Mad Hedge Fund Trader

2022 Annual Asset Class Review

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I am once again writing this report from a first-class sleeping cabin on Amtrak’s legendary California Zephyr.

By day, I have two comfortable seats facing each other next to a panoramic window. At night, they fold into two bunk beds, a single and a double. There is a shower, but only Houdini could navigate it.

I am anything but Houdini, so I go downstairs to use the larger public hot showers. They are divine.

 

 

We are now pulling away from Chicago’s Union Station, leaving its hurried commuters, buskers, panhandlers, and majestic great halls behind. I love this building as a monument to American exceptionalism.

I am headed for Emeryville, California, just across the bay from San Francisco, some 2,121.6 miles away. That gives me only 56 hours to complete this report.

I tip my porter, Raymond, $100 in advance to make sure everything goes well during the long adventure and to keep me up-to-date with the onboard gossip.

The rolling and pitching of the car is causing my fingers to dance all over the keyboard. Microsoft’s Spellchecker can catch most of the mistakes, but not all of them.

 

 

As both broadband and cell phone coverage are unavailable along most of the route, I have to rely on frenzied Internet searches during stops at major stations along the way to Google obscure data points and download the latest charts.

You know those cool maps in the Verizon stores that show the vast coverage of their cell phone networks? They are complete BS.

Who knew that 95% of America is off the grid? That explains so much about our country today.

I have posted many of my better photos from the trip below, although there is only so much you can do from a moving train and an iPhone 12X pro.

Here is the bottom line which I have been warning you about for months. In 2022, you are going to have to work twice as hard to earn half as much money with double the volatility.

It’s not that I’ve turned bearish. The cause of the next bear market, a recession, is at best years off. However, we are entering the third year of the greatest bull market of all time. Expectations have to be toned down and brought back to earth. Markets will no longer be so strong that they forgive all mistakes, even mine.

2022 will be a trading year. Play it right, and you will make a fortune. Get lazy and complacent and you’ll be lucky to get out with your skin still attached.

If you think I spend too much time absorbing conspiracy theories or fake news from the Internet, let me give you a list of the challenges I see financial markets are facing in the coming year:

 

 

The Ten Key Variables for 2022

1) How soon will the Omicron wave peak?
2) Will the end of the Fed’s quantitative easing knock the wind out of the bond market?
3) Will the Russians invade the Ukraine or just bluster as usual?
4) How much of a market diversion will the US midterm elections present?
5) Will technology stocks continue to dominate, or will domestic recovery, and value stocks take over for good?
6) Can the commodities boom get a second wind?
7) How long will the bull market for the US dollar continue?
8) Will the real estate boom continue, or are we headed for a crash?
9) Has international trade been permanently impaired or will it recover?
10) Is oil seeing a dead cat bounce or is this a sustainable recovery?

 

 

 

The Thumbnail Portfolio

Equities – buy dips
Bonds – sell rallies
Foreign Currencies – stand aside
Commodities – buy dips
Precious Metals – stand aside
Energy – stand aside
Real Estate – buy dips
Bitcoin – Buy dips

 

 

1) The Economy 

What happens after a surprise variant takes Covid cases to new all-time highs, the Fed tightens, and inflation soars?

Covid cases go to zero, the Fed flip flops to an ease and inflation moderates to its historical norm of 3% annually.

It all adds up to a 5% US GDP growth in 2022, less than last year’s ballistic 7% rate, but still one of the hottest growth rates in history.

If Joe Biden’s build-back batter plan passes, even in diminished form, that could add another 1%.

Once the supply chain chaos resolves inflation will cool. But after everyone takes delivery of their over orders conditions could cool.

This sets up a Goldilocks economy that could go on for years: high growth, low inflation, and full employment. Help wanted signs will slowly start to disappear. A 3% handle on Headline Unemployment is within easy reach.

 

A Rocky Mountain Moose Family

 

2) Equities (SPX), (QQQ), (IWM) (AAPL), (XLF), (BAC)

The weak of heart may want to just index and take a one-year cruise around the world instead in 2022 (here's the link for Cunard).

So here is the perfect 2022 for stocks. A 10% dive in the first half, followed by a rip-roaring 20% rally in the second half. This will be the year when a big rainy-day fund, i.e., a mountain of cash to spend at market bottoms, will be worth its weight in gold.

That will enable us to load up with LEAPS at the bottom and go 100% invested every month in H2.

That should net us a 50% profit or better in 2022, or about half of what we made last year.

Why am I so cautious?

Because for the first time in seven years we are going to have to trade with a headwind of rising interest rates. However, I don’t think rates will rise enough to kill off the bull market, just give traders a serious scare.

The barbell strategy will keep working. When rates rise, financials, the cheapest sector in the market, will prosper. When they fall, Big Tech will take over, but not as much as last year.

The main support for the market right now is very simple. The investors who fell victim to capitulation selling that took place at the end of November never got back in. Shrinking volume figures prove that. Their efforts to get back in during the new year could take the S&P 500 as high as $5,000 in January.

After that the trading becomes treacherous. Patience is a virtue, and you should only continue new longs when the Volatility Index (VIX) tops $30. If that means doing nothing for months so be it.

We had four 10% corrections in 2021. 2022 will be the year of the 10% correction.

Energy, Big Tech, and financials will be the top-performing sectors of 2022. Big Tech saw a 20% decline in multiples in 2022 and will deliver another 30% rise in earnings in 2022, so they should remain at the core of any portfolio.

It will be a stock pickers market. But so was 2021, with 51% of S&P 500 performance coming from just two stocks, Tesla (TSLA) and Alphabet (GOOGL).

However, they are already so over-owned that they are prone to dead periods as long as eight months, as we saw last year. That makes a multipronged strategy essential.

 

Frozen Headwaters of the Colorado River

 

3) Bonds (TLT), (TBT), (JNK), (PHB), (HYG), (MUB), (LQD)

Amtrak needs to fill every seat in the dining car to get everyone fed on time, so you never know who you will share a table with for breakfast, lunch, and dinner.

There was the Vietnam Vet Phantom Jet Pilot who now refused to fly because he was treated so badly at airports. A young couple desperately eloping from Omaha could only afford seats as far as Salt Lake City. After they sat up all night, I paid for their breakfast.

A retired British couple was circumnavigating the entire US in a month on a “See America Pass.” Mennonites are returning home by train because their religion forbade automobiles or airplanes.

The national debt ballooned to an eye-popping $30 trillion in 2021, a gain of an incredible $3 trillion and a post-World War II record. Yet, as long as global central banks are still flooding the money supply with trillions of dollars in liquidity, bonds will not fall in value too dramatically. I’m expecting a slow grind down in prices and up in yields.

The great bond short of 2021 never happened. Even though bonds delivered their worst returns in 19 years, they still remained nearly unchanged. That wasn’t good enough for the many hedge funds, which had to cover massive money-losing shorts into yearend.

Instead, the Great Bond Crash will become a 2022 business. This time, bonds face the gale force headwinds of three promised interest rates hikes. The year-end government bond auctions were a complete disaster.

Fed borrowing continues to balloon out of control. It’s just a matter of time before the last billion dollars in government borrowing breaks the camel’s back.

That makes a bond short a core position in any balanced portfolio. Don’t get lazy. Make sure you only sell a rally lest we get trapped in a range, as we did for most of 2021.

 

A Visit to the 19th Century

 

4) Foreign Currencies (FXE), (EUO), (FXC), (FXA), (YCS), (FXY), (CYB)

For the first time in ages, I did no foreign exchange trades last year. That is a good thing because I was wrong about the direction of the dollar for the entire year.

Sometimes, passing on bad trades is more important than finding good ones.

I focused on exploding US debt and trade deficits undermining the greenback and igniting inflation. The market focused on delta and omicron variants heralding new recessions. The market won.

The market won’t stay wrong forever. Just as bond crash is temporarily in a holding pattern, so is a dollar collapse. When it does occur, it will happen in a hurry.

 

5) Commodities (FCX), (VALE), (DBA)

The global synchronized economic recovery now in play can mean only one thing, and that is sustainably higher commodity prices.

The twin Covid variants put commodities on hold in 2021 because of recession fears. So did the Chinese real estate slowdown, the world’s largest consumer of hard commodities.

The heady days of the 2011 commodity bubble top are now in play. Investors are already front running that move, loading the boat with Freeport McMoRan (FCX), US Steel (X), and BHP Group (BHP).

Now that this sector is convinced of an eventual weak US dollar and higher inflation, it is once more the apple of traders’ eyes.

China will still demand prodigious amounts of imported commodities once again, but not as much as in the past. Much of the country has seen its infrastructure build out, and it is turning from a heavy industrial to a service-based economy, like the US. Investors are keeping a sharp eye on India as the next major commodity consumer.

And here’s another big new driver. Each electric vehicle requires 200 pounds of copper and production is expected to rise from 1 million units a year to 25 million by 2030. Annual copper production will have to increase 11-fold in a decade to accommodate this increase, no easy task, or prices will have to ride.

The great thing about commodities is that it takes a decade to bring new supply online, unlike stocks and bonds, which can merely be created by an entry in an excel spreadsheet. As a result, they always run far higher than you can imagine.

Accumulate commodities on dips.

 

Snow Angel on the Continental Divide

 

6) Energy (DIG), (RIG), (USO), (DUG), (UNG), (USO), (XLE), (AMLP)

Energy may be the top-performing sector of 2022. But remember, you will be trading an asset class that is eventually on its way to zero.

However, you could have several doublings on the way to zero. This is one of those times.

The real tell here is that energy companies are drinking their own Kool-Aid. Instead of reinvesting profits back into their new exploration and development, as they have for the last century, they are paying out more in dividends.

There is the additional challenge in that the bulk of US investors, especially environmentally friendly ESG funds, are now banned from investing in legacy carbon-based stocks. That means permanently cheap valuations and shares prices for the energy industry.

Energy stocks are also massively under-owned, making them prone to rip-you-face-off short squeezes. Energy now counts for only 3% of the S&P 500. Twenty years ago it boasted a 15% weighting.

The gradual shut down of the industry makes the supply/demand situation more volatile. Therefore, we could top $100 a barrel for oil in 2022, dragging the stocks up kicking and screaming all the way.

Unless you are a seasoned, peripatetic, sleep-deprived trader, there are better fish to fry.

 

 

7) Precious Metals (GLD), (DGP), (SLV), (PPTL), (PALL)

The train has added extra engines at Denver, so now we may begin the long laboring climb up the Eastern slope of the Rocky Mountains.

On a steep curve, we pass along an antiquated freight train of hopper cars filled with large boulders.

The porter tells me this train is welded to the tracks to create a windbreak. Once, a gust howled out of the pass so swiftly, that it blew a passenger train over on its side.

In the snow-filled canyons, we saw a family of three moose, a huge herd of elk, and another group of wild mustangs. The engineer informs us that a rare bald eagle is flying along the left side of the train. It’s a good omen for the coming year.

We also see countless abandoned 19th century gold mines and the broken-down wooden trestles leading to them, relics of previous precious metals booms. So, it is timely here to speak about the future of precious metals.

Fortunately, when a trade isn’t working, I avoid it. That certainly was the case with gold last year.

2021 was a terrible year for precious metals. With inflation soaring, stocks volatile, and interest rates going nowhere, gold had every reason to rise. Instead, it fell for almost all of the entire year.

Bitcoin stole gold’s thunder, sucking in all of the speculative interest in the financial system. Jewelry and industrial demand was just not enough to keep gold afloat.

This will not be a permanent thing. Chart formations are starting to look encouraging, and they certainly win the price for a big laggard rotation. So, buy gold on dips if you have a stick of courage on you.

Would You Believe This is a Blue State?

 

8) Real Estate (ITB), (LEN)

The majestic snow-covered Rocky Mountains are behind me. There is now a paucity of scenery, with the endless ocean of sagebrush and salt flats of Northern Nevada outside my window, so there is nothing else to do but write. 

My apologies in advance to readers in Wells, Elko, Battle Mountain, and Winnemucca, Nevada.

It is a route long traversed by roving banks of Indians, itinerant fur traders, the Pony Express, my own immigrant forebearers in wagon trains, the transcontinental railroad, the Lincoln Highway, and finally US Interstate 80, which was built for the 1960 Winter Olympics at Squaw Valley.

Passing by shantytowns and the forlorn communities of the high desert, I am prompted to comment on the state of the US real estate market.

There is no doubt a long-term bull market in real estate will continue for another decade, although from here prices will appreciate at a 5%-10% slower rate.

There is a generational structural shortage of supply with housing which won’t come back into balance until the 2030s.

There are only three numbers you need to know in the housing market for the next 20 years: there are 80 million baby boomers, 65 million Generation Xer’s who follow them, and 86 million in the generation after that, the Millennials.

The boomers have been unloading dwellings to the Gen Xers since prices peaked in 2007. But there are not enough of the latter, and three decades of falling real incomes mean that they only earn a fraction of what their parents made. That’s what caused the financial crisis.

If they have prospered, banks won’t lend to them. Brokers used to say that their market was all about “location, location, location.” Now it is “financing, financing, financing.” Imminent deregulation is about to deep-six that problem.

There is a happy ending to this story.

Millennials now aged 26-44 are now the dominant buyers in the market. They are transitioning from 30% to 70% of all new buyers of homes.

The Great Millennial Migration to the suburbs and Middle America has just begun. Thanks to Zoom, many are never returning to the cities. So has the migration from the coast to the American heartland. 

That’s why Boise, Idaho was the top-performing real estate market in 2021, followed by Phoenix, Arizona. Personally, I like Reno, Nevada, where Apple, Google, Amazon, and Tesla are building factories as fast as they can. 

As a result, the price of single-family homes should rocket during the 2020s, as they did during the 1970s and the 1990s when similar demographic forces were at play.

This will happen in the context of a coming labor shortfall, soaring wages, and rising standards of living.

Rising rents are accelerating this trend. Renters now pay 35% of their gross income, compared to only 18% for owners, and less, when multiple deductions and tax subsidies are taken into account. Rents are now rising faster than home prices.

Remember, too, that the US will not have built any new houses in large numbers in 13 years. The 50% of small home builders that went under during the crash aren’t building new homes today.

We are still operating at only a half of the peak rate. Thanks to the Great Recession, the construction of five million new homes has gone missing in action.

That makes a home purchase now particularly attractive for the long term, to live in, and not to speculate with.

You will boast to your grandchildren how little you paid for your house, as my grandparents once did to me ($3,000 for a four-bedroom brownstone in Brooklyn in 1922), or I do to my kids ($180,000 for a two-bedroom Upper East Side Manhattan high rise with a great view of the Empire State Building in 1983).

That means the major homebuilders like Lennar (LEN), Pulte Homes (PHM), and KB Homes (KBH) are a buy on the dip.

Quite honestly, of all the asset classes mentioned in this report, purchasing your abode is probably the single best investment you can make now. It’s also a great inflation play.

If you borrow at a 3.0% 30-year fixed rate, and the long-term inflation rate is 3%, then, over time, you will get your house for free.

How hard is that to figure out? That math degree from UCLA is certainly earning its keep.

 

Crossing the Bridge to Home Sweet Home

 

9) Bitcoin

It’s not often that new asset classes are made out of whole cloth. That is what happened with Bitcoin, which, in 2021, became a core holding of many big institutional investors.

But get used to the volatility. After doubling in three months, Bitcoin gave up all its gains by year-end. You have to either trade Bitcoin like a demon or keep your positions so small you can sleep at night.

By the way, right now is a good place to establish a new position in Bitcoin.

 

10) Postscript

We have pulled into the station at Truckee in the midst of a howling blizzard.

My loyal staff has made the ten-mile trek from my beachfront estate at Incline Village to welcome me to California with a couple of hot breakfast burritos and a chilled bottle of Dom Perignon Champagne, which has been resting in a nearby snowbank. I am thankfully spared from taking my last meal with Amtrak.

 

 

After that, it was over legendary Donner Pass, and then all downhill from the Sierras, across the Central Valley, and into the Sacramento River Delta.

Well, that’s all for now. We’ve just passed what was left of the Pacific mothball fleet moored near the Benicia Bridge (2,000 ships down to six in 50 years). The pressure increase caused by a 7,200-foot descent from Donner Pass has crushed my plastic water bottle. Nice science experiment!

The Golden Gate Bridge and the soaring spire of Salesforce Tower are just around the next bend across San Francisco Bay.

A storm has blown through, leaving the air crystal clear and the bay as flat as glass. It is time for me to unplug my Macbook Pro and iPhone 13 Pro, pick up my various adapters, and pack up.

We arrive in Emeryville 45 minutes early. With any luck, I can squeeze in a ten-mile night hike up Grizzly Peak and still get home in time to watch the ball drop in New York’s Times Square on TV.

I reach the ridge just in time to catch a spectacular pastel sunset over the Pacific Ocean. The omens are there. It is going to be another good year.

I’ll shoot you a Trade Alert whenever I see a window open at a sweet spot on any of the dozens of trades described above.

Good luck and good trading in 2022!

John Thomas
The Mad Hedge Fund Trader

 

 

The Omens Are Good for 2022!

Mad Hedge Fund Trader

The Market Outlook for the Week Ahead, or The Triple Virus Attack

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Those who were bemoaning the lack of market volatility certainly had their wishes fulfilled last week and then some. Volatility attacked the $30 level remorselessly like a hoard of barbarians. But it didn’t close there.

We actually got three Omicrons last week, the virus kind, the Fed kind, and the jobs variety, with the November Nonfarm Payroll report coming in at a paltry 210,000. Yet, the Headline unemployment rate cratered to a new post-pandemic low, from 4.6% to 4.2%. Go figure.

The Fed’s move amounts to a sudden dramatic lean towards a hawkish stance. The word “transitory” has hopefully been banished from the Fed lexicon for good.

The final flush on Friday no doubt cleansed the market like a colonoscopy, vaporizing any bad positions from yearend reports. That’s why the reopening stocks like hotels, cruise lines, airlines, and casinos were sold down so hard and bounced back with equal vigor.

Last week’s violence cleared the way for the yearend rally to continue, with the final destination a close at the year’s top tic all-time high.

Of course, everyone knows interest rates are rising except the bond market, where prices seemed to magically levitate, keeping interest rates low. Rumors of hedge funds covering shorts to bury losses abound. This is the trade that everyone universally got wrong.

I think the incredible move on Friday was due to hedge funds stampeding to cover money-losing short positions ahead of embarrassing yearend reports.

From here on, trading should get easier as the smarter money departs for Hawaii, the Caribbean, Aspen, or in this case Lake Tahoe, where the pristine waters and ski slopes beckon. Volume and volatility should bleed out from here.

I’m sticking with my long tech, long financials, and short bond strategy until payday, which should be soon.

The Nonfarm Payroll Report Disappoints in November, coming in at 210,000. Over 600,000 was expected. The Headline Unemployment Rate fell to 4.2%, a new post pandemic low. There was a lot of confusing and contradictory data this month. Professional & Business Services added 90,000, Couriers & Messengers 26,800, and Leisure & Hospitality 23,000. But total Employment added 1.1 million. Government lost 25,000 jobs.

 

 

How Real is Omicron? On Friday, the market viewed it as a delta variant 2.0. I don’t think so. If anything, it shows how effective the global early response system has become to new variants. South Africa caught omicron with only a handful of cases and the borders started closing immediately. There is no indication that Omicron can’t be stopped by vaccination. It will only kill the anti-vaxers. It means we’re safer, not more at risk, and the economic recovery and the bull market should continue.

Oil Plunges Down 13% in a Day, breaking $70, as fears of a new variant-caused recession run rampant. It was a “sell everything” selloff.

Biden Says No Travel Restrictions or Lockdowns, in response to the new Covid Omicron variant. Therefore, no negative response for the stock market. It was worth a 350-point rally yesterday.

Pending Home Sales Soar by 7.5% in October. The Midwest showed the strongest sales, reflecting a mass migration to cheaper homes from the coasts.

ADP Comes in Red Hot at 534,000. Services dominated and Leisure & Hospitality picked up a massive 136,000. Large companies led the hiring binge. It augers well for the Friday Nonfarm Payroll Report.

More Taper Sooner was the bottom line on Powell’s comments last week. The Fed governor said in testimony in front of the Senate Banking Committee that inflation is no longer “transitory”, implying that hotter inflation numbers are to come. Yikes! Finally, a nod to reality! Stocks tanked 600 points on the comment. Bonds should crash but strangely are holding up. Watch this space. The news could give us a tradable bottom for all asset classes.

ISM Manufacturing Improves, from 60.8 to 61.1 in November. It’s more proof that the economy is expanding.

Weekly Jobless Claims Still Hot at 222,000, and continuing claims fell below 2 million, a new post-pandemic low. No recession here.


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!

With the pandemic-driven meltdown on Friday, my December month-to-date performance plunged to -4.58%. My 2021 year-to-date performance took a haircut to 72.18%. The Dow Average is up 13.00% so far in 2021.

I used the collapse in interest rates to add a 20% position in financial stocks, Goldman Sachs (GS), and Bank of America (BAC).  I got hammered with my existing short in bonds, with the ten-year yield plunging to an eye-popping 1.37%.

That brings my 12-year total return to 494.73%, some 2.00 times the S&P 500 (SPX) over the same period. My 12-year average annualized return has ratcheted up to 41.22% easily the highest in the industry.

We need to keep an eye on the number of US Coronavirus cases at 49 million and rising quickly and deaths topping 788,000, which you can find here.

The coming week will be all about the inflation numbers.

On Monday, December 6, nothing of note takes place as we move into the yearend slowdown.

On Tuesday, December 7 at 5:30 AM EST, the US Balance of Trade is released for October. We will remember Pearl Harbor Day when the US Navy lost 3,000 men.

On Wednesday, December 8 at 5:15 AM, the JOLTS Job Openings for October are published.

On Thursday, December 9 at 8:30 AM, the Weekly Jobless Claims are disclosed.

On Friday, December 10 at 5:30 AM EST the US Inflation Rate for November is printed. At 2:00 PM, the Baker Hughes Oil Rig Count is out.

As for me, occasionally I tell close friends that I hitchhiked across the Sahara Desert alone when I was 16 and am met with looks that are amazed, befuddled, and disbelieving, but I actually did it in the summer of 1968.

I had spent two months hitchhiking from a hospital in Sweden all the way to my ancestral roots in Monreale, Sicily, the home of my Italian grandfather. My next goal was to visit my Uncle Charles, who was stationed at the Torreon Air Force base outside of Madrid, Spain.

I looked at my Michelin map of the Mediterranean and quickly realized that it would be much quicker to cut across North Africa than hitching all the way back up the length of Italy, cutting across the Cote d’Azur, where no one ever picked up hitchhikers, then all the way down to Madrid, where the people were too poor to own cars.

So one fine morning found me taking deck passage on a ferry from Palermo to Tunis. From here on, my memory is hazy and I remember only a few flashbacks.

Ever the historian, even at age 16, I made straight for the Carthaginian ruins where the Romans allegedly salted the earth to prevent any recovery of a country they had just wasted. Some 2,000 years later, it worked as there was nothing left but an endless sea of scattered rocks.

At night, I laid out my sleeping bag to catch some shut-eye. But at 2:00 AM, someone tried to bash my head in with a rock. I scared them off but haven’t had a decent night of sleep since.

The next day, I made for the spectacular Roman ruins at Leptus Magna on the Libyan coast. But Muamar Khadafi pulled off a coup d’état earlier and closed the border to all Americans. My visa obtained in Rome from King Idris was useless.

I used to opportunity to hitchhike over Kasserine Pass into Algeria, where my uncle served under General Patton in WWII. US forces suffered an ignominious defeat until General Patton took over the army 1n 1943. Some 25 years later, the scenery was still littered with blown-up tanks, destroyed trucks, and crashed Messerschmitt’s.

Approaching the coastal road, I started jumping trains headed west. While officially the Algerian Civil War ended in 1962, in fact, it was still going on in 1968. We passed derailed trains and smashed bridges. The cattle were starving. There was no food anywhere.

At night, Arab families invited me to stay over in their mud brick homes as I always traveled with a big American Flag on my pack. Their hospitality was endless, and they shared what little food they had.

As a train pulled into Algiers, a conductor caught me without a ticket. So, the railway police arrested me and on arrival took me to the central Algiers prison, not a very nice place. After the police left, the head of the prison took me to a back door, opened it, smiled, and said “si vou plais”. That was all the French I ever needed to know. I quickly disappeared into the Algiers souk.

As we approached the Moroccan border, I saw trains of camels 1,000 animals long, rhythmically swaying back and forth with their cargoes of spices from central Africa. These don’t exist anymore, replaced by modern trucks.

Out in the middle of nowhere, bullets started flying through the passenger cars splintering wood. I poked my Kodak Instamatic out the window in between volleys of shots and snapped a few pictures.

The train juddered to a halt and robbers boarded. They shook down the passengers, seizing whatever silver jewelry and bolts of cloth they could find.

When they came to me, they just laughed and moved on. As a ragged backpacker I had nothing of interest for them.

The train ended up in Marrakesh on the edge of the Sahara and the final destination of the camel trains. It was like visiting the Arabian nights. The main Jemaa el-Fna square was amazing, with masses of crafts for sale, magicians, snake charmers, and men breathing fire.

Next stop was Tangiers, site of the oldest foreign American embassy, which is now open to tourists. For 50 cents a night, you could sleep on a rooftop under the stars and pass the pipe with fellow travelers which contained something called hashish.

One more ferry ride and I was at the British naval base at the Rock of Gibraltar and then on a train for Madrid. I made it to the Torreon base main gate where a very surprised master sergeant picked up half-starved, rail-thin, filthy nephew and took me home. Later, Uncle Charles said I slept for three days straight. Since I had lice, Charles shaved my head when I was asleep. I fit right in with the other airmen.

I woke up with a fever, so Charles took me to the base clinic. They never figured out what I had. Maybe it was exhaustion, maybe it was prolonged starvation. Perhaps it was something African. Possibly, it was all one long dream.

Afterwards, my uncle took for to the base commissary where I enjoyed my first cheeseburger, French fries, and chocolate shake in many months. It was the best meal of my life and the only cure I really needed.

I have pictures of all this which are sitting in a box somewhere in my basement. The Michelin map sits in a giant case of old, used maps that I have been collecting for 60 years.
 
Stay Healthy.

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

 

The Mediterranean in 1968

 

 

 

 

 

 

 

 

Mad Hedge Fund Trader

December 1 Biweekly Strategy Webinar Q&A

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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

 

 

 

 

 

 

Mad Hedge Fund Trader

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

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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!

 

Mad Hedge Fund Trader

How to Handle the Friday November 19 Options Expiration

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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

 

Mad Hedge Fund Trader

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

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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

 

 

 

 

 

 

 

Mad Hedge Fund Trader

Notice to Military Subscribers

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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!

Mad Hedge Fund Trader

Where Does Bitcoin Go From Here?

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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.

 

 

 

 

 

 

 

 

 

 

 

 

 

Mad Hedge Fund Trader

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

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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

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 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 70th 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

 

 

 

 

 

 

 

Mad Hedge Fund Trader

The Death of King Coal

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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?

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