Research Archives - Mad Hedge Fund Trader

Short Selling School 101

$1 trillion is about to hit the stock market if another government stimulus package passes in July. So far, most stimulus has ended up in the stock market, one way or the other.

Perhaps that is why we saw a golden cross in the S&P 500 weeks ago, where the 50-day moving average rose sharply through the 200-day moving average. That is usually a bullish signal.

The problem is that everyone knows this, and there are more important issues to consider.

The stock market is now more overpriced than it has been over the last 20 years when the Dotcom Bubble exploded. The (SPY) has risen and an unprecedented 40% in four months.

And the pandemic is triggering a secondary shutdown of much of the economy, trashing the most optimistic “V” shaped recovery scenarios.

We are also solidly into the high risk, low return time of the year from May to November. Historically, the total return for stocks this time of year for the past 70 years is precisely zero.

I, therefore, think it is timely to review how to make money when prices are falling. I call it Short Selling School 101.

I don’t think we are going to crash to new lows from here, maybe drop only 10%-20%. So, some of the most aggressive bearish strategies described below won’t be appropriate.

If you are long stocks in general a low-risk hedge for you might be to sell short the August S&P 500 August 21, 2020, $340 call options for $1.40. If stocks plunge, you have some downside cushion ($1.40 X 100) = $140 in cash. Sell short one call option for every 100 shares of (SPY) you own. If stocks rise and your stock gets called away 6% higher you will think you died and went to heaven. Just buy them back on the next dip.

If the bear move extends you can simply repeat this gesture every month until the cows come home.

If you have big positions in single stocks, like Tesla (TSLA) or Apple (AAPL), you can execute the same kind of strategy. Selling short the Tesla August 21, 2020 $2,000 call option for $70.00 to hedge an existing long in the stock look like the no brainer here. You should sell one option contract for every 100 shares you own to bring in ($70.00 X 100) = $7,000 in cash.

There is nothing worse than closing the barn door after the horses have bolted or hedging after markets have crashed.

No doubt, you will receive a wealth of short selling and hedging ideas from your other research sources and the media right at the next market bottom.

That is always how it seems to play out, great closing the barn doors after the horses have bolted.

So I am going to get you out ahead of the curve, putting you through a refresher course on how to best trade falling markets now, while stock prices are still rich.

I’m not saying that you should sell short the market right here. But there will come a time when you will need to do so.

Watch my Trade Alerts for the best market timing. So here are the best ways to profit from declining stock prices, broken down by security type:

Bear ETFs

Of course, the granddaddy of them all is the ProShares Short S&P 500 Fund (SH), a non-leveraged bear ETF that is supposed to match the fall in the S&P 500 point for point on the downside. Hence, a 10% decline in the (SPY) is supposed to generate a 10% gain in the (SH).

In actual practice, it doesn’t work out like that. The ITF has to pay management operating fees and expenses, which can be substantial. After all, nobody works for free.

There is also the “cost of carry,” whereby owners have to pay the price for borrowing and selling short shares. They are also liable for paying the quarterly dividends for the shares they have borrowed, around 2% a year. And then you have to pay the commissions and spread for buying the ETF.

Still, individuals can protect themselves from downside exposure in their core portfolios through buying the (SH) against it (click here for the prospectus). Short selling is not cheap. But it’s better than watching your gains of the past seven years go up in smoke.

Virtual all equity indexes now have bear ETFs. Some of the favorites include the (PSQ), a short play on the NASDAQ (click here for the prospectus), and the (DOG), which profits from a plunging Dow Average (click here for the prospectus).

My favorite is the (RWM) a short play on the Russell 2000, which falls 1.5X faster than the big cap indexes in bear markets (click here for the prospectus).

Leveraged Bear ETFs

My favorite is the ProShares UltraShort S&P 500 (SDS), a 2X leveraged ETF (click here for the prospectus). A 10% decline in the (SPY) generates a 20% profit, maybe.

Keep in mind that by shorting double the market, you are liable for double the cost of shorting, which can total 5% a year or more. This shows up over time in the tracking error against the underlying index. Therefore, you should date, not marry this ETF, or you might be disappointed.

3X Leveraged Bear ETF

The 3X bear ETFs, like the UltraPro Short S&P 500 (SPXU), are to be avoided like the plague (click here for the prospectus).

First, you have to be pretty good to cover the 8% cost of carry embedded in this fund. They also reset the amount of index they are short at the end of each day, creating an enormous tracking error.

Eventually, they all go to zero and have to be periodically redenominated to keep from doing so. Dealing spreads can be very wide, further added to costs.

Yes, I know the charts can be tempting. Leave these for the professional hedge fund intraday traders for which they are meant.

Buying Put Options

For a small amount of capital, you can buy a ton of downside protection. For example, the April (SPY) $182 puts I bought for $4,872 on Thursday allows me to sell short $145,600 worth of large-cap stocks at $182 (8 X 100 X $6.09).

Go for distant maturities out several months to minimize time decay and damp down daily price volatility. Your market timing better is good with these because when the market goes against you, put options can go poof and disappear pretty quickly.

That’s why you read this newsletter.

Selling Call Options

One of the lowest risk ways to coin it in a market heading south is to engage in “buy writes.” This involves selling short call options against stock you already own but may not want to sell for tax or other reasons.

If the market goes sideways or falls, and the options expire worthless, then the average cost of your shares is effectively lowered. If the shares rise substantially they get called away, but at a higher price so you make more money. Then you just buy them back on the next dip. It is a win-win-win.

Selling Futures

This is what the pros do, as futures contracts trade on countless exchanges around the world for every conceivable stock index or commodity. It is easy to hedge out all of the risks for an entire portfolio of shares by simply selling short futures contracts for a stock index.

For example, let’s say you have a portfolio of predominantly large-cap stocks worth $100,000. If you sell short 1 June 2016 contract for the S&P 500 against it, you will eliminate most of the potential losses for your portfolio in a falling market.

The margin requirement for one contract is only $5,000. However, if you are short the futures and the market rises, then you have a big problem, and the losses can prove ruinous.

But most individuals are not set up to trade futures. The educational, financial, and disclosure requirements are beyond mom-and-pop investing for their retirement fund.

Most 401Ks and IRAs don’t permit the inclusion of futures contracts. Only 25% of the readers of this letter trade the futures market. Regulators do whatever they can to keep the uninitiated and untrained away from this instrument.

That said, get the futures markets right, and it is the quickest way to make a fortune if your market direction is correct.

Buying Volatility

Volatility (VIX) is a mathematical construct derived from how much the S&P 500 moves over the next 30 days. You can gain exposure to it through buying the iPath S&P 500 VIX Short-Term Futures ETN (VXX) or buying call and put options on the (VIX) itself.

If markets fall, volatility rises, and if markets rise, then volatility falls. You can, therefore, protect a stock portfolio from losses through buying the (VIX).

I have written endlessly about the (VIX) and its implications over the years. For my latest in-depth piece with all the bells and whistles, please read “Buy Flood Insurance With the (VIX)” by clicking here.

Selling Short IPOs

Another way to make money in a down market is to sell short recent initial public offerings. These tend to go down much faster than the main market. That’s because many are held by hot hands, known as “flippers,” don’t have a broad institutional shareholder base.

Many of the recent ones don’t make money and are based on an, as yet, unproven business model. These are the ones that take the biggest hits.

Individual IPO stocks can be tough to follow to sell short. But one ETF has done the heavy lifting for you. This is the Renaissance IPO ETF (click here for the prospectus at http://www.renaissancecapital.com/ipoinvesting/ipoetf/ipoetf.aspx ). As you can tell from the chart below, (IPO) was warning that trouble was headed out way since the beginning of March. So far, a 6% drop in the main indexes has generated a 20% fall in (IPO).

Buying Momentum

This is another mathematical creation based on the number of rising days over falling days. Rising markets bring increasing momentum while falling markets produce falling momentum.

So, selling short momentum produces additional protection during the early stages of a bear market. Blackrock has issued a tailor-made ETF to capture just this kind of move through its iShares MSCI Momentum Factor ETF (MTUM). To learn more, please read the prospectus by clicking here.

Buying Beta

Beta, or the magnitude of share price movements, also declines in down markets. So, selling short beta provides yet another form of indirect insurance. The PowerShares S&P 500 High Beta Portfolio ETF (SPHB) is another niche product that captures this relationship.

The Index is compiled, maintained and calculated by Standard & Poor's and consists of the 100 stocks from the (SPX) with the highest sensitivity to market movements, or beta, over the past 12 months.

The Fund and the Index are rebalanced and reconstituted quarterly in February, May, August, and November. To learn more, read the prospectus by clicking here.

Buying Bearish Hedge Funds

Another subsector that does well in plunging markets is publicly listed bearish hedge funds. There is a couple of these that are publicly listed and have already started to move.

One is the Advisor Shares Active Bear ETF (HDGE) (click here for the prospectus). Keep in mind that this is an actively managed fund, not an index or mathematical relationship, so the volatility could be large.

Oops, Forgot to Hedge

The Market Outlook for the Week Ahead, or Covid-19 is Back!

Diary, Newsletter, Research

This was the week that the Coronavirus came back with a vengeance.

The market had been backing out the pandemic for the past three months. Now it is abruptly pricing it back in.

Hospitalizations soared in 16 states to new all-time highs, as the first wave continues to grow exponentially. Deaths have topped 125,000. The good news is that only 5,000 died last week. That is nearly two 9/11’s, or 12 Boeing 747’s crashes worth of victims.

Apple has closed eight stores in Texas and another 14 stores in Florida. Arizona is on the verge of running out of hospital beds. This is going to weigh heavily on the market until we see another interim peak. It looks like the last one was certainly a false summit, in climber’s lingo.

What was really interesting last week is what DIDN’T happen. While the “reopening” stock LIKE banks (BAC), energy (XOM), cruise lines (CCL), hotels (MGM), casinos (WYNN), airlines (UAL) were absolutely slaughtered, gold, technology, and biotech barely moved. It says volumes about what happens next. You want to use selloffs to buy quality at a discount, not garbage that is going to zero.

Technology and biotech are where you want to focus your buying of stock, futures, and LEAPS. The next big dip is the one you buy.

You can count on the government stepping in and announcing more stimulus on the next down 1,000-point day. Thursday mornings seem to be a favorite time, right before the next horrific Weekly Jobless Claims are announced, which also seem to be reaccelerating.

The Fed can do this for free, without spending any money, simply by expanding the asset classes eligible for quantitative easing. Some $8 trillion in QE certainly buys a lot of friends in the market. I believe that any run in the S&P 500 (SPX) down to 2,700 will be met by government action.

Treasury Secretary Steve Mnuchin expects another stimulus package in July, but only if he gives away the store to Nancy Pelosi. Just what the market needs, more stimulus. Most of the 40 million out of work are still jobless. It could be $1 trillion worth of stimulus checks and other giveaways headed for the stock market, like the last lot. My kids still haven’t spent their first checks! We’re going broke anyway, so why not?

The stock market is clearly running out of gas, at a 26 multiple, the highest since the Dotcom bubble top. Any more stimulus may simply go into bank deposits. The risk/reward for new positions here is terrible. It sits nicely into my sideways range scenario for the rest of the year.

Existing Home Sales are down 9.7% in May, the worst in ten years. They are off 26.6% YOY, the worst figure since 1982 when home mortgage rates were at 18%. Inventories are down an eye-popping 18.8% to 4.8 months as sellers pulled listing to avoid virus-infested buyers. The first-time buyers live, but the action is shifting out of condos and into single family homes in the burbs.

Weekly Jobless Claims jump 1.5 million, far worse than forecast. It looks like we are getting a second wave of jobless as Corona ravages the south and business hangers-on throw in the towel. Some 20 million Americans remain on state unemployment benefits, which will start to run out shortly. Will stocks look through this?

Banks are banned from paying dividends and buying back shares, orders the US Treasury. The Fed estimates that pandemic-related loan losses could reach $700 billion, wiping out their capital. Every bailout comes with a pound of flesh. The banks have made billions off of stimulus loans, like the PPP. The banks rallied because the news wasn’t worse, like a mandatory 5% share giveaway, which happened last time. Buy banks like (JPM), (BAC), and (C) on an expected yield curve steepening.

Tesla (TSLA) is now the world’s most valuable car company, with a market capitalization of over $180 billion. It just passed Toyota Motors (TM). (TSLA) is now worth more than the entire US car industry combined. That could double very quickly. The upcoming model Y is expected to be its biggest seller and a third production plant will be announced imminently. The rush out of public transit and into private cars simply accelerated a pre-existing trend or the company.

When we come out on the other side of this, 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 400% or more in the coming decade.

My Global Trading Dispatch enjoyed another respectable week, taking in a welcome 3.87%, bringing June in at +2.56%. Despite the market diving nearly 10%, we pulled in big profits from our short positions and captured accelerated time decay on our longs. My eleven-year performance stands at a new all-time high of 368.75%.

That takes my 2020 YTD return up to a more robust +12.88%. This compares to a loss for the Dow Average of -12.3%, up from -37% on March 23. My trailing one-year return popped back up to 53.27%. My eleven-year average annualized profit recovered to +34.91%.

The only numbers that count for the market are the number of US Coronavirus cases and deaths, which you can find here. It’s jobs week and we should see an onslaught of truly awful numbers.

On Monday, June 29 at 11:00 AM EST, US Pending Home Sales for May are out.

On Tuesday, June 30 at 10:00 AM EST, the April Case-Shiller National Home Price Index is published.

On Wednesday, July 1, at 9:15 AM EST, the ADP Private Employment Report is released. At 10:30 AM EST, the EIA Cushing Crude Oil Stocks are published.

On Thursday, June 2 at 8:30 AM EST, Weekly Jobless Claims are announced.

On Friday, June 3, at 8:30 AM EST, the June Nonfarm Payroll Report is printed. Since last month was a large overstatement, June could be positively diabolical. The Baker Hughes Rig Count is out at 2:00 PM EST.

As for me, I am rushing out and doing errands, like a trip to the barber, haircut, hardware store, dry cleaners, the dentist, and the doctor in case the California economy shuts down once again. We’ve been slightly open for a few weeks.

That may be all we get this year.

Stay healthy.

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

June 17 Biweekly Strategy Webinar Q&A

Diary, Newsletter, Research

Below please find subscribers’ Q&A for the June 17 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Silicon Valley, CA with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!

Q: What is the best way to buy long term LEAPS for unlimited profits?

A: There is no such thing as unlimited profits on LEAPS; they are specifically limited to about 500% or 1,000%. Most people will take that. The answer is to wait for crash day. That’s when you dive into LEAPS, or during very prolonged sell-offs like we had in February or March. That’s where you get the bang per buck. On a capitulation day, you can pick up these things for pennies.

Q: How do you explain that all the cities and states that had major COVID-19 outbreaks and deaths are controlled by Democrats?

A: That’s like asking why you don’t get foot and mouth disease in New York City. The majority of US cities are Democratic, while the rural areas tend towards Republicans and the suburbs that flip back and forth. So, you will always get these big hotspots in cities where the population density is highest and there is a lot of crowding because that’s where the people are. Covid-19 is a disease that relies on within six-foot transmission. You are not going to get these big outbreaks in rural places because there are few people. Horse, cow, and pig diseases are another story. That is one reason the disease has become so politicized by the president.

Q: What is the time horizon for your picks?

A: It’s really a price function rather than a time horizon. Sometimes, a trade works in a day, other times it’s a month. I try to send out a large number of trade alerts because we have new subscribers coming in every day and the first thing they want is a trade alert. Occasionally, I’ll make 10% in a day and I take that immediately.

Q: I’m a new investor; trading in a pandemic is one thing, but what about other risks like volcanic eruptions, major solar flares, or global war? How do I prepare for one of three of these things in the next 25 years?

A: I’m actually worried about all three of those happening this year. If you lived through 1968, everything bad tends to happen in one year, and bad things tend to happen in threes. This is a year where we’re kind of making it up as we go along because there is no precedent. The playbook has been thrown out. Those who always relied on trading stocks and securities predictable ranges got wiped out.

Q: Beijing has quarantined its population again and canceled flights; is this going to cause the Chinese government to ramp up the blame game with the US?

A: Absolutely, the US is the number one Corona incubator in the world by far. We have 120,000 deaths—China had 4,000 deaths with four times the population. Many countries are blaming us for keeping this pandemic alive and spreading it further. But I don’t think foreign relations are a high priority right now with our current government. That said, it is easier for a dictatorship to control an epidemic than a democracy. In China, they were welding people’s doors shut who had the disease.

Q: Do you think taking away the $600 or $1200 stipend for the unemployed is going to crush the chances for many trying to get back to work?

A: It will. A lot of the stimulus measures only delay collapse by a couple of months. The PPP money was only for 2 months; I know a lot of companies are counting on that to stay in business. Some state unemployment benefits run out soon. Either you’re going to have to start forking up $3 trillion every other month, or you’re going to get another sharp downturn in the economy. Cities are bracing themselves for the worst eviction onslaught ever. Mass starvation among the poor is a possibility.

Q: Where do you place stops on vertical spreads?

A: Since vertical spreads don’t lend themselves to technical analysis, you have to draw a line in the sand—for me, it’s 2%. If I lose 2% of my total capital, or 20% on the total position, then I get the heck out of there and go look for another trade. That’s easy for me to do because I know that 90% of the time my next trade is a winner.

Q: Why did you sell your S&P 500 (SPY) July $330/$320 put spread at absolutely the worst moment?

A: The market broke my lower strike price, which is always a benchmark for getting out of a losing trade. When you go out-of-the-money on these spreads, the leverage works against you dramatically. This market isn’t lending itself to any kind of conventional historic analysis. The market went higher than it ever should have based on any kind of indicator you’re using. When the market delivers once in 100 year moves like we had off the March 23 bottom, you are going to be wrong. However, we immediately made the money back by putting on a (SPY) July $335/$340 put spread with a shorter maturity, and a (SPY) July $260-$$270 call spread. If you’re in this business, you’re going to take losses and be made to look like a perfect idiot, like I did twice last week.

Q: Who is getting involved down 10%?

A: I would say you’re getting both institutions and individuals involved down 10%. You keep hearing about $5 trillion in cash on the sidelines, and that’s how it’s coming to work. Plus, we have 13 million new day traders gambling away their stimulus checks.

Q: Why have you not put on a currency trade this year?

A: With the incredible volatility of the stock market, there were always better fish to fry. Currencies haven’t moved that much, and you want stocks that are dropping by 80% in two months and gapping up 200% the next two months. So, in terms of trading opportunities, currencies are number three on that list. Would you rather buy Apple (AAPL) for a 75% move, or the Euro (FXE) for a 6% move? My favorite has been the Aussie (FXA) and it has only gone up 20%.

Q: Do you issue trade alerts on LEAPS?

A: I don’t; most trade alerts are short term trades in the next month or two because we have to generate a large number of them. However, in February, March, and April, we started sending out lists of LEAPS. We sent out about 25 LEAPS recommendations. We did ten for Global Trading Dispatch (BA), (UAL), (DAL), ten for the Mad Hedge Technology Letter (AAPL), (MSFT), and five for the Mad Hedge Biotech & Health Care Letter (BIIB), (PFE). Even if you got just one or two of these, you got a massive impact on your performance because they did go up 500% to 1,000% in 2 months, which is normally the kind of return you see in two years. So, getting people to buy all those LEAPS was probably the greatest call in the 13-year history of this letter. I know subscribers who made many millions of dollars.

Q: I am new to trading; other than placing a trade, what do you recommend I get a handle on in the learning process?

A: We do have two services for sale. We have “Options for the Beginner,” and that I would highly recommend, and I’ll make sure that’s posted in the store. You can’t read or study enough. If you really want to go back to basics, read the 1948 edition of Graham and Dodd, where Warren Buffet got his education actually working for Benjamin Graham in the ’40s.

Q: Will Occidental Petroleum (OXY) go bankrupt?

A: No, they have the strongest balance sheet of any of the oil majors, so I would bet they would hang around for some time. They also have no offshore oil, which is the highest cost source of oil. But it’s going to be a volatile time for a while.

Q: Usually the selling is telling me to go away. With this market, the amount of money on the sidelines, is it going to be a stock picker’s market?

A: Yes, like I said the playbook is out the window. Normally, you get a month’s worth of trading in a month, now you get a month's worth in a day or two. So, we’re on fast forward, Corona is the principal driver of the market and no one knows what it’s going to do. The teens were a great index play. The coming Roaring Twenties will be a stock picker’s market because half of the companies will go out of business, while many will rise tenfold. You want to be in the latter, not the former. And index gets you the wheat AND the chaff.

Q: Will there be another opportunity to buy LEAPS?

A: Yes, especially if we get a second corona wave and it slaps the market down to new lows again. There’s a 50/50 chance of that happening. The rate of Corona cases is now increasing exponentially. We had 4,000 new cases in California yesterday.

Q: How do you see Main Street two years from now? Will the battered middle class ever recover?

They will if they move online. I think main street will be empty in two years. Only the largest companies are surviving because they have the cash reserve to do so. And they seem to be able to get government bailout money far better than the local nail salon or dry cleaner. Again, this was a trend that had been in place for decades but was greatly accelerated by the pandemic. I was in Napa, CA yesterday and half of the storefront shops had gone out of business.

Q: What are your thoughts on the spacecraft company Virgin Galactic (SPCE)?

A: Great for day traders, great for newbies, but not real investment material here. I don’t think the company will ever make money. It was just part of the temporary space had. Better to read about it in the papers and have a laugh than risk your own hard-earned money. Elon Musk’s Space X though is a completely different story.

Q: Which is the better buy now: Walmart (WMT), Costco (CSCO), or Target (TGT)?

A: I’d probably go for Target because they have been the fastest to move to the new online order and curb pickup universe. But Costco is also a great play.

Q: When should I buy Tesla?

A: On the next meltdown or down 30% from here, if and whenever we get that. It’s going to $2,500, then $5,000.

Q: With QE infinity, it doesn’t sound like we’ll get to LEAPS country. Do you agree?

A: No, I wouldn’t agree because at some point, the government might run out of money, the bond market won’t let them borrow anymore, and the money that gets approved doesn’t actually get spent because the works are so gummed up. Plus, Corona is in the driver's seat now. What if we’re wrong and we don’t get 250,000 cases by August, but 500,000 cases? 20 million? There are 100 things that could go wrong and get us back down to lows and only one that can go right and that is a Covid-19 vaccine. We’ve essentially been on nonstop QEs for the last 10 years already and the market has managed many 20% selloffs during that time. If we pursue a Japanese monetary policy, we will get a Japanese result, near-zero growth for 30 years.

Good Luck and Stay Healthy.

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

Mount Everest in 1976

Testing Tesla's Self-Driving Technology

Diary, Newsletter, Research

I knew I was on the right track when the salesman told me that the customer who just preceded me for a Tesla Model X 90D SUV was the Golden Bay Warriors star basketball player, Steph Currie.

Well, if it’s good enough for Steph, then it’s good enough for me.

Last week, I received a call from Elon Musk’s office to test the company’s self-driving technology embedded in their new vehicles for readers of the Diary of a Mad Hedge Fund Trader.

I did, and prepare to have your mind blown!

I was driving at 80 MPH on CA-24, a windy eight-lane freeway that snakes its way through the East San Francisco Bay Area mountains. Suddenly the salesman reached over a flicked a lever on the left side of the driving column.

The car took over!

There it was, winding and turning along every curve, perfectly centered in the lane. As much as I hated to admit it, the car drove better than I ever could. It does especially well at night or in fog, a valuable asset for senior citizens whose night vision is fading fast.

All that was required was for me to touch the steering wheel every two minutes to prove that I was not sleeping.

The cars do especially well in rush hour driving, as it is adept at stop and go traffic. You can just sit there and work on your laptop, read a book, or watch a movie on the built in 4G WIFI HD TV.

When we returned to the garage, the car really showed off. When we passed a parking space, another button was pushed, and we perfectly backed 90 degrees into a parking space, measuring and calculating all the way.

The range is 290 miles, which I can recharge at home at night from a standard 220-volt socket in my garage in seven hours. When driving to Lake Tahoe, I can stop half way at get a full charge in 30 minutes. The new chargers operate at a blazing 400 miles per hour.

The chassis can rise as high as eight inches off the ground so it can function as a true SUV.

The “ludicrous mode,” a $10,000 option, takes you from 0 to 60 mph in 2.9 seconds. However, even a standard Tesla can accelerate so fast that it will make the average passenger carsick.

Here’s the buzzkill.

Tesla absolutely charges through the nose for extras.

The 22-inch wheels, the third row of seats to get you to seven passengers, the premium sound, the leather seats, and the self-driving software can easily run you $30,000-$40,000.

A $750 tow hitch will accommodate a ski or back rack. There is a $1,000 delivery charge, even if you pick it up at the Fremont factory.

It’s easy to see how you can jump from an $84,990 base price to a total cost of $162,500, including taxes, for the ultra-luxury Performance model, as I did.

My company will be purchasing the car under Section 179 of the International Revenue Code. The car qualifies because it weighs over 6,000 pounds and is therefore a truck under the new tax law.

This allows me to deduct the entire $162,500 cost of the vehicle upfront, plus the maintenance and insurance costs for the entire life of the car. However, I will have to maintain a mileage log as a hedge against any future IRS audits.

Ironically, Section 179 was enacted as a subsidy for consumer purchases of the eight mile per gallon Hummer, which was originally built by AM General and owned by General Motors (GM).

After several attempts to sell, the division failed, production was permanently shut down. However, the tax subsidies live on for any like designed vehicle.

It looks like I’ll have to buy two Teslas this year.

As for “drop dead’ curb appeal, nothing beats the Model X. Buy the stock on every 20% dip. My original cost is $16.50 a share and it topped $1,000 last week.

It’s another way of saying “buy the shares and you get the car for free.”

Thanks for Your Subscription!

Ten More Ugly Messages from the Bond Market

Diary, Newsletter, Research

The global bond markets have been screaming an ugly message at us loud and clear, and I’m afraid that it’s not a positive one.

Amazingly, US Treasury bonds have soared early this year, taking the (TLT) up a stunning 40 points.

In the meantime, stocks have suffered the sharpest crash in history, plunging ten times faster than the worst days of the 1929 crash, down 37%.

The implications for your investment portfolio are so momentous and far-reaching that I am going to have to list them one by one.

Read them and weep:

1) The US is in a severe depression.

2) The pandemic is not even close to ending. US deaths topped 85,000 yesterday and may triple from here.

3) The presidential election has become a major source of instability, and no one has any idea of how this will all end. Trump is currently trying to bankrupt the US Post Office to frustrate mail-in voting.

4) The immigration crisis is reaching a humanitarian crisis of epic proportions. It has become our Syria, which landed four million immigrants in Europe.

5) The stock market is in the process of crashing…. Again, failing dramatically at the 200-day moving average. That “Sell in May” thing may work big time this year.

6) The Trump trade is toast. Financials, commodity, energy, coal, and industrial stocks are leading the charge to the downside.

7) Oil (USO) is in free fall and may go negative again, another classic recession predictor. For the first time in history. Most small and medium-sized energy companies will go under. Coal has dropped to a historic low of 19% of US electricity production, less than total alternative sources, and is never coming back.

8) Bitcoin is rocketing, up an eye-popping 100% since the crash began. This has become the big hot money trade of 2020 in addition to that other great flight to safety trade, gold (GLD).

9) The US dollar (UUP) is flatlining, wiping out the growth of the foreign earnings of US multinationals. Foreign economies are collapsing even faster than ours, taking their interest rates and currencies lower at warp speed.

10) The unemployment rate, now at all-time lows, not bottom out for months. The great irony here is that while the president vociferously campaigned on an aggressive jobs program, he may well preside over the biggest job losses in history. The Fed is targeting total unemployment of 52 million, worst than the Great Depression.

For more on this, please read my recent piece, “Why You Will Lose Your Job in the Next Five Years and What to Do About It” by clicking here.

There is another alternative explanation to all of this.

A certain Monty Python sketch about a parrot comes to mind.

That all we saw a giant short squeeze in the hedge funds’ core short position in bonds for the umpteenth time, and that we are almost done.

Hedge funds have grown in size to where they are now the perfect contrary market indicator. It is the classic “Too many people in one side of the canoe” trade. A Yogi Berra quote comes to mind; “Nobody goes there anymore because it is too crowded.”

There are other structural factors at play here which are hard to beat. For more on this, please read my opus on “Why Are Bond Yields So Low” by clicking here.

Long Bonds are About to Take a Chainsaw to Your Portfolio

How the Mad Hedge Market Timing Algorithm Tripled My Performance

Diary, Newsletter, Research

I couldn’t believe my eyes.

Upon analyzing my performance data for the past year, it couldn’t be clearer.

After three years of battle testing, the algorithm has earned its stripes. I started posting it at the top of every newsletter and Trade Alert last year and will continue to do so in the future.

Once I implemented my proprietary Mad Hedge Market Timing Index in October 2016, the average annualized performance of my Trade Alert service has soared to an eye-popping 34.14%.

As a result, new subscribers have been beating down the doors trying to get in.

Let me list the highpoints of having a friendly algorithm looking over your shoulder on every trade.

*Algorithms have become so dominant in the market, accounting for up to 80% of total trading volume, that you should never trade without one

*It does the work of a seasoned 100-man research department in seconds

*It runs real-time and optimizes returns with the addition of every new data point far faster than any human can. Imagine a trading strategy that updates itself 30 times a day!

*It is artificial intelligence-driven and self-learning.

*Don’t go to a gunfight with a knife. If you are trading against algos alone,
you WILL lose!

*Algorithms provide you with a defined systematic trading discipline that will enhance your profits.

And here’s the amazing thing. My Mad Hedge Market Timing Index correctly predicted the outcome of the presidential election, while I got it dead wrong.

You saw this in stocks like US Steel, which took off like a scalded chimp the week before the election.

When my and the Market Timing Index’s views sharply diverge, I go into cash rather than bet against it.

Since then, my Trade Alert performance has been on an absolute tear. In 2017, we earned an eye-popping 57.39%. In 2018, I clocked 23.67% while the Dow Average was down 8%, a beat of 31%. In 2019, I clocked a blockbuster 56%

Here are just a handful of some of the elements which the Mad Hedge Market Timing Index analysis in real-time, 24/7.

50 and 200-day moving averages across all markets and industries

The Volatility Index (VIX)

The junk bond (JNK)/US Treasury bond spread (TLT)

Stocks hitting 52-day highs versus 52-day lows

McClellan Volume Summation Index

20-day stock bond performance spread

5-day put/call ratio

Stocks with rising versus falling volume

Relative Strength Indicator

12-month US GDP Trend

Case Shiller S&P 500 National Home Price Index

Of course, the Trade Alert service is not entirely algorithm-driven. It is just one tool to use among many others.

Yes, 50 years of experience trading the markets is still worth quite a lot.

I plan to constantly revise and upgrade the algorithm that drives the Mad Hedge Market Timing Index continuously, as new data sets become available.

Obviously, in light of the recent stock market crash, a ton of new valuable data is available for which my algo can mine.

It’s All About the Inputs

Now the Fat Lady is REALLY Singing for the Bond Market

Diary, Newsletter, Research

The most significant market development so far in 2020 has not been the epic stock market crash and rebound, the nonstop rally in tech stocks (NASDQ), the rebound of gold (GLD), or negative oil prices, although that is quite a list.

It has been the recent peaking of the bond market (TLT), which a few weeks ago was probing all-time highs.

I love it when my short, medium, and long-term calls play out according to script. I absolutely hate it when they happen so fast that I and my readers are unable to get in at decent prices.

That is what has happened with my short call for the (TLT), which has been performing a near-perfect swan dive since April. The move has been enough to boost me back into positive numbers for 2020.

The yield on the ten-year Treasury bond has soared from 3.25% in 2018 to an intraday low of 0.31% in March.

Lucky borrowers who demanded rate locks in real estate financings at the end of January are now thanking their lucky stars. We may be saying goodbye to the 3% handle on 5/1 ARMS for the rest of our lives.

The technical damage has been near-fatal. The writing is on the wall. A 1.00% yield for the ten-year is now easily on the menu for 2020, if not 2.00% or 3.0%.

This is crucially important for financial markets, as interest rates are the well spring from which all other market trends arise.

Wiser thinkers are peeved that the promised bleeding of federal tax revenues is causing the annual budget deficit to balloon from a low of a $450 billion annual rate in 2016 to $1.2 trillion last year and over $5 trillion in 2020.

Add in the bond purchases from the Fed’s new promise of $8 trillion in quantitative easing and you get true government borrowing of $13 trillion for 2020. It will all end in tears for bond and US dollar holders.

And don’t forget the president, who recently threatened to default on US Treasury bonds, just as the Treasury was trying to float $3 trillion in new issues. It is a short seller’s dream come true.

As rates rise, so does the debt service costs of the world’s largest borrower, the US government. The burden will soar in a hockey stick-like manner, currently at 4% of the total budget.

What is of far greater concern is what the tax bill does to the National Debt, taking it from $24 trillion to $32 trillion over the next year, a staggering rise of 50%. Even Tojo and Hitler couldn’t get the US to buy that much. If we get the higher figure, then we are looking not at another recession, but at yet another 1930-style depression.

Better teach your kids to drive for UBER early, as they are the ones who are going to have to pay off this gargantuan debt. That is if (UBER) is still around.

So what the heck are you supposed to do now? Keep selling those bond rallies, even the little ones. It will be the closest thing to a rich uncle you will ever have, if you don’t already have one.

Make your year now because the longer you put it off, the harder it will be to get.

How to Handle the Friday March 20 Options Expiration

Diary, Newsletter, Research

Followers of the Global Trading Dispatch have the good fortune to own a deep in-the-money options position that expires on Friday, and I just want to explain to the newbies how to best maximize their profits on that March 20 expiration.

This involves the:

Apple (AAPL) March 2020 $220-$230 in-the-money vertical BULL CALL spread

Microsoft (MSFT) March 2020 $120-$125 in-the-money vertical BULL CALL spread

Amazon (AMZN) March 2020 $1,350-$1,400 in-the-money vertical BULL CALL spread

Provided that we don’t have another 3,000 point move down in the market this week, these positions should expire at their maximum profit points. So far, so good.

I’ll do the math for you on the Apple (AAPL) position. Your profit can be calculated as follows:

Profit: $10.00 - $8.80 = $1.20

(11 contracts X 100 contracts per option X $1.20 profit per options)

= $1,320 or 13.63% in 7 trading days.

Many of you have already emailed me asking what to do with these winning positions.

The answer is very simple. You take your left hand, grab your right wrist, pull it behind your neck, and pat yourself on the back for a job well done.

You don’t have to do anything.

Your broker (are they still called that?) will automatically use your long position to cover your short position, canceling out the total holdings.

The entire profit will be credited to your account on Monday morning March 23 and the margin freed up.

Some firms charge you a modest $10 or $15 fee for performing this service.

If you don’t see the cash show up in your account on Monday, get on the blower immediately and find it.

Although the expiration process is now supposed to be fully automated, occasionally mistakes do occur. Better to sort out any confusion before losses ensue.

If you want to wimp out and close the options position before the March 20 expiration, it may be expensive to do so. You can probably unload them pennies below their maximum expiration value.

Keep in mind that the liquidity in the options market disappears and the spreads substantially widen when a security has only hours, or minutes until expiration on Friday. So, if you plan to exit, do so well before the final expiration at the Friday market close.

This is known in the trade as the “expiration risk.”

One way or the other, I’m sure you’ll do OK, as long as I am looking over your shoulder, as I will be, always. Think of me as your trading guardian angel.

I am going to hang back and wait for good entry points before jumping back in. It’s all about keeping that “Buy low, sell high” thing going.

I’m looking to cherry-pick my new positions going into the next quarter end.

Take your winnings and go out and buy yourself a well-earned dinner. Or use it to put a down payment on a long cruise.

Well done and on to the next trade.

This Market Can Be Very Tricky

Capturing Some Yield with Cell Phone REITs

Diary, Newsletter, Research

I am constantly bombarded with requests for high-yield, low-risk investments in this ultra-low interest rates world.

While high-yield energy Master Limited Partnerships LIKE (AMLP) can offer double-digit returns, they carry immense risks. After all, if the prices of oil drop to $5-$10 a barrel, replaced by alternatives as I eventually expect, all of these instruments will get wiped out.

You can earn 5%-8% from equity-linked junk bonds. However, their fates are tied to the future of the stock market at a 20-year valuation high against flat earnings.

You might then migrate to Real Estate Investment Trusts (REITs) like Simon Property Group (SPG), which acts as a pass-through vehicle for investments in a variety of property investments. However, many of these are tied to shopping malls and the retail industry, the black hole of investment today.

So where is the yield-hungry investor to go?

You may have heard about something called 5G. This refers to the rollout of fifth-generation wireless technology that will increase smartphone capabilities tenfold. Whole new technologies, like autonomous driving and artificial intelligence, will get a huge boost from the advent of 5G. Apple (AAPL) will launch its own 5G phone in September.

5G, like all cell phone transmissions, rely on 50-200-foot steel towers strategically placed throughout the country, frequently on mountain peaks or the tops of buildings. With demand from the big phone carriers soaring, there is a construction boom underway in cell phone towers. There just so happens to be a class of REITs that specializes in investment in this sector.

Cells Phone REITs constitute a $125 billion market and make up 10% of the REIT indexes. They own 50%-80% of all investment-grade towers. They are all benefiting from a massive upgrade cycle to accommodate the 5G rollout. These REITs own or lease the land under the cell towers and then lease them to the phone companies, like Verizon (VZ), AT&T (T), T-Mobile (TMUS), and Sprint (S) for ten years with 3% annual escalation contracts.

American Tower (AMT) is far and away the largest such REIT, with 170,000 towers, has provided an average annual return over the past ten years, and offers a fairly safe 1.65% yield. They are currently expanding in Africa. Even during the 2008 crash, (AMT) still delivered an 8% earnings growth.

SBA Communications (SBAC) is the runt of the sector with only 30,000 towers. However, it has a big presence in Central and South America and is seeing earnings grow at a prolific 80% annual rate. (SBAC) is offering a 1.48% yield at today’s prices.

Crown Castle International (CCI) is in the middle with 40,000 large towers and 65,000 small ones. 5G signals travel only a 1,000 meters, compared to several miles for 4G, requiring the construction of tens of thousands of small towers where (CCI) is best positioned. (CCI) offers a hefty 3.39% yield.

Small cell towers are roughly the size of an extra-large pizza box and will soon be found on every urban street corner in the US. AT&T (T) has estimated that there is a need for over 300,000 small cell phone towers in the US alone.

So, if you’re looking for a sea anchor for your portfolio, a low-risk, high-return investment that won’t see a lot of volatility, Cell phone REITs may be your thing. Buy (CCI) on dips.

Can you hear me now?

California Goes Whole Hog on Solar

Diary, Newsletter, Research

As of January 1, 2020, it is illegal to build a home in California without solar panels.

Furthermore, dozens of cities have gone as far as banning natural gas appliances like ovens, heaters, and burners.

It is the most ambitious solar initiative anywhere in the world today. Those who invest in backup storage batteries like the Tesla Powerwall, will receive additional cash incentives.

It’s not like solar is new in the Golden State. It boasts over one million homes with installed panels out of a total housing stock of 16 million. It is all part of a grand plan for the state to obtain 100% of its electric power from alternative sources by 2030.

The new measures are expected to add $9,500 to the cost of new home construction. Builders are expected to eat most of it.

However, it will cut utility bills by $19,000 over the 30-year life of a solar system. And that is at today’s prices. California homeowners have already suffered two back-to-back 15% price increases over the past two years. With northern California’s utility PG&E (PGE) in bankruptcy, more stiff price hikes are expected.

You would think that the news would set the share prices of American solar companies, like First Solar (FSLR) and SunPower (SPWR), on fire.

They haven’t.

That's because solar prices are joined at the hip with conventional energy sources.

When oil is cheap, solar share prices die a horrible death. When oil is dear, everybody and his brother wants to pile into everything alternative, be it solar panels, storage batteries, windmills, electric cars, and high mileage hybrid cars like the Prius.

The sole exception has been the Invesco Solar ETF (TAN). It has a globally diversified portfolio that invests in countries with much higher electricity prices than hours, thanks to local regulation and taxes. Only 53% of its investments are in the US, with a hefty 19% in Hong Kong alone, of all places.

The last two years have produced a new reason to go off the grid. Ferocious wildfires in the Golden State that have killed hundreds have led to total statewide blackouts from PG&E whenever wind speeds exceed 40 miles an hour.

Unless you want to keep throwing out all your frozen food every few weeks, the only way to move forward is with a solar-powered battery backup system. It’s just a matter of time before high-end homes can only be sold with 48 hours of backup power. The same logic applies to the hurricane-ravaged east and Gulf coasts. It’s especially an issue today with up to 25% of Bay Area residents working from home.

No juice, no job.

As for me, I am in the process of doubling up my own solar system, taking it up to a gargantuan 23,114 kWh, with three Tesla Powerwalls thrown in for good measure.

But then I have a Tesla P110D Model X that eats up 1,000 kWh a month. All of my appliances are electric except the gas burner because my traditional chef can’t cook without it and the water heater, because I want to have 200 gallons of water at all times in case an earthquake hits. I am turning into my own mini electric power utility, and I am not alone.

I have been encouraged by my experience with my first solar system, which I installed five years ago. It has worked flawlessly, since it has no moving parts. The installer promised me a six-year breakeven against my $500 a month power bill. I covered my cost in four years, thanks to soaring power prices.

And who has the highest electricity prices in the United States? That would be Hawaii, where all fuels have to be imported from great distances. Hawaiians have to pay a massive 66 cents a kilowatt. California only has to pay a peak rate of 55 cents a kilowatt, also among the highest in the country. Drive along Honolulu Interstate H1 today and all you see are solar panels.

Aloha!