Research Archives - Mad Hedge Fund Trader

December 1 Biweekly Strategy Webinar Q&A

Below please find subscribers’ Q&A for the December 1 Mad Hedge Fund Trader Global Strategy Webinar broadcast from the safety of Silicon Valley.

Q: What are your thoughts on Square (SQ)?

A: There is a whole range of FinTech companies including Square (SQ) and PayPal (PYPL), as well as Mastercard (MA), American Express (AXP), and Visa (V), which have been completely slaughtered in the last 3 months. The theme behind that selling is that Bitcoin, being a frictionless transaction system, will wipe out all existing fee taking financial services. You’re getting long-term investors selling because of that. And that’s why all of these sectors have sold in unison, so everything looks incredibly cheap now. I know a lot of people who are starting to pick up PayPal down here, so that is what's going on.

Q: How do you see iShares 20 Plus Year Treasury Bond (TLT) ETF moving forward?

A: It has to go down. Accelerated tapering with a new interest rate policy about to hit and 7% GDP growth against 6.2% inflation—this has been the toughest bond market of all time. I expect we start getting dramatic falls once people get the memo, but that hasn’t happened yet; and if anything, you could get strength at the end of the year as people throw in the towel on money-losing shorts to window dress their holdings for customers. I think that's why we had this monster ten-point rally in just a week—it’s people trying to get out of losing trades before year-end.

Q: Could Omicron trigger a recession?

A: No. This is entirely media hype. But algorithms are totally gullible to media hype. All they need to sell is the right word in a headline, like “Omicron.” When the virus first hit last year we had 0% immunity, and when Delta hit we had about 50% immunity. At 90% immunity, the virus will have ten times more difficulty stopping the economy. We now have so much testing, so many early warning systems, and so many better ways to treat the disease for people who already got it with the Pfizer pill and so on, that this is nowhere near the threat to the economy that it was even six months ago. So, buy any Omicron-inspired selloffs; that’s what I've been doing since Friday.

Q: What’s the relationship between high oil prices and the direction of Tesla (TSLA) stock?

A: They track pretty much one for one. High oil prices are great for Tesla, as they are for all-electric cars, because it makes switching to electric much more financially attractive. If you’re paying $5 per gallon at the pump as we are here in California, you have a much bigger incentive to switch to an electric car than it was when gasoline was $2. And that has historically been the case with all alternative forms of energy for the last 50 years; what would always kill alternative energy in the past was cheap oil—oil going down to $30 a barrel and gasoline at $2 a gallon. When it's that cheap, people don't want to pay a premium for electric. By the way, my energy cost is zero as I charge my cars at home with my solar panels. Even when I use public charging stations the energy cost is the same as paying 30 cents for a gallon of gas, which was the price when I was in high school.

Q: If volatility is about to explode, can we careen straight into a high-rate environment?

A: There is no quick connection between stock market volatility and interest rates. It would take dramatically higher interest rates to really hurt the stock market, and I'm talking 3% or 4% on a 10 year, not 1.48% which is what we have now. So, I don’t think interest rates rise high enough to offset the tremendous gains being made by technology and the enormous profits this is spinning off, and that is the fundamental case for a bull market that goes on for 10 more years.

Q: What is better to buy here, Apple (AAPL) or Microsoft (MSFT)?

A: Apple actually has been a laggard for the last six months, bumping up against that $150 level. Now that it has broken out to the upside, I’d be a buyer of Apple, but both are great names. I have heavy positions in both and am quite happy to run them.

Q: Is CRSPR Therapeutics (CRSP) worth a LEAP?

A: Yes, but I would go out 2 or 2.5 years to the maximum maturity, do an at-the-money like an $80-$90 LEAPS and then hope on a positive press announcement sometime in the next 2 years, and that should get you a 100% return.

Q: Thoughts on Facebook (FB)?

A: I’m avoiding Facebook because it just has too many balls in the air right now, changing their name, changing their business model—it’s not really clear what Meta is yet to most consumers, and I’d rather own Apple (AAPL) and Microsoft (MSFT).

Q: When is your autobiography being finished?

A: I don’t know because I don't know how it ends, I'm still living it. So, I'll keep chipping away at it every week when I have time. In a couple of years maybe we’ll launch the biography of John Thomas pdf book on the website, and you can all have a fascinating read. I still have decades worth of pictures in photo albums to go through to remember all the things I've done so there's a lot more good stuff to come. A Hollywood writer is working on a movie script about my life. Next week is about crossing the Sahara Desert when I was 16.

Q: Is our electric grid capable of taking care of all of the oodles of electric vehicles about to plug in?

A: Absolutely not, the grid has to be tripled in size to handle all the EV’s coming our way, which means we need to build 200,000 miles of new long-distance transmission cables, which are all made out of aluminum. Oh, and by the way, the 25 million EVs coming our way each uses 200 pounds of copper—there's another trade hint, Freeport-McMoRan (FCX). And of course, Alcoa (AA) is the big play on aluminum.

Q: What do you think of the ProShares Bitcoin Strategy (BITO) ETF?

A: I actually like it because it's tracking quite nicely with the underlying Bitcoin, the slippage there or the contango is only about 4% a year. That is worth doing to get improved liquidity and security by buying through the BITO ETF. We still have Bitcoin on a “BUY” signal is see $100,000 next year. The new fork will make it move for competitive with Ethereum.

Q: Do you expect a 5% dip in tax loss selling at the end of the year, or is this overhyped?

A: It's way overhyped because who has losses? Nobody has any losses this year to lock in, unless you have a big holding in China, so I don't think there will be any tax loss selling this year. I think we will close the markets at all-time highs on the last day of the year, and whatever tax effects there will be minimal. Plus, if you wait another month till January you don't have to pay the taxes for 16 months—sounds like a good deal to me. The chances of any major increases in tax rates have been greatly reduced over the coming play.

Q: Is copper (COPA.L) an inflation play?

A: Absolutely, it's one of the best inflation plays out there. It was always a great inflation play even before the electric car industry existed; copper and all other hard assets are great inflation plays. Oh, and then do you think at 6.2% we have inflation already? I kind of think the answer is yes! To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in to www.madhedgefundtrader.com, go to MY ACCOUNT, click on GLOBAL TRADING DISPATCH, then WEBINARS, and all the webinars from the last ten years are there in all their glory.

Good Luck and Stay Healthy!

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

A Note on Assigned Options, or Options Called Away with Goldman Sachs

Diary, Newsletter, Research

Goldman Sachs (GS) shares went ex-dividend yesterday, December 1 for a $2.00 quarterly dividend.

Anyone who has the (GS) December 2021 $340-$360 vertical bull call debit spread could potentially have their short positions in the $360 calls called away, or exercised against them by hedge fund seeking to capture the dividend.

Although the return for such a move is very small, some 0.51%, making this highly unlikely, it is not impossible. So it’s important to know how to handle these events.

If exercised, brokers are required by law to email you immediately and I know all of this may sound confusing at first. But once you get the hang of it, this is the greatest way to make money since sliced bread.

I call it the “Screw up risk.”

If it happens, there is only one thing to do: fall down on your knees and thank your lucky stars. You have just made the maximum possible profit for your position instantly.

Most of you have short option positions, although you may not realize it. For when you buy an in-the-money vertical option spread, it contains two elements: a long option and a short option.

The short options can get “assigned,” or “called away” at any time, as it is owned by a third party, the one you initially sold the put option to when you initiated the position.

You have to be careful here because the inexperienced can blow their newfound windfall if they take the wrong action, so here’s how to handle it correctly.

Let’s say you get an email from your broker telling that your call options have been assigned away.

I’ll use the example of the Goldman (GS) $340-$360 in-the-money vertical BULL CALL spread.

For what the broker had done in effect is allow you to get out of your call spread position at the maximum profit point 12 days before the December 17 expiration date. In other words, what you bought for $16.00 on November 30 is now worth $20.00, giving you a near-instant profit $2,400, or 25.00% in 2 trading days!

All have to do is call your broker and instruct them to “exercise your long position in your (GS) December 17 $340 calls to close out your short position in the (GS) November 17 $360 calls.”

You must do this in person. Brokers are not allowed to exercise options automatically, on their own, without your expressed permission.

This is a perfectly hedged position, with both options having the same name and the same expiration date, so there is no risk. The name, number of shares, and number of contracts are all identical, so you have no exposure at all.

Calls are a right to buy shares at a fixed price before a fixed date, and one options contract is exercisable into 100 shares.

Short positions usually only get called away for dividend-paying stocks or interest-paying ETFs like the (TLT). There are strategies out there that try to capture dividends the day before they are payable. Exercising an option is one way to do that.

Weird stuff like this happens in the run-up to options expirations like we have coming.

A call owner may need to buy a long (GS) position after the close, and exercising his long (GS) call is the only way to execute it.

Adequate shares may not be available in the market, or maybe a limit order didn’t get done by the market close.

There are thousands of algorithms out there which may arrive at some twisted logic that the puts need to be exercised.

Many require a rebalancing of hedges at the close every day which can be achieved through option exercises.

And yes, options even get exercised by accident. There are still a few humans left in this market to blow it by writing shoddy algorithms.

And here’s another possible outcome in this process.

Your broker will call you to notify you of an option called away, and then give you the wrong advice on what to do about it.

There is a further annoying complication that leads to a lot of confusion. Lately, brokers have resorted to sending you warnings that exercises MIGHT happen to help mitigate their own legal liability.

They do this even when such an exercise has zero probability of happening, such as with a short call option in a LEAPS that has a year or more left until expiration. Just ignore these, or call your broker and ask them to explain.

This generates tons of commissions for the broker but is a terrible thing for the trader to do from a risk point of view, such as generating a loss by the time everything is closed and netted out.

There may not even be an evil motive behind the bad advice. Brokers are not investing a lot in training staff these days. In fact, I think I’m the last one they really did train.

Avarice could have been an explanation here but I think stupidity and poor training and low wages are much more likely.

Brokers have so many ways to steal money legally that they don’t need to resort to the illegal kind.

This exercise process is now fully automated at most brokers but it never hurts to follow up with a phone call if you get an exercise notice. Mistakes do happen.

Some may also send you a link to a video of what to do about all this.

If any of you are the slightest bit worried or confused by all of this, come out of your position RIGHT NOW at a small profit! You should never be worried or confused about any position tying up YOUR money.

Professionals do these things all day long and exercises become second nature, just another cost of doing business.

If you do this long enough, eventually you get hit. I bet you don’t.

Calling All Options!

How to Handle the Friday November 19 Options Expiration

Diary, Newsletter, Research

Happy and newly enriched followers of the Mad Hedge Fund Trader Alert Service have the good fortune to own a record ten deep-in-the-money options positions that expire on Friday, November 19 at the stock market close in two days.

I have to admit that I traded like a Wildman this month, pedal to the metal, and 100% invested. This will take our 2021 year-to-date performance to over 100% for the first time in our 14-year history. I like to think that is the end result of my 53 years of investment in researching trading strategies.

Sometimes, overconfidence works.

It is therefore time to explain to the newbies how to best maximize their profits.

These involve the:

(GS) 11/$330-$350 call spread 10.00%

(GS) 11/$385-$395 call spread 10.00%

(MS) 11/$85-$90 call spread 10.00%

(MS) 11/$95-$98 call spread 10.00%

(BAC) 11/$37-$40 call spread 10.00%

(BAC) 11/$43-$46 call spread 10.00%

(TLT) 11/$150-$153 put spread 10.00%

(ROM) 11/$105-$110 call spread 10.00%

(BRKB) 11/$275-$280 call spread 10.00%

(BRKB) 11/$277.50-$282.50 call spread 10.00%

Provided that we don’t have another 2,000-point move down in the market in the next two days, these positions should expire at their maximum profit points.

So far, so good.

I’ll do the math for you on our deepest in-the-money position, the Goldman Sachs (GS) November 19 $330-$350 vertical bull call spread, which I almost certainly will run into expiration. Your profit can be calculated as follows:

Profit: $20.00 expiration value - $16.50 cost = $3.50 net profit

(6 contracts X 100 contracts per option X $3.50 profit per options)

= $2,100 or 17.65% in 24 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 November 22 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 make your broker find it.

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

If you want to wimp out and close the position before the 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 understandably disappears, and the spreads substantially widen, when a security has only hours, or minutes until expiration on Friday, November 19. 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 month end.

Take your winnings and go out and buy yourself a well-earned dinner. Just make sure it’s take-out. I want you to stick around.

Well done, and on to the next trade.

You Can’t Do Enough Research

The Market Outlook for the Week Ahead, or Profiting from Inflation

Diary, Newsletter, Research

Worried about inflation?

I’m not. That’s because I know how to trade inflation, which we had in spades during the 1970s when it reached a horrific 18% rate. Those who figured out the game early made fortunes. Those who didn’t got killed.

And what is the best protection against inflation? You own stocks and homes, as much as you can get your hands on.

That’s because in an inflationary environment, companies can raise their prices faster than the inflation rate, which they have been doing since the summer. That’s why we have just seen the best earnings quarter in recent memory and all-time high stock indexes.

Homes do well because there are still 85 million millennials chasing a housing stock that is easily short ten million homes and are given free money to chase prices upward.

I asked a local real estate agent when home prices would slow down and she answered, “it might slow down on Christmas eve and Christmas day, and after that, it will take off again.”

I think home prices will continue to rise for another decade, but not at this year’s ballistic rate.

What about impending rising interest rate, you may ask? They will rise but not enough to hurt either stocks or homes. The pandemic vastly accelerated technology, which we all know is the greatest price destroyer of all time. So, inflation will go up, but from zero to 3%-4%, not the 18% of yore.

And yes, prices are rising for the working classes, those least able to pay them. But the same minimum wage workers are getting the biggest pay hikes in history, up to 100% in some cases, more than offsetting inflation.

And while stocks and homes see rising inflation, bonds don’t. My feeling is that the bond market will stumble across it in the dark some nights and prices will crash. Bonds will keep ignoring inflation until they can’t. The bond vigilantes will then return with a vengeance and are doing their stretching exercises as we speak.

One of the odder things about the past week is that each of the three announcements heralding sharply higher inflation trigger sharp moves up in bonds when they were supposed to go down. That worked until Thursday when the worst 30-year Treasury bond auction since 1990 prompted a $5.00 selloff.

Another bizarre development is that call options are trading at greater premiums than put options, an exceedingly rare event. That means that the consensus for stocks is now almost universally up.

It also means that the at-the-money long-dated LEAPS call option spreads I have been pelting my Concierge members with have become massively profitable. Six months out you can earn eye-popping 100% returns, and 200% in some of the more volatile names, like (ROM) and (MSTR).

The bottom line is that goldilocks is moving in for the long term and might advance to senior citizenship on this watch.

That works for me, so I’m going on a long hike.

The $1.2 Trillion Infrastructure Budget Passes, adding another 6% in GDP growth for the next two years. Construction detours are about to break out all over the country, and the domestic recovery play is on fire. Lost along the way was $550 million in social spending. No increase in corporate taxes sets up a perfect storm for stocks the next several months. Stay fully invested as I begged you to do weeks ago.

The US Reopens, provided you have two Covid shots and a test within the last three days. Got to keep those pesky diseased foreigners out! Hotels, airlines, casinos, and cruise lines took off like a scalded chimp, taking the indexes to new all-time highs. Buy (ALK) and (LUV) on dips.

The Bitcoin Rally Continues, with new all-time highs for both (BITO) and (ETHE). Concerns about the monetary health of the US are rising ahead of a major debt ceiling fight in Congress in December.

Inflation Soars with a Red Hot 6.2% CPI Print in October, the highest in 31 years. Energy, rent, and car costs led the gains. Bitcoin (BITO) and Ethereum (ETHE) jumped to new all-time highs in response. This is only going to get better. You can now count on a Fed interest rate hike in June.

The Disappearing Worker Trend Continues, with a record 4.4 million quitting in September. Workers are taking advantage of the labor shortage to switch jobs for higher wages. This will get worse before it gets better. Good luck trying to hire anyone.

US Consumer Sentiment Hits Ten-Year Low, down from 71.7 to 68.6 in October, according to the University of Michigan. Inflation at a 30-year high 6.2% is starting to hit consumers hard.

Elon Musk Tesla Sales Top $5.1 billion, to pay off Uncle Sam. That must be one hell of a tax bill. At this rate, the market is rapidly running out of the sole seller. Buy (TSLA) on dips.

My Ten-Year View

When we come out the other side of pandemic, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 240,000 here we come!

My Mad Hedge Global Trading Dispatch saw a massive +8.95% gain in October, followed by a decent 4.42% so far in November. My 2021 year-to-date performance moved to a new high of 92.97%. The Dow Average is up 18.00% so far in 2021.

After the recent ballistic move in the market, we got a week of consolidation which brought some generalized bitching, moaning, and wining.

I am continuing to run my longs in. Those include (MS), (GS), (BAC), (BRKB), and a short in the (TLT). The (TLT) short brought some hair-raising moments when we got a $3.00 spike up in the wake of the red hot 6.2% CPI release. I knew it was a complete BS move and successfully stared it down, watching it all reverse the next day. I don’t do this very often.

All positions are now approaching their maximum profit point and we have nothing left but time decay to capture. So, I am going to run these into the November 19 expiration in 4 trading days and capture all the accelerated time decay.

That brings my 12-year total return to 515.52%, some 2.00 times the S&P 500 (SPX) over the same period. My 12-year average annualized return has ratcheted up to 43.26%, easily the highest in the industry.

My trailing one-year return popped back to positively eye-popping 112.08%. I truly have to pinch myself when I see numbers like this. I bet many of you are making the biggest money of your long lives.

We need to keep an eye on the number of US Coronavirus cases at 47 million and rising quickly and deaths topping 763,000, which you can find here.

The coming week will be all about the inflation numbers.

On Monday, November 15 at 9:00 AM, the New York Empire State Manufacturing Index for November is released. WeWork reports.

On Tuesday, November 16 at 8:30 AM, US Retail Sales for October are printed. Home Depot (HD) and Walmart (WMT) report.

On Wednesday, November 17 at 8:30 AM, the Housing Starts and Building Permits for October are published. NVIDIA (NVDA) and Cisco Systems (CSCO) report.

On Thursday, November 18 at 8:30 AM, Weekly Jobless Claims are announced. The Philadelphia Fed Manufacturing Index is printed. Macy's (M) and Alibaba (BABA) report.

On Friday, November 19 at 2:00 PM, the Baker Hughes Oil Rig Count are disclosed.

As for me, I am sitting in the Centurion Lounge in San Francisco Airport waiting for a United flight to Las Vegas where I have to speak at an investment conference. I have time to kill so I will reach back into the deep dark year of 1968 in Sweden.

My trip to Europe was supposed to limit me to staying with a family friend, Pat, in Brighton, England for the summer. His family lived in impoverished council housing.

I remember that you had to put a ten pence coin into the hot water heater for a shower, which inevitably ran out when you were fully soaped up. The trick was to insert another ten pence without getting soap in your eyes.

After a week there, we decided the gravel beach and the games arcade on Brighton Pier were pretty boring, so we decided to hitchhike to Paris.

Once there, Pat met a beautiful English girl named Sandy, and they both took off for some obscure Greek island, the ultimate destination if you lived in a cold, foggy country.

That left me stranded in Paris.

So, I hitchhiked to Sweden to meet up with a girl I had run into while she was studying English in Brighton. It was a long trip north of Stockholm, but I eventually made it.

When I finally arrived, I was met at the front door by her boyfriend, a 6’6” Swedish weightlifter. That night found me bedding down in a birch forest in my sleeping bag to ward off the mosquitoes which hovered in clouds.

I started hitchhiking to Berlin, Germany the next day. I was picked up by Ronny Carlson in a beat-up white Volkswagen bug to make the all-night drive to Goteborg where I could catch the ferry to Denmark.

1968 was the year that Sweden switched from driving English style on the left to the right. There were signs every few miles with a big letter “H”, which stood for “hurger”, or right. The problem was that after 11:00 PM, everyone in the country was drunk and forgot what side of the road to drive on.

Two guys on a motorcycle driving at least 80 pulled out to pass a semi-truck on a curve and slammed head on to us, then were thrown under the wheels of the semi. The driver was killed instantly, and his passenger had both legs cut off at the knees.

As for me, our front left wheel was sheared off and we shot off the mountain road, rolled a few times, and was stopped by this enormous pine tree.

The motorcycle riders got the two spots in the only ambulance. A police car took me to a hospital in Goteborg and whenever we hit a bump in the road, bolts of pain shot across my chest and neck.

I woke up in the hospital the next day, with a compound fracture of my neck, a dislocated collar bone, and paralyzed from the waist down. The hospital called my mom after booking the call 16 hours in advance and told me I might never walk again. She later told me it was the worst day of her life.

Tall blonde Swedish nurses gave me sponge baths and delighted in teaching me to say Swedish swear words and then laughing uproariously when I made the attempt.

Sweden had a National Healthcare system then called Scandia, so it was all free.

Decades later, a Marine Corp post-traumatic stress psychiatrist told me that this is where I obtained my obsession with tall, blond women with foreign accents.

I thought everyone had that problem.

I ended up spending a month there. The TV was only in Swedish, and after an extensive search, they turned up only one book in English, Madame Bovary. I read it four times but still don’t get the ending.

The only problem was sleeping because I had to share my room with the guy who lost his legs in the accident. He screamed all night because they wouldn’t give him any morphine.

When I was released, Ronny picked me up and I ended up spending another week at his home, sailing off the Swedish west coast. Then I took off for Berlin to get a job since I was broke.

I ended up recovering completely. But to this day whenever I buy a new Brioni suit in Milan, they have to measure me twice because the numbers come out so odd. My bones never returned to their pre-accident position and my right arm is an inch longer than my left. The compound fracture still shows upon X-rays.

And I still have this obsession with tall, blond women with foreign accents.

Go figure.

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

Brighton 1968

Ronny Carlson in Sweden

Notice to Military Subscribers

Diary, Newsletter, Research

To the dozens of subscribers in Afghanistan, Somalia, and Iraq, and the surrounding ships at sea, thank you for your service!

I think it is very wise to use your free time to read my letter and learn about financial markets in preparation for an entry into the financial services when you muster out.

Nobody is going to call you a baby killer and shun you, as they did when I returned from Southeast Asia five decades ago. In fact, employers have been given fantastic tax breaks and other incentives to hire you.

I have but one request. No more subscriptions with .mil addresses, please. The Defense Department, the CIA, the NSA, Homeland Security, and the FBI do not look kindly on private newsletters entering the military network, even the investment kind, even ones from veterans like me.

If you think civilian spam filters are tough, watch out for the military kind! And no, I promise that there are no secret messages embedded with the stock tips. “BUY” really does mean “BUY.” “Sell” means “Sell” too.

If I did not know the higher-ups at these agencies, as well as the Joints Chiefs of Staff, I might be bouncing off the walls in a cell at Guantanamo by now wearing an orange jumpsuit.

It also helps that many of the mid-level officers at these organizations have made a fortune with their meager government retirement funds following my advice. All I can say is that if the Baghdad Stock Exchange ever becomes liquid, I'm going to own it.

Where would you guess the greatest concentration of readers The Diary of a Mad Hedge Fund Trader is found? New York? Nope. London? Wrong. Chicago? Not even close.

Try a ten-mile radius centered on Langley, Virginia, by a large margin.

The funny thing is, half of the subscribing names coming in are Russian. I haven't quite figured that one out yet.

Did we hire the entire KGB at the end of the cold war? If we did, it was a great move. Those guys were good. That includes you, Yuri.

So, keep up the good work, and fight the good fight. But please, only subscribe to my letter with personal Gmail, Yahoo, or Hotmail addresses. That way my life can become a lot more boring.

Oh, and by the way, Langley, you're behind on your bill. Please pay up, pronto, and I don't want to hear whining about any damn budget cuts!

I Want My Mad Hedge Fund Trader!

Where Does Bitcoin Go From Here?

Diary, Newsletter, Research

I first got involved with bitcoin in 2011, when a subscriber wanting to thank me for a spectacular investment performance GAVE me ten Bitcoin. They were then worth $1 each.

Then, I forgot about them. When they appreciated to $100 in 2013, I decided to sell them and take the family out to dinner at The French Laundry, the best restaurant in California’s Napa Valley. I thought I was a genius.

Back then, early in the life of Bitcoin, theft was rampant, and exchange regularly went bankrupt. So cashing in on my windfall wasn’t such an unreasonable thing to do.

That turned out to be the most expensive dinner of my life. If I had kept the ten Bitcoin, they would be worth today over $600,000. Maybe I’m not such a genius after all.

Unless you have been living in a cave for the past five years, you have probably heard of Bitcoin.

By now, you have decided that it is the greatest money-making opportunity of all time or the greatest scam since Carlo Ponzi amassed a fortune selling international postal coupons in 1922.

Some things are certain. Bitcoin will change the financial system beyond all recognition. It will revolutionize banking and investment. And it will vastly accelerate the digitization of the global economy to everyone’s benefit.

After reading this book, you may or may not want to invest in Bitcoin. However, a working knowledge of what it is and how it works will become essential for everyone as the 21st century unfolds.

For s start, Bitcoin, other cryptos, and future cryptos yet to be invented will save $1 trillion a year in transaction costs in the global economy. Who will be the beneficiary of this bounty? You, me, and all the companies we invest in.

It is certain that some form of current or future crypto will be a stepping stone to a global digital currency, not just for emerging nations like El Salvador, but all nations.

And here is the most interesting thing. The eventual impact of crypto on our lives hasn’t even been imagined yet.

Going back to my Defense Department days, I was one of a handful who was present at the birth of the Internet and the similarities are legion. A few clever people were aware of bits and corners of the Internet back in 1989, but nobody had a big picture.

Long term predictions might as well have been science fiction. Insiders were buying up domain names for a dollar each, such as Mcdonalds.com, whitehouse.com, and sex.com. The MacDonald’s site was later sold to the fast-food company for $10 million.

When the Internet began mass adoption in 1995, no one imagined that every taxi company in the world would be out of business in 15 years. New York City taxi medallions once worth $1 million became worthless, prompting many suicides.

Nor did prime downtown apartment owners all over the world expect they could rent their homes for astronomical daily rates through Airbnb (ABNB). They didn’t even expect that a small startup named Netflix (NFLX) would stream videos online, wiping out Blockbuster Video.

Bitcoin was created by Satoshi Nakamoto, a pseudonymous person or team who outlined the technology in a 2008 white paper. Nobody knows for sure. It might even be a US government agency that invented Bitcoin. It’s an appealingly simple concept: bitcoin is digital money that allows for secure, trustless, peer-to-peer transactions on the internet.

Unlike other payment services, like PayPal’s Venmo (PYPL), which rely on the traditional financial system for permission to transfer money and on existing debit/credit accounts, bitcoin is decentralized: any two people, anywhere in the world, can send bitcoin to each other without the involvement of a bank, government, or other institution.

Every transaction involving Bitcoin is tracked on the blockchain, which is like a bank’s ledger, or log of customers’ funds going in and out of the bank. In simple terms, it’s a record of every transaction ever made using bitcoin. Think of blockchain as a chain of blocks of code, each one of which contains millions of lines of code.

Unlike a bank’s ledger, the Bitcoin blockchain is distributed across the entire network. No company, country, or third party is in control of it; and anyone can become part of that network. The Mad Hedge Fund Trader is part of that network, otherwise known as a “node.”

There will only ever be 21 million Bitcoins. This is digital money that cannot be inflated or manipulated in any way.

It isn’t necessary to buy an entire bitcoin: you can buy just a fraction of one if that’s all you want or need. To open my own crypto wallet, I started with an initial buy of one ten thousand of a Bitcoin, or $10. Now, I’m trading in the millions.

Whatever the outcome of Bitcoin is, one thing is certain. None of our lives will be the same.

The Market Outlook for the Week Ahead, or The Good News is Here

Diary, Newsletter, Research

Here’s the good news.

You know those pesky seasonals that have been a drag of the market for the past five months? You know, that sell in May and go away thing?

It’s about to end, vanish, and vaporize.

We are only ten trading days away from when seasonals turn hugely positive on November 1.

On top of that, the pandemic is rapidly receding, the economy reaccelerating, and workers are returning to the workforce. The action Biden took with the west coast ports should unlock the logjam there. It all sounds like a Goldilocks scenario.

The ports issue has nothing to do with the pandemic. The truth is that with 6% GDP growth, the US economy is growing faster than it has ever done before. That means we are buying a lot more stuff, more than our antiquated infrastructure can handle. Unlock the ports, and growth could accelerate even further.

Bitcoin has been on fire as well, doubling since August 1. The focus has been on the launch of the first crypto futures ETF, which may happen as early as today. All of the trade alerts we issued in this space have been total home runs. (Click here for our Bitcoin Letter).

As a result, Bitcoin is within striking range of hitting a new all-time high at $66,000. Break that, and we could see a melt-up straight to $100,000.

Want another reason to be bullish? The Millennial generation is about to inherit $68 trillion by 2030. Guess where that is going? Bitcoin and all other risk assets, as younger investors tend to be more aggressive.

So, what to do about all of this?

Keep doing more of what’s working. Buy financials and Bitcoin and sell short bonds. Wait for tech to bottom out at the next interest rate peak, then load the boat there once again.

Make as much money as you can now because 2022 could be a year of diminished expectations. Stocks might rise by only 15% compared to this year’s 30% torrid rate.

As for Bitcoin, that is a horse of a different color.

CPI Hits 5.4%, and was up 0.4% in September, a high for this cycle. This time, it was food and energy that took the lead. Used car prices, which went ballistic last month, showed a decline. Supply chain problems are wreaking havoc and those with inventory can charge whatever they want. The Fed thinks this is transitory, the bond market doesn’t. Sell rallies in the (TLT).

Weekly Jobless Claims Plunge to 293,000, a new post-pandemic low. With delta in retreat, higher wages are luring people back to work to deal with massive supply chain problems. This may be the beginning of the big drop in unemployment to pre-pandemic levels. Stocks will love it. Buy stocks on dips.

Big Banks Report Blowout Earnings and are firing on all cylinders. The best is yet to come. Interest rates are rising, default rates are falling, profit margins expanding, and the economy is growing at a record rate. Buy (JPM), BAC), and (C) on dips.

The Nonfarm Payroll Bombs in September, coming in at only 194,000. That follows a weak 235,000 in August. The headline Unemployment Rate dropped to a new post-pandemic low of 4.8%, down from a peak of 22%. It’s not a soggy economy that’s causing this, but a shortage of people to hire. Some 10 million workers have gone missing from the American economy, and many may never come back.

Bitcoin Soars to $61,000, a five-month high, putting the previous $66,000 high in range. With ten crypto ETFs waiting in the wings for SEC approval, a flood of money is about to hit the sector. Several countries are now considering the adoption of Bitcoin as a national currency after El Salvador’s move. Keep buying Bitcoin dips. Mad Hedge Bitcoin Letter followers are making a fortune.

Oil (USO) Tops $80, after OPEC limits production increases to 400,000 barrels a day, dragging on the stocks market. Prices are approaching levels that will restrain growth. Pandemic under-investment and distribution problems have triggered a short squeeze. There will be many spikes on the way to zero.

Fed Minutes Show Taper to Start in November, as discussed in the September meeting. They may start with $15 billion a month in fewer bond purchases. The inflation boogie man is getting bigger with the 5.4% print on Tuesday. Sell rallies in the (TLT)

JOLTS Comes in at 10.4 million indicating that the labor shortage is getting more severe. Millions are still staying home for fear of catching covid. There is also a massive skills disparity resulting from decades of under-investment in education.

IMF Cuts Global Growth Forecast to 5.9%. Supply chains, delta, inflation worries, and vaccine access are to blame.

US Dollar (UUP) Hits One-Year High on rising interest rates. This will continue for the foreseeable future. Stand aside from the (UUP) as this is a countertrend trade. We may be only 15 basis points away from an interim peak in rates at 1.76% for the ten-year.

My Ten Year View

My Mad Hedge Global Trading Dispatch saw a heroic +8.91% gain so far in October. My 2021 year-to-date performance soared to 81.51%. The Dow Average was up 15.4% so far in 2021.

Figuring that we are either at, or close to a market bottom, and being a man of my convictions, I kept 90% invested in financial stocks all the wall until the October 15 options expirations. Those include (MS), (GS), (JPM), (BLK), (BRKB), (BAC), and (C).

The payday was big and more than covered earlier in the month stop-losses in (SPY) and (DIS). I quick trip by the Volatility Index (VIX) to $29, then back to $15 was a big help.

That brings my 12-year total return to 511.06%, some 2.00 times the S&P 500 (SPX) over the same period. My 12-year average annualized return now stands at an unbelievable 43.19%, easily the highest in the industry.

My trailing one-year return popped back to positively eye-popping 119.57%. I truly have to pinch myself when I see numbers like this. I bet many of you are making the biggest money of your long lives.

We need to keep an eye on the number of US Coronavirus cases at 45 million and rising quickly and deaths topping 725,000, which you can find here.

The coming week will be slow on the data front.

On Monday, October 18 at 8:15 AM, Industrial Production for September is published. Johnson & Johnson (JNJ) reports.

On Tuesday, October 19 at 8:00 AM, the Housing Starts for September are released. Netflix (NFLX) reports.

On Wednesday, October 20 at 7:30 AM, Crude Oil Stocks are announced. Tesla (TSLA) and IMB (IBM) report.

On Thursday, October 21 at 8:30 AM, Weekly Jobless Claims are announced. At 10:00 AM, Existing Home Sales for September are printed. Alaska Air (ALK) and Southwest Air (LUV) report.

On Friday, October 22 at 8:45 AM, the US Markit Flash Manufacturing and Services PMI is out. American Express (AXP) reports. At 2:00 PM, the Baker Hughes Oil Rig Count are disclosed.

As for me, I normally avoid the diplomatic circuit, as the few non-committal comments and soggy appetizers I get aren’t worth the investment of time.

But I jumped at the chance to celebrate the 70^th anniversary of the founding of the People’s Republic of China with San Francisco consul general Gao Zhansheng.

Happy Birthday, China!

When I casually mention that I survived the Cultural Revolution from 1968 to 1976 and interviewed major political figures like Premier Deng Xiaoping, who launched the Middle Kingdom into the modern era, and his predecessor, Zhou Enlai, modern-day Chinese are enthralled.

It’s like going to a Fourth of July party and letting drop that I palled around with Thomas Jefferson and Benjamin Franklin.

Five minutes into the great hall, and I ran into my old friend Wen. She started out her career with the Chinese Intelligence Service and had made the jump to the Foreign Ministry, as all their best people did. Wen was passing through town with a visiting trade mission.

When I was touring China in the seventies as the guest of the Bank of China, Wen was assigned as my guide and translator, and we kept in touch over the years. I was assigned a bodyguard who doubled as the driver of a tank-like Russian sedan, a Volga.

The Cultural Revolution was on, and while the major cities were safe, we ran the risk of running into a renegade band of xenophobic Red Guards, with potentially fatal consequences.

By the time Wen married, China had already adopted its one-child policy. As much as she wanted more children, she understood the government’s need to adopt such a drastic policy. Without it, the population today would be 1.6 billion, not 1.2 billion, and all of the money that went into buying capital goods would have been spent on food imports instead.

The country would have stagnated at its 1980 per capita income of $100/year. There would have been no Chinese economic miracle. She was very proud of her one son, who was a software engineer at Microsoft (MSFT) in Beijing.

I asked if she recalled our first trip together and a dark cloud came over her face. We were touring a section of Fuzhou in southern China when three policemen marched up. They started shouting at Wen that we were in a restricted section of the city where foreigners were not allowed. They started mercilessly beating her with clubs.

I was about to intercede when my late wife, Kyoko, let go with a blood-curdling tirade in Japanese that froze them in their tracks. I saw from the fear in their faces that she had ignited their wartime fear of Japanese authority and the dreaded Kempeitai, or secret police, and they beat a hasty retreat.

To this day, I’m not exactly sure what Kyoko said. We took Wen back to our hotel room and bandaged her up, putting ice on the giant goose egg on her head. When I left, I gave her my paperback copy of HG Well’s A Short History of the World, which she treasured, as the book was then banned in China.

Wen mentioned that she was approaching the mandatory retirement age of 60, and soon would be leaving the Foreign Service. I suggested she move to San Francisco, which offered a thriving Chinese community.

She laughed. No matter how much prices had fallen, she could never afford anything here on a Chinese civil servant’s salary.

I asked Wen if she still had the book I gave her nearly five decades ago. She said it had become a treasured family heirloom and was being passed down through the generations.

As she smiled, I notice the faint scar on her eyebrow from that unpleasantness so long ago.

Good Luck and Good Trading
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

Kyoko and I in Beijing in 1977

The Death of King Coal

Diary, Newsletter, Research

Virtually all of the research you receive are about stocks you should buy. This report is about stocks you should sell….with both hands as fast as you can.

It is perhaps the most important data release of the last several years that no one noticed. As a result, one of the best shorting opportunities in years is rearing its ugly head.

US coal production hit a 41-year low in 2020. Coal as a percentage of US power output has plunged from 28% to 10% over the last decade to only 437 million short tons. Total coal production has plunged by 64% during this time.

The end result will be a massive shift of wealth out of the major coal-producing regions of the US in the east.

If energy has a proverbial buggy whip maker, it is king coal. And while US coal production has been in free fall, alternatives have been rising sharply, especially solar, now accounting for 20% of US energy consumption.

The implications for the US economy are enormous. I used to be kept awake at night by the wailing whistles of Union Pacific (UNP) engines delivering Wyoming coal to California ports for shipment on to China. They have all disappeared.

Those trains are now moving oil south from Canada and North Dakota to the oil distribution hub in Cushing, Oklahoma, or even all the way to Gulf ports, except that this time they are using a North/South rail line like Norfolk Southern (NSC) rather than the East/West running Union Pacific. Clearly, there are consequences.

In recent the last year, the few listed coal names left have enjoyed a nice rally. This is because of the generalized global “RISK ON” move that has unfolded since the pandemic peaked. The Van Eck Vectors Coal ETF was shut down in 2020 for lack of interest.

It also helps that the incoming Biden administration is unlikely to hammer away at China on trade front as did the previous one. China is far and away the world’s largest buyer of coal.

I believe that in the coming years, the entire US coal industry will go bankrupt and get purchased by the Chinese for pennies on the dollar, or for their outstanding debt alone at a big discount. Needless to say, this makes the entire sector a great candidate for a core short.

Coal is hopelessly uncompetitive with natural gas. Burning gas produces a fraction of the carbon dioxide of coal, and alternatives like wind and solar produce none whatsoever. Coal faces onerous environmental regulation, which will almost certainly get worse under a future administration. US utilities are therefore closing coal-fired power plants as fast as they can.

The outgoing administration was the most pro-coal one in American history. Yet, not a single new coal-fired was built during their reign.

However, coal-dependent communities are not about to turn into ghost towns. They have the great advantage of offering some of the lowest operating costs anywhere in the country. Free rent is becoming common. You'd be nuts to start a new business in the San Francisco Bay Area these days, which has become a haven of the wealthy.

Throw in some decent broadband and they can handily join the global economic community. Yes, you can turn coal miners into programmers, at least the young ones. They all grew up playing video games just like the rest of us.

I Don’t See Any Future in This, Do You?

Is USA Inc. a Short?

Diary, Newsletter, Research

What would happen if I recommended a stock that had no profits, was losing $3 trillion a year and had a net worth of negative $44 trillion?

Chances are, you would cancel your subscription to the Mad Hedge Fund Trader, demand a refund, unfriend me from your Facebook account, and delete me from your Twitter network.

Yet, that is precisely what my former colleague at Morgan Stanley did a few years ago, technology guru Mary Meeker.

Now a partner at venture capital giant Kleiner Perkins, Mary has brought her formidable analytical talents to bear on analyzing the United States of America as a stand-alone corporation.

The bottom line: the challenges are so great they would daunt the best turnaround expert. The good news is that our problems are not hopeless or unsolvable.

The US government was a miniscule affair until the Great Depression and WWII when it exploded in size. Since 1965 when Lyndon Johnson’s “Great Society” began, GDP rose 2.7 times, while entitlement spending leaped 11.1 times.

If current trends continue, the Congressional Budget Office says that entitlements and interest payments will exceed all federal revenues by 2025.

Of course, the biggest problem is with healthcare spending, which will see no solution until healthcare costs are somehow capped. Despite spending more than any other nation, we get one of the worst results, with lagging quality of life, life spans, and infant mortality.

Some 28% of Medicare spending is devoted to a recipient’s final four months of life. Somewhere, there are emergency room cardiologists making a fortune off of this. A night in an American hospital costs 500% more than in any other country.

Social Security is an easier fix. Since it started in 1935, life expectancy has risen by 26% to 78, while the retirement age is up only 3% to 66. Any reforms have to involve raising the retirement age to at least 70 and means testing recipients. If you make $1 billion a year, you don’t need a monthly social security check.

The solutions to our other problems are simple but require political suicide for those making the case.

For example, you could eliminate all tax deductions, including those for home mortgage deductions, charitable contributions, IRA contributions, dependents, and medical expenses, and raise $1 trillion a year. That would only make a dent in our current $3 trillion a year budget deficit.

Mary reminds us that government spending on technology laid the foundations of our modern economy. If the old DARPANET had not been funded during the sixties, Google, Yahoo, eBay, Facebook, Cisco, and Oracle would be missing today. Tech generates about 50% of all the profits in the US today.

Global Positioning Systems (GPS) were also invented by and is still run by the government and has been another great wellspring of profits. (I got to use it during the 1980s while flying across Greenland when it was still top secret. The Air Force base that ran it was called “Sob Story”).

There are a few gaping holes in Mary’s “thought experiment”. I doubt she knows that the Treasury Department carries the value of America’s gold reserves, the world’s largest at 8,965 tons worth $832 billion, at only $34 an ounce, versus an actual current market price of $1,861. By the way, the stash has only been seen once in 50 years.

Nor is she aware that our ten aircraft carriers are valued at $1 each, against an actual cost of $10 billion each in today’s dollars. And what is Yosemite worth on the open market, or Yellowstone, or the Grand Canyon? These all render her net worth calculations meaningless.

No, the USA is not a short. In fact, it is a long term scream long. The arguments as to why show up in the Diary of a Mad Hedge Fund Trader every day of the year. During the publishing run of this letter, I have seen the Dow Average soar from 600 to 30,000.

How could I think otherwise?

Mary expounds at length on her analysis, which you can buy in a book entitled USA Inc. at Amazon by clicking here.

Worth More Than a Dollar?

Many Thanks for Your Concerns

Diary, Newsletter, Research

Sorry for the late letter this morning. I received a call from Cal Fires yesterday asking for a spotter pilot near the Lake Tahoe region.

So, the early AM found me flying a wide circle around the Sierra foothills with a pair of binoculars and a GPS calling in new smoke plumes to Central Command in Sacramento.

When you get near the big fires, the turbulence is incredible and you wonder if the plane can hold together. These are things better observed from a distance.

Thank you, Clyde Cessna for building such great aircraft!

Thankfully, the kids are old enough to drive themselves to school. I gave them $20 for dinner in case I didn’t come back.

Don’t worry about me. I evacuated out of Lake Tahoe weeks ago, as even back then, the smoke was so thick that the air was unbreathable. All of Lake Tahoe has now been evacuated, except for Incline Village at the northern tip.

There are now 70 bulldozers building a giant fire break at South Lake Tahoe. The 25,000 residents have been moved to emergency evacuation centers throughout northern Nevada.

The casinos are all closed but the hotels are open to house firefighting and support teams. Some teams have been lost to Covid. The water bombers are knocking the daylights out of the West Shore.

Welcome to the nightmare scenario. This is a disaster on a biblical scale.

At home, we are watching the TV, amazed at videos of 600-pound bears on fire running out of the mountains.

In the meantime, I have received dozens of emails, phone calls, and text messages from subscribers asking about my safety.

Don’t worry, all is well here out in San Francisco. But thanks for asking!

The View from Incline Village, Nevada