Newsletter Archives

What?s On Your Plate for This Week?

August has been our biggest positive month in a year for subscribers to the Diary of a Mad Hedge Fund Trader, gaining more than 7%. During September, 2015, I brought in a ballistic 11.99% for investors.

My 69 month performance hit 205% at the Friday close, a new all time high.

Learning How to Dance the Contango

The Volatility Bottom is In

Diary, Newsletter

Well, I certainly earned my crust of bread last week.

After buying the Volatility Index at the Friday lows, it rocketed by an incredible 25%.

If I continue to be right, you want to use every subsequent (VIX) dip to go long.

I am one of those cheapskates who buys Christmas ornaments by the bucket load from Costco in January for ten cents on the dollar, because my eleven month theoretical return on capital comes close to 1,000%.

I also like buying flood insurance in the middle of the summer drought, when the forecast in California is for endless days of sunshine.

That is what we are facing now with the volatility index (VIX) where premiums probed such rock bottom prices.

Yikes!

?Get this one right, and the profits you can realize are spectacular.

It gets better. If the bottom in volatility exactly coincides with the peak in the stock market that it measures, volatility could be headed back up to the 20 handle, and maybe more.

I double dare you to look at the charts below and tell me this isn?t happening.

Watch carefully for other confirming trends to affirm this trade is unfolding. Those would include a strong dollar, falling stocks, plunging oil, and a weak Yen, Euro, and fixed income instruments of any kind.

Notice that every one of these is happening this week!

Reversion to the mean, anyone?

You may know of this from the many clueless talking heads, beginners, and newbies who call (VIX) the ?Fear Index?.

Long-term subscribers to? my Trade Alert Service profited handsomely after I urged them to sell short this index three times since January. Shorting every spike up has worked like a charm.

For those of you who have a PhD in higher mathematics from MIT, the (VIX) is simply a weighted blend of prices for a range of options on the S&P 500 index.

The formula uses a kernel-smoothed estimator that takes as inputs the current market prices for all out-of-the-money calls and puts for the front month and second month expirations.

The (VIX) is the square root of the par variance swap rate for a 30 day term initiated today. To get into the pricing of the individual options, please go look up your handy dandy and ever useful Black-Scholes equation.

You will recall that this is the equation that derives from the Brownian motion of heat transference in metals. Got all that?

For the rest of you who do not possess a PhD in higher mathematics from MIT, and maybe scored a 450 on your math SAT test, or who don?t know what an SAT test is, this is what you need to know.

When the market goes up, the (VIX) goes down. When the market goes down, the (VIX) goes up. Period. End of story. Class dismissed.

The (VIX) is expressed in terms of the annualized movement in the S&P 500, which today is at $2,163.

So for example, a (VIX) of $14 means that the market expects the index to move 4.0%, or 72 S&P 500 points, over the next 30 days.

You get this by calculating $14/3.46 = 4.0%, where the square root of 12 months is 3.46.

The volatility index doesn?t really care which way the stock index moves. If the S&P 500 moves more than the projected 4.0%, you make a profit on your long (VIX) positions.

Probability statistics suggest that there is a 68% chance (one standard deviation) that the next monthly market move will stay within the 4.0% range.

I am going into this detail because I always get a million questions whenever I raise this subject with volatility-deprived investors.

It gets better. Futures contracts began trading on the (VIX) in 2004, and options on the futures since 2006.

Since then, these instruments have provided a vital means through which hedge funds control risk in their portfolios, thus providing the ?hedge? in hedge fund.

If you make money on your (VIX) trade, it will offset losses on other long positions. This is how the big funds most commonly use it.

No one who buys fire insurance ever complains when their house doesn?t burn down.

Make Volatility Your Friend Not Your Enemy

August 26, 2016

Diary, Newsletter, Summary

Global Market Comments
August 26, 2016
Fiat Lux

Featured Trade:
(EMERGING MARKETS ARE BACK!),
(EEM), (ELD), (CEW), (TLT),
(TESTIMONIAL),
(CHINA?S LONG AND WINDING ROAD),
(FSLR), (YGE)

iShares MSCI Emerging Markets (EEM)
WisdomTree Emerging Markets Lcl Dbt ETF (ELD)
WisdomTree Emerging Currency Strat ETF (CEW)
iShares 20+ Year Treasury Bond (TLT)
First Solar, Inc. (FSLR)
Yingli Green Energy Holding Co. Ltd. (YGE)

Emerging Markets Are Back!

Diary, Newsletter

Boy, did we have a great run in emerging markets during the 2000s!

A global commodity boom caused many of these markets to rise tenfold or more.

Go back to the earliest newsletters published by the Diary of a Mad Hedge Fund Trader in 2008, and you will find them chock full of recommendations to buy hard assets, emerging market ETFs, debt, and currencies.

As former colonies, many of these countries still base their economies on production of the precious and base metals, energy, and foodstuffs they once supplied the motherland.

And as a former correspondent for The Economist magazine covering this territory, I knew them well.

Then in 2011, the party abruptly ended, and a vicious five-year bear market ensued.

Oil peaked first, eventually nosediving some 82.5%, from $149 to $26.

Remember Dr. Copper, the only commodity with a PhD in economics? He gave up 57.9%.

And gold, that ultimate store of value for Armageddonists and conspiracy theorists everywhere? It plunged by 48.2%.

There are still a lot of unhappy American gold eagles sitting in bank deposit boxes around the country gathering dust, thanks to those ridiculous theories.

It didn?t help that a raging bull market in developed market government bonds sucked even more money out of these beleaguered countries.

The Emerging market debt ETF (ELD), collapsed by 32%. The emerging market currency ETF (CEW) dropped by 35.5%.

My long-term subscribers can already see where this is going.

The wonderful thing about all of these cross asset class declines is that they have a leveraged effect on each other.

So while the ishares MSCI Emerging Market ETF (EEM) fell by 38.9%, in dollar terms it declined by more than half.

Then a funny thing happened during the second week of January 2016.

Gold took off like a rocket.

It was closely followed by silver, oil copper, palladium, platinum, and iron ore. Only the ags failed to participate.

The bull market was back!

Portfolio managers were given a simple choice.

Should they chase developed market assets trading at all time highs with yields approaching zero. Or should they load up on emerging assets at decade lows with yields approaching 12%?

Yields that high can cover up a lot of mistakes and preserve principal.

If you voted for the latter, you deserve a brass ring.

Here we are some eight months later, and the emerging bull market is alive and well. In fact, it is about to take another substantial new leg upwards.

My money is on emerging market handily beating the major US stock indexes for the rest of 2016.

The reasons for this are many and complex.

For a start, the iShares MSCI Emerging Market ETF (EEM) is still cheap.

It has to rise by 21.6% just to get back up to its 2011 highs. As a laggard play, it is beyond reproach.

In emerging market debt, the positive carry is enormous.

The Wisdom Tree Emerging Market Local Debt Fund (ELD) is yielding 5.46%, some 390 basis points high than the ten year Treasury bond (TLT).

And if you want to go with individual rifle shots in single countries, you can earn as much as 11.90% in Brazil.

The ?lower for longer? philosophy of the Fed just shines a giant great spotlight on this paper.

And guess what happened while you weren?t looking?

Emerging market debt has ?emerged.?

Five years of balance sheet repair means their credit quality has improved.

Local credit markets have grown up too.

Once dominated by huge inflows and outflows from foreign investors, markets are now much more in balance, thanks to the rise of? local institutional investors and pension funds.

The fundamentals of these countries have been steadily improving.

Falling currencies gave them a competitive advantage that allowed? trade surpluses to dramatically improve.

Political stability is improving. During my journalist days, you used to be able to count on one good coup d??tat or revolution in the area a year. No more.

Many business friendly, pro trade governments have come into power, such as in Argentina, India and Peru.

Emerging market GDP growth rates are still double those found in developed markets.

Markets themselves are improving. Spreads for stocks and bonds are now much tighter in emerging markets and liquidity has improved. They are ?roach motel? markets no more, where you can check in, but you can?t check out.

Get this one right, and the cross asset class hockey stick effect we saw on the downside will work just as well on the upside.

In short, there is a lot more to the emerging market dollar than there used to be. It is just a matter of time before financial markets figure this out.

Looking for the Next Bull Market

August 25, 2016

Diary, Newsletter, Summary

Global Market Comments
August 25, 2016
Fiat Lux

Featured Trade:
(MAD OPTIONS TRADER DELIVERS A 214.71% PROFIT IN 27 MONTHS),
(WHY I SOLD SHORT THE EURO),
(FXE), (EUO), (TLT), (TBT), (SPY),
(TAKING A BITE OUT OF STEALTH INFLATION)

CurrencyShares Euro ETF (FXE)
ProShares UltraShort Euro (EUO)
iShares 20+ Year Treasury Bond (TLT)
ProShares UltraShort 20+ Year Treasury (TBT)
SPDR S&P 500 ETF (SPY)

Mad Options Trader Delivers a 214.71% Profit in 27 Months

Diary, Newsletter

I have recently heard from several subscribers of my new Mad Options Trader (MOT) service that they have earned enough in their first three weeks to cover it's cost FOR THE NEXT SEVERAL YEARS!

?Whiz?, who runs MOT for me, has certainly had a hot hand, with almost every trade turning immediately profitable.

At the request of several members, I have therefore conducted an audit of the long term trading performance of the Mad Options Trader.

The numbers blew my mind.

Since May 20, 2014, the Mad Options Trader has delivered A STUNNING 214.71% PROFIT, net of fees.

This is during a period when the overall market performance was essentially zero.

That is far better than my own numbers, but then ?Whiz? is much more aggressive and using more leverage over a shorter time frame than I am.

Chalk my cautiousness up to my advanced age. I am too old to start over again as a junior trader at Morgan Stanley, as if they would have me back.

Still, you now have your choice of winners, Mad Options Trader up +214.71% in 27 months, or Mad Hedge Fund Trader up +201.65% in 69 months.

You are spoiled for choice. It doesn?t get any better than that in the trading world.

I take great pleasure in pointing out that Whiz and I provide the only trade mentoring services that publish audited performance on a daily basis.

NONE OF THE OTHERS DO BECAUSE THEY ALL LOSE MONEY!

Believe me, if they HAD decent performance to report, it would be in your inbox every morning. Their silence speaks volumes.

I should take this opportunity to remind you that your free subscription to the Mad Options Trader expires in only one week, on August 31.

After that, the service will only be available as a $1,500 upgrade to your existing Mad Hedge Fund Trader service.

Nancy is taking orders now. You can email her directly with your request at support@madhedgefundtrader.com.

SPECIAL NOTE: Because of the urgency and frequency of the Mad Options Trader Alerts, you absolutely MUST sign up for our text message service.

For risk profiles of some of MOT?s recent trades, please see the charts below.

The ?Mad Options Trader service focuses primarily on the weekly US equity options expirations, with the goal of making profits at all times.

The trading will take place in the S&P 500 (SPX), major industry ETF?s like the Financials Select Sector (XLF), and large capitalized single names, such as Facebook (FB), JP Morgan Chase & Co. (JPM), and Apple (AAPL).

Matt is my old friend and fellow comrade in arms of Top Gun Options, one of the best performing trade mentoring outfits in the industry.

Matt?s performance works out to an eye-popping average of 7.92% a month, and annualizes out to an incredible 95.11% a year.

Matt, a native of New Jersey, joined the Navy straight out of college, and rose to become an F-18/A fighter pilot. He attended the famed Top Gun school in Coronado, California. During the second Iraq War, Matt flew 44 combat missions.

Matt left the service in 2006, and immediately entered the hedge fund industry. A rapid series of promotions eventually took him to Peak6 Investments, L.P., a prominent Chicago hedge fund.

There, he soaked up the most crucial elements of technical market timing, fundamental name selection, risk control, and options trade execution.

These are the multiple skills that have enabled Matt to post such a blockbuster performance.

Matt, known to his friends by his old pilot handle of ?Whiz?, is an incredibly valuable addition to the Mad Hedge Fund Trader team. I have appointed him Head of Options Trading.

I have known for some time that fortunes were being made in the weekly options expirations, where stories of tenfold returns are not unheard of. It is a strategy that is perfectly suited to these highly volatile, uncertain times, with most options positions expiring within four days.

Matt allows us to fill that gap in our product offerings.

The Mad Options Trader provides essential support for the active trader and will include:

1) Instant Trade Alerts texted at key technical levels. Alerts will be sent out on the opening and closing of every filled position.

2) Weekly Market Strategy Webinars held every Monday at 1:00 to 1:30 PM ET to give you a head?s up on the week ahead.

3) A weekly Live Trading Room held every Tuesday from 9:00 to 10:30 AM ET to give followers active real time trading experience.

4) Specialized Training Webinars on how to best execute Matt?s trades.

What I love about Matt is that he eats his own cooking.

Many of the Trade Alerts he recommends are executed in his own personal retirement account with real dollars.

From September 1, The Mad Options Trader will be available as a $1,500 per year upgrade to The Diary of the Mad Hedge Fund Trader or Global Trading Dispatch, the core research and trade mentoring service of the Mad Hedge Fund Trader.

Good Luck and Good Trading,
John Thomas
Publisher and CEO of The Mad Hedge Fund Trader

?I Only Hire the Best Talent

Why I Sold Short the Euro

Diary, Newsletter

Sometimes during the heat of battle, I am unable to send out Trade Alert Updates, giving the logic behind my positions.

Yesterday was one of those days.

In rapid succession, I knocked out short positions in the Euro (FXE), (EUO), US Treasury bonds (TLT), (TBT), and the S&P 500 (SPY), (SH), (SDS). I would have bought the (VXX) if I?d had more time.

All three positions are making money today, the Euro hugely so.

I think the fix is in. Fed vice chairman Stanley Fischer showed his hand a couple of days ago, when he remarked about the Fed?s economic targets needed for a rate rise drawing near.

Fed speakers will talk up the chance of an interest rate rise all the way until their September 20-21 Federal Open Market Committee (FOMC) meeting. They will then do absolutely nothing.

By then, all of our positions should have expired at their maximum profit point.

So until then, you can expect the entire yield play space to trade sideways best case, or get battered worst case. That?s all we need for this position to work. Today, they are getting battered.

Higher interest rates are great news for the US dollar and terrible for all other currencies.

Interest rate differentials are far and away the largest driver of foreign exchange markets. It sets up a great carry trade whereby traders can short Euros against the greenback and earn a large positive spread.

In the meantime, Europe will continue to signal that their rates will stay lower for longer.

Their economy is far too feeble to do otherwise. Now the Euro strength of the past two months is substantially eating into their exports.

Rising dollar : falling Euro sounds like a trade to me.

The same logic applies to the (SPY) and (TLT) trades, both of which will be damaged by rising rates.

In addition, the technical outlook for the Euro looks particularly dire. Look at the charts below, and you see a head and shoulders top within another head and shoulders top.

Not good, not good.

A dive below $1.10 for the Euro is a chip shot and is already well underway. A break below $1.00 is possible, but not until 2017.

I just thought you?d like to know.

August 24, 2016

Diary, Newsletter, Summary

Global Market Comments
August 24, 2016
Fiat Lux

SPECIAL CAR INDUSTRY ISSUE

Featured Trade:
(SEPTEMBER 16TH PORTLAND, OR GLOBAL STRATEGY LUNCHEON),
(THE DEATH OF THE CAR),
(GM), (F), (TSLA), (GOOG), (AAPL)

General Motors Company (GM)
Ford Motor Co. (F)
Tesla Motors, Inc. (TSLA)
Alphabet Inc. (GOOG)
Apple Inc. (AAPL)

August 23, 2016

Diary, Newsletter, Summary

Global Market Comments
August 23, 2016
Fiat Lux

Featured Trade:
(OCTOBER 7TH INCLINE VILLAGE, NV GLOBAL STRATEGY LUNCHEON),
(RISE OF THE QUANTS),
(MS), (GS),
(MAD OPTIONS TRADER TESTIMONIAL)

Morgan Stanley (MS)
The Goldman Sachs Group, Inc. (GS)

Rise of the Quants

Diary, Newsletter

At almost every Global Strategy Luncheon I have hosted for the past decade, the same experience would replay itself.

Some kid would approach me with an algorithm driven trading program that was guaranteed to make money. It back tested perfectly and delivered spectacular returns.

Would I be willing to fund it for $1 million?

My answer was always the same: NO.

For a start, as a Math minor from UCLA, I never believed that the supplicants had the academic chops to accomplish such a feat. It all reeked of cherry picked data mining to me.

I know that big brokers like Morgan Stanley (MS) and Goldman Sachs (GS) deployed armies of Computer Science PhDs using $10 million mainframes attempting to accomplish the same thing.

Results were mixed at best.

Only the giant quant houses like Jim Simons? highly secretive Renaissance Technologies, LLC and DE Shaw have found the Holy Grail.

Finally, as a Marine combat pilot I can assure you that all machines eventually break. It is a certainty. This is what they drill into you at flight school. The only question is when.

When you?re betting your life on a machine, such a lesson leaves a deep imprint.

Just ask the shareholders of Knight Capital, who on August 1, 2012 saw their equity largely wiped out when a programming glitch enabled their computers to accidently lose $440 million in 30 minutes. A single line of errant code was the culprit.

However, I am starting to change my mind. At least this dog CAN learn new tricks.

The convincing factor has been the mysterious behavior of the major stock indexes over the past year, where traditional short-term market timing indicators have suddenly become useless.

Technical analysis has become a license to lose money, prompting adherents to buy every rally and sell each dip at great cost.

Just look at the market action of the past month, where you can hold a ruler over the charts and define a perfectly flat line. It is not a chart reflective of human interaction.

It?s as if all the traders were suddenly kidnapped and held hostage at an undisclosed location. I?ve never seen anything like it before.

Hedge funds are getting slaughtered, delivering their worst year in a 30-year history. As a result, a great washout in the industry is now underway. It may be the next industry to get totally disrupted.

As with all sea changes in market behavior, the reasons are legion.

A principal factor is the utter collapse of the cost of processing power. Super computers passed the processing power of the human brain in 2012.

It will improve a trillion fold by 2020, when such firepower will be available on a low-end laptop for only $2,000.

This means that entry-level technology budgets for these strategies will plunge from tens of millions to hundreds of dollars.

What happens when you get a several thousand fold drop in the cost of a technology? You get a lot more of it.

Enter social media and the sharing economy. All of a sudden, the tools needed to develop quantitative trading strategies are widely available, often for free.

Almost anyone can now access infinite amounts of data, again, for free. New big data programs make the analysis of this data easy.

Communities of programmers, mathematicians, and algorithmic traders are now sharing information in order to gain a competitive edge. Machine learning and artificial intelligence are joining the fray.

And while many hedge funds are still charging the traditional 2% and 20%, many quant managers don?t charge management fees at all. They?ll settle for a flat 20% of net profits, whatever those are.

The numbers are starting to impact the make up of the hedge fund community.

In 2009, some $407.7 million of $3 trillion in hedge fund assets was driven by quantitative strategies, according to Hedge Fund Research. Today, that figure has leapt to $878.7 billion, some 31.35% of the declining total.

At a time when the traditional hedge fund strategies are failing, some of the bolder firms are experimenting with the new technologies.

Steven Cohen?s Point 72 has committed up to $250 million in Quantopian?s start up crowdsourced hedge fund.

Numerai, a small San Francisco based hedge fund, is awarding prizes to ?the best trading programs submitted anonymously by data scientists.

Bridgewater Associates and Ken Griffin?s Citadel have hired advanced computing staff from IBM and Microsoft.

Other hedge funds are scouring Silicon Valley and the big universities for the talent to cobble together an in house effort.

Performance will ultimately determine which strategies will take us forward. So far the quants are winning.

Many algorithmic traders are showing decent profits in 2016. If conventional managers are up, they are lagging the 7% gain of the S&P 500.

And many are still down on the year in the wake of the meteoric six-month run in equities since February 9. Underweight managers have been chasing performance all year.

In the end, it is the investors who will determine the success or failure of quantitative algorithmic trading. Until now, it has remained a niche in which few individuals can participate.

It remains to be seen how much money the markets can absorb from the specialized, high technological approaches to the market, and whether the big pension funds can ever go near them.

A recurring flaw in many of these programs is the assumption of constant market liquidity which Long Term Capital Management proved to be a myth in 1998.

Still, who knows? Your next fund manager may be a Terminator.