Global Market Comments
November 4, 2024
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD or TRADING ONE UNCERTAINTY FOR ANOTHER plus RECOLLECTIONS OF A MARINE),
(NVDA), (DHI), (LEN), (KBH), (PHM), (TOL), (JPM)
Here I am holed up in a mountaintop retreat.
I have six months of canned food, one month of water, and a year supply of ammo. There is an AR-15 and 12 gauge shotgun at the front door. There is a 45 caliber Colt Peacemaker and a Browning 45 at the backdoor. I sleep with a 9mm Glock 17 under my pillow and a baseball bat next to the bed. There are empty tin cans strung from the shrubbery to sound the alarm for any unexpected intruders.
Let the election begin!
Actually, I think the big surprise will be how little violence takes place. The violence threatened by one political party will fail to show. It was all talk, no substance, and just one big con. That alone should be worth a thousand-point rally in the Dow Average.
Of course, the passing of the election isn’t going to end the uncertainty for the stock market. All we are really doing is trading one kind of uncertainty for another. If Harris wins, will she be able to govern from the middle and how much will she be able to keep her party’s left wing at bay?
If Trump is elected, how many of his threats will be carried out, or was it all just talk? And how much will the courts allow him to carry out extreme policies? Then, there is the issue of who has control of the House and the Senate.
It will all add up to increased market volatility, which I love as a trader. Volatile markets yield much higher returns.
Buy this year’s winners and sell the losers. That is what every professional money manager will be doing on Wednesday morning. They want to window dress their holdings for yearend and harvest tax losses, mostly in energy. That makes the post-election rally really very easy to play.
In one of the most curious market timings in history, Dow Jones announced that it is adding Nvidia (NVDA) to their 30-strong stock market average on Friday, November 8, just three days after the presidential election, and possibly when the outcome is not yet known.
The Dow Jones Industrial Average was the only major US equity benchmark that didn't hold Nvidia. Intel (INTC) will be taken out to the woodshed, which just announced a massive $16 billion loss and has shrunk to a mere $100 billion in market cap. (INTC) is a mere shadow of its former self with a caricature of a CEO.
The normal reaction by the market is a 5-10% pop in the new Dow entrants and a similar 5-10% decline in the shares of the banished company. This is good news for followers of the Mad Hedge Fund Trader because virtually everyone now has (NVDA) as their largest holding, either by selection or capital appreciation.
The 19th century Dow has been playing catchup in gaining exposure to the largest technology companies. The Dow became 30 stocks in 1928. The DJIA was originally created by Charles Dow in 1896 and contained just 12 stocks. The number of stocks in the DJIA increased to 20 in 1916.
The move will increase the volatility of the Dow by adding a stock that is up 170% this year while removing one that has fallen 50%. It will lead to higher highs and then lower lows. Remember, (NVDA) fell 40% in July. It also continues to technology drift of the Dow to keep up with its main competitor, NASDAQ. The last company to join the Dow was Amazon.
When you do the hard work and perform your research well, all surprises tend to be happy ones.
A number of readers have expressed concern over DH Horton’s (DHI) disappointing results. But if anything, the bull case for the industry is stronger than ever. An imminent post-election rally in the bond market and drop in interest rates is about to cause the industry to explode to the upside.
The US new homes market is massively underbuilt. We are short anywhere from 10-20 million homes. Normal inventory is 6 months, and we are currently at 3 months. We went into the pandemic short of homes and then demand exploded. The average home price is now $420,000 against an average income of $75,000, requiring $130,000 in annual income to qualify for a conventional 30-year fixed rate loan.
If you want to live in San Jose, CA you need to earn $463,000 a year. Half of the new homes built this year are in only ten cities, with four in Texas as Americans continue a century-long trend of moving from north to south and from the coasts to the southwest. Building permits are actually falling, down 7% this year.
Concentration of the industry, and therefore the elimination competition, has continued at an incredible pace. Only ten firms control 50% to 80% of new home construction, making it difficult for new entrants. That’s up from only 10% 30 years ago. As a result, the number of floor plan options has shrunk dramatically.
Vice President Harris is proposing a $25,000 tax credit for first-time buyers if elected. She has also suggested subsidies to build 3 million affordable housing units. You always buy a sector that is about to see a big inflow of government largess. Buy (LEN), (KBH), (PHM), (TOL), and (DHI) on dips.
In October, we have gained a breathtaking +7.68%. My 2024 year-to-date performance is at an amazing +52.92%. The S&P 500 (SPY) is up +19.92% so far in 2024. My trailing one-year return reached a nosebleed +65.56. That brings my 16-year total return to +729.55%. My average annualized return has recovered to +52.42%.
I am going into the election as cautious as possible, with 80% in cash and 20% long. When you’re up this much you don’t take chances. I maintained two longs in (DHI) and (JPM) that are well in the money.
Some 63 of my 70 round trips, or 90%, were profitable in 2023. Some 63 of 82 trades have been profitable so far in 2024, and several of those losses were really break-even. Some 22 out of the last 23 trade alerts were profitable. That is a success rate of +76.82%.
Try beating that anywhere.
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 600% 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, November 4 at 8:30 AM EST, the US Factory Orders are published.
On Tuesday, November 5 at 6:00 AM, the US Presidential Elections take place. The last polls close in Hawaii at 1:00 AM EST.
On Wednesday, November 6 at 11:00 AM, the MBA Mortgage rate is printed.
On Thursday, November 7 at 11:00 AM, the Federal Reserve announces its interest rates decision. A 25-basis point cut is in the bag. A press conference follows at 11:30 AM.
On Friday, November 8 at 8:30 AM, the University of Michigan Consumer Sentiment is announced. At 2:00 PM the Baker Hughes Rig Count is printed.
As for me, as the son of a Marine who served on Guadalcanal in 1942, I had an unusual childhood. The memories all came flooding back to me as the HBO program, The Pacific, which aired once again over last Memorial Day weekend.
Every scene in the ten-hour series I had already heard about around campfires, at veteran’s reunions, or in officers clubs around the world. At five, I learned how to open a coconut by tapping around the three eyes with a bayonet. At ten, I could shinny up a palm tree with a belt wrapped around my ankles.
I learned that you can shoot down a Japanese zero fighter by leading with four hand widths and aiming high. A tank can be disabled by ramming a log into its tracks. There was the survival training; practicing how to find water in the desert, setting a snare trap to catch small animals to eat, and starting a fire with only flint and steel. All the sniper training was fun but was fortunately never put to use.
I can still thrill the kids by hitting a quarter taped to a tree 50 feet away with a Winchester lever action 30-30. We outfitted ourselves with surplus WWII equipment from the “Supply Sergeant” for camping trips, which you could buy for a couple of dollars. Now, you only find these things in museums. We ate leftover C-rations.
Perhaps it was dad’s explanation of how to make highly alcoholic hooch out of canned peaches that led to my degree in biochemistry. In the end, I had my own Marine career as a combat pilot in Desert Storm, and many tasks that followed. There you learn the true meaning of “gung ho.”
At 73, I stay in boot camp shape. In my free time, I hike 100 miles in the High Sierras over 8,000 feet in eight days. I am carrying a 50-pound pack, and living on only 500 calories a day entirely composed of fruit and nuts. I love every minute of it.
Watching the series, I was reminded how feeble and meaningless my profession is, toiling away all year just to create a spreadsheet full of numbers, and how the men of eight decades ago were made of sterner stuff. Buying a dip on a bad day just doesn’t equate to “taking out that machine gun.”
How times have changed. Fall down on your knees and give thanks for your simple life.
You can buy the Hugh Ambrose book the series was based on by clicking here. You can purchase the DVD by clicking here.
Good Luck and Good Trading,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
"Homo Sapiens, the first truly free species, is about to decommission the natural selection, the force that made us," said E.O. Wilson, a Harvard University biology professor.
Global Market Comments
November 1, 2024
Fiat Lux
Featured Trade:
(PLEASE USE MY FREE DATABASE SEARCH)
The original purpose of this letter was to build a database of ideas to draw on in the management of my hedge fund.
When a certain trade comes into play, I merely type in the symbol, name, currency, or commodity into the search box, and the entire fundamental argument in favor of that position pops up.
You can do the same. Just type anything into the search box with the little magnifying glass in the upper right-hand corner of my home page, and a cornucopia of data, charts, and opinions will appear.
Even the prices of camels in India (click here to find out why they’re going up).
The database goes back to February 2009, totaling 4 million words. Watching the traffic over time, I can tell you how the database is being used:
1) Small hedge funds want to see what the large hedge funds are doing.
2) Large hedge funds look to see what they have missed, which is usually nothing.
3) Midwestern advisors to find out what is happening in New York and Chicago.
4) American investors to find out if there are any opportunities overseas (there always are).
5) Foreign investors to find out what the heck is happening in the US (about 1,000 inquiries a day come in through Google’s translation software).
6) Specialist traders in stocks, bonds, currencies, commodities, and precious metals looking for cross-market insights, which will give them a trading advantage with their own book.
7) High net-worth individuals managing their own portfolios so they don’t get screwed on management fees.
8) Low net worth individuals, students, and the military looking to expand their knowledge of financial markets (lots of free online time in the Navy).
9) People at the Treasury and the Fed trying to find out what the private sector is doing.
10) Staff at the SEC and the CFTC to see if there is anything new they should be regulating.
11) More staff at the Congress and the Senate looking for new hot-button issues to distort and obfuscate.
12) Yet, even more staff in Obama’s office gauging his popularity and the reception of his policies.
13) As far as I know, no justices at the Supreme Court read my letter. They’re all closet indexers.
14) Potential investors/subscribers attempting to ascertain if I have the slightest idea of what I am talking about.
15) Me trying to remember trades that I recommended long ago but have forgotten.
16) Me looking for trades that worked so I can say, ‘I told you so.’
It’s there, it’s free, so please use it.
Global Market Comments
October 31, 2024
Fiat Lux
Featured Trade:
(ORDER EXECUTION 101)
Given the recent difficulty in placing orders in this violent, illiquid market, I have been inundated with requests for how to execute orders. So, I thought I’d take some time today to expound on the basics of order execution 101.
There are three basic ways to intelligently get an order into the market:
1) The No Brainer Average In. Buy half on receipt of my Trade Alert and half at the close. It’s that simple. If there is a tight spread and lots of volume, such as you usually get with the (SPY), just go to the market.
This is what a lot of institutions do and is why you get the volume spikes in the market at the opening and the close every day.
If you are trying to get into an illiquid position, such as with a far-month option on the Japanese yen, the spreads can be quite wide, possibly as much as 10%.
Going to the market can mean giving up a large chunk of your profit upfront. So, place limit orders in the middle of the spread, giving the market makers time to lay off risk in the underlying security or in the futures.
That will enable them to tighten up the spread and fill your order without taking you to the cleaners.
2) The Scale In. Let’s say I issue a trade alert to buy a spread at $4.00. The market is indicating a price of $3.85-$4.15. Break this down into seven orders of $3.85, $3.90, $395, $4.00, $4.05, $4.10, and $4.15. Then, forget about them.
By the end of the day, one will certainly get done, and maybe a few more. They will all get done only if the stock drops. But whatever happens, you will end up with a nice average and the low of the day in a rising market.
The reverse logic is true for put spreads.
2) The Principal Method. If you are a large, high-net-worth individual or institution, you can call your broker and ask him to make a market in any security. He will give you a bid and an offer wide enough to compensate for the risk he is taking, and you just lift the leg you want.
Warning: if your broker consistently loses money trading with you, he will quit returning your phone calls. That has happened to me a lot.
3) The Discretionary Method. Find a broker you trust to execute on a best-efforts basis at his discretion. He will want to grow your business and will do the best price he can. Expect to pay a higher commission and fees for this service, as you should. A lot of independent financial advisors now operate on this basis.
4) Overnight GTCs. If you live in a foreign time zone when the US stock market is closed, such as Australia, simply enter a spread of Good-Until-Cancelled orders overnight. For example, if I send out a trade alert to buy at $9.00, enter limit orders GTC at $9.00, $9.10, $9.20, $9.30, and $9.40. You should get done on some or all of these. This also applies to Americans who work during the day or don’t want to sit in front of a screen all day.
But a good broker worth his salt will usually earn his keep and then some, so it is worthwhile.
He has the news feeds right in front of him, has access to in-house and third-party research, like this newsletter, and is talking to clients and other traders all day long. So he should use this information to your advantage.
Don’t expect his service to be price competitive with discount online execution services. You get what you pay for.
Better not to be penny-wise and pound-foolish. Caution: many brokers won’t take these orders unless they know you well, as they are afraid of getting sued.
Be very careful of using limit stop losses these days. In the big flash crashes, some unfortunate investors got filled with market orders down 90%, especially with ETFs.
Better to let your broker use a “pocket” stop loss where he will call you before executing
If you get a Trade Alert from me and the security has already moved 5%, don’t chase it. The 3% rule applies to ETF’s.
Sometimes, merely going for a refill on your coffee, taking out the trash, or reading the morning papers is enough to miss an opportunity in this market.
I know because I have done it plenty of times myself.
Keep your discipline. Wait for the price to come back to you, or wait for the next Trade Alert. There are plenty of fish in the sea, and it is just a matter of time before another juicy one swims by.
Which One Did You Say I Should Buy?
Global Market Comments
October 30, 2024
Fiat Lux
Featured Trade:
(TAKE A LEAP INTO LEAPS)
How would you like to make 15 or 20 cents on every dollar invested? That is what we have been doing many times a month all year, and in fact, since Mad Hedge started 16 years ago.
Would you like to make better than that, say 100% a year? How about 1,000% a year?
Such a return is likely, if not probable. All you have to do is learn about LEAPS.
LEAPS, or Long Term Equity Participation Securities, are just a fancy name for a stock option with a maturity of more than one year.
You execute orders for these securities on your options online trading platform, pay options commissions, and endure option-like volatility.
Another way of describing LEAPS is that they offer a way to rent stocks instead of buying them, with the prospect of enjoying many years’ worth of stock gains for a fraction of the price.
While this may sound risky, in fact, 39 of the 40 LEAPS I have issued over the last three years have expired at maximum profits of 100%, 1,000%, or even 2,000%
Do I have your interest now?
While these are highly leveraged instruments, you can’t lose any more money than you put into them. Your risk is well-defined.
And there are many companies in the market where LEAPS are a very good idea, especially on those gut-wrenching 1,000-point down days, which may be coming soon.
Interested?
Currently, LEAPS are listed all the way out until June 2027.
However, the further expiration dates will have far less liquidity than near-month options, so they are not a great short-term trading vehicle. That is why limit orders in LEAPS, as opposed to market orders, are crucial.
These are really for your buy-and-forget investment portfolio, defined benefit plan, 401k, or IRA.
Because of the long maturities, premiums can be enormous. However, there is more than one way to skin a cat, and the profit opportunities here can be astronomical.
Like all options contracts, a LEAPS gives 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 a LEAPS expires "out-of-the-money" – when exercising, you can lose all the money that was 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.
LEAPS are also offered on exchange-traded funds (ETFs) that track indices like the Standard & Poor's 500 index (SPY) and the Dow Jones Industrial Average (INDU), so you could bet on up or down moves of the broad market.
Please note that these options are illiquid, and it may take some work to get in or out. Executing these trades is more an art than a science.
Notice that the day-to-day volatility of LEAPS prices is miniscule, less than 10%, since the time value is so great, and you have a long position simultaneously offset by a short one.
This means that the day-to-day moves in your P&L will be small. It also means you can buy your position over the course of a month, just entering new orders every day. I know this can be tedious but getting screwed by overpaying for a position is even more tedious.
Not all stocks have options, and not all stocks with ordinary options also offer LEAPS.
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 LEAP contract until the LEAP owner exercises.
Despite the Wild West image of options, LEAPS are actually ideal for the right type of conservative investor.
They offer 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 outsized profit opportunities.
For the right investor, they are the ideal instrument.
Let me go through some examples to show you their inner beauty.
By now, you should all know what are vertical bull call debit spreads. If you don’t, then please click here for a quickie video tutorial (you must be logged in to your account).
Let’s go back to February 9 when the Dow Average plunged to its 23,800 low for 2018. I begged you to buy the Apple (AAPL) June 2018 $130-$140 call spread at $8.10, which most of you did. A month later, that position is worth $9.40, up some 16.04%. Not bad.
Now let’s say that instead of buying a spread four months out, you went for the full year and three months to June 2019.
That identical (AAPL) $130-$140 would have cost $5.50 on February 9. The spread would be worth $9.40 today, up 70.90%, and worth $10 on June 21, 2019, up 81.81%.
So, by holding a 15-month-to-expiration position for only a month, you get to collect 86.67% of the maximum potential profit of the position.
So, now you know why we leap into LEAPS.
When the meltdown comes, use this strategy to jump into longer term positions in the names we have been recommending and you should be able to retire early.
“You can reduce discretionary spending down to zero and it won’t have much impact on our fiscal problems because it’s such a small proportion of the total,” said Ben Bernanke, former chairman of the Federal Reserve.