in history. 2022 is looking like 5.5%, still double the pre-pandemic rate. Personally, I think these numbers are low, and the stock market thinks so too. Keep buying dips in the good names.
Investors pouring out of bonds and into stocks, according to a survey of mutual fund flows last week. I couldn’t agree more. The Fed can’t keep holding on to zero rates forever, and when their turn comes, its will be brutal.
My Ten Year View
When we come out the other side of pandemic, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 240,000 here we come!
My Mad Hedge Global Trading Dispatch profit reached a 1.84% gain so far in July. My 2021 year-to-date performance appreciated to 70.44%. The Dow Average is up 13.35% so far in 2021.
I spent the week running my two last positions, a long in (JPM) and a short in the (TLT) into the July 16 options expiration. Both expired at max profit. I then immediately strapped on a new short in the (SPY), my first since the pandemic began. That leaves me 90% in cash. I’m keeping positions small as long as we are at extreme overbought conditions.
That brings my 11-year total return to 492.99%, some 2.00 times the S&P 500 (SPX) over the same period. My 12-year average annualized return now stands at an unbelievable 42.56%, easily the highest in the industry.
My trailing one-year return exploded to positively eye-popping 108.94%. I truly have to pinch myself when I see numbers like this. I bet many of you are making the biggest money of your long lives.
We need to keep an eye on the number of US Coronavirus cases at 34.1 million and deaths topping 609,000, which you can find here.
The coming week will be a weak one on the data front.
On Monday, July 19 at 11:00 AM, the NAHB Housing Market Index for July is out. Johnson & Johnson (JNJ) and Verizon (VZ) report.
On Tuesday, July 20, at 8:30 AM, Housing Starts for June are printed. Haliburton (HAL) and United Airlines (UAL) report.
On Wednesday, July 21 at 11:30 AM, EIA Crude Oil Stocks are announced. Netgear (NTGR) reports.
On Thursday, July 22 at 8:30 AM, we learn the latest Weekly Jobless Claims. At 11:00 AM, we get Existing Home Sales for June. American Airlines (AAL) and Biogen (BIIB) report.
On Friday, July 23 at 2:00 PM, we learn the Baker-Hughes Rig Count. American Express (AXP) reports.
As for me, we all had to rearrange our budgets in the last year, dumping old spending habits and adopting new ones.
As for me, my electric scooter bill with Lime (click here for the site) has gone through the roof. They neatly fill the gap between walking and Uber in major tourist areas like Long Beach.
It’s a lot of fun, provided you don’t kill yourself on your first ride. The scooters go fast, some 20 miles an hour. Each one has a 13-mile range. When you’re done, you just drop it, take its picture, and then Lime picks it up and recharges it overnight.
I think I broke all seven of their mandatory rules (no driving on sidewalks, driving without a helmet, drinking while driving….). Hey, the great thing about being my age is that there are no long-term consequences to anything.
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Check Out My New Wheels
Here is the Problem
