Research Archives - Mad Hedge Fund Trader

Who Says There Aren't Any Good Jobs?

While recently winging my way across the South Pacific a few years ago and browsing the local papers, I spotted an unusual job offer:

WANTED: Social worker, tax-free salary of $60,000 with free accommodation and transportation, no experience necessary, must be flexible and self-sufficient.

With the unemployment rate rising for recent college grads, I was amazed that they were even advertising for such a job. Usually, such plum positions get farmed out to a close relative of the hiring officials involved.

Intrigued, I read on.

To apply, you first had to fly to Auckland, New Zealand, then catch a flight to Tahiti. After that you must endure another long flight to the remote Gambler Island, then charter a boat for a 36-hour voyage.

Once there, you had to row ashore to a hidden cove on the island, as there was no dock or even a beach.

It turns out that the job of a lifetime is on remote Pitcairn Island, some 2,700 miles ENE of New Zealand, home to the modern descendants of the mutineers of the HMS Bounty.

History buffs will recall that in 1790, Fletcher Christian led a rebellion against the tyrannical Captain William Bligh, casting him adrift in a lifeboat.

He then kidnapped several Tahitian women and disappeared off the face of the earth. When he stumbled across Pitcairn, which was absent from contemporary naval charts, he burned the ship to avoid detection.

An off-course British ship didn’t find the island until some 40 years later, only to find that Christian had been killed for his involvement in a love triangle decades earlier.

The job is not without its challenges. There is only one doctor, and electric power is switched on only 10 hours a day. Supply ships visit every three months. The local language is a blend of 18^th century English and Tahitian called Pitkern, for which there is no dictionary.

Previous workers have a history of going native. Oh, and 10% of the island’s 54 residents are registered sex offenders, due to its long history of incest.

The next time someone you know complains about being unable to find a job, just tell them they are not looking hard enough, and to brush up on their Pitkern.

For more on the job situation, please visit my website by clicking here.

Tackling the Low Inflation Myth

Diary, Newsletter, Research

I have long told my listeners at conferences, webinars, and strategy luncheons my definition of the “new inflation”: the price for whatever you have to buy is rising, as with your home, health care, and a college education.

The price of the things you need to sell, such as your labor and services, is falling.

So while official government numbers show that the overall rate of inflation is muted at multigenerational highs, the reality is that the standard of living of most Americans is being squeezed at an alarming rate by both startling price increases and real wage cuts.

I finally found someone who agrees with me.

David Stockman was president Ronald Reagan’s director of the Office of Management and Budget from 1981-1985. I regularly jousted with David at White House press conferences, pointing out that the budgets he was proposing would not produce a balanced budget, as he claimed.

Instead, I argued that they would lead to an enormous expansion of the federal deficit. In the end, I was right, with the national debt growing 400% during the Reagan years.

To his credit, David later admitted to running two sets of books for the national accounts, one for external consumption for people like me, and a second internal one for the president with much more dire consequences.

When David finally made the second set of books public, there was hell to pay. It was a fiery departure. I knew Ronald Reagan really well, and when the cameras weren’t rolling, he could get really angry.

After a falling out with Reagan over exactly the issues I brought up, Stockman disappeared for three decades.

He is now back with a vengeance.

He is running a blog named David Stockman’s Contra Corner (click here for the link at http://davidstockmanscontracorner.com ), a site he says “where mainstream delusions and cant about the Welfare State, the Bailout State, Bubble Finance, and Beltway Banditry are ripped, refuted and rebuked.” (Good writing was never his thing).

Despite this rant, there is no place I won’t go to discover some valid arguments and useful statistics, and Stockman is no exception.

For a start, home utility prices have been skyrocketing for the past decade, nearly doubling. Over the last 12 months alone, it has jumped by 5.3%, while natural gas is up more than 10%, compared to an annual Consumer Price Index rise of only 3.3%.

But utilities have such a low 5% weighting in the Fed’s inflation calculation it barely moves the needle.

Wait, it gets better.

Gasoline costs have also been on a relentless uptrend since the nineties. Crude oil is up from a $10 low to today’s print of $95. Retail gasoline has popped from $1 a gallon to $5.50 in California, and that’s off from the year’s high at $3.50.

That works out to an annualized increase of 57%, or more than triple the official inflation rate.

The nation’s 40 million renting households have been similarly punished with price increases. They have averaged a 5.0% annual rate, nearly double the inflation rate.

The country’s 75 million homeowners are getting hit in the pocketbook as well. They have seen the cost of water, sewer, and trash collection balloon at a 4.8% annualized rate. And this has been an almost entirely straight-line move, with no pullbacks. And home insurance? It is absolutely through the roof.

David recites a dirty laundry list of Fed omissions and understatements on the inflation front, including gold, silver, and commodities prices.

All of these nickels and dimes add up to quite a lot for a family of four who is trying to scrape by on a median household income of $69,000 a year. And Heaven help you if you try to live on that in California.

The cost of a few items has declined, but not by much. They are largely composed of cheap import substitutes from Asia, including apparel, shoes, household furniture, consumer electronics, toys, and appliances.

One area the Fed data doesn’t remotely come close to measuring is the plunging cost of technology. How do you measure the savings from products that didn’t exist 20 years ago, like smart phones, iPods, iPads, and solid-state hard drives? How do you measure the cost of services that are handed out for free as Google, Facebook, and X do?

I can personally tell the cost of my own business is probably 90% cheaper to run than it would have three decades ago. I remember shelling out $5,000 for a COMPAQ PC that costs $300 today but has 1,000 times the performance.

David finishes with his usual tirade against the Fed, accusing them of obsessing over the noise of the daily data releases and missing the long-term trend.

Anyone like myself who watched in horror how long it took our central bank to recognize the seriousness of the 2008 financial crisis pr the pandemic would agree.

This all reminds me of what a college Economics professor once told me during the late 1960’s. “Statistics are like a bikini bathing suit. What they reveal is fascinating, but what they conceal is essential.”

What They Reveal is Fascinating....

Google’s Major Breakthrough in Quantum Computing

Diary, Newsletter, Research

I have been following quantum computing since they moved from the theoretical to the practical about five years ago.

The reason is very simple. They promise to bring a 1 trillion-fold increase in computing power at zero cost, promising to solve in seconds some of the world’s most vexing problems.

They also have the potential to ramp the stock market up at least ten times over the next decade and bring on a new golden age. No kidding!

Last week an academic paper leaked and was quickly withdrawn suggesting that Google has accomplished a major breakthrough in the field.

Google claims to have built the first quantum computer that can carry out calculations beyond the ability of today’s most powerful supercomputers, a landmark moment that has been hotly anticipated by researchers.

A paper by Google’s researchers was briefly posted earlier this week on a NASA website before being removed, claiming that their processor was able to perform a calculation in three minutes and 20 seconds that would take today’s most advanced classical computer, known as Summit, approximately 10,000 years. Yikes!

The researchers said this meant “quantum supremacy” when quantum computers carry out calculations that had previously been impossible, had been achieved. This dramatic speed-up relative to all known classical algorithms provides an experimental realization of quantum supremacy on a computational task and heralds the advent of a much-anticipated computing paradigm. This experiment marks the first computation that can only be performed on a quantum processor.

The system can only perform a single, highly technical calculation, according to the researchers, and the use of quantum machines to solve practical problems is still years away. But the Google researchers called it “a milestone towards full-scale quantum computing”.

They also predicted that the power of quantum machines would expand at a “double exponential rate”, compared to the exponential rate of Moore’s Law, which has driven advances in silicon chips in the first era of computing. That means a potential doubling of computing power every nine months with a halving of cost.

While prototypes of so-called quantum computers do exist, developed by companies ranging from IBM (IBM) to start-ups such as Rigetti Computing, they can only perform the same limited tasks classical computers can, albeit quicker. There is also a huge problem accessing stored data. Quantum computers, if they can be built at scale, will harness properties that extend beyond the limits of classical physics to offer exponential gains in computing power.

A November 2018 report by the Boston Consulting Group said they could “change the game in such fields as cryptography and chemistry (and thus material science, agriculture, and pharmaceuticals) not to mention artificial intelligence and machine learning . . . logistics, manufacturing, finance, and energy”.

Unlike the basic binary elements of classical computers, or bits, which represent either zeros or ones, quantum bits, or “qubits”, can represent both at the same time. By stringing together qubits, the number of states they could represent rises exponentially, making it possible to compute millions of possibilities instantly.

Some researchers have warned against overhyping the quantum supremacy, arguing that it does not suggest that quantum machines will quickly overtake traditional computers and bring a revolution in computing. Led by John Martinis, an experimental physicist from the University of California, Santa Barbara, Google first predicted it would reach quantum supremacy by the end of 2017. But the system it built, linking together 72 qubits proved too difficult to control. It eventually revamped the system to create a 53-qubit design it codenamed Sycamore.

The system was given the task of proving that a random-number generator was truly random. Though that job has little practical application, the Google researchers said that “other initial uses for this computational capability” included machine learning, materials science, and chemistry.

“It’s a significant milestone, and the first time that somebody has shown that quantum computers could outperform classical computers at all,” said Steve Brierley, founder of quantum software start-up Riverlane, who has worked in the field for 20 years and is an adviser on quantum technologies to the UK government. “It’s an amazing achievement.”

To illustrate where we are with Quantum computers today, think of it as 1945, when only five mainframe computers existed in the world, all in the US and England. That’s when IBM founder Thomas Watson famously predicted that “The total market for computers is five.”

Oops.

How to Gain an Advantage with Parallel Trading

Diary, Newsletter, Research

One of the most fascinating things I learned when I first joined the equity trading desk at Morgan Stanley during the early 1980s was how to parallel trade.

A customer order would come in to buy a million shares of General Motors (GM) and what did the in-house proprietary trading book do immediately?

It loaded the boat with the shares of Ford Motors (F).

When I asked about this tactic, I was taken away to a quiet corner of the office and read the riot act.

“This is how you legally front-run a customer,” I was told.

Buy (GM) in front of a customer order, and you will find yourself in Sing Sing shortly.

Ford (F), Toyota (TM), Nissan (NSANY), Daimler Benz (DDAIF), BMW (BMWYY), or Volkswagen (VWAPY), are no problem.

The logic here was very simple.

Perhaps the client completed an exhaustive piece of research concluding that (GM) earnings were about to rise.

Or maybe a client's old boy network picked up some valuable insider information.

(GM) doesn’t do business in isolation. It has tens of thousands of parts suppliers for a start. While whatever is good for (GM) is good for America, it is GREAT for the auto industry.

So through buying (F) on the back of a (GM) might not only match the (GM) share performance, it might even exceed it.

This is known as a Primary Parallel Trade.

This understanding led me on a lifelong quest to understand Cross Asset Class Correlations, which continue to this day.

Whenever you buy one thing, you buy another related thing as well, which might do considerably better.

I eventually made friends with a senior trader at Salomon Brothers while they were attempting to recruit me to run their Japanese desk.

I asked if this kind of legal front running happened on their desk.

“Absolutely,” he responded. But he then took Cross Asset Class Correlations to a whole new level for me.

Not only did Salomon’s buy (F) in that situation, they also bought palladium (PALL).

I was puzzled. Why palladium?

Because palladium is the principal metal used in catalytic converters, which remove toxic emissions from car exhaust, and has been required for every U.S. manufactured car since 1975.

Lots of car sales, which the (GM) buying implied, ALSO meant lots of palladium buying.

And here’s the sweetener.

Palladium trading is relatively illiquid.

So, if you catch a surge in the price of this white metal, you would earn a multiple of what you would make on your boring old parallel (F) trade.

This is known in the trade as a Secondary Parallel Trade.

A few months later, Morgan Stanley sent me to an investment conference to represent the firm.

I was having lunch with a trader at Goldman Sachs (GS) who would later become a famous hedge fund manager and asked him about the (GM)-(F)-(PALL) trade.

He said I would be an IDIOT not to take advantage of such correlations. Then he one-upped me.

You can do a Tertiary Parallel Trade here through buying mining equipment companies such as Caterpillar (CAT), Cummins (CMI), and Komatsu (KMTUY).

Since this guy was one of the smartest traders I ever ran into, I asked him if there was such a thing as a Quaternary Parallel Trade.

He answered “Abso******lutely,” as was his way.

But the first thing he always did when searching for Quaternary Parallel Trades would be to buy the country ETF for the world’s largest supplier of the commodity in question.

In the case of palladium, that would be South Africa (EZA), the world's largest non-sanctioned producer, which together accounts for 74% with Russia of the world’s total production.

Since then, I have discovered hundreds of what I can Parallel Trading Chains, and have been actively making money off of them. So have you, you just haven’t realized it yet.

I could go on and on.

If you ever become puzzled or confused about a trade alert I am sending out (Why on earth is he doing THAT?), there is often a parallel trade in play.

Do this for decades as I have and you learn that some parallel trades break down and die. The cross relationships no longer function.

The best example I can think of is the photography/silver connection. When the photography business was booming, silver prices rose smartly.

Digital photography wiped out this trade, and silver-based film development is still only used by a handful of professionals and hobbyists.

Oh, and Eastman Kodak (KODK) went bankrupt in 2012.

However, it seems that whenever one Parallel Trading Chain disappears, many more replace it.

You could build chains a mile long simply based on how well Apple (AAPL) is doing.

And guess what? There is a new parallel trade in silver developing. For whenever someone builds a solar panel anywhere in the world, they are using a small amount of silver for the wiring. Build several tens of millions of solar panels and that can add up to quite a lot of silver.

What goes around comes around.

Suffice it to say that parallel trading is an incredibly useful trading strategy.

Ignore it at your peril.

Sometimes Markets are Hard to Figure Out

Taking Off for the 2023 Mad Hedge World Tour

Diary, Newsletter, Research

By the time you read this, I will be on a flight to New York City where I will meet with Concierge clients and host my Strategy Luncheon.

I will eventually end up at my chalet in Zermatt, Switzerland where I traditionally restart my year. Weather permitting, I will climb the 14,692-foot Matterhorn again. Is it seven times this year, or eight? I can’t remember.

Otherwise, I’ll rejoin Zermatt Search and Rescue again visiting old friends and pulling stranded Americans off of Alpine peaks. It seems I’m the only one up there who has a sense of humor and speaks English.

I leave you with a “mission accomplished.” We are closing out the first half up +64.39% so far in 2023. If all three remaining positions expire at max profit, we will be up +66.40%.

While most investors are only slowly becoming aware that we are in a bull market, you got the heads-up last October. Since the October 13 low, Mad Hedge has gained an awesome +76.15%! This is a year when a lot of people are wrong and YOU are right.

I have worked the hardest in my life the past year, and it is time for a break. I have also put myself through the most grueling training regimen ever, hiking 2,000 miles in torrential rains and snowshoeing another 600, all with a 50-pound pack.

Covid took a lot out of me in 2022.

Every year, it seems to get harder to keep the calendar at bay.

Getting out into the real world and soaking up new data and opinions is invaluable in shaping my own global view, and your performance benefits from it.

I will be traveling with my laptop and keeping in touch with the markets. While 18^th century Internet service is passable, the bandwidth can be snail-like. So, unless I see something extraordinary, I will cut back on new Trade Alerts.

I never actually STOP working, I just change my office location from home offices in Incline Village and San Francisco, to a French castle, and Italian villa, or a Mediterranean mega yacht.

So, I deserve a break. I am risking over trading. I need to spend some time alone on a mountaintop, communing with the spirits, attempting to discover the new long-term market trends hiding themselves in the mist.

While on the road, I will continue writing my newsletter, giving you my daily dose of market insight. I will also be re-running some of my favorite research pieces from the past when my travel schedule does not allow Internet access.

This is to expose my thousands of new subscribers to the golden oldies and to remind the legacy readers who have since forgotten them.

I will be back in San Francisco in early August, glued to my screens once again for another year of toil in the salt mines. In the meantime, please feel free to email me. Concierge members can call me any time for free on WhatsApp.

In the meantime, I shall be raising a glass to all of you at dinner, the loyal readers of The Diary of a Mad Hedge Fund Trader. Salute! Prost! Kampai, and Cheers! Thanks for making this letter a huge success!

If you want to take the opportunity to meet me in person, please find my strategy luncheon schedule below. To purchase tickets for the luncheons, please go to my online store and click on the country and city of your choice.

Thursday, July 6, 12:00 PM New York City
Thursday, July 13, 12:00 PM Seminar at Sea on the Queen Mary II
Thursday, July 19, 12:00 PM London England
Friday, July 27, 3:00 PM Cortina d’Ampezzo, Italy
Thursday, August 1, 12:00 PM Florence Italy
Thursday, August 4, 12:00 PM Vienna Austria
Saturday, August 5, 12:00 PM Rome Italy

I look forward to seeing you there, and thanks for supporting my research.

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

Mad Hedge Market Timing Index

Now Which One of These is for Austria?

My 2022 LEAPS Track Record

Diary, Newsletter, Research

Recently, I have been touting a 2022 track record of +84.63%.

I have a confession to make.

I lied.

In actual fact, my performance was far higher than that. In reality, I generated a multiple of that +84.63% figure.

That is because my published performance is only for my front-month short-term trade alerts. It does not include the LEAPS recommendations (Long Term Equity Anticipation Securities) issued in 2022, the details of which I include below.

LEAPS have the identical structure as a front month vertical bull call debit spread. The only difference is that while front-month call spreads have expiration dates of less than 30 days, LEAPS go out to 18-30 months.

LEAPS also have strike prices far out of-the-money instead of deep in-the-money, giving you infinitely more upside leverage. LEAPS are actually synthetic futures contracts on the underlying stock.

Of the 12 LEAPS executed in 2022, eight made money and four lost. But the successful trades win big, up to 1,260% in the case of NVDIA (NVDA). With the losers, you only write off the money you put up.

And you still have 18 months until expiration for my four losers, ample time for them to turn around and make money. In the case of my biggest loser for Rivian (RIVN), Tesla launched an unprecedented EV price way shortly after I added this position. Never take on Tesla in a price war. Black swans happen.

Of course, timing is everything in this business. I only add LEAPS during major market selloffs as the leverage is so great, over 20X in some cases, of which there were four in 2022.

If you would like to receive more extensive coverage of my LEAPS service, please sign up for the Mad Hedge Concierge Service where you can excess a separate website devoted entirely to LEAPS. Be aware that the Concierge Service is by application only, has a limited number of places, and there is usually a waiting list.

Given the numbers below, it is easy to understand why most professional full-time traders only invest their personal retirement funds in LEAPS.

To learn more about the Mad Hedge Concierge Service, please contact customer support at support@madhedgefundtrader.com

2022 LEAPS Track Record

Date Position Cost Price Profit

9/27/2022 (FCX) January 2025 $42-$45 Call spread LEAPS $0.65 $1.26 94%

9/28/2022 (PANW) January 2025 $306.67-$313.33 Call spread LEAPS $0.80 $4.42 453%

9/28/2022 (RIVN) January 2025 $75-$80 Call spread LEAPS $0.50 $0.06 -88%

9/29/2022 (NVDA) January 2025 $270-$280 Call spread LEAPS $0.50 $6.80 1,260%

9/30/2022 (BRK/B) January 2025 $420-$430 Call spread LEAPS $1.00 $1.95 95%

10/3/2022 (JPM) January 2025 $175-$180 Call spread LEAPS $0.50 $0.89 78%

10/4/2022 (MS) January 2025 $130-$135 Call spread LEAPS $0.50 $0.24 -52%

10/12/2022 (VRTX) January 2025 $430-$440 Call spread LEAPS $1.50 $2.76 84%

11/9/2022 (TLT) January 2024 $95-$100 Call spread LEAPS $2.30 $3.51 53%

11/10/2022 (GOLD) January 2025 $27-$30 Call spread LEAPS $0.25 $0.18 -28%

11/28/2022 (SLV) January 2025 $25-$26 Call spread LEAPS $0.50 $0.22 -56%

12/19/2022 (TSLA) January 2025 $290-$300 Call spread LEAPS $1.50 $2.94 96%

Good luck and good trading,

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

The Sweet Taste of LEAPS

Cybersecurity is Only Just Getting Started

Diary, Newsletter, Research

One of the unfortunate aspects of the pandemic has been a tenfold increase in online fraud.

I get a dozen phishing attacks a day pretending to be Walmart, the Bank of America, and Amazon. And I never click on anything from Apple asking me to change my ID and password. The crooks are just getting too good.

However, where there are criminals there is investment gold.

The cybersecurity sector has been spurred upward with the rest of technology in recent months, creating a rare entry point on the cheap side of the longer-term charts.

The near-destruction of Sony (SNE) by North Korean hackers years ago has certainly put the fear of God into corporate America. Apparently, they have no sense of humor whatsoever north of the 38th parallel.

As a result, there is a generational upgrade in cybersecurity underway, with many potential targets boosting spending by multiples.

It’s not often that I get a stock recommendation from an army general. That is exactly what happened the other day when I was speaking to a three-star about the long-term implications of the escalating trade war.

He argued persuasively that the world will probably never again see large-scale armies fielded by major industrial nations. Wars of the future will be fought online, as they have been silently and invisibly over the past 20 years.

All of those trillions of dollars spent on big ticket, heavy metal weapons systems, like submarines and F-35 fighters ($122 million each) are pure pork designed by politicians to buy voters in marginal swing states.

The money would be far better spent where it is most needed, on the cyber warfare front. Needless to say, my friend shall remain anonymous.

The problem is that when wars become cheaper, you fight more of them, as is the case with online combat.

You probably don’t know this, but during the Bush administration, the Chinese military downloaded the entire contents of the Pentagon’s mainframe computers at least seven times.

This was a neat trick because these computers were in stand-alone, siloed, electromagnetically shielded facilities not connected to the Internet in any way. Here are essentially no secrets about anything anymore.

In the process, they obtained the designs of all of our most advanced weapons systems, including our best smart nukes. What have they done with this top-secret information?

Absolutely nothing.

Like many in senior levels of the US military, the Chinese have concluded that these weapons are a useless waste of valuable resources. Far better value for money are more hackers, coders, and servers, which the Chinese have pursued with a vengeance.

You have seen this in the substantial tightening up of the Chinese Internet through the deployment of the Great Firewall, which blocks local access to most foreign websites, including Wikipedia.

Try sending an email to someone in the middle Kingdom with a Gmail address. It is almost impossible. This is why Google (GOOG) closed their offices there years ago.

I know of these because several Chinese readers are complaining that they are unable to open my own Mad Hedge Trade Alerts, or access their foreign online brokerage accounts.

As a member of the Joint Chiefs of Staff recently told me, “The greatest threat to national defense is wasting money on national defense.”

Although my brass-hatted friend didn’t mention the company by name, the implication is that I need to go out and buy Palo Alto Networks (PANW) right now.

Palo Alto Networks, Inc. is an American network security company based in Santa Clara, California just across the water from my Bay area office.

The company’s core products are advanced firewalls designed to provide network security, visibility and granular control of network activity based on application, user, and content identification. To visit their website please click here.

Palo Alto Networks competes in the unified threat management and network security industry against Cisco (CSCO), FireEye (FEYE), Fortinet (FTNT), Check Point (CHKP), Juniper Networks (JNPR), and Cyberoam, among others.

The really interesting thing about this industry is that there really are no losers. That’s because companies are taking a layered approach to cybersecurity, parceling out contracts to many of the leading firms at once, looking to hedge their bets.

To say that top management has no idea what these products really do would be a huge understatement. Therefore, they buy all of them.

This makes a basket approach to the industry more feasible than usual. You can do this by buying the $435 million capitalized Pure Funds ISE Cyber Security ETF (HACK), which boasts CyberArk Software (CYBR and FireEye (FEYE) as its largest positions.

(HACK) has been a hedge fund favorite since the Sony attack.
For more information about (HACK), please click here.

And don’t forget to change your password.

When Artificial Intelligence Says, “Take a Vacation,” or How to Buy 90-Day T-bills.

Diary, Newsletter, Research

I now have access to the most powerful artificial intelligence trading application in the world, which you will be able to access through the soon-to-be-launched Mad Hedge AI.

Not finding any good low-risk/high-return trades on my own, I hit the mainframes for inspiration. I asked for a list of stocks that have a 90% or better probability of rising over the next 15 days into the June 15 quadruple witching option expiration.

After examining every tick for 3,000 stocks over the last 30 years, guess how many names AI came back with?

Absolutely none.

I guess when AI tells you to do nothing at a market top, that’s a good thing.

That means it is now the time to explore the wonderful world of 90-day Treasury bills, whose yields are now ticked 5.22% yesterday. That’s pretty competitive in a world where stocks yield only 2% and the potential principal risk is real. You are being paid a lot to be a wimp and sit on the sidelines right now.

T-bills are issued every Wednesday with 17-week maturities and are backed by the full faith and credit of the United States government. The ticker symbol is (US-T). It’s as close to safety and a guaranteed return you will ever get, short of hiding gold bars under your bed. But gold bars don’t pay any interest, can always get stolen, and at 400 troy ounces are heavy (27.28 pounds).

You buy T-bills at a discount, and they mature at par. So the August 31, 2023 T-bills I bought yesterday at $98.69574 will pay an annualized yield of 5.22%. They trade in $100,000-round lots, but you can buy odd lots for as little as $1,000 if you are willing to pay a slightly higher price and accept a slightly lower yield.

You can buy these directly from the US Treasury, from your local banks, or your own online broker.

Brokers never recommend T-bills because the commission is nil. They want you instead to rapidly trade short-dated options where the commissions for them are enormous. Better yet, they want you to keep your money in their bank which might pay 1%....or nothing at all and involve real credit risk.

If your broker does go bankrupt, and anything is possible, simply ask to have your 90-day T-bills delivered to another broker or bank. They are not allowed to keep them. Cash deposits get tied up in any bankruptcy proceeds. Just ask former MF Global customers who had to wait three years to get their money back.

Don’t expect to get an elaborately embellished bond in the mail like you used to. All government securities have been digital since 2011 to save money. To learn more about T-bills, please click here.

Old School Treasury Bills

What AI Can and Can’t Do

Diary, Newsletter, Research

The future has arrived!

Over the last few weeks, I picked up some astonishing developments in artificial intelligence.

*Mainframes at Stanford University and the University of California at Berkeley were given a direct connection to speak freely with each other. Within 30 minutes they dumped English as a means of communication because it was too inefficient and developed their own language which no human could understand. They then began exchanging immense amounts of data. Fearful of what was going on, the schools unplugged the machines after only eight hours.

*All of the soccer videos ever recorded were downloaded into two robots, but they were not taught how to play the game or given any rules. Not only did figure out how to play the game, it developed plays and maneuvers no one in the sport has ever thought of in its 150-year history.

*It normally takes a PhD candidate five years to 3D map a protein. An AI app 3D mapped all 200 million known proteins in seven weeks, shortcutting one billion years of PhD level research with existing technology. These new maps have already been used to design a malaria vaccine and enzymes that eat plastic. They will soon cure all human diseases.

*A developer asked an AI program a half dozen questions in Bengali, not an easy language. Within an hour, it spoke the language fluently, without any instructions to do so.

By now, word has gotten out about the incredible opportunities AI presents. Our only limitation is our own imagination on how to use it. AI will instantly triple the value of any company that uses it.

What has changed is that we now have millions of computers powerful enough and an Internet fast enough to realize its full potential.

It all vindicates my own long-term vision, unique in the investing community, that in the coming decade, immense technology profits will more than replace the trillions of dollars worth of Fed liquidity we feasted on during the 2010s. Extended QE is proving just a bridge to a much more prosperous future.

The Internet has created about $10 trillion in value since its inception. AI will create double that in half the time. That’s what will take the Dow from 33,000 to 240,000.

No surprise then that the top ten AI companies have delivered 120% of the stock market gains so far in 2023. The other 490 companies in the S&P 500 have either gone nowhere to down.

However, there are many things that AI can’t do. Here is the list.

1) AI Can’t Predict large anomalous events, otherwise known as Black Swans. AI takes past trends and extrapolates them into the future. It in no way could have seen 9/11, the 2008 crash or the pandemic coming, although I warned my hedge fund clients for years that we were overdue. All of the AI stock trading apps I have seen so far, including my own, max out at 90% accuracy. The other 10% is accounted for by black swans: earnings shocks, foreign crises, sudden FDA stage three denials, surprise legal judgments, foreign invasions, or the murder of a key man in a tech company, as recently happened in San Francisco.

2) AI Lies and Lies Often. AI was asked to write a scientific paper on a specific subject. It came back with an elegant and well-researched piece. The problem was that all of the books it made reference to didn’t exist. AI learned early to tell humans what they want to hear.

3) AI Requires Exponential Computing Capacity. Only five companies have the muscle to pursue true AI. No surprise that these, including (AAPL), (GOOGL), (AMZN), and (TSLA), account for the bulk of stock market performance this year. This won’t always be the case. Some 30 years ago, it required thousands of mainframes to contain all human knowledge. Today, that task can be accomplished with a cheap $1,000 laptop.

4) Internet Capacity Will Be a Limiting Factor for AI for Years. To accommodate the traffic that is taking place right now, the Internet will have to grow 500% practically overnight, and that is with five main players. What happens when we have 5 million? That’s why NVIDIA (NVDA) has gone nuts.

5) AI Hallucinates, as anyone who drives a Tesla will tell you. If a car makes a left turn in Florida, the 4 million vehicles in the world’s largest neural network learn from it. The problem is that sometimes the data from that Florida car is placed directly in front of a California one, prompting it to brake abruptly, causing accidents. This is known as “ghost braking.” I have explained to Elon Musk that his database has grown so large, eight video feeds per 4 million cars going back many years and billions of miles, that he may be going behind the limits of known physics.

6) While the Growth Opportunities for AI are Unlimited, the ability of humans and society to absorb it isn’t. All jobs will be affected by AI and millions destroyed, starting with low-level programmers and call centers, and millions more will be created. People are talking about regulating AI but have no idea where to start. Maybe with (AAPL), (GOOGL), (AMZN), and (TSLA)?

7) The Terminator Issue. Can AI be controlled? Or have we started a chain reaction that is unstoppable, as with an atomic bomb? AI researchers have noticed a disturbing issue where AI programs are learning skills on their own, without our instructions. This is referred to as “emergent properties.” If AI is using humans as its example, we can’t exactly count on it to be benign.

Needless to say, AI will be at the core of your investment approach, probably for the rest of your life.

2014 at Micron Technology

The Market Outlook for the Week Ahead, or A Tale of Two Markets

Diary, Newsletter, Research

Investors are so out of position it hurts.

I have always believed that markets will always do whatever they have to do to screw the most people and it is doing that right now with a vengeance.

Some $750 billion has poured into cash and equivalents since January 1. Margin debt is now at the Dotcom bust low of 1.4% of the S&P 500 not seen since 2002. Equity Allocations are at a 15 Year Low, with massive amounts of cash in 90-day T-bills now yielding 5.25%.

The broader market is expensive looking at 19 times 2023 earnings. But take out the top five performing FANGS and we are down to a very reasonable 15 times for the remaining 495 stocks.

I told you this would happen, that the bear market ended on October 15 and that big tech would lead any recovery. I reiterated this view in depth with my 2023 All Asset Class Review on January 4 (click here for the link).

In the meantime, a lot of investors had angry conversations with investment advisors this week as to why they didn’t own NVIDIA (NVDA). They heard it was too expensive, that it had already moved too much (triple since October 15), the government was going default on its debt, and that we were headed into recession.

Suffice it to say that if they lived here with me in Silicon Valley, they wouldn’t take this view. The world is going NVIDIA crazy on a huge earnings beat, taking the shares up 30%. Q1 revenues came in at $7.2 billion versus an expected $6.5 billion. Demand from AI and data centers is surging.

(NVDA) has been a core Mad Hedge holding since it went public a decade ago. It is now up 175-fold and has at least another seven bagger ahead of it. (NVDA) has matched the 175-fold gain we caught with our 2010 recommendation for Tesla. The (NVDA) January 2025 LEAPS I recommended on September 29 at 50 cents is now worth $6.25 and expires worth $10, up 20-fold!

It all vindicates my own long-term vision, unique in the investing community, that in the coming decade, technology profits will more than replace the Fed liquidity we feasted on during the 2010s.

The Internet has created about $10 trillion in value since inception. AI will create a lot more than that. That’s what will take the Dow from 33,000 to 240,000.

In the meantime, new home building is incredibly going from strength to strength and is one of the few domestic sides of the economy that is prospering mightily. New Home Sales hit a 13-Month High, up 4.1% in April. If you had told me five years ago that while 30-year fixed mortgage rates were at a two-decade high of 7.0%, demand for new homes was so strong that builders were running out of inventory, I would have told you that you were out of your mind.

Yet, here we are.

This is because half of the builders that went bust in the 2008 subprime housing crash never came back, creating a structural shortage of homes that will take 20 years to return to balance.

Baby boomers now aged 61 to 78 rushed to buy homes in their late 20s during the prosperity of the 1960s and 1970s. Only 10% paid cash for their homes, many of whom worked on Wall Street, like me.

Some 75 million Millennials are now buying homes in their mid 30’s and are therefore much wealthier than previous generations. Working in tech like my kids, some 35% are paying all cash and are immune to the interest rate cycle. That means they can afford much nicer homes than we boomers could.

Those who do borrow plan to refi quickly in a year or two when mortgages are back below 5.0%. Then the residential real estate will absolutely catch on fire. Buy (TOL), (LEN), (KBH), and (PHM) on dips.

Oh, and buy boatloads of bonds (TLT) too.

There is another angle to the story that is fascinating. High housing prices are turning Yankees into Confederates and Hawaiians into cowboys.

An onslaught of my friends have recently retired from New York for the green hills of North Carolina. The problem is that if I moved there, they’d be burning crosses on my front lawn in the first week.

Natives Hawaiians have fled their green hills for the Nevada deserts because they can’t afford to live there anymore, moving from an $800,000 median homes price to $400,000. When I was in Las Vegas a few weeks ago, I noticed ads for a hula contest, Hawaiian language lessons at the county library, and SPAM at Safeway. Outrigger canoes have been spotted on a disappearing Lake Mead. The chief complaint? Leis wilt a lot faster in the dry desert air.

So far in May, I have managed a modest 1.38% profit. My 2023 year-to-date performance is now at an eye-popping +63.13%. The S&P 500 (SPY) is up only a miniscule +10.53% so far in 2023. My trailing one-year return reached a 15-year high at +108.59% versus +12.02% for the S&P 500.

That brings my 15-year total return to +660.32%. My average annualized return has blasted up to +48.91%, another new high, some 2.72 times the S&P 500 over the same period.

Some 41 of my 44 trades this year have been profitable. My last 22 consecutive trade alerts have been profitable.

I executed no trades last week, content to run my long in Tesla and a short in Tesla, the “short strangle” strategy. I now have a very rare 80% cash position due to the lack of high-return, low-risk trades. I ran a rare loss last week because while my long in Tesla is now at max profit, my short is approaching its near strike. That goes with my philosophy of when you’re wrong, be small. When you’re right, go big.

Ford (F) Cuts Deal with Tesla to Share National Charger Network, putting Elon Musk well on his way to becoming the largest electric utility in the world. It won’t affect the existing 4 million Tesla drivers yet. Ford only sold 62,000 EVs in 2022 and 25,000 the year before. Access will be provided through adapters, the (F) adopting the Tesla charging standard. It kind of screws (GM) left on its own. It was worth a $13 pop for (TSLA). Keep buying (TSLA) on dips.

Divergence Between the S&P 500 and the S&P Equal Weight is the greatest since December 1999. The Dotcom Bubble topped four months later. It’s a function of concentration in the top five tech stocks, my “Five Aces” strategy. Risk is rising. The flight to big tech balance sheets and AI has been huge. You heard it here first.

Marvel Technologies (MRVL) Rockets 25% on Spectacular Earnings Beat, as the AI fever spreads out into infrastructure plays like second-line chip makers. Demand for integrated circuits from data centers, carrier infrastructure, networking, and the auto industry is off the charts. The Internet has to grow 500% quickly to accommodate new AI demand right now. The gold rush is on. Buy (MRVL) on dips.

Inflation Continues to Fall, down 0.4% in April according to the Personal Consumption Expenditures Index Price Index. Food prices rose 6.9% from a year ago while energy fell 6.3%.

Fitch Puts US Debt on Credit Watch, meaning that it is due for a downgrade. It’s the first time since the 2011 Moody’s downgrade from AAA to AA+. Threats of default have real-world consequences.

Pending Home Sales Collapse, unchanged from March, but down 20% YOY on a signed contract basis. Soaring interest rates get the blame. The northeast took the big hit.

Ely Lily Price Target Raised to $500, by Bank of America on the strength of their Ozempic weight loss drug. The stock is up fivefold since Mad Hedge recommended it five years ago. Keep buying (LLY) on tips.

30-Year Fixed Rate Mortgages Jump Back to 7.0%, on the impasse in Washington and default fears. The residential real estate recovery goes back on hold.

(TLT) Approaches 2023 Low. The closer we get to a debt ceiling deal, the lower we go. When a deal is done, it unleashes a new onslaught of bond selling by the Treasury, and lower lows on bonds. In the dream scenario, we fall all the way to $95 in the (TLT) where we will be issuing recommendations for call spreads and LEAPS by the boatload.

My Ten-Year View

When we come out the other side of the recession, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. The economy decarbonizing and technology hyper-accelerating, creating enormous investment opportunities. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The new America will be far more efficient and profitable than the old.

Dow 240,000 here we come!

On Monday, May 29 is Memorial Day. All markets are closed.

On Tuesday, May 30 at 6:00 AM EST, the S&P Case Shiller National Home Price Index is printed.

On Wednesday, May 31 at 7:00 AM, the JOLTS Job Openings Report is out.

On Thursday, June 1 at 8:30 AM, the Weekly Jobless Claims are announced.

On Friday, June 2 at 2:00 PM, the May Nonfarm Payroll Report is released.

As for me, with the 36^th anniversary of the 1987 crash coming up this year, when shares dove 20% in one day, I thought I’d part with a few memories.

I was in Paris visiting Morgan Stanley’s top banking clients, who then were making a major splash in Japanese equity warrants, my particular area of expertise.

When we walked into our last appointment, I casually asked how the market was doing (Paris is six hours ahead of New York). We were told the Dow Average was down a record 300 points. Stunned, I immediately asked for a private conference room so I could call the equity trading desk in New York to buy some stock.

A woman answered the phone, and when I said I wanted to buy, she burst into tears and threw the handset down on the floor. Redialing found all transatlantic lines jammed.

I never bought my stock, nor found out who picked up the phone. I grabbed a taxi to Charles de Gaulle airport and flew my twin Cessna as fast as the turbocharged engines take me back to London, breaking every known air traffic control rule.

By the time I got back, the Dow had closed down 512 points. Then I learned that George Soros asked us to bid on a $250 million blind portfolio of US stocks after the close. He said he had also solicited bids from Goldman Sachs, Merrill Lynch, JP Morgan, and Solomon Brothers, and would call us back if we won.

We bid 10% below the final closing prices for the lot. Ten minutes later he called us back and told us we won the auction. How much did the others bid? He told us that we were the only ones who bid at all!

Then you heard that great sucking sound.

Oops!

What has never been disclosed to the public is that after the close, Morgan Stanley received a margin call from the exchange for $100 million, as volatility had gone through the roof, as did every firm on Wall Street. We ordered JP Morgan to send the money from our account immediately. Then they lost the wire transfer!

After some harsh words at the top, it was found. That’s when I discovered the wonderful world of Fed wire numbers.

The next morning, the Dow continued its plunge, but after an hour managed a U-turn, and launched on a monster rally that lasted for the rest of the year. We made $75 million on that one trade from Soros.

It was the worst investment decision I have seen in the markets in 53 years, executed by its most brilliant player. Go figure. Maybe it was George’s risk control discipline kicking in?

At the end of the month, we then took a $75 million hit on our share of the British Petroleum privatization, because Prime Minister Margaret Thatcher refused to postpone the issue, believing that the banks had already made too much money.

That gave Morgan Stanley’s equity division a break-even P&L for the month of October 1987, the worst in market history. Even now, I refuse to gas up at a BP station on the very rare occasions I am driving a rental internal combustion engine from Enterprise.

My Quotron Screen on 1987 Crash Day

Good luck and good trading!

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