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The Market Outlook for the Week Ahead, or The Fed is Done!

We’ve just seen our last interest rate rise in the economic cycle. Yes, I know that our central bank took no action at their last meeting in September. The market has just done its work for it.

And the markets are no shrinking violet when it comes to taking bold action. The 50 basis points it took bond yields up over the last two weeks is far more than even the most aggressive, economy-wrecking, stock market-destroying Fed was even considering.

And that doesn’t even include the rate hikes no one can see, the deflationary effects of quantitative tightening, or QT. That is the $1 trillion a year the Fed is sucking out of the economy with its massive bond sales.

It really is a miracle that the US economy is growing as fast as it is. After a warm 2.4% growth rate in Q2, Q3 looks to come in at a blistering 4%-5%. That is definitely NOT what recessions are made of.

Where is all this growth coming from?

Some of the credit goes to the pandemic spending, the free handouts we call got to avoid starvation while Covid ravaged the country. You probably don’t know this, but nothing happens fast in Washington. Government spending is an extremely slow and tedious affair.

By the time that contracts are announced, bids awarded, permits obtained, men hired, and the money spent, years have passed. That means money approved by Congress way back in 2020 is just hitting the economy now.

But that is not the only reason. There is also the long-term structural push that is a constant tailwind for investors:

Hyper-accelerating technology.

Yes, I know, there goes John Thomas spouting off about technology again. But it is a really big deal.

I have noticed that the farther away you get from Silicon Valley, the more clueless money managers are about technology. You can pick up more stock tips waiting in line at a Starbucks in Palo Alto than you can read a year’s worth of research on Wall Street.

What this means is that most large money managers, who are based on the east coast are constantly chasing the train that is leaving the station when it comes to tech.

On the west coast, managers not only know about the new tech, but the tech that comes after that and another tech that comes after that, if they are not already insiders in the current hot deal. This is how artificial intelligence stole a march on almost everyone, until a year ago, unless you were on the west coast already working in the industry. Mad Hedge has been using AI for 11 years.

You may be asking, “What does all of this mean for my pocketbook?” a perfectly valid question. It means that there isn’t going to be a recession, just a recession scare. That technology will bail us out again, even though our old BFF, the Fed, has abandoned us completely.

Which brings me to the current level of interest rates. I have also noticed that the farther away you get from New York and Washington, the less people know about bonds. On the west coast mention the word “bond” and they stare at you cluelessly. Indeed, I spent much of this year explaining the magic of the discount 90-day T-bill, which no one had ever heard of before (What! They pay interest daily?).

In fact, most big technology companies have positive cash balances. Look no further than Apple’s $140 billion cash hoard, which is invested in, you guessed it, 90-day T-bills when it isn’t buying its own stock, and is earning a staggering $7.7 billion a year in interest.

The great commonality in the recent stock market correction is easy to see. Any company that borrows a lot of money saw its stock get slaughtered. Technology stocks held up surprisingly well. That sets up your 2024 portfolio.

Put half your money in the Magnificent Seven stocks of Apple (AAPL), Amazon (AMZN), Meta (META), Microsoft (MSFT), Tesla (TSLA), (NVIDIA), and Salesforce (CRM).

Put your other half into heavy borrowers that benefit from FALLING interest rates, including bonds (TLT), junk bonds (JNK), (HYG), Utilities (XLU), precious metals (GOLD), (WPM), copper (FCX), foreign currencies (FXA), (FXE), (FXY), emerging markets (EEM).

As for me, I never do anything by halves. I’m putting all my money into Tesla. If I want to diversify, I’ll buy NVIDIA. Diversification is only for people who don’t know what is going to happen.

I just thought you’d like to know.

So far in October, we are up +2.96%. My 2023 year-to-date performance is still at an eye-popping +63.76%. The S&P 500 (SPY) is up +12.89% so far in 2023. My trailing one-year return reached +76.46% versus +22.57% for the S&P 500.

That brings my 15-year total return to +660.95%. My average annualized return has fallen back to +48.07%, another new high, some 2.64 times the S&P 500 over the same period.

Some 44 of my 49 trades this year have been profitable.

Chaos Reigns Supreme in Washington, with the firing of the first House speaker in history. Will the next budget agreement take place on November 17, or not until we get a new Congress in January 2025? Markets are discounting the worst-case scenario, with government debt in free fall. Definitely NOT good for stocks, which are reaching for a full 10% correction, half of 2023’s gains.

September Nonfarm Payroll Report Rockets, to 336,000, and August was bumped up another 50,000. The economy remains on fire. The headline Unemployment Rate remains steady at an unbelievable 3.8%. And that’s with the UAW strike sucking workers out of the system. This is supposed to by impossible with 5.5% interest rates. Throw out you economics books for this one!

JOLTS Comes in Hot at 9.61 million job openings in August, 700,000 more than the July report. The record labor shortage continues. Will the Friday Nonfarm Payroll Report deliver the same?

ADP Rises 89,000 in September, down sharply from previous months, showing that private job growth is growing slower than expected. August was revised down. It’s part of the trifecta of jobs data for the new month. The mild recession scenario is back on the table, at least stocks think so.

Weekly Jobless Claims Rise to 207,000, still unspeakably strong for this point in the economic cycle. Continuing claims were unchanged at 1.664%.

Traders Pile on to Strong Dollar, headed for new highs, propelled by rising interest rates. There is a heck of a short setting up for next year.

Yen Soars on suspected Bank of Japan intervention in the foreign exchange markets to defend the 150 line against the US dollar. The currency is down 35% in three years and could be the BUY of the century.

Kaiser Goes on Strike with 75,000 health care workers walking out on the west coast. The issue is money. The company has a long history of labor problems. This seems to be the year of the strike.

Oil (USO)Gets Slammed on Recession Fears, down 5% on the day to $85, in a clear demand destruction move and worsening macroeconomic picture. Europe and China are already in recession. It’s the biggest one-day drop in a year. Is the top in?

Tesla Delivers 435,059 Vehicles in September, down 5% from forecast, but the stock rose anyway. The Cybertruck launch is imminent, where the company has 2 million new orders. Keep buying (TSLA) on Dips. Technology is accelerating.

EVs have Captured an Amazing 8% of the New Car Market. They have been helped by a never-ending price war and generous government subsidies. EV sales are now up a miraculous 48% YOY and are projected to account for a stunning 23% of all California sales in Q3. Tesla is the overwhelming leader with a 52% share in a rapidly growing market, distantly followed by Ford (F) at 7% and Jeep at 5%. However, a slowdown may be at hand, with EV inventories running at 97 days, double that of conventional ICE cars. This could create a rare entry point for what will be the leading industry of this decade, if not the century. Buy more Tesla (TSLA) on bigger dips, if we get them.

Apple Upgrades New iPhone 15 to deal with overheating from third-party gaming. It will shut down some of its background activity, including some of the new AI functions, which were stressing the central processor. Third-party apps were adding to the problem, such as Uber and games from (META). This is really cutting-edge technology.

Moderna (MRNA) Bags a Nobel Prize in Chemistry. Katalin Kariko and Drew Weissman’s work helped pioneer the technology that enabled Moderna and the Pfizer Inc.-BioNTech SE partnership to swiftly develop shots. I got four and they saved my life when I caught Covid. I survived but lost 20 pounds in two weeks. It was worth it.

My Ten-Year View

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

Dow 240,000 here we come!

On Monday, October 9, there is no data of note released.

On Tuesday, October 10 at 8:30 AM EST, the Consumer Inflation Expectations is released.

On Wednesday, October 11 at 2:30 PM, the Producer Price Index is published.

On Thursday, October 12 at 8:30 AM, the Weekly Jobless Claims are announced. The Consumer Price Index is also released.

On Friday, October 13 at 1:00 PM the September University of Michigan Consumer Expectations is published. At 2:00 PM, the Baker Hughes Rig Count is printed.

As for me, one of the many benefits of being married to a British Airways senior stewardess is that you get to visit some pretty obscure parts of the world. In the 1970s, that meant going first class for free with an open bar, and occasionally time in the cockpit jump seat.

To extend our 1977 honeymoon, Kyoko agreed to an extra round trip for BA from Hong Kong to Colombo in Sri Lanka. That left me on my own for a week in the former British crown colony of Ceylon.

I rented an antiquated left-hand drive stick shift Vauxhall and drove around the island nation counterclockwise. I only drove during the day in army convoys to avoid terrorist attacks from the Tamil Tigers. The scenery included endless verdant tea fields, pristine beaches, and wild elephants and monkeys.

My eventual destination was the 1,500-year-old Sigiriya Rock Fort in the middle of the island which stood 600 feet above the surrounding jungle. I was nearly at the top when I thought I found a shortcut. I jumped over a wall and suddenly found myself up to my armpits in fresh bat shit.

That cut my visit short, and I headed for a nearby river to wash off. But the smell stayed with me for weeks.

Before Kyoko took off for Hong Kong in her Vickers Viscount, she asked me if she should bring anything back. I heard that McDonald’s had just opened a stand there, so I asked her to bring back two Big Macs.

She dutifully showed up in the hotel restaurant the following week with the telltale paper bag in hand. I gave them to the waiter and asked him to heat them up for lunch. He returned shortly with the burgers on plates surrounded by some elaborate garnish and colorful vegetables. It was a real work of art.

Suddenly, every hand in the restaurant shot up. They all wanted to order the same thing, even though the nearest stand was 2,494 miles away.

We continued our round-the-world honeymoon to a beach vacation in the Seychelles where we just missed a coup d’état, a safari in Kenya, apartheid South Africa, London, San Francisco, and finally back to Tokyo. It was the honeymoon of a lifetime.

Kyoko passed away in 2002 from breast cancer at the age of 50, well before her time.

Stay Healthy,

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

Sigiriya Rock Fort

Kyoko

October 2, 2023

Diary, Newsletter, Summary

Global Market Comments
October 2, 2023
Fiat Lux

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD, or BACK IN BUSINESS)
(TLT), (GLD), (SLV), (XLU), (IWM), (EEM), (FXA), (FXE), (FXB), (USO), (UUP), (AMZN), (TSLA), (F)

The Market Outlook for the Week Ahead, or Back in Business

Diary, Newsletter

It’s a good thing I don’t rely on my Social Security Check to cover my extravagant cost of living, which is the maximum $4,555 a month. For it came within hours of coming to a halt when an agreement was passed by Congress to renew funding for another 45 days. It was almost an entirely Democratic bill, passing 335 to 91 in the House and the Senate by 88 to 9.

Unfortunately, that does put me in the uncomfortable position of delivering humanitarian aid to Ukraine right when $6.2 billion in US assistance is cut off. That was the price the Dems had to pay to get the Republicans on board needed to pass the bill. Better a half a loaf than no loaf at all. Still, I am going to have some explaining to do next week in Kiev, Mykolaiv, and Kherson. It’s a big win for Vladimir Putin.

Funding now ends on November 17, when the next crisis begins. The big question is when the markets will deliver a sigh of relief rally on Congress hitting the “snooze” button, or whether it will focus on the next disaster in November.

We’ll have to wait and see.

In the meantime, all eyes are on the market’s leading falling interest rate plays, which continue to go from bad to worse. Those include bonds (TLT), precious metals (GLD), (SLV), utilities (XLU), small-cap stocks (IWM), emerging markets (EEM), and foreign currencies (FXA), (FXE), (FXB).

Consider this your 2024 shopping list.

Ten-year US Treasury bond yields reached a stratospheric 4.70% last week a 17-year high and up a monster 0.90% since the end of June. Summer proved a fantastic time to take a vacation from the bond market.

They could easily reach 5% before the crying is all over. Perhaps this is why my old friend, hedge fund legend David Tepper, said his best investment right now is a subprime six-month certificate of deposit yielding 7.0%.

What we might be witnessing here is a return to the “old normal” when bonds spent most of their time ranging between 2%-6%. The 60-year historic average bond yield is 2% over the inflation rate (see chart below). That alone takes us to a 5.0% bond yield.

Interest rates have been kept artificially low for 15 years because no one wanted a recession in 2008 and no one wanted a recession during the pandemic in 2000. It all melded into one big decade-and-a-half period of easy money. Pain avoidance wasn’t just the universal American monetary policy, it was the global policy.

Now it’s time to pay the piper and unwind the thousands of business models that depended on free money. There will be widespread pain, as we are now witnessing in commercial real estate and private equity. Perhaps it is best to take the 5.5% bribe 90-day Treasury bond yield is offering you and stay out of the market.

While Detroit remains mired by the UAW strike, EVs have catapulted to an amazing 8% of the new car market. They have been helped by a never-ending price war and generous government subsidies. EV sales are now up a miraculous 48% YOY and are projected to account for a stunning 23% of all California sales in Q3.

Tesla is the overwhelming leader with a 52% share in a rapidly growing market, distantly followed by Ford (F) at 7% and Jeep at 5%.

However, a slowdown may be at hand, with EV inventories running at 97 days, double that of conventional ICE cars. This could create a rare entry point for what will be the leading industry of this decade, if not the century. Buy more Tesla (TSLA) on bigger dips, if we get them.

Hedge Funds are Cutting Risk at Fastest Pace Since 2020, when the pandemic began. From retail investors to rules-based systematic traders, appetite for equities is subsiding after a 20% rally this year that’s fueled by euphoria over artificial intelligence. Fast money investors increased their bearish wagers to drive down their net leverage — a gauge of risk appetite that measures long versus short positions — by 4.2 percentage points to 50.1%, according to Goldman Sachs Group Inc.’s prime brokerage. That’s the biggest week-on-week decline in portfolio leverage since the depths of the pandemic bear market.

The Treasury Bond Freefall Continues, as long-term yields probe new highs. New issue of $134 billion this week didn’t help. Nothing can move on the risk until rates top out, even if we have to wait until 2024.

Oil (USO) Hits $95, a one-year high, as the Saudi/Russian short squeeze continues. $100 a barrel is a chipshot and much higher if we get a cold winter. Inventories at the Cushing hub are at a minimum.

The US Dollar (UUP) Hits New Highs, as “high for longer” interest rates keep powering the greenback. The buck is also catching a flight to safety bid from a potential government shutdown. It should be topping soon.

Moody’s Warns of Further US Government Downgrades, in the run up to the Saturday government shutdown. The shutdown lasts, the more negative its impact would be on the broader economy. Unemployment could soar. It would also render all US government data releases useless for the next three months.

ChatGPT Can Now Browse the Internet, according to its creator, OpenAI. Until now, the chatbot could only access data posted before September 2021. The move will exponentially improve the quality and effectiveness of AI apps, including my own Mad Hedge AI

Amazon (AMZN) Pouring $4 Billion into AI, with an investment in Anthropic, a ChatGPT competitor. (AMZN) is racing to catch up with (MSFT) and (GOOGL). Its chatbot is caused Claude 2. Amazon’s card to play here is its massive web services business AWS. The AI wars are heating up.

Hollywood Screenwriters Guild Strike Ends, after 150 days, which is thought to have cost the US economy $5 billion in output. The hit was mostly taken by Los Angeles, where 200,000 are employed. The Actor’s union is still on strike. Talk shows should be offering new content in a few days.

S&P Case Shiller Rises to New All-Time High, for the sixth consecutive month as inventory shortages drove up competition. In July, the index in increased 0.6% month over month and 1% over the last 12 months, on a seasonally adjusted basis. July’s movement reached a new high for the nationwide home index, surpassing the record set in June 2022. Chicago (+4.4%), Cleveland (+4.0%), and New York (+3.8%) delivered the biggest gains. The median home price for existing homes rose to 1.9 to $406,700 according to the National Association of Realtors (NAR). The robust housing market suggests that while some buyers pulled back due to high borrowing costs, demand continues to outweigh supply.

This is the Unit I Will be Joining at the Front in Ukraine, as made clear by their YouTube recruiting video. They asked me to assist with mine removal on territory formerly occupied by Russia. I really don’t know what I’m getting into. Improvision is key. It’s better than playing golf in retirement. Polish up your Ukrainian first.

So far in August, we are down -4.70%. My 2023 year-to-date performance is still at an eye-popping +60.80%. The S&P 500 (SPY) is up +17.10% so far in 2023. My trailing one-year return reached +92.45% versus +8.45% for the S&P 500.

That brings my 15-year total return to +657.99%. My average annualized return has fallen back to +48.15%, another new high, some 2.50 times the S&P 500 over the same period.

Some 41 of my 46 trades this year have been profitable.

My Ten-Year View

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

Dow 240,000 here we come!

On Monday, October 2, at 8:30 PM EST, the ISM Manufacturing PMI is out.

On Tuesday, October 3 at 8:30 AM, the JOLTS Job Openings Report is released.

On Wednesday, October 4 at 2:30 PM, the ISM Services Report is published.

On Thursday, October 5 at 8:30 AM, the Weekly Jobless Claims are announced.

On Friday, October 6 at 2:30 PM the September Nonfarm Payroll Report is published. At 2:00 PM the Baker Hughes Rig Count is printed.

As for me, I will try to knock out a few memories early this morning while waiting for the Matterhorn to warm up so I can launch on another ten-mile hike. So I will reach back into the distant 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 to some obscure Greek island, the ultimate destination if you lived in a cold, foggy country.

That left me stranded in Paris with little money.

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 that hovered in clouds.

I started hitchhiking to Berlin, Germany the next day, which offered paying jobs. 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 side of the road 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 mph 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 motorcycle 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 laughed uproariously when I made the attempt.

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

Decades later a Marine Corps 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. And she killed herself because….?

The only problem was sleeping because I had to share my room with the guy who lost his legs in the same 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. Few Germans wanted to live in West Berlin because of the ever-present risk of a Russian invasion so there we always good-paying jobs.

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 up on X-rays.

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

Go figure.

Brighton 1968

Ronny Carlson in Sweden

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

September 18, 2023

Diary, Newsletter, Summary

Global Market Comments
September 18, 2023
Fiat Lux

Featured Trade:

(I’M TAKING OFF FOR UKRAINE TODAY AND I NEED YOUR HELP)
(MARKET OUTLOOK FOR THE WEEK AHEAD)
(XLK), (TSLA), (GM), (F)

The Market Outlook for the Week Ahead

Diary, Newsletter

I’m not so worried that the market won’t go up. It really bothers me that stocks are unable to go down.

That means you don’t get a flush out of positions that generates the cash needed to finance the next leg up in the bull market.

Usually, that happens in the fall because historically that’s when farmers are at maximum distress, when they have run out of cash after paying for seed, fertilizer, and labor all year long but have yet to be paid for their harvest.

This was a big deal in 1900 when farming accounted for 50% of the economy. With farming now at 2% it’s not such a big deal, but once cyclicality in the market is established, it lives on forever.

With the Fed, traders, and investors fixated on inflation, you usually get a big reaction in the monthly release of the Consumer Price Index. This time, we got nada, nothing, bupkiss, even though the 0.6% rise in inflation should have triggered a meaningful market selloff.

You know it’s a pretty dead week when the lead news item is about a union that has been going out of business for 40 years. That’s because all the growth in the country during this period has been in nonunion industries, namely in technology (XLK) and at Tesla (TSLA). Notice that nonunion (TSLA) was up 10% this week, the big winner in the strike. Elon Musk has fought unionization tooth and nail for 20 years and is now coming up roses.

As a result, UAW membership plunged from 1.4 million in 1978 to 400,000, a decline of some 71.4%. The union now has more retirees than workers. That’s a lot of dead weight to carry.

One effect of this decline has been a fall in real wages during the same 45 years. What the UAW is attempting in their demands is to make up for the entire 45 years of real wage losses in one shot with a whopping great 40% increase over five years, a 32-hour work week, and better medical benefits.

It isn’t going to work.

When I picked up my first Tesla Model S some 14 years ago, I was given a tour of the factory. I was blown away by what I saw. There were no people!

I literally saw a vast factory floor of machines making machines. Occasionally, someone passed me by on a bicycle on their way to change a tool on a robot or lubricate a joint. EVs have 80% fewer parts than internal combustion vehicles and therefore require 80% fewer workers.

This is what caused me to immediately plunge into Tesla stock at a split-adjusted $2.45 a share and take my readers there as well.

One is reminded of the Luddite movement in England in 1812 when workers destroyed machines to avoid work. It was an effort to protect home spinning wheels which had until then produced the world’s cotton fabric. After an armed rebellion was put down, the machines eventually reduced the cost of cotton cloth 100-fold and launched the Industrial Revolution.

Some 200 years ago, most people could only afford one set of clothes. Now they have dozens, or hundreds if they have daughters (I have three).

Hint to the UAW: Destroying General Motors (GM), Ford (F), and Stellantis (the old Chrysler) isn’t going to get you a better job.

It's not that I am anti-union. After all, my grandfather was in the Teamsters Union during the great depression at the height of union power. It’s just that this strike is particularly stupid, grasping, and overreaching.

If you want to learn more about the Luddite movement, please click here for the history.

When the market does come out of its coma, there is no doubt where the big money is headed.

The Arm Holdings IPO (ARM) was some six times oversubscribed and it rose 25% from its initial $51 pricing on the first day as institutions rushed to top up meager allocations. The word is out. Stay underweight AI chip design companies at your peril….at whatever the price. At $69, (ARM) sports a positively bubblicious price-earnings multiple of 100X.

Sometimes, the greatest trades are those sitting right in front of our noses begging for attention. That would be the Japanese yen, which has been in free fall for three years.

If the Bank of Japan ends its zero-interest rate policy, the last in country the world to have one, the Japanese yen will rocket, and the Nikkei average will crash. With Japan’s inflation rate now at a 40-year high at 3.30% how far away can that be?

It might be setting up the long of the year in the foreign exchange market. You would think that is a certainty after a 33% drop in recent years. Maybe this is why the Nikkei has been in the doldrums since June.

So far in September, we are down unchanged, with no trade alerts issued. Patience is the name of the game here. My 2023 year-to-date performance is still at an eye-popping +60.80%. The S&P 500 (SPY) is up +16.57% so far in 2023. My trailing one-year return reached +83.85% versus +20.47% for the S&P 500.

That brings my 15-year total return to +657.99%. My average annualized return has fallen back to +47.85%, some 2.47 times the S&P 500 over the same period.

Some 41 of my 46 trades this year have been profitable.

Consumer Price Index Rises 0.6% in August, the hottest read in 18 months, but in line with expectations. Energy was the main cause, which is up 40% from its May low. The Core and Inflation Rate was up only 0.3%. Stocks and bonds barely reacted. A huge increase in auto insurance was another factor, no doubt the result of the multiple climate disasters taking place across the country.

Arm Holdings Jumps 25% on First Day of Trading. Masayoshi Sohn is happy because he still owns the remaining 90% of the company. This is where the hot money is going, and it pulled the rest of tech up as well.

EV Sales Soared by 70% in California in August, and the rest of the country is likely to follow. The coming Cybertruck release will add fuel to the fire. EV is going mainstream. China, the US, and Germany lead in global EV sales. California would be fourth if it were broken out as a separate country at 109,069 units in Q2.

US Jobless Claims Fall Again to 220,000, a drop of 5,000. The US economy is reigniting again.

Gold and Bonds are Bottoming, or so says a UK hedge fund. Distress selling off the UK’s selling of gold market the low for both bonds and the yellow metal back in 1999-2002. We could be seeing a repeat today. I think they’re right.

Morgan Stanley Upgrades Tesla, off the back of its massive AI business, which could add $600 billion in value to the company. (MS) had previously been bearish on Tesla, so (TSLA) rose 6%. (Tesla has long been the largest user of AI with a fleet of 5 million AI-driven EVs. Why was (MS) so slow to figure this out? Buy (TSLA) on dips.

Hydrogen is Going Nowhere, and the stocks are a great short, says the Argonaut hedge fund. While electric power is infinitely scalable, hydrogen demands the same inefficient infrastructure as does gasoline. Saudi Arabia has a massive advantage in that it has an unlimited supply of other energy form to convert oil into hydrogen, and solar power.

Apple is Still a Hold, for the long term and a “BUY” on any 10% correction. It is now basically an India play, as that is where future growth lies. China is peaking out. The titanium finish for the new iPhone 15 looks cool. There is a USB-C charging cable in your future to bring it in compliance with EC rules. The camera goes from a 2X to a 5X zoom. The new Special Video is a killer app. There is also a major increase in the use of artificial intelligence.

Space X is Moving into the Cargo Business, shipping goods from New York to Australia in 35 minutes. That’s what is possible for high value-added freight with rockets that can reliably take off and land. The move should take the value of Space X from the present $150 billion to $500 billion. So thinks my friend Ron Baron of the Baron Funds, and early Tesla investor. He also thinks Tesla will soar from $857 billion today to $5 trillion in five years, making it the most valuable company in the world by far. I couldn’t agree more.

Caesars Entertainment Suffers Major Hack, paying a ransom thought to be in the millions of dollars. The crooks threatened to leak the casino’s entire customer list to the dark web, including mine. A serious hack can wipe out a company, as happened to Sony a decade ago. 1234 no longer works as a password. Buy Palo Alto Networks (PANW).

My Ten-Year View

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

Dow 240,000 here we come!

On Monday, September 18, the NAHB Housing Market Index is out.

On Tuesday, September 19 at 8:30 PM EST, US Building Permits are released.

On Wednesday, September 20 at 2:00 PM EST, the Federal Reserve released its interest rate decision. A press conference follows.

On Thursday, September 21 at 8:30 AM EST, the Weekly Jobless Claims are announced. We also get Existing Homes Sales.

On Friday, September 22 at 6:45 AM the NS&P Global Composite Flash PMI for August is published. At 2:00 PM the Baker Hughes Rig Count is printed.

As for me, having visited and lived in Lake Tahoe for most of my life, I thought I’d pass on a few stories from this historic and beautiful place.

The lake didn’t get its name until 1949 when the Washoe Indian name was bastardized to come up with “Tahoe”. Before that it was called the much less romantic Lake Bigler after the first governor of California.

A young Mark Twain walked here in 1863 from nearby Virginia City where he was writing for the Territorial Enterprise about the silver boom. He described boats as “floating in the air” as the water clarity at 100 feet made them appear to be levitating. Today, clarity is at 50 feet, but it should go back to 100 feet when cars go all-electric.

One of the great engineering feats of the 19^th century was the construction of the Transcontinental Railroad. Some 10,000 Chinese workers used black powder to blast a one-mile-long tunnel through solid granite. They tried nitroglycerine for a few months but so many died in accidents they went back to powder.

The Union Pacific moved the line a mile south in the 1950s to make a shorter route. The old tunnel is still there, and you can drive through it at any time if you know the secret entrance. The roof is still covered with soot from woodfired steam engines. At midpoint, you find a shaft to the surface where workers were hung from their ankles with ropes to place charges so they could work on four faces at once.

By the late 19^th century, every tree around the lake had been cut down for shoring at the silver mines. Look at photos from the time and the mountains are completely barren. That is except for the southwest corner, which was privately owned by Lucky Baldwin who won the land in a card game. The 300-year-old growth pine trees are still there.

During the 20^th century, the entire East Shore was owned by one man, George Whittell Jr., son of one of the original silver barons. A man of eclectic tastes, he owned a Boing 247 private aircraft, a custom mahogany boat powered by two Alison aircraft engines, and kept lions in heated cages.

Thanks to a few well-placed campaign donations, he obtained prison labor from the State of Nevada to build a palatial granite waterfront mansion called Thunderbird, which you can still visit today (click here at https://thunderbirdtahoe.org ). During Prohibition, female “guests” from California crossed the lake and entered the home through a secret tunnel.

When Whittell died in 1969, a Mad Hedge Concierge Client bought the entire East Shore from the estate on behalf of the Fred Harvey Company and then traded it for a huge chunk of land in Arizona. Today the East Shore is a Nevada State Park, including the majestic Sand Harbor, the finest beach in the High Sierras.

When a Hollywood scriptwriter took a Tahoe vacation in the early 1960’s, he so fell in love with the place that he wrote Bonanza, the top TV show of the decade (in front of Hogan’s Heroes). He created the fictional Ponderosa Ranch, which tourists from Europe come to look for in Incline Village today.

In 1943, a Pan Am pilot named Wayne Poulson who had a love of skiing bought Squaw Valley for $35,000. This was back when it took two days to drive from San Francisco. Wayne flew the China Clippers to Asia in the famed Sikorski flying boats, the first commercial planes to cross the Pacific Ocean. He spent time between flights at a ranch house he built right in the middle of the valley.

His wife Sandy bought baskets from the Washoe Indians who still lived on the land to keep them from starving during the Great Depression. The Poulson’s had eight children and today, each has a street named after them at Squaw.

Not much happened until the late forties when a New York Investor group led by Alex Cushing started building lifts. Through some miracle, and with backing from the Rockefeller family, Cushing won the competition to host the 1960 Winter Olympics, beating out the legendary Innsbruck, Austria, and St. Moritz, Switzerland.

He quickly got the State of California to build Interstate 80, which shortened the trip to Tahoe to only three hours. He also got the state to pass a liability limit for ski accidents to only $2,000, something I learned when my kids plowed into someone, and the money really poured in.

Attending the 1960 Olympic opening ceremony is still one of my fondest childhood memories, produced by Walt Disney, who owned the nearby Sugar Bowl ski resort.

While the Cushing group had bought the rights to the mountains, Poulson owned the valley floor, and he made a fortune as a vacation home developer. The inevitable disputes arose and the two quit talking in the 1980’s.

I used to run into a crusty old Cushing at High Camp now and then and I milked him for local history in exchange for stock tips and a few stiff drinks. Cushing died in 2003 at 92 (click here for the obituary at https://www.nytimes.com/2006/08/22/obituaries/22cushing.html )

I first came to Lake Tahoe in the 1950s with my grandfather who had two horses, a mule, and a Winchester. He was one-quarter Cherokee Indian and knew everything there was to know about the outdoors. Although I am only one-sixteenth Cherokee with some Delaware and Sioux mixed in, I got the full Indian dose. Thanks to him I can live off the land when I need to. Even today, we invite the family medicine man to important events, like births, weddings, and funerals.

We camped on the beach at Incline Beach before the town was built and the Weyerhaeuser lumber mill was still operating. We caught our limit of trout every day, ten back in those days, ate some, and put the rest on ice. It was paradise.

During the late 1990’s when I built a home in Squaw Valley I frequently flew with Glen Poulson, who owned a vintage 1947 Cessna 150 tailwheel, looking for untouched high-country lakes to fish. He said his mother was lonely since her husband died in 1995 and asked me to have tea with her and tell her some stories.

Sandy told me that in the seventies she asked her kids to clean out the barn and they tossed hundreds of old Washoe baskets. Today Washoe baskets are very rare, highly sought after by wealthy collectors, and sell for $50,000 to $100,000 at auction. “If I had only known,” she sighed. Sandy passed away in 2006 and the remaining 30-acre ranch was sold for $15 million.

To stay in shape, I used to pack up my skis and boots and snowshoe up the 2,000 feet from the Squaw Valley parking lot to High Camp, then ski down. On the way up I provided first aid to injured skiers and made regular calls to the ski patrol.

After doing this for many winters, I finally got busted when they realized I didn’t have a ski pass. It turns out that when you buy a lift ticket you are agreeing to a liability release which they absolutely had to have. I was banned from the mountain.

Today Squaw Valley is owned by the Colorado-based Altera Mountain Company, which along with Vail Resorts own most of the ski resorts in North America. The concentration has been relentless. Last year Squaw Valley’s name was changed to the Palisades Resort for the sake of political correctness. Last weekend, a gondola connected it with Alpine Meadows next door, creating the largest ski area in the US.

Today there are no Washoe Indians left on the lake. The nearest reservation is 25 miles away in the desert in Gardnerville, NV. They sold or traded away their land for pennies on the current value.

Living at Tahoe has been great, and I get up here whenever I can. I am now one of the few surviving original mountain men and volunteer for North Tahoe Search & Rescue.

On Donner Day, every October 1, I volunteer as a docent to guide visitors up the original trail over Donner Pass. Some 175 years later the oldest trees still bear the scars of being scrapped by passing covered wagon wheels, my own ancestors among them. There is also a wealth of ancient petroglyphs, as the pass was a major meeting place between Indian tribes in ancient times.

The good news is that residents aged 70 or more get free season ski passes at Diamond Peak, where I sponsored the ski team for several years. My will specifies that my ashes be placed in the Middle of Lake Tahoe. At least I’ll be recycled. I’ll be joining my younger brother who was an early Covid-19 victim and whose ashes we placed there in 2020.

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

The Ponderosa Ranch

The Poulson Ranch

Donner Pass Petroglyphs

An Original Mountain Man

August 10, 2023

Diary, Newsletter, Summary

Global Market Comments
August 10, 2023
Fiat Lux

Featured Trades:

(WEDNESDAY, SEPTEMBER 6, 2023 SAN DIEGO, CALIFORNIA GLOBAL STRATEGY LUNCHEON)
(HOW TO GAIN AN ADVANTAGE WITH PARALLEL TRADING),
(GM), (F), (TM), (NSANY), (DDAIF), BMW (BMWYY), (VWAPY),
(PALL), (GS), (EZA), (CAT), (CMI), (KMTUY),
(KODK), (SLV), (AAPL)

CLICK HERE to download today's position sheet.

How to Gain an Advantage with Parallel Trading

Diary, Newsletter, Research

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

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

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

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

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

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

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

The logic here was very simple.

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

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

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

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

This is known as a Primary Parallel Trade.

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

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

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

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

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

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

I was puzzled. Why palladium?

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

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

And here’s the sweetener.

Palladium trading is relatively illiquid.

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

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

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

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

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

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

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

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

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

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

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

I could go on and on.

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

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

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

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

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

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

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

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

What goes around comes around.

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

Ignore it at your peril.

Sometimes Markets are Hard to Figure Out

May 30, 2023

Diary, Newsletter, Summary

Global Market Comments
May 30, 2023
Fiat Lux

Featured Trades:

(MARKET OUTLOOK FOR THE WEEK AHEAD, or A TALE OF TWO MARKETS)
(SPY), (TLT), (TSLA), (NVDA), (TOL), (LEN), (KBH), (PHM), (TLT), (MRVL), (F)

CLICK HERE to download today's position sheet.

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

Diary, Newsletter, Research

Investors are so out of position it hurts.

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

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

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

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

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

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

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

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

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

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

Yet, here we are.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

My Ten-Year View

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

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

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

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

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

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

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

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

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

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

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

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

Then you heard that great sucking sound.

Oops!

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

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

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

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

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

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

My Quotron Screen on 1987 Crash Day

Good luck and good trading!

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