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The Market Outlook for the Week Ahead, or Entering Terra Incognita

During the Middle Ages, when explorers sought new lands and their rich treasures, large sections of their navigational charts were marked with the term “terra incognita.”

That meant what lays beyond was unknown and that they should enter only at their own risk. Often there was a picture of a dragon or a sea monster to mark the spot.

There was also often a warning that you might even sail off of the edge of the earth.

Financial markets have entered a “terra incognita” of their own recently.

Here is the big unknown: How high can ten-year US Treasury bond yields soar when the Federal Reserve is promising to keep overnight interest pegged at 25 basis points until 2024 in the face of essentially unlimited monetary and fiscal stimulus?

So far, the answer is: more.

That is a really big question because we’ve never really been here before.

In fact, some Cassandras from the right are even predicting such a policy will cause us to sail off of the edge of the earth. The modern-day equivalent of running into dragons is inviting runaway inflation.

I can tell you from my own vast, almost immeasurable navigational experience (I am licensed by the US government) that “terra incognita” does not invite inordinate risk-taking or betting of ranches by traders or investors. Instead, they tend to sit on their hands, work on their golf swing, or update their Facebook pages.

That is what the Volatility Index (VIX) last week is essentially screaming at us by touching the $19 handle for the first time in a year.

Almost everyone I know has made more money in the markets than at any time in their lives. That is what a near doubling of the stock market in a year gets you.

And the new wealth was not attained because their intelligence and market insight have suddenly doubled, although a strong case for such can be made for readers of Mad Hedge Fund Trader.

So I used the Friday, March 19 option expiration to go into a rare 100% cash position. I really have gotten away with too much lately.

Then feeling guilty, I slapped on a single long in Tesla (TSLA), that old reliable money-maker. It’s worked for me since it was $3.50 a share. After all, a gigantic green energy infrastructure bill is about to pass in Congress. What better to own than the world’s largest EV car maker.

And what a tear it has been.

After bringing in a ballistic 66.64% profit in 2020, I reeled in another 40.38% gain in the first 2 ½ months of 2021. I did this via 40 trades which generated 38 wins and only two losses. That’s a success rate of an incredible 95%. I have to pinch myself when I read these numbers.

I am concerned because numbers any higher than this will look fake. It’s a rule of thumb in the investment business that when managers claim a 100% success rate, they are either high-frequency traders back by super-fast mainframe computers or running a scam.

So, I have been advising clients to pare back their biggest positions that became massively overweight purely through capital appreciation. Financials come to mind. JP Morgan (JPM) up 81% in three months? Sounds like a Ponzi Scheme.

So let me give you some upside targets in the bond market. We doubled bottomed in 2012 and 2016 at a 1.37% yield in the ten-year Treasury bond yield. We have already surpassed that level like a hot knife through butter.

At the depths of the 2008-2009 Great Recession, rates bottomed at 2.0% yield, which now seems within easy reach. The lowest yield we saw after the 2003 Dotcom Crash was a 3.0%.

When the upside targets in interest rates in this cycle are the lows of the previous economic cycles, that augurs pretty well for the future of stock prices. That is the guaranteed outcome of the tidal wave of cash now sweeping the global financial system.

The permabears are warning that the “Roaring Twenties” have already happened. I argued that they are only just getting started and that the indexes have another 4X of upside in them over the rest of the decade. When the last “Roaring Twenties” occurred, you didn’t sell in 1921.

It also reminds me of the huge “rip your face off” rally we saw from March 2009 to 2010. A lot of market gurus said then that was the peak. They were wrong. Today, they are driving for Uber and Lyft.

So when a talking head warns you that higher interest rates will cause the stock market to crash, just turn off the boob tube and go back to practicing your golf swing.

The Mad Hedge Summit Videos are Up, from the March 9,10, and 11 confab. Listen to 27 speakers opine on the best strategies, tactics, and instruments to use in these volatile markets. The product discounts offered last week are still valid. Start, stop, and pause the videos at your leisure. Best of all, access to the videos is FREE. Access them all by clicking here at www.madhedge.com, click on CURRENT SUMMIT REPLAYS in the upper right-hand corner, and then choose the speaker of your choice.

Ten Year Bond Yields (TLT) soar to a 1.75%, setting financials on fire and demolishing tech (QQQ). We are rapidly approaching a 2.00% yield, which could trigger a huge round of profit-taking on bond shorts, a domestic stock selloff, and a tech rally. The next great rotation may be just ahead of us.

Oil (USO) dives 8% on fears of an imminent Saudi production increase and a worsening Covid-19 outlook in Europe. Are we next with all these early reopening’s? Gone 100% cash at the close with the March quadruple witching option expiration.

A Tax Hike is next on the menu. Corporate tax rates are returning from 21% to 28% for the small proportion of companies that actually PAY tax. Raising taxes on earnings of more than $400,000. Pass through entities to get a haircut. Increasing estate taxes. You better die soon if you want your kids to stay rich. Increase in capital gains taxes over $1 million. I want my SALT deduction back! The grand negotiation begins on who needs bridges, rail lines, and subway extensions. Hint: for some reason, there have been no new federal projects started in California for the past four years and all the existing ones were cut back.

Value Stocks (IWM) are beating growth ones, reversing a decade-long trend. The Russell Value Index is up 11% this year, while growth is unchanged. It’s a total flip from last year when growth was tech-led. This could continue for years, or until the tech becomes the new value stocks. Big winners include Boeing (BA), JP Morgan (JPM), and Morgan Stanley (MS), all Mad Hedge moneymakers.

Bitcoin tops 61,000. Nothing else to say but that because there are no fundamentals. It’s up 80% in 2021 and 540% YOY. But it is becoming a good risk-taking indicator thought, and right now it is shouting a loud and clear “Risk On.”

It’s going to be All About Stock Picking for the Rest of 2021, says Morgan Stanley strategist Mike Wilson. Dragging on the index from here on will be the prospects of rising rates, tax hikes, and inflation. Mike especially dislikes small caps (IWM) which have already had a terrific run, with a 19% YTD gain. Stock picking? Boy, did you come to the right place!

Fed to hold off on rates hikes through 2023, said Governor Jay Powell after the open Market Committee Meeting. Bonds rallied a full half-point on the news and then crashed again, taking yields to a new 1.70% high. It sees inflation reaching a positively stratospheric 2.0% sometime this year, after which it will die, so nothing to do here. This is what a 100% dovish FOMC gets you. Let the games begin!

New Housing Starts Collapse, from an expected +2.5% to -10.3%, as high lumber, land, labor, and interest rates take their toll. This will only drive new home prices high at a faster rate and the little remaining supply dries up. Millennials need some place to live.

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 400% to 120,000 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 120,000 here we come!

It’s amazing how well patience can help your performance. My Mad Hedge Global Trading Dispatch profit reached a super-hot 16.89% during the first half of March on the heels of a spectacular 13.28% profit in February.

It was a tough week in the market, so I held fire and ran my seven remaining profitable positions into the March 19 options expiration. I took advantage of a meltdown in Tesla (TSLA) shares to put on my only new position of the week with a very deep-in-the-money long. That leaves me with 90% cash and a barrel full of dry powder.

This is my fifth double-digit month in a row. My 2021 year-to-date performance soared to 40.38%. The Dow Average is up a miniscule 7.7% so far in 2021.

That brings my 11-year total return to 462.93%, some 2.12 times the S&P 500 (SPX) over the same period. My 11-year average annualized return now stands at an unbelievable 41.14%.

My trailing one-year return exploded to 121.60%, the highest in the 13-year history of the Mad Hedge Fund Trader. 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 29.8 million and deaths topping 542,000, which you can find here. Thankfully, death rates have slowed dramatically, but Obituaries are still the largest sector in the newspaper.

The coming week will be a boring one on the data front.

On Monday, March 22, at 9:00 AM, Existing Home Sales for February are released.

On Tuesday, March 23, at 9:00 AM, New Home Sales are published.

On Wednesday, March 24 at 8:30 AM, we learn US Durable Goods for February are printed.

On Thursday, March 25 at 8:30 AM, Weekly Jobless Claims are out. We also get the final read of US Q4 GDP.

On Friday, March 26 at 8:30 AM, US Personal Income & Spending for February are released. At 2:00 PM, we learn the Baker-Hughes Rig Count.

As for me, I have been doing a lot of high altitude winter mountain climbing lately, and with the warm spring weather, the risk of avalanches is ever present. It takes me back to the American Bicentennial Everest Expedition, which I joined in 1976.

It was led by my old friend, instructor, and climbing mentor Jim Whitaker, who pulled an ice ax out of my nose on Mt. Rainer in 1967 (you can still see the scar). Jim was the first American to summit the world’s highest mountain. I tried to break a high-speed fall and an ice ax kicked back and hit me square in the face. If I hadn’t been wearing goggles I would have been blinded.

I made it up to 22,000 feet on Everest, to Base Camp II without oxygen because there were only a limited number of canisters reserved for those planning to summit. At that altitude, you take two steps, and then break to catch your breath.

There is a surreal thing about that trip that I remember. One day, a block of ice the size of a skyscraper shifted on the Khumbu Ice Fall and out of the bottom popped a body. It was a man who went missing on the 1962 American expedition. Everyone recognized him as he hadn’t aged a day in 15 years, since he was frozen solid.

I boiled my drinking water, but at that altitude, water can’t get hot enough to purify it. So I walked 100 miles back to Katmandu with amoebic dysentery. By the time I got there, I’d lost 50 pounds, taking my weight to 120 pounds.

Jim was an Eagle Scout, the first full-time employee of Recreational Equipment Inc. (REI), and last climbed Everest when he was 61. Today, he is 92 and lives in Seattle, WA.

Jim reaffirms my belief that daily mountain climbing is a great life extension strategy, if not an aphrodisiac.

Stay healthy.

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

March 1, 2021

Diary, Newsletter, Summary

Global Market Comments
March 1, 2021
Fiat Lux

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD, or WAKE UP CALL),
(TLT), (JPM), (BAC), (C), (MS), (GS),
(JNJ), (AAPL), (FB), (AMZN), (GOOGL)

The Market Outlook for the Week Ahead, or Wake Up Call

Diary, Newsletter

This was the week the stock traders learned there was such a thing as a bond market. They know this because it was bonds that completely demolished their stock trading books.

Suddenly, markets went from zero offered to zero bid. Many strategists labored under the erroneous assumption that ten-year US Treasury yields would never surpass 1.50% in 2021. Yet, here we are only in March and it’s already topped 1.61%. It’s become the one-way trade of the year.

The bond market seems to be discounting an imminent runaway inflation rate. But at a 1.4% annual figure, it's nowhere to be seen, not with 20 million unemployed and Main Streets everywhere looking like ghost towns.

I still believe that technology is evolving so fast, hyper-accelerated by the pandemic, that it will wipe out any return of inflation. I will not believe in inflation until I see the whites of its eyes, to paraphrase Colonel William Prescott at the Battle of Bunker Hill.

Of course, it is I who has been screaming from the rooftops about the coming crash of the bond markets, since March 20. Being short the bond market has been one of my most profitable trades of 2020 AND 2021. If I am annoyed by anything, it happened too fast, depriving me several more round trips a slower crash would have permitted.

When you have to own stocks, make them financials (JPM), (BAC), (C), which benefit from rising rates. Their loan rates are rocketing while their cost of money is fixed at the Fed overnight cost of funds at 0.25%. Trading volumes at the brokers (MS), (GS) are through the roof, especially for options traders.

It is all a perfect money-making machine. At least, the stock market thinks so.

I’ll tell you something that markets are not paying attention to at all, and it is the tremendous improvement in the pandemic. Since January 20, news cases have cratered from 250,000 a day to only 70,000, down 72%. The best-case scenario which markets discounted by near doubling in 11 months is happening.

With the addition of the Johnson & Johnson (JNJ) vaccine, some 700 million doses will be available by June. We could be back to normal by summer, at least in the parts of the country that don’t believe it is still a hoax.

This breathes life into the blockbuster 7.5% GDP growth scenarios now making the rounds. I think people have no idea how hot the economy is really going to get. Labor and materials shortages may be only three months off, but with no inflation.

So, what does all this mean for the markets? It all sets up the normal 5%-10% correction that I have been predicting. If you have two-year LEAPS on your favorite names, hang on to them. We are going much higher.

I went into the Monday selloff with a rare 100% cash position. The 20% I have now in commodities I picked up on puke out, throw up on your shoe capitulation days.

The barbell is still the winning strategy.

Domestic recovery stocks have been on fire for six months, with small banks up a ballistic 80%. Big tech has gone nowhere. But their earnings are still exploding, in effect, making them 20% cheaper over the same time period.

It’s just a matter of time before markets rotate back into tech and give domestic recovery a break. Think (AAPL), (FB), (AMZN), and (GOOGL). That is where the smart money is going right now.

The bond auction was a total disaster. The US Treasury offered $62 billion worth of seven-year US Treasury bonds, double the amount a year earlier. At a 1.95% yield and no one showed. Foreign participation was the worst in seven years. The bid-to-cover ratio was pitiful. Over issuance by the government crushing the market? Who knew? Imagine how high interest rates would be if the Fed wasn’t buying $120 billion a month of bonds?

The insanity is back, with GameStop (GME) doubling in the last 15 minutes of the month. Nobody knows why. It was why stocks tanked at the close on Thursday, scaring away real investors in real stocks. (GME) has become an indicator of all that’s wrong with the market.

Copper demand is rocketing, says Freeport McMoRan (FCX) CEO Richard Adkerson. That’s why he is opening three new US mines this year, adding 250 million pounds in annual output. Biden’s ambitious EV plans are the trigger. You can’t build an EV without a lot of the red metal. The world’s largest copper producer has become a major climate change and ESG play.

NVIDIA blows it away, with sales up a blockbuster 66%. Demand from gamers locked up at home was overwhelming. Purchases by bitcoin miners were through the roof. Even demand from the auto industry was up 16%, even though card sales aren’t. Too bad they picked the wrong day to announce, with the stock off 8.2%. (NVDA) is the one tech stock I would buy on dips.

Fed says business failures will continue at record pace, mostly occurring among small, unlisted local businesses. Biden’s $1.9 trillion rescue budget will come too late for many. Unemployment could stay chronically high for years, as the Weekly Jobless Claims are suggesting.

Housing starts fell in January, down 6.0% to 1.58 million units. A much smaller drop was expected. Rising land and lumber costs are cutting into the economics of new construction. Home prices are going to have to accelerate to suck in more supply. Housing Permits for new construction soared by 10.4% last month, so the future looks bright for builders.

Tesla (TSLA) crashed, down $180 in two days. We have just suffered a perfect storm of bad news about Tesla. Interest rates have been soaring, bad for all tech in the mind of the market. Competitor Lucid Motors announced a SPAC valued at $11 billion. And Elon Musk said Bitcoin looked “high” after investing $1.5 billion. Get ready to buy the dip, but not yet.

Quantitative easing to continue, says Fed governor Jay Powell, even if the economy improves. The $120 billion in bond-buying remains, even if the economy improves. He’s doing everything possible to create inflation.

Panic hits the crypto markets, dragging down technology equities with them. The two have been trading 1:1 for four months. Bitcoin suffered an eye-popping 25% plunge from $58,000 to 43,600. The tail is now wagging the dog. All risk-taking may have spiked with the Friday options expiration. Watch Bitcoin for a tech stock revival and vice versa. Stocks have earnings multiple support. Crypto doesn’t. I’ll buy Bitcoin when they post a customer support number.

Australian dollars soars as predicted, from $58 to $79 in 11 months. We could hit parity in 2022. The Aussie is basically a call option on a synchronized global economic recovery. End of the pandemic will also bring a resumption of massive Chinese investment in the Land Down Under. Keep buying the dips in (FXA).

Case-Shiller explodes to the upside, up 10.4% in December. It’s the hottest read in seven years for the National Home Price Index. Phoenix (14.4%), San Diego (13.0%), and Seattle (13.6%) were the strongest cities. The flight from the cities continues.

(TLT) breaks $138, surpassing my end 2021 target of a 1.50% ten-year US Treasury yield. So, I lied. My new yearend target is now $120, which would take ten-year yields to 2.00%. With a $1.9 trillion rescue budget about to kick in after the $900 billion that passed in December, the economy and demand for funds are about to rocket. Better hurry up and buy that house before mortgage rates rise out of reach.

Weekly Jobless Claims sink to 730,000. I can’t believe that 730,000 is now considered a good number, compared to 50,000 a year ago.

My Mad Hedge Global Trading Dispatch closed out with a 13.28% profit in February after a blockbuster 10.21% in January. The Dow Average is up a miniscule 1.1% so far in 2021.

This is my fourth double-digit month in a row. My 2021 year-to-date performance soared to 23.49%. After the February 19 option expiration, I am now 80% in cash, with longs in (XME) and (FCX).

That brings my 11-year total return to 446.04%, some 2.12 times the S&P 500 (SPX) over the same period. My 11-year average annualized return now stands at an unbelievable 39.64%.

My trailing one-year return exploded to 93.48%, the highest in the 13-year history of the Mad Hedge Fund Trader. We have earned 103.31% since the March 20, 2020 low.

We need to keep an eye on the number of US Coronavirus cases at 28 million and deaths topping 510,000, which you can find here.

The coming week will be a boring one on the data front.

On Monday, March 1, at 10:00 AM EST, the ISM Manufacturing Index is out. Zoom (ZM) reports.

On Tuesday, March 2, at 9:00 AM, Total US Vehicle Sales for February are announced. Target (TGT) and Hewlett Packard (HPQ) report.

On Wednesday, March 3 at 8:15 AM, the ADP Private Employment Report is released. Snowflake (SNOW) reports.

On Thursday, March 4 at 9:30 AM, Weekly Jobless Claims are printed. Broadcom (AVG) and Costco (CSCO) report.

On Friday, March 5 at 8:30 AM, The February Nonfarm Payroll Report is announced. Big Lots (BIG) reports. At 2:00 PM, we learn the Baker-Hughes Rig Count.

As for me, the deed is done, I got my first Covid-19 shot, pure Pfizer.

The Marine Corps failed to deliver, as only active duty are getting shots. Washoe County ran out. Incline Village said I couldn’t get a shot until July. My own doctor had no clue.

Then I got an automated call from the doctor who did my stem cell treatment on my knees five years ago. They belonged to a large group that had my birthday in their system and my number came up on the first day the under ’70s opened up.

Going there was a celebration. Everyone was thrilled to death to get their shot. It was like winning the lottery. Our little local hospital operated with machine-like efficiency, inoculating 1,300 a day. It was a straight drive in, dive out. It was an “all hands-on deck” effort, with everyone from the board directors to the billing clerks manning the needles. It took longer to buy a Big Mac than to get my shot.

To make sure I didn’t pass out, I was sent to a holding area, where a person was assigned to each car. I got the CEO and grilled him relentlessly on his business model for 30 minutes.

I haven’t felt this good since I got my polio vaccine sugar cube in 1955.

Stay healthy.

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

January 20 Infection Rate

March 3 Infection Rate

February 8, 2021

Diary, Newsletter, Summary

Global Market Comments
February 8, 2021
Fiat Lux

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE SWEET SPOT CONTINUES),
(INDU), (SPY), (SLV), (GME), (TLT), (JPM), (BAC), (C), (BLK)

The Market Outlook for the Week Ahead, or the Sweet Spot Continues

Diary, Newsletter

We just completed the best week in the 13-year history of the Mad Hedge Fund Trader.

Kudos have been coming in from all over the world, with stories of retirements financed, mortgages paid off, and college educations paid for. Some Mad Hedge Concierge clients are reporting windfall profits of $1 million a day.

The key was calling the GameStop (GME) fiasco the one hit wonder that it was, and using it as an opportunity to go 100% long, pedal to the metal, and bet the ranch. When the market gives you a gift, you grab it with both hands as if your life depended on it and don’t let go.

It worked.

That’s what 50 years of practice gets you, the ability to spot the gold coins lying on the street ignored by everyone else and pocket them immediately.

A record $4.2 billion poured into technology stock funds last week as investors call the end of the six-month big tech correction. The barbell approach is working like a charm, with buying bouncing back and forth like a ping pong ball between domestics, technology, or both sectors go up at the same time. It’s better than owning a printing press for $100 bills.

The Mad Hedge Technology Letter also spotted which way the gale force winds were blowing and piled on the longs as well. (AMZN), (QCOM), and (CRWD), it’s all music to my ears. My old friend Jeff retired, paving the way for another doubling in his stock (AMZN).

We now are getting a clearer picture of how 2021 will play out in the stock market. Periods of sideways action will be followed by big gaps up, eventually taking us to a Dow Average of 40,000.

The sweet spot continues. As low as interest rates and inflation remain low and a tidal wave of new money is pouring into the economy, you have a rich uncle writing you a check every month from the stock market.

We have not had a correction of more than 4% since October. This could go on for years.

Where will the next surprise come from?

When Joe Biden gets his full $1.9 trillion in upfront rescue spending. With the grim tidings of three disastrous monthly jobs reports out, it couldn’t go any other way. The cost of waiting is just too high, especially for the 18 million U-6 unemployed and millions of small businesses hanging on by their fingernails.

The Nonfarm Payroll Report came in very weak, at 49,000 in January. The headline Unemployment Rate was at 6.3%, a decline as more people are leaving the workforce. The U-6 broader “discouraged worker” unemployment rate is still at 11%. December was revised down to an even bigger 227,000 loss. Construction was down 10,000, Retail down 37,000, and Government Jobs were up 43,000. It’s the third disappointing month in a row so a double-dip recession is still on the table. We have a very long road to recovery.

Weekly Jobless Claims improved, dropping to 779,000, the lowest since November. The correlation with falling Covid-19 cases is almost perfect, which have declined by 35% in two weeks. Is the stock market getting ready to roar?

US GDP fell by 3.5% in 2020, wiping out all of 2019 and a good chunk of 2018 as well. The last quarter of 2020 came in at -4.8%, much worse than expected, and further downward revisions are coming, according to the Bureau of Economic Analysis. The economy won’t recover pre-pandemic levels until late 2022 or 2023. The biggest drags on the economy were dramatic falls in consumer spending, nonresidential fixed investment, and a trade war-induced plunge in exports.

Pending Home Sales fell, 0.3% in December, but are still up a staggering 21.4% YOY. It is the highest December reading on record, but the fourth straight month of declines. A historic shortage of supply is the main reason.

The short squeeze play moved to silver, with prices hitting an eight-year high. Many local dealers are seeing business rise tenfold over the weekend and are running out of inventory. The white metal was up 35% in two days. It’s the largest one-day volume every. This time, the kids may have got it wrong, since all short positions in the options market are fully hedged with long positions in silver futures or silver bars. The GameStop players only saw the short side. Long term, I love (SLV) for industrial demand from electric cars and solar panels and see it going from today’s $28 to $50, but not today.

Apple (AAPL) is boosting share buybacks and is borrowing to do it. It’s issuing $14 billion in bonds out to 40 years in maturity at 95 basis points above Treasuries. If Apple is so aggressive in buying its own stock, maybe you should too.

The Apple car is moving forward, as incredible as it may seem. The company is in talks with South Korea’s Hyundai to produce autonomous self-driving electric vehicles that will be available by 2024. I’ll believe it when I see it. I’ve seen Apple self-driving cars in the Bay Area for years. It’s an interesting combination: Apple software, a South Korean design, and non-union Georgian metal bashing combined. Sounds like a winner to me.

The GameStop (GME) game ends. Back to selling used video games in shopping malls. Millions were lost in the crash from $483 to $49. Back to buying real stocks with the systemic threat to the main market over.

Jeff Bezos retired, putting the operation of Amazon into the hands of Andy Jassy, the inventor and head of the cloud unit AWS. No move in the stock beyond the first few seconds. Jassy has been there since the beginning. If I were the second richest man in the world, after Elon Musk, I’d take some time off too. Now, maybe my former Morgan Stanley colleague will have drinks with me. Buy (AMZN) on dips. My two-year target is $5,000.

Bombs away for the bond market, as the (TLT) hits a new 2021 low, taking ten-year yields up to 1.13%. I’m taking profits on the last of my bond shorts and piling money into financials, which love higher interest rates. Buy (JPM), (BAC), (C), and (BLK) on dips. A 1.50% yield on the ten-year US Treasury bond here we come! This is the quality trade of 2021.

The ADP Private Employment recovered, up 174,000 in January after a 74,000 plunge in December. Leisure & Hospitality is the big variable.

PayPal transactions were up 25% in 2020, showing the incredible extent of the online migration of the economy. Keep going with Fintech. There’s another double in (PYPL).

When we come out the other side of the 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 400% to 120,000 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 120,000 here we come!

My Mad Hedge Global Trading Dispatch earned an amazing 14.15% during the first week of February after a blockbuster 10.21% in January. The Dow Average is up 3.47% so far in 2021. This is my fourth double-digit month in a row. My 2021 year-to-date performance soared to 24.36%.

I absolutely nailed the market bottom created by the GameStop fiasco, which I didn’t expect to last any more than days. I went 100% leveraged long, which enabled me to achieve the astounding numbers I am reporting today.

Not only did I get the market right, I picked the perfect sectors as well. I jumped 60% into financials, 20% in Tesla, 10% for commodities, and 10% in chips. I used the bond market meltdown to cover the last of my bond shorts. But all of my financial longs are essentially bond shorts.

That brings my 11-year total return to 446.81%, some 2.08 times the S&P 500 over the same period. My 11-year average annualized return now stands at an Everest-like new high of 40.02%.

My trailing one-year return exploded to 87.85%, the highest in the 13-year history of the Mad Hedge Fund Trader. We have earned 105.58% since the March 20, 2020 low.

We need to keep an eye on the number of US Coronavirus cases at 27 million and deaths 465,000, which you can find here. We are now running at a heartbreaking 3,000 deaths a day. But that is down 35% from the recent high.

The coming week will be a boring one on the data front.

On Monday, February 8 at 11:00 AM EST, Consumer Inflation Expectations for January are out. Softbank (SFTBY) and KKR & Co. (KKR) report.

On Tuesday, February 9 at 6:00 AM, the NFIB Business Optimism Index is released. Cisco Systems (CSCO) and Twitter (TWTR) report.

On Wednesday, February 10 at 8:30 AM, the US Core Inflation Rate is announced. Coca-Cola (KO) and Uber (UBER) report.

On Thursday, February 11 at 9:30 AM, Weekly Jobless Claims are printed. Walt Disney (DIS) and AstraZeneca (AZN) report.

On Friday, February 12 at 2:00 PM, we learn the Baker-Hughes Rig Count. As we have a three day weekend following, option volatility should collapse. Moody’s (MCO) reports.

As for me, I went into Reno last week to replace the windshield on my Toyota Highlander, my Tahoe car, which below zero temperatures had cracked. One-third of the town was shut down and boarded up, while what remained was booming. A giant shopping mall near downtown has resumed construction, but with less retail and more residential. Reno is the third fastest-growing city in the US and has become a metaphor for the entire country.

Still waiting for my Covid-19 vaccination. I’m at the top of four lists. Even the military can’t get enough. With any luck, I’ll have it in weeks.

Stay healthy.

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

Markets Can Be Tricky

September 21, 2020

Diary, Newsletter, Summary

Global Market Comments
September 21, 2020
Fiat Lux

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD, or HERE’S THE BLACK SWAN FOR 2020),
(SPY), (INDU), (TSLA), (JPM), (TLT), (C),
(V), (GLD), (AAPL), (AMZN), (UUP)

The Market Outlook for the Week Ahead, or Here’s the Black Swan for 2020

Diary, Newsletter, Summary

I had the pleasure of meeting Supreme Court Justice Ruth Bader Ginsberg only last year. She was funny, a great storyteller, and smart as a tack. If she disagreed with you, she pounced like a lion with a prescient one-liner.

She was also a goldmine of historical anecdotes about American history over the past 60 years, recalling incidents seen from her front-row seat as if they had happened yesterday.

She was also frail and rail-thin as if a faint breeze could knock her over at any time. Contracting cancer five times will do this to a person. Assistants helped her walk.

Her unexpected passing is now on the verge of creating a new financial crisis. Any chance of passing further stimulus in the US congress has just turned to ashes. The focus in Washington has turned entirely to the Supreme Court for the rest of 2020.

As a result, tens of thousands more small business will go under, millions of families will be thrown out on to the street, and the Great Depression will drag on. There is nothing left to spike the punch bowl with.

The Dow Average on Monday morning will open down 1,000 points, led by Tesla (TSLA) and the big technology stocks. US Treasury bonds (TLT) will rocket $5. The US dollar (UUP) will soar on a flight to safety bid.

Traders were already cutting positions and scaling back risk to duck the coming turmoil of the presidential election. We are also trying to front-run a yearend stock selloff prompted by a Biden rise in the capital gains tax from 21% to 40%.

That’s a bit of a moot point as 75% of stock ownership is owned by tax-exempt funds. The remaining 25% is most tied up in institutions that duck the tax by never selling or are embedded on corporate cross ownerships which never change.

Now we have uncertainty with a turbocharger, with gasoline poured in the air intake (pilot talk).

With Democrats refighting the battle of the Alamo, I doubt that Trump can ram through a third Supreme Court nomination. Remember how the last one went, for Brett Cavanaugh? Filibusters alone could delay proceeding by a month. These are NOT developments that make stocks go up.

If Trump succeeds, it may be a pyrrhic victory, costing Republicans at least five Senate seats, losing a majority, and increasing the margin of a presidential loss. If retired astronaut wins the Senate in Arizona on November 3, only two Republicans need to fold to make a Supreme Court nomination impossible.

It’s not like the stock market was in such great shape going into this, the biggest black swan of 2020. The market is being flooded with high priced initial public offerings, some 12 in the coming week alone. Apparently, there is an extreme shortage of high growth large-cap technology stocks and Silicon Valley is more than happy to meet that demand.

Cloud storage player Snowflake (SNOW) saw price talk at $70, an IPO of $120, and a first-day peak of $275. This created $70 billion in market value with the stroke of a key.

Of course, flooding the market like this ends up killing the goose thay laid the golden eggs and is a common signal of market tops. Existing stock holdings have to be sold to buy new ones, taking markets south.

We have already seen the 30-day and 50-day moving averages broken, and sights are clearing set on the 200-day. They would take us to a full top to bottom correction in the indexes of 20%. That would take the S&P 500 from $3,600 to $3,000, The Dow Average from $26,298 to $24,000, and Apple from $137 to $84.

If the Volatility Index (VIX) goes over $50, I’ll start sending out lists of very low risk, high return two-year options LEAPS like I did last time.

The Fed says no interest rate hike until 2023 and promises to heat up the economy even more than previously. The long-term average 2% inflation target I reaffirmed. Jay sees a net shrinkage of the US GDP this year ay 3.7%. Since governor Jay Powell promised to run the economy hot weeks ago, ten-year US treasury bonds have only eked out a paltry rise to 72 basis points.

The market isn’t buying it. It’s tough to beat ever hyper-accelerating technology that crushes prices. Still, I’ll keep selling short bond rallies because it’s just a matter of time before the government crushes the market with massive over-issuance. Sell every rally in the (TLT). The Fed put lives! Buy stocks on dips.

Election chaos is starting to price in, with the US dollar (UUP) getting an undeserved bid in a flight to safety trade and stock down 1,000 points from the week’s high. All sorts of Armageddon scenarios are making the rounds now and traders are pulling out of the market to protect hard-earned profits. For details watch the final season of House of Cards, where martial law is declared in Ohio to reverse an election outcome. No kidding!

Citigroup announced a surprise $900 million loss. I can’t wait for the excuse for this surprise, out-of-the-blue “operational error.' It’s most likely an expensive hack. It’s the kind of black swan that can hit you any time if you are a short-term trader. Long term investors should be buying the dip in (C).

China’s Retail Sales rise for the first time in 2020, up 0.5% in August. First into the pandemic, first out. Keeping Corona deaths to 4,000 was also a big help. It’s proof that economies CAN recover post-COVID-19. Buy China on dips (BABA), (BIDU). Stocks there will enjoy a huge post-election rally once the trade war winds down.

US Consumer Sentiment hits six-month high, up from a 75 estimate to 78.9. The University of Michigan report is proof that those who have money are spending it. Another green shoot. Didn’t help stocks today though.

Oil collapsed 15% on the dimming outlook for the global economy. Not even massive well shutdowns caused by this week’s hurricane could boost prices. Avoid all energy plays like the plague.

Morgan Stanley says the trading boom won’t last forever, says my former employer coming off of a record quarter. Too much of a good thing won’t last forever. Make hay while the sun shines.

The value rotation is on, with large scale selling of technology stocks and the chasing of banks and other recovery plays. It’s been a long time coming and could well persist until the end of the year. The option expiration at the close on Friday was exacerbating all moves, which is why I dumped my last two tech positions days prior. It’s too early to buy tech again on dips. Wait for a pre-election meltdown.

Copper hit a new four-year high as traders bet on an accelerating recovery in the global economy. My favorite, Freeport McMoRan, the world’s largest copper producer and a long time Mad Hedge subscriber is soaring, up 257% from the market lows. China, which is done with the Coronavirus and whose economy is recovering rapidly, has returned as a major buyer of the red metal. Keep buying (FCX) on dips.

When we come out the other side of this, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 400% or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old.

My Global Trading Dispatch clocked its third blockbuster week in a row. I cashed in on my winnings with longs in (JPM), (TLT), (V), (GLD), (AAPL), and (AMZN), rang the cash register with shorts in (TLT) and (SPY), and booked a small loss in a long in (C). This took my cash position from 0% to 80% and I am looking to go to 100% in the coming week. The risk/reward in the market now is terrible.

Notice that I am shifting my longs away from tech and toward domestic recovery plays.

That takes our 2020 year-to-date back up to a blistering 35.74%, versus -2.93% for the Dow Average. September stands at a nosebleed 9.19%. That takes my eleven-year average annualized performance back to 36.43%. My 11-year total return is back for another new all-time high at 392.12%. My trailing one-year return popped back up to 54.87%.

The coming week is a big one for housing data. The only numbers that really count for the market are the number of US Coronavirus cases and deaths, which you can find here.

On Monday, September 21 at 8:30 AM EST, the Chicago Fed National Activity Index is out.

On Tuesday, September 22 at 10:00 AM EST, Existing Home Sales for July are released.

On Wednesday, September 23 at 9:00 AM EST, the US Home Price Index for July is printed. At 10:30 AM EST, the EIA Cushing Crude Oil Stocks are out.
change.

On Thursday, September 24 at 8:30 AM EST, the Weekly Jobless Claims are announced. At 10:00 AM the all-important Existing Home Sales for July are published.

On Friday, September 25, at 8:30 AM EST, US Durable Goods Sales for August are disclosed. At 2:00 PM The Bakers Hughes Rig Count is released.

As for me, I’ll climb up on the roof this weekend and clean the ash from my 59 solar panels. The fallout from the nearby raging forest fires has been so extreme that it has cut my solar output by 25%.

It’s not just me. Over a million homes in California have the same problem, putting a serious dent in the state’s electricity production.

Stay healthy.

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

September 16, 2020

Diary, Newsletter, Summary

Global Market Comments
September 16, 2020
Fiat Lux

Featured Trade:

(THE BULL CASE FOR BANKS),
(JPM), (BAC), (C), (WFC), (GS), (MS)

The Bull Case for Banks

Diary, Newsletter

Banks have certainly been the red-headed stepchild of equity investment in 2020.

While technology shares have rocketed by two, three, and four-fold, banks have remained mire in the muck, down 35% on the year while the S&P 500 is up 6%.

However, all that is about to change.

Banks have become the call option on a US economic recovery. When the economic data runs hot, banks rally. When it’s cold, they sell-off. So, in recent months bank share prices have been flat-lining.

You have to now ask the question of when the data stay hot, how high will banks run?

There also is a huge sector rotation issue staring you in the face. Where would you rather put new money, stocks at all-time highs trading at ridiculous multiples, or a quality sector in the bargain basement? Big institutions have already decided what to do and are buying every dip.

Banks certainly took it on the nose with the onset of the pandemic. Interest rates went to zero and loan default rates soared, demanding a massive increase in loan loss provisions.

Much more stringent accounting rules also kicked in during January known as “Current Expected Credit Losses.” That requires banks to write off 100% of their losses immediately, rather than spread them out over a period of years.

Then in June, the Federal Reserve banned bank share buybacks and froze dividends to preserve capital in expectation of more loan defaults.

So what happens next?

For a start, fall down on your knees and thank Dodd-Frank, the Obama era financial regulation bill.

Banks carped for years that it unnecessarily and unfairly tied their hands by limiting leverage ratios to only 10:1. Morgan Stanley reached 40:1 going into the Great Recession and barely made it out alive, while ill-fated Lehman Brothers reached a suicidal 100:1 and didn’t.

That meant the banks went into the pandemic with the strongest balance sheets in decades. No financial crisis here.

Thanks to government efforts to bring the current Great Depression to a quick end, generous fees have been raining down on the banks from the numerous loan programs they are helping to implement.

And trading profits? You may have noticed that options trading volume is up a monster 95% so far in 2020 and increased by a positively meteoric 120% in August. That falls straight to the banks’ bottom lines. If you’re wondering why your online trading platform keeps crashing, that’s why.

I list below my favorite bank investments using the logic that during depressions, you want to buy Rolls Royces, Teslas, and Cadillacs at deep discounts, not Volkswagens, Fiats, or Trabants.

JP Morgan (JPM) – Is the crown jewel of the sector, with the best balance sheet and the strongest customers. It has over reserved for losses that are probably never going to happen, stowing away some $25 billion in the last quarter alone.

Morgan Stanley (MS) - Brokerage-oriented ones like Morgan Stanley (MS) and Goldman Sachs (GS) are benefiting the most from the explosion in stock and options trading. I’ll pick my former employer (MS), where I once accounted for 80% of equity division profits, as (GS) is still mired in the aftermath of the $5 billion Malaysia scandal.

Bank of America (BAC) - is another quality play with a fortress balance sheet.

Citigroup (C) – Is the leveraged play in the sector with a slightly weaker balance sheet and more aggressive marketing strategy. It seems like they’re always trying to catch up with (JPM). This week’s revelation of a surprise $900 million “operational loss” and the penalties to follow knocked 13% of the share price. This is the high volatility play in the sector.

And what about Wells Fargo (WFC), you may ask, the cheapest bank of all? Unfortunately, it still has to wear a hair suit because of its many regulatory transgressions, before, during, and after the financial crisis so I’ll give it a miss. Oh, and Warren Buffet is selling too.