April 5, 2019

Global Market Comments
April 5, 2019
Fiat Lux

Featured Trade:
(SPY), (VIX), (TSLA), (BA), (FXB), (AMZN), (IWM), (EWU)

April 3 Biweekly Strategy Webinar Q&A

Below please find subscribers’ Q&A for the Mad Hedge Fund Trader April 3 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!

Q: I’ve gotten a lot of newsletters but not many trades. Why is that?

A: Perfect trades do not happen every day of the year. They happen a few times a year and they tend to bunch up. Most time in the market is spent waiting for an entry point and then piling on 5 or 10 trades rapidly. We’re letting our profits run and waiting for new trades to open up, so just be patient and we’ll get you more trades than you can chew on.

If you have to ask this question, you are probably overtrading. The goal is to make yourself rich, not your broker. The other newsletters that offer a trade alert every day don’t publish their performance as I do and lose money for their followers hand over fist.

Q: Are we on track for a market peak in May?

A: Yes; if we keep climbing up, eventually hitting new highs this month, then we are setting up perfectly for a pretty sharp pullback around May 10th. That would be a good time to get rid of all your longs and put on some short positions, certainly deep in the money put spreads—we’ll be knocking quite a few of those out in the end of April/beginning of May.

Q: Are you worried about the Russell 2000 (IWM) climb?

A: I’m not. If you look at the chart, every up move has been weak, and every down move has been strong. Looking at the chart, it’s still in a clear downtrend dragging all the other markets, and this is because small-cap stocks do poorly in recessions or market pullbacks.

Q: How severe and how long do you see the coming bear market being?

A: If history repeats itself, then it’s going to be rather shallow. The last move down was only three months long and that stunned a lot of people who were expecting a more extreme pullback. I don’t see conditions in place that indicate a radically deep pullback—25% at most and 6-12 months in duration, which won’t be enough to liquidate your portfolio and justify the costs of getting out now and trying to get back in later. They key thing is that there are no systemic threats to the market other than the exploding levels of government borrowing.

Q: If you had the Tesla (TSLA) April $310-$330 vertical bear put spread, would you keep it?

A: Probably, yes, because you have a $15 cushion against a good news surprise and a lot less at risk. I got out of my Tesla (TSLA) April $300-$320 vertical bear put spread because my safety cushion shrank to only $5 and the risk/reward turned sharply against me.

Q: Should we be buying the Volatility Index (VIX) here for protection?

A: Not yet; we still have enough momentum in the stock market to hit all-time highs. After that, you really want to start looking at the VIX hard, especially if we get down to the $12 level. So good thinking, just not quite yet—as we know in the market, timing is everything.

Q: Are you getting nervous about the short Disney (DIS) calls?

A: I’m always nervous, every day of the year about every position, and yes, I’m watching them. You are paying me to be nervous so you can go play golf. We may take a small hit on the calls if the stock keeps rising, but that will be offset by a bigger gain on the call spread we’re long against.

Q: When is the quarterly option expiration?

A: It was on March 15 and the next one is June 21. This is an off-month expiration coming up on April 18th, and that’s only 12 trading days away.

Q: If you get a hard Brexit (FXB) in the next few weeks, what will happen to the pound?

A:  It’s risen about 10% in the last few weeks on hopes of a Brexit outright failure. If that doesn't happen, the pound will get absolutely slaughtered.

Q: If China (FXI) is stimulating their economy, will that eventually help the U.S.?

A: Stimulus anywhere in the world always gets back to the U.S. because we’re the world’s largest market. So, yes, it will be positive.

Q: Would you consider trading UK stocks under Brexit fail?

A: Yes, and there is a UK stock ETF, the iShares MSCI United Kingdom ETF(EWU) and you’re looking at a 20%-25% rise in the British stock market if they completely give up on Brexit or just have another election.

 Q: What are your thoughts on the China trade war?

A: The Chinese are in no rush to settle; that’s why we keep missing deadline after deadline and all the positive rumors are coming from the U.S. side. It’s looking more like a photo op trade deal than an actual one.

 Q: If we get a top in stocks in May, how far do you expect (SPY) to go?

A: Not far; maybe 5% or 10%, you just have to allow all the recent players who got in to get out again, and if the economy slows to, say, a 1% rate in Q1, that’s not a panicky type market. That’s a 10% correction market and what we’ll probably get. If the economy then improves in Q2 and Q3, then we may go back up again to new highs. We seem to have a three quarter a year stock market and therefore, a three quarter a year stock market. Q1 is always a write off for the economy.

Q: Do you still like Amazon (AMZN)?

A: Absolutely, yes—it’s going to new highs. And it’s also starting to make a move on the food market, cutting prices at Whole Foods, which it owns, for the 3rd time this year. So, it’s moving on several fronts now, including healthcare. There’s at least a double in the company long term from these levels, and a triple if they break the company up.

Q: If you bought the stock in Boeing (BA) instead of the option spread, would you stay long?

A: I would, yes. It’s a great company and there's an easy 10% move in that stock once they get the 737 MAX back off the ground again which they should do within the month.

Q: What do you think about food stocks with big name brands like Hershey (HSY)?

A: I’ve never really liked the food industry. It’s really a low margin industry. You’re looking at 2% a year earnings growth against the big food companies vs 20% a year growth in tech which is why I stick with tech. My advice is always to focus on the few sectors that are the best 5% of the market and leave the dross for the index funds.

 Q: With the current bullish wave in the market (SPY), what sector/stocks do you think have the most momentum to break out another 10% to 15% gain in the next one to three months?

A: The next 10% to 15% in the market will only happen after we drop 5-10% first. I believe this is the last 5% move of the China trade deal rally and after that, markets will fall or go to sleep for six months.

Q:  Do you expect 2019 to be more like 2018 or 2017? We know you are predicting the (SPX) will hit an all-time high of 3000 in 2019. Do you think it zooms up to a blow-off top in Q2/Q3 and then pulls back in Q4, like 2018?  Or, do you expect a steadier ascent with minor pullbacks along the way (like 2017), closing at or near the year's highs on Dec 31? This guidance will really help.

A: I think we have made most of the gains for 2019. Only the tag ends are lifted. We have already hit the upside targets for most strategists, and mine is only 7% higher. After that, there is a whole lot of boring ahead of us for 2019 and the (VIX) should drop to $9. After complaining about horrendous market volatility in December, traders will beg for volatility.

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






March 25, 2019

Global Market Comments
March 25, 2019
Fiat Lux

Featured Trade:
(SPY), (TLT), (BIIB), (GOOG), (BA), (AAPL), (VIX), (USO)

The Market Outlook for the Week Ahead, or Game Changer

“When the facts change, I change. What do you do sir?” is a famous quote from the great economist John Maynard Keynes which I keep taped to the top of my monitor and constantly refer to.

The facts certainly changed on Wednesday when the Federal Reserve announced a change in the facts for the ages. Not only did governor Jay Powell announce that there would be no further rate increases in 2019.

He also indicated that the Fed would end its balance sheet unwind much earlier than expected. That has the effect of injecting $2.7 trillion into the US financial system and is the equivalent of two surprise interest rate CUTS.

The shocking move opens the way for stocks to trade up to new all-time high, with or without a China trade deal. Only the resumption of all-out hostilities, like the imposition of new across the board 25% tariffs, would pee on this parade.

As if we didn’t have enough to discount into the market in one shot. I held publication of this letter until Sunday night when we could learn more about the conclusion of the Mueller Report. There was no collusion with Russia and there will be no obstruction of justice prosecution.

However, the report did not end the president’s legal woes as it opened up a dozen new lines of investigation that will go on for years. The market could care less.

At the beginning of the year, I listed my “Five Surprises for 2019”. They were:

*The government shutdown ended and the Fed makes no move to raise interest rates

*The Chinese trade war ends

*The US makes no moves to impeach the Trump, focusing on domestic issues instead

*Britain votes to rejoin Europe

*The Mueller investigation concludes that he has an unpaid parking ticket in
NY from 1974 and that’s it

Notice that three of five predictions listed in red have already come true and the remaining two could transpire in coming weeks or months. All of the above are HUGELY risk positive and have triggered a MONSTER Global STOCK RALLY

Make hay while the sun shines because what always follows a higher high? A lower low.

The Fed eased again by cutting short their balance sheet unwind and ending quantitative tightening early. It amounts to two surprise interest rate cuts and is hugely “RISK ON”. New highs in stocks beckon. This is a game changer.

Bonds soared and rates crashed taking ten-year US Treasury bond yields down to an eye-popping 2.42%, still reacting to the Wednesday Fed comments. This is the final nail in the bond bear market as global quantitative easing comes back with a vengeance. German ten years bonds turn negative for the first time since 2016.

Interest rates inverted with short term rates higher than long term ones for the first time since 2008. That means a recession starts in a year and the stock market starts discounting that in three months.

Interest rates are now the big driver and everything else like the economy, valuations, and earnings are meaningless. Foreign interest rates falling faster than ours making US assets the most attractive in the world. BUY EVERYTHING, including stocks AND bonds.

Biogen blew up canceling their phase three trials for the Alzheimer drug Aducanumab. This is the worst-case scenario for a biotech drug and the stock is down a staggering 30%. Some $12 billion in prospective income is down the toilet. Avoid (BIIB) until the dust settles.

Europe fined Google $1.7 billion, in the third major penalty in three years. Clearly, there’s a “not invented here” mentality going on. It's sofa change to the giant search company. Buy (GOOG) on the dip.

More headaches for Boeing came down the pike. What can go wrong with a company that has grounded its largest selling product? Answer: they get criminally prosecuted. That was the unhappy news that hit Boeing (BA), knocking another $7 off the shares. It can’t get any worse than this, can it? Buy this dip in (BA).

Indonesia canceled a massive 737 order for 49 planes, slapping the stock on the face for $9. Apparently, they are unwilling to wait for the software fix. Buy the dip in (BA).

Oil prices hit a new four-month high at $58 a barrel as OPEC production caps work and Venezuela melts down. At a certain point, high energy prices are going to hurt the economy. Buy (USO) on dips.

The CBOE suspended bitcoin futures due to low volume and weak demand. It could be a fatal blow for the troubled cryptocurrency. Avoid bitcoin and all other cryptos. They’re a Ponzi scheme.

Equity weightings hit a 2 ½ year low as professional institutional money managers sell into the rally. They are overweight long defensive REITs and short European stocks. Watch out for the reversal.

December stock sellers are now March buyers. Expect this to lead to a higher high, then a lower low. Volatility is coiling. Don’t forget to sit down when the music stops playing.

Volatility hits a six-month low with the $12 handle revisited once again down from $30. (VIX) could get back to $9 before this is all over. Avoid (VIX) as the time decay will kill you.

Weak factory orders crush the market, down 450 points at the low. Terrible economic data is not new these days. But it ain’t over yet. Buy the dip.

The Mad Hedge Fund Trader was up slightly on the week.  That’s fine, given the horrific 450 point meltdown the market suffered on Friday. We might have closed unchanged on the day but for rumors that the Mueller Report would be imminently released.

March is still negative, down -1.54%.  My 2019 year to date return retreated to +11.74%,  boosting my trailing one-year return back up to +24.86%. 
My nine-year return recovered to +311.88%. The average annualized return appreciated to +33.71%. I am now 40% in cash, 40% long and 20% short, and my entire portfolio expires at the April 18 option expiration day in 14 trading days.

The Mad Hedge Technology Letter used the weakness to scale back into positions in Microsoft (MSFT), Alphabet (GOOGL), and PayPal (PYPL), which are clearly going to new highs.

The coming week will be a big one for data from the real estate industry.

On Monday, March 25, Apple will take another great leap into services, probably announcing a new video streaming service to compete with Netflix and Walt Disney.

On Tuesday, March 26, 9:00 AM EST, we get a new Case Shiller CoreLogic National Home Price index which will almost certainly show a decline.

On Wednesday, March 27 at 8:30 AM, we get new Trade Deficit figures for January which have lately become a big deal.

Thursday, March 28 at 8:30 AM EST, the Weekly Jobless Claims are announced. We also then get another revision for Q4 GDP which will likely come down.

On Friday, March 29 at 10:00 AM, we get February New Home Sales. The Baker-Hughes Rig Count follows at 1:00 PM.

As for me, I’m praying that it stops snowing in the High Sierras long enough for me to get over Donner Pass and spend the spring at Lake Tahoe. We are at 50 feet for the season, the second highest on record.

Good luck and good trading.

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








March 22, 2019

Global Market Comments
March 22, 2019
Fiat Lux

Featured Trade:

(BA), (FCX), (IWM), (JNJ), (FXB), (VIX), (JPM)

March 20 Biweekly Strategy Webinar Q&A

Below please find subscribers’ Q&A for the Mad Hedge Fund Trader March 20 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!

Q: What do you make of the Fed’s move today in interest rates?

A: By cutting short their balance sheet unwind early and ending quantitative tightening (QT) early, it amounts to two surprise interest rate cuts and is hugely “RISK ON”. In effect, they are injecting $2.7 trillion in new cash into the financial system. New highs in stocks beckon, and technology stocks will lead. This is a game changer. In a heartbeat, the world has moved from QT to QE, and we already know what that means for socks. They go up.

Q: Why buy Boeing shares (BA) ahead of a global recession?

A: It’s an 18-day bet that I’ve made in the options market. The US economic data is already indicating recession. The data will continue to worsen and that will continue until we go into a recession. But that’s not happening in 18 trading days. Also, we’re getting into Boeing down 20% from the top so our risk is minimal.

 Q: Why are we in an open Russell 2000 (IWM) short position?

A: We now have three long positions— 40% on the long side with the Freeport McMoRan (FCX) double position. It’s always nice to have something on the other side to hedge sudden 145-point declines like we have today. Ideally, you want to be hedged at all times. But it’s hard to fund good companies to sell short in a bull market.

Q: Do you need some euphoria to get the Volatility Index (VIX) to the $30-$60 level?

A: No, you don’t need euphoria. You need fear and panic. The (VIX) is a good “fear index” in that it rises when markets are crashing and falling when markets are slowly rising. And for that reason, I’m not buying (VIX) right now. With a sideways to slowly rising market, we could see the $9 handle again before this move is over.

Q: What should be the exit on the Russell 2000 (IWM)?

A: One choice is taking 80% of the maximum profit when you hit it—that’s where the risk-reward tips against you if you keep the position. The other option is to be greedy and run it all the way into expiration, taking the full profit. It depends on your risk tolerance. Remember, we hit the 80% profit three times in March only to stop out of positions for a loss. The market just doesn’t seem to want to let you take the whole 100%.

Q: Why are all your expirations on April 18?

A: That’s when the monthly options expire; therefore, they have the most liquidity of any other option expiration. If you go with the weeklies before or after the monthlies, the liquidity declines dramatically, which can be very frustrating. Since I used to cover only the largest clients, we could only trade in monthlies because we needed the size.

Q: Will Johnson and Johnson (JNJ) survive all those talcum powder lawsuits?

A: They’ve been going on for 10 years—you’d think they’d know by now if they have asbestos in their talcum powder or not. I highly doubt this will get anywhere; they’ll probably win everything on appeal.

Q: What do you anticipate on Brexit?

A: I think eventually Brexit will fail; we’ll have a referendum which will get voted down, Britain will rejoin Europe, and the British pound (FXB) will go to $1.65 to the dollar where it was when Brexit hit three years ago, up from $1.29 today. It would be economic suicide for Britain to leave Europe, as they would have to compete against Europe, the US, and China alone, and they are slowly figuring that out. Demographic change alone over three years would guarantee that another referendum fails.

Q: My partner owns JP Morgan (JPM). Do you still say banks are not a good place to be?

A: Yes. Fintech is eating their lunch. If they couldn't go up with interest rates moving up in the right direction, they certainly won’t be doing better now that interest rates are going down. Legacy banks are the new buggy whip industry.

Q: Why are commodities (FCX) increasing with a coming recession?

A: They are a hard asset and do better in inflation. Also, they’re stimulating their economy in China and we aren't—commodities do better in that situation as China is the world’s largest buyer of commodities, as do all Chinese investments.

Q: Would you buy Biogen (BIIB) on the dip? Its down 30% today.

A: Canceling their advanced phase three trials for the Alzheimer drug Aducanumab is the worst-case scenario for a biotech company. Some $12 billion in prospective income is down the toilet and many years of R&D costs are a complete write-off. Avoid (BIIB) until the dust settles.






March 19, 2019

Global Market Comments
March 19, 2019
Fiat Lux

Featured Trade:


Turbulence at Boeing (BA)

You would think that with all the bad news out, Boeing shares would finally hit bottom.

All Boeing 737 Max 8 planes have been grounded. The 58 new $100 million planes a month scheduled for delivery have been suspended. That means one of the largest companies in the United States is banned from selling far and away its most important product.


This morning we learned that Federal prosecutors are investigating Boeing as to whether it was criminally negligent in obtaining the troubled aircraft’s original FAA certification. Subpoenas for emails and documentation have been issued, and a general ruckus created.

This was a guaranteed outcome. You want deregulation? This is what you get. You cut budgets? This is also what you get. I highly doubt that Boeing will be found criminally culpable for the two crashes. This is all an outcome from the US government’s withdrawal from oversite of the private sector.

The truth is that the technological and cost advantages of the Boeing 737 Max are so enormous that airlines have little choice but to stand behinf them. That explains why Boeing has a ten-year, 4,636 plane order book for the plane. Boeing has to fix this problem or there will be NO aircraft industry.

This is why Southwest Airlines (LUV) has ordered 249 of the cutting edge planes, followed by 123 for United (UAL) and 76 for American (AAL).

Having been a commercial pilot for most of my life, and once owning a European air charter company I have some insights into this issue.

These two crashes are not a software problem, which can be fixed in days. It is a pilot training issue. And I have been subjected to this training myself hundreds of times until I can do it blindfolded and in my sleep. Whenever you have a runaway autopilot problem, you PULL THE DAMN CIRCUIT BREAKER!

However, if you are poorly trained, as are many emerging airline pilots, and can’t remember which of the 100 circuit breakers you need to pull with a runaway autopilot then the plane will crash. The harsh truth here is that MOST modern-day pilots can’t hand fly a plane without an autopilot.

I am therefore willing to bet that Boeing shares are near or at a medium-term bottom, now $75 off its high from only weeks ago.

Boeing Aircraft (BA) is one of the great icons of American manufacturing, and also one of the country’s largest exporters. I was given a private, sneak preview of the new Dreamliner at the Everett plant days before the official launch with the public, and I can tell you that this engineering marvel is a quantitative leap forward in technology. No surprise that the company has amassed one of the greatest back order books in history.

I can also tell you that my family has a very long history with Boeing (BA). During WWII, my dad got down on his knees and kissed the runway when the B-17 bomber in which he served as tail gunner (two probables) made it back despite the many holes. It was only after the war that he learned that the job had one of the highest fatality rates in the services.

Some 40 years later, I got down on my knees and kissed the runway when a tired and rickety Boeing 707 held together with spit and bailing wire which was first delivered as Dwight Eisenhower’s Air Force One in 1955, flew me and the rest of Reagan’s White House Press Corp to Tokyo in 1983 and made it there in one piece.

I even tried to buy my own personal B-17 bomber in the nineties for a nonprofit air show I was planning but was outbid by the late Paul Allen on behalf of his new aviation museum. Note to self: never try to outbid a co-founder of Microsoft on anything.

So it is with the greatest difficulty that I examine this company in the cold hard light of a stock analyst. There is nothing fundamentally wrong with the company. But its major customers around the world are suffering from some unprecedented stress.

US airlines are getting hammered by the rising cost of fuel. Delta even resorted to the unprecedented move of buying its own refinery to assure fuel supplies. Europe, where Boeing competes fiercely against its arch enemy, Airbus, is clearly in recession. Government-owned airlines there are in ferocious cost-cutting mode.

China, another one of Boeing’s largest customers, is also slowing down, thanks to the trade war. As for Japan, the economy there is going from bad to worse. All Nippon Airways was awarded the first Dreamliner for delivery because it is such a large customer. It is just a matter of time before this harsh reality starts to put a dent in the company’s impressive earnings growth.

This is not for the weak of heart.




They Build Those Boeings to Last

March 18, 2019

Global Market Comments
March 18, 2019
Fiat Lux

Featured Trade:

(FCX), (AAPL), (IWM), (SPY), (BA), (FXI), (FXB)

The Market Outlook for the Week Ahead, or a Stiff Dose of Humility

Sometimes markets have to give you a solid dose of humility, blindside you with a sucker punch, and slap you across the face with a wet kipper. Last week was definitely one of those weeks for me.

It was only just a matter of time before this happened. We posted new record gains for the first ten weeks of 2019. It was just a matter of time before the reality check kicked in.

I believed that we have seen the sharpest rally in stocks since the 2009 bottom, we were overdue for a respite. That respite came and only lasted a week. It has been an especially frustrating week for those few of us who watch economic data because it has been unremittingly awful while stocks rose daily.

There were really no reasons for shares to rise that week. There were also no reasons to sell, other than a dozen or so complete disasters that are looming just over the horizon. Still, to quote an old friend of mine, “Markets can remain irrational longer than you can remain liquid.”
The bull market reached ten years old last week, and if you read this letter you caught every dollar of the move up since then, plus some. But how much longer will it last? The technicals say it’s already in its death throes.

China trade negotiations (FXI) endlessly continued as they have for a year, but now the Chinese have thrown up a roadblock. They want everything in writing. In the wake of the North Korean disaster, can you blame them? This will weigh heavily on stocks until it's done.

Another day, another Brexit vote failed again. The pound (FXB) is doing the Watusi. Avoid all UK plays until the issue is decided.

The share buyback blackout started on Friday for many companies which are not allowed to repurchase their own shares up to 30 days ahead of the Q1 earnings reports. If you take the largest buyers of shares out of the market, what is left? Look to play the short side for the market.

Boeing (BA) hit bottom as the US became the last country to ban the 737 Max 8. Imagine being 35,000 feet in the air and you find out your plane is grounded for safety reasons, as 6,000 people did last week. Buy more (BA) on the dip. The next move is from $360 to $450.

Weekly Jobless Claims jumped, by 6,000 to a seasonally adjusted 229,000. Notice claims aren’t falling anymore. Another sign the tax cut stimulus is shrinking? Or that there is no one left to hire with any skills whatsoever?

Tesla (TSLA) released its Model Y SUV, but the cheaper $39,000 version won’t be available until 2021 and the stock dove. We are approaching the make or break level for the stock, the bottom of a two-year range. Get ready to buy on the meltdown. This is a ten bagger in a decade. Buy (TSLA).
The Mad Hedge Fund Trader lost ground last week. The tenth rally in 11 weeks made my short positions lose money faster than my long positions could make it back.

The Mad Hedge Technology Letter was stopped pit of a short position in Apple (AAPL) for a small loss a heartbreaking three days before its options expiration.

February came in at a hot +4.16% for the Mad Hedge Fund Trader. March started negative, down -2.18%.

My 2019 year to date return retreated to +11.46%, a new all-time high and boosting my trailing one-year return back up to +23.72%. 
My nine-year return pared back to +311.60%. The average annualized return appreciated to +33.69%. 

I am now 60% in cash, 20% long Freeport McMoRan (GLD), 10% short the S&P 500, and 10% short the Russell 2000. My short bond position (TLT) expired at its maximum profit point of $1,140.

As for the Mad Hedge Technology Letter, it covered its short in Apple (AAPL) for a small loss.

Q4 earnings reports are pretty much done, so the coming week will be pretty boring on the data front after last week's fireworks.

On Monday, March 18, at 10:00 AM EST, the March Homebuilders Index is out.

On Tuesday, March 19, 8:30 AM EST, February Housing Starts is published.

On Wednesday, March 20 is the first official day of Spring, at last!

Thursday, March 21 at 8:30 AM EST, the Weekly Jobless Claims are announced. At 10:00 AM, we get a new number for Leading Economic Indicators.

On Friday, March 22 we get a delayed number for Existing Home Sales.

The Baker-Hughes Rig Count follows at 1:00 PM.

As for me, it’s fundraising time here in the San Francisco Bay Area for local schools and gala balls are now a weekly event. I, who have pursued a lifelong pursuit of low prices and great deals, ended up paying $1,000 for a homemade coffee cake, $7,000 for tickets to the Golden State Warriors, and $10,000 for the best table in the house. Hey, what’s the value of money if you can’t spend it? You can’t take it with you.

Good luck and good trading.

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