Global Market Comments
June 9, 2023
Fiat Lux
Featured Trades:
(JUNE 7 BIWEEKLY STRATEGY WEBINAR Q&A),
($VIX), (TSLA), (TLT), (FCX), (RUT), (COIN), (AAPL),
(ROM), (AMZN), (PYPL), (NVDA), (COPX), (FXI)
CLICK HERE to download today's position sheet.
Below please find subscribers’ Q&A for the June 7 Mad Hedge Fund Trader Global Strategy Webinar, broadcast from Lake Tahoe, NV.
Q: Do you ever trade the CBOE Volatility Index ($VIX)?
A: No, I used to, but I got hit a few times. That’s because 95% of the year is spent seeing the ($VIX) go down, and then the other 5% basically doubles overnight. It’s a short play only. With a long ($VIX), the time decay is enormous, and it’s just not worth owning. The only way to make money in ($VIX) is to buy it right before a giant VIX spike. And the floor traders in Chicago have a huge inside advantage in that market. So, I finally gave up and decided there's better things to do.
Q: Buy the price dip for Tesla (TSLA)?
A: I’d have to look at the charts, but if it gets back down to $200, I would start hoovering it up again. The fundamentals are really arriving for Tesla big time, as is the long-term bull case.
Q: With the debt crisis over, how low will the iShares 20 Plus Year Treasury Bond ETF (TLT) go in the short term?
A: Well, we know they have to issue a trillion dollars of 90-day T-bills in the next few weeks. The debt ceiling crisis stopped Treasury bill issuance for several months and now they have a lot of catch-up to do. So, best case scenario, the (TLT) drops to $95, then you load the boat for the rest of your life in (TLT) LEAPS, like a $95-$100 2024 LEAPS. And that should double about every year.
Q: Are you concerned about commodities given the weakness in the Chinese economy?
A: Yes, it’s definitely slowing the commodities recovery, but is also giving you a fantastic opportunity to get into things like Freeport McMoRan (FCX) at a cheaper price, where it was just a couple of weeks ago. All of the commodities look like they’re bottoming now, it’s time to buy them.
Q: It seems like you really love the Russell 2000 (RUT).
A: I hate the Russell. You only want to own big money stocks because that's where the big money goes first. Big money doesn’t go into the Russell, and as long as there's any doubt of a recession coming, they’ll perform poorly.
Q: Coinbase (COIN) is getting sued by the SEC, should I buy on the dip?
A: No, the whole crypto infrastructure is getting sued out of existence and disappearing. They went after Binance also. It seems like the SEC just doesn’t like crypto very much. That kind of shrinks the whole industry back down to hot wallets, where you slowly have direct control of your bitcoin on the network and you don't use any outside brokers to buy and sell it because there may not be any left shortly.
Q: Should we still hold the Apple (AAPL) bull call spread?
A: Yes, I think we have enough room on our call spread in the next 7 trading days to take max profit. However, if you have any doubts, no one ever gets fired for taking a profit.
Q: Is the ProShares Ultra Technology ETF (ROM) a buy at this time?
A: No, if anything, ROM is a sell. It almost had a near-double move. So no, wait for a 20% or 30% correction this summer in ROM and then go in. It has actually led most tech because it's a 2X long ETF. Sometimes I just want to shoot myself. You buy before stocks double, not afterwards.
Q: What will trigger a correction this summer?
A: The risk of a further rise in interest rates, which we may get. Other than that, the market is running out of negatives.
Q: What is the risk of US currency not being the world reserve?
A: Zero. I have been asked this question every day for the last 50 years and so far, I have been right. What would you rather keep your savings in Chinese Yuan, Russian rubles, or Euros? I would say none of those. And US currency will remain the reserve currency for this century, easily, until a digital US dollar comes out.
Q: Do you want to buy the cellphone companies?
A: No, not really. They weren’t very interesting before—it's a low margin, highly competitive cutthroat business—and now you have one of the world's largest companies, Amazon (AMZN), potentially offering phones for free? I think I'll pass on that one.
Q: Do you have any interest in pairs trading?
A: No, they blow up too often.
Q: Did you say you sent out a one-year LEAPS on Freeport McMoRan (FCX), the $35-$38?
A: Yes, if you didn’t get it, email customer support.
Q: Are investing in 90-day Treasury bills until the next one or two Fed meetings are over a good idea?
A: Yes, that is a good idea. Cash has a high-value night now. Remember, a dollar at a market top is worth $10 at a market bottom, and we now have a rare opportunity to get paid 5.2% or 5.3% while we wait. That hasn’t happened in almost 20 years.
Q: Will the new Apple VR headset be a boon to the stock price?
A: Yes, adding 10% to your earnings is always good, but it won’t happen immediately. You need a few thousand third-party app developers to come through with services before the earnings really get going. That's what happened with iTunes when the iPhone came out. Growth was slow when Apple only allowed its in-house apps to be sold—when they opened to the public, the business went up 100 times. That's maybe what will happen with the virtual headset.
Q: PayPal (PYPL) has dropped a lot, should I buy it here?
A: No, cutthroat competition in the sector is destroying the share price. There are too many other better things to buy.
Q: Why do so many professional analysts say the market will go down this year, but it goes up every day?
A: Professional analysts are just that—they're analysts, not traders. And often these days, to save money, your professional analyst is 26 years old, so they don’t have much market experience. I like to think that 50 years of trading experience backed with algorithms helps.
Q: Do you think oil could hit $100 a barrel next year?
A: Yes, definitely. Especially if we get a decent economic recovery and Saudi Arabia doesn’t immediately bring back 3 million barrels a day that they’ve cut.
Q: Should I chase NVIDIA (NVDA) here?
A: No, better to own cash here than Nvidia. Buy Nvidia on the next dip, or another Nvidia wannabe company, which will almost certainly arrive shortly.
Q: When will we get peace in Ukraine?
A: Within a year, I would say. Russia has literally run out of ammunition, and Ukraine is getting more. Ukraine is also getting F16s, our older fighter planes, and many other advanced weapons and parts—those are a big help. They can beat anything the Russians throw up.
Q: Is Global X Copper Miners ETF (COPX) a good copper play?
A: Yes it is, but you don’t get the leverage that you do with an FCX LEAP. I don’t know how far the top will go, but that would be a great trade one to two years out.
Q: Can you explain why there is a short squeeze in copper?
A: There are 200 pounds of copper needed for each EV, and EV production is exploding both here and in China. Tesla is expected to make 2 million EVs this year, especially with the $33,000 price point. China manufactures this many EVs as well. Four million EVS and 200 pounds of copper per EV equals the entire annual production of copper right now. At some point, people will notice that and they’ll take copper as much as they took lithium up last year.
Q: What do you mean when you say LEAPS one or two years?
A: It really depends on your risk. When you buy a two-year LEAPS, you usually get the extra year for free or almost nothing, and if you get a rapid increase in the underlying share price, the two-year LEAP will go up almost as much as the one year. So for most people who don’t want to watch the market every day, the two-year LEAPS is probably a better choice.
Q: Why did you buy only one LEAPS contracts?
A: All of my LEAPS recommendations are only for one contract. It is up to you to decide what your risk tolerance and experience level is, whether you buy 1, 100, or 1,000 contracts, so I leave the size up to you because it can vary tremendously depending on the person. Also, one contract makes the math really easy for people to understand.
Q: At what point do you sell your LEAPS?
A: Well, if you get a rapid 500% profit, which happened with many of the LEAPS that we did in October as well as the ones we did in March, I would take it. However, the goal on these is to go for the 10 baggers, or the 100% return in a year, and you usually need to hold it for the full year to get that. But, if the stock takes off like a rocket, I would take the profit. How many times in your life do you get a 500% profit in a month or two? I would say none. So, when you get that with these LEAPS recommendations, take it and run like a madman, move to a different country, and change your name.
Q: With the ($VIX) this low and many great companies for the second half down, would you buy single LEAPS instead of spreads?
A: I would; the problem with the call spread strategy is that it’s not the best thing to do at big market bottoms, down 20%, 30%, and 40%. The better thing to do is the LEAPS, but the LEAPS is a one- or two-year position, and I have to be sending out trade alerts every day. At market bottoms, you definitely want to get the most market leverage possible on the upside, and LEAPS does that for you in spades. They essentially turn your stock into a synthetic futures contract with a 10x leverage.
Q: When do we expect China (FXI) to take over Taiwan?
A: Never, because if they invade Taiwan, China loses its food supply from the US, which cannot be replaced anywhere. They also lose their international trade, so they won’t have the profits with which to buy food elsewhere. I’ve been in China when millions died during a famine and let me tell you, there is NO substitute for food. Not all the money in the world can buy it when it just plain isn’t available. But China will keep threatening and bluffing as they have done for 74 years.
To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in to www.madhedgefundtrader.com, go to MY ACCOUNT, click on GLOBAL TRADING DISPATCH or TECHNOLOGY LETTER then WEBINARS, and all the webinars from the last 12 years are there in all their glory.
Good Luck and Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Sometimes the Market Can be Tough to Figure Out
Global Market Comments
April 14, 2023
Fiat Lux
Featured Trade:
(APRIL 12 BIWEEKLY STRATEGY WEBINAR Q&A),
(GLD), (GDX), (GOLD) (MSFT), (JPM), (BAC), (C), (BRK/B), (TLT), (FLIN), (EPI), (INDA), (FXI), (UNG), (FRC)
CLICK HERE to download today's position sheet.
Below please find subscribers’ Q&A for the April 12 Mad Hedge Fund Trader Global Strategy Webinar, broadcast from Incline Village, CA.
Q: Should I “Sell in May and go Away”
Why wait until May? Up 49% YTD, we’ve already picked the low hanging fruit for 2023. The market is now at the top end of the range in the face of a weakening economy. Maybe there is another 100 points of upside potential in the market versus 400 points of downside risk. The markets have pulled forward not only the first quarter’s performance, but possibly that for the entire year. That’s what an $18 (VIX) is telling you. The game from here is to buy the next bottom in big technology stocks for an explosive second half move up to (SPY) $4,800. This is a short-term call only. Keep all your one- and two-year LEAPS. The market won’t fall enough to justify a round trip in these illiquid positions.
Q: How do I avoid assignment risk with these call spreads and put spreads?
A: You don't want to avoid it. You want to be exercised early on the short leg of your call spreads because it allows you to take 100% of the profits well before expiration day. Some people were getting called on the banking call spreads last week because dividends were imminent and I had to explain how lucky they were. The reason hedge funds call away these options is that they want to buy the stock one, two, or three days before the stocks go ex-dividend, so they can get an immediate payoff and then get rid of the position. In the case of JP Morgan (JPM), they paid out a $1 dividend on Monday last week, so we had a lot of exercises right before that. All you have to do is call your broker (they’re not allowed to do this unless you call them), tell them to exercise your long option to meet your short, and you’re out of the position at max profit and you get the money immediately. So that is the issue. Only stocks that pay dividends or interest get called away, so the high dividend things like the banks or the iShares 20 Plus Year Treasury Bond ETF (TLT) will get called away. Zero dividend stocks almost never get called away unless someone is trying to cover a short in aftermarket hours. My experience is that only 1% of your positions ever get called away.
Q: What are your thoughts on the bottom for United States Natural Gas Fund (UNG) and what will trigger the reversal on it?
A: The bottom is somewhere around here—we’re very close to or even below some of the historic bottoms for natural gas over the last 20 years, which is around $2/MM BTU for natural gas. We could bounce around here for a while. The trigger for the recovery will be a stronger economic recovery in China, which is the world's largest natural gas importer. When the Ukraine War broke out, a lot of that gas got diverted to Germany. Those contracts are now expiring and we’re in a position now where we can start re-exporting that gas to China. They’ll take all we can produce. So that should be positive for Nat Gas. Also, because of the damage caused by the explosion at the Cheniere Energy (LNG) export facilities in Texas, our capacity to exported was impaired for many months. Those are coming back online now. This is why you look at Nat Gas now, and is why I put on a two-year LEAPS instead of a one-year.
Q: Would I go into cash with my favorite stocks?
A: Yes, for the short term. No, for the long term. All of my stocks are great long-term holds, but if you’re day trading or weekly trading or monthly trading, now is not a bad place to go cash so you have lots of dry powder on the next meltdown, especially with 90-day T-bills giving you 5%.
Q: Should we purchase gold bullion as a small percentage of our portfolio?
A: Better to buy gold stocks like SPDR Gold Trust (GLD), VanEck Gold Miners ETF (GDX), and Barrick Gold (GOLD) and Newmont Mining (NEM). Gold bullion is expensive to store, is heavy, takes up a lot of space in your safe deposit box, and it can be stolen—that is the problem with physical assets. I prefer the financial assets, the gold miners, to the underlying metal, which should perform at 4x the rate of actual gold.
Q: Have you changed your December 2024 view on bank stocks?
A: No.
Q: Is it true that Warren Buffet thinks the banking crisis is not over?
A: Yes it is, but it will be confined to smaller banks, which are losing their deposits to larger banks like JP Morgan (JPM), Bank of America (BAC), Citibank (C), and Berkshire Hathaway (BRK/B). It’s the regional banks that are going to have a much more difficult time rolling over real estate loans that are coming due. You have a $1.5 trillion of commercial real estate loans coming due in the next year, and these loans originally were taken out at 0% or 2% or 3%. They’re now going to have to refinance at 7%, 8%, 9% or 10%, and that will create a problem because a lot of their borrowers don’t qualify for their loans anymore. That’s going to be a drag but it’s going to hit the Midwest in one-off situations that can be easily ring-fenced. The net effect of the regional banking crisis is going to be to suck money out of the middle part of the US and park it on the coasts where the big banks are, mostly on the east coast.
Q: Based on your view, the market is due for a short-term correction, would you keep long-term LEAPS on the banks?
A: Absolutely yes. First off the banks have already had their correction, thanks to the regional banking crisis. If you have any downside in banks it will be minimal, the upside is maybe 10x greater than the downside in banks. So yes, you keep your LEAPS, and that’s why you have long-term LEAPS—to take the long-term view and just forget about them, don’t even look at them day to day because they won’t change. The time value on those long-dated options is so great that you get very little day-to-day movement in the actual price.
Q: How are you going to be successful with AI?
A: Well you hire only the absolute best software engineers, which we have here in San Francisco and Silicon Valley. How to invest in AI is much harder; there are no pure AI plays. Microsoft bought the frontrunner for $13 billion, ChatGPT, and any other participants in cutting edge AI are all giant companies where it’s just a small part of their business. However, down the road, like in a year or two or three, you will be invited to buy pure AI spinoffs at tremendously inflated multiples, and that will be the only way to get in. That might be the top for the stock. I’ve only seen this happen like 100 times before, why should AI be any different? The best way to benefit from AI is to use it yourself, just like when Microsoft brought out Office—there was no way to get a pure play on Microsoft Office other than buying Microsoft (MSFT) itself. You did a lot better using the apps for your own business and your own investment styles. The big view on AI is that it will double the value of all existing companies that you already own by cutting costs and improving service value. That part of my Dow 240,000 call.
Q: Do you like Chinese solar stocks?
A: No, China has its own unique political risks which I don’t want to get involved with right now. And even the solar companies in the US are hugely overbought. Great long-term businesses for all of these companies, but the stocks have already discounted a decent chunk of that, there are better fish to fry, like bank stocks for example. The best way to play China is to buy the surrounding emerging countries (EEM) it buys from, not China itself.
Q: I hear that India is the next China. How best to play it?
A: That’s true, India is the next China; but it won’t grow at the peak rate that China did in its best days in the 2000s, which is a growth rate of around 13% a year. India might do half of that, and the simple answer is that China is a dictatorship and could order what they needed to do to max out growth. India is a democracy and can’t do things like arbitrary land seizures or big infrastructure projects and so on. So, that will cut the growth rate in India by half but that’ll still be double America’s long term growth rate, which is a mature economy. And the ETFs to play there in India are (FLIN), the (EPI), and the (INDA). Those are three good index ETFs in India.
Q: Do you expect a 2.5% US Treasury yield by year-end?
A: Yes, and in fact we’ve already done half of that move from the 4.60% yield that we have at the peak last October. So yes, the trend is our friend, and the hard thing to do in the bond market is to get into it, because everybody in the world is now expecting lower interest rates.
Q: What options spreads would you do on the iShares 20 Plus Year Treasury Bond ETF (TLT)?
A: Well here, none, because we’re at a high for the year, but wait for a $5 point selloff and then do $5 points in-the-money. That’s what I do like clockwork, don’t even think about it. If we drop more that $5 I’ll just buy more.
Q: Do you expect Natural Gas (UNG) to be higher by the end of the year for the current price?
A: Absolutely, yes, 8 months is more than enough time to get China online again and buying all the natural gas they can get their hands on unless they invade Taiwan.
Q: Any interesting LEAPS on First Republic Corporation (FRC)?
A: You can buy the July 2023 $22.500$25 vertical bull call debit spreads LEAPS for 60 cents and see it expire at $2.50 in 15 months. With an incredible implied volatility at 177% that’s the furthest option maturity that is trading. I think the better trade here is just to buy the stock. You’re going to be limiting your upside with a LEAPS. With a “BUY” in the stock here, you’re looking at 2, 3, 4 times upside potential in a recovery—and remember this thing’s trading at $14, it used to be trading at $100 a month ago. So, don’t limit your upside with an options trade on something that’s clearly extremely oversold after a 90% down-move in a month. That's a rare situation. Full disclosure: I own (FRC). I bought some at $15 and I bought more at $12, just as a go-crazy trade—but I know the (FRC) bank and the management.
Q: How to buy Natural Gas?
A: You buy (UNG), the ETF, to make it really easy. Just remember you have a -35% one-year contango on that so it’s got to go up more than 35% in a year for you to make money.
Q: Any risk of holding banks and brokers through earnings?
A: I would say not much. If they announce surprise losses, they’ll be small. The first quarter was actually a very good quarter for banks and brokers because they made tons of money on their options business, where the volumes have doubled. And the banking crisis didn’t really kick in during the first quarter, at least from a business point of view. So, I don’t expect downside surprises—if there are, it will be small ones, not worth selling and trying to get back in because you’ll just end up paying a higher price.
Q: Are we building new nuclear plants?
A: No, but we had the first expansion in 7 years of the exiting Vogtle plant in Georgia which added a new reactor. The real demand will come from new designs of nuclear plants and the US modernizing its nuclear weapons designs. All of the nuclear fuel that we bought from the Soviet Union after its collapse 30 years ago has all been used up. It ran all of the nuclear power plants in the US for 20 years. That has run out and the prospects of resupplying from Russia now are zero.
Q: Do you foresee China invading Taiwan?
A: Never going to happen. If China (FXI) does invade Taiwan they 1.) lose their entire foreign food supply from the US and 2.) lose all their trade with the US that they need to earn the money to pay for food from other sources like Australia and Russia. So, never going to happen, but they will keep bluffing all year, as they have done continuously since 1949.
Q: Could commercial real estate be a problem for large insurance companies?
A: Only if the default rate goes up; and again, it’s going to be a case-by-case basis where they invested—is it Manhattan or San Francisco where the vacancy rates are at all-time highs at 30%, or is it the Midwest, where the credit quality has deteriorated the most, and is looking at the higher default rates? What is more likely is that interest rates will fall sharply by 2024 bailing these companies out.
To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in to www.madhedgefundtrader.com , go to MY ACCOUNT, click on GLOBAL TRADING DISPATCH or TECHNOLOGY LETTER then WEBINARS, and all the webinars from the last 12 years are there in all their glory.
Good Luck and Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
1976 in Laos
Global Market Comments
January 13, 2023
Fiat Lux
Featured Trade:
(JANUARY 11 BIWEEKLY STRATEGY WEBINAR Q&A)
(ROM), (FCX), (QQQ), (VIX), (TSLA), (TLT), (MSFT), (RIVN), (VIX), (BRK/B), (RTX), (LMT), (FXI), (UNG), (GLD), (GDX), (SLV), (WPM)
Below please find the subscribers’ Q&A for the January 11 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Silicon Valley in California.
Q: In your trade alert you expected that the (TLT) might go up as much as 30% this year. But in your latest newsletter, you mentioned that the chaos in the US House of Representatives would greatly raise the risk of a default on US government debt by the summer and certainly cast a shadow over your 50% long bond position. Is it still a good idea to hold on to the (TLT) ETF over the next 2-6 months?
A: It is. The extremists who now control the House are not interested in governing or passing laws but gaining clicks, raising money, and increasing speaker’s fees. It may have converted (TLT) from a straight-up trade to a flat-line trade. We will still make the maximum profit on call spreads and LEAPS but with greater risk. But even chaos in the House can’t head off a recession, which the bond market seems intent on pricing in by going up. However, if you depend on government payments for any reason, be it Social Security, a government salary, a tax refund, or a payment for a contract, expect delays. The housing market also ceases because closings can’t take place during government shutdowns. Also, 30% of my bond longs expire in four trading days, and the remainder on February 17.
Q: Is it wise to sell the 2X ProShares Ultra Technology ETF (ROM) now or keep holding?
A: I think the (ROM), NASDAQ, and technology stocks in general may make several runs at the lows over the next six months but won’t fall much from here. A recession is priced in. Once we get through this, you’re looking at doubles and triples for the best names. So, the risk/reward overwhelmingly favors holding on to a one-year view.
Q: would you buy Tesla (TSLA) here?
A: I would start scaling in. The bad news is about to dry up, like Twitter, the recession, the pandemic in China, and Elon Musk selling shares. Then we face an onslaught of good news, like the new Mexico factory announcement, the Cybertruck launch, solid state batteries, and annual production hitting 2 million. At this level, the shares are priced in multiple worst-case scenarios. It is selling at 10X 2025 earnings, half the market multiple. At the end of the day, Tesla has an unassailable 14-year start over the rest of the industry and is the only company in the world that makes money on EVs. There’s an easy 10X here on two-year LEAPS.
Q: I’m in the Freeport McMoRan (FCX) January 25 2-year LEAP approaching the upper end of the 42/45 range. If it crosses 45, do we close the position?
A: Sell half, take your profit. If you’re in the LEAP, my guess is you probably have a 500% profit here in only 3 months, which is not bad. And then you keep the remaining half because you’re then playing with the house's money, and Freeport has a shot of going all the way to $100 a share by the 2025 expiration, and that will get you your full 1,000% return on the position. It’s always nice to be in a position where it’s impossible to lose money on a trade, and that certainly is where you are now with your (FCX) LEAP and everybody else in the FCX LEAP in October also.
Q: As a member of the Florida Retirement System, I’m curious how Blackrock (BLK) and other firms are dealing with the Santos’ plan for their portfolios.
A: Having a state governor manage your portfolio and make your sector and stock picks is an absolutely terrible idea. I can’t imagine a worse possible outcome for your retirement funds. Florida is not the only state doing this—Louisiana and Texas are doing it too. The goal is to drive money out of alternative energy and back into the oil industry, and obviously, this is being financed by the oil industry, which is pissed off over their low multiples. Suffice it to say it’s not a good idea to move out of one of the fastest-growing industries in the market and move into an industry that’s going to zero in 10 years. If that’s their investment strategy, I wish they’d stick to politics and leave investing for true professionals to do.
Q: What do you think about cannabis stocks?
A: I’m a better user of the product than the stock. How about that? How hard is it to grow weed? At the end of the day, these are just pure marketing companies, and that value added is low. Plus, they have huge competition from the black market still selling ½ to ⅓ below market prices because they’re tax-free; the local taxes on these cannabis sales are enormous.
Q: Would you recommend selling a bear market rally when the S&P goes to 405?
A: The (QQQ) would be the better short, something like the $310-320 vertical bear put spread for February to bring in some free money. That’s what I'm planning to do if we get up that high, which we may not.
Q: How do you take advantage of a low CBOE Volatility Index (VIX)?
A: You don’t; there’s nothing to do here with the (VIX) at $22. My trades this year were not volatility trades—because we did them with low volatility, they were pure directional trades betting that the longs would go up and the shorts would go down and they all worked.
Q: Will Rivian (RIVN) survive?
A: Yes, they have two years of cash flow in the bank, and they’re boosting production. However, a high-growth, non-earning stock like Rivian is just out of favor right now. Will they come back into favor? Yes, probably in a year or so, but in the meantime, people are much happier buying Microsoft (MSFT) at a discount than Rivian.
Q: Do you ever buy butterfly spreads?
A: No, four-legged trades run up a lot of commissions, are hard to execute because you have 4 spreads, and have lower returns. They are also lower risk and for people who have no idea what the market is going to do. I don’t need the lower risk trades because I know what markets are going to do.
Q: Do you suggest any Microsoft (MSFT) LEAPS?
A: Yes, go out two years with LEAPS and go out about 50% on your strike prices. A 50% move here in Microsoft in two years is a complete no-brainer.
Q: With weakness in retail, rising inventories, and high consumer debt, will consumers dip into savings?
A: Yes they will, but that will predominantly happen at the bottom half of the economy—the part of the economy that has minimal to no savings. The upper half seems to be doing well—the middle class and of course, the wealthy— and are not cutting back their spending at all, which is why this seems to be a recession that may not actually show up. So, what can I say? The rich are doing great and everyone else is doing less than great, and stocks are reflecting that. Nothing new here.
Q: Would you hold off on tech LEAPS for a bigger selloff, or closer to April?
A: If we do get another big selloff and challenge the October lows, I’ll be pumping out those LEAPS as fast as I can write them; except then, a two-year LEAPS will have an April of 2025 expiration.
Q: I just signed up. What are the advantages of LEAPS?
A: A possible 10x return in 2 years with very low risk. I would suggest going to my website, logging in, and doing a search for LEAPS. There will be a piece there on how to execute a LEAPS, and the Concierge members can also find that piece by logging into their website.
Q: Best and worst sectors?
A: First half, already mentioned them. We like commodities, healthcare, financials, and Berkshire Hathaway (BRK/B) in the first half and tech in the second half.
Q: Have we reached a low in cryptocurrencies?
A: Probably not, and I’ll tell you why I’ve given up on cryptos: I may not live long enough to see the bottom in crypto. It has Tokyo written all over it, and it took Tokyo 30 years to resume a bull market after it crashed in 1990. We’re still at the scandal stage where it turns out that the majority of these trading platforms were stealing money from customers. This is not a great inspiration for investing in that sector. When you have the best quality growth stocks down 80-90%; why bother with something that may not exist or may never recover in your lifetime? I’m out of the crypto business, but there are a wealth of crypto research sources still online and I’m sure they’d be more than happy to give you an opinion.
Q: Why have defense stocks like Raytheon (RTX) and Lockheed Martin (LMT) been weak recently?
A: A couple of reasons. #1 Just outright profit taking into the end of the year in one of the best-performing sectors. #2 The end of the war in Ukraine may not be that far off, and if that happens that could trigger a major round of selling in defense. We did get the three-day ceasefire over the Russian Orthodox New Year, that’s a possible hint, so that may be another reason.
Q: Political outlook on 2024?
A: It’s too early to make any calls, anything could happen; but if we get a repeat of the November election outcome, you could have Democrats retake control of both houses of congress—that’s where the betting money is going right now.
Q: Would you bottom fish in the United States Natural Gas Fund (UNG)?
A: No, I would not—I am avoiding energy like the plague. Remember the all-time low for natural gas is $0.95 per MM BTU, so we still could have a long way to go.
Q: Would you buy iShares China Large-Cap ETF (FXI) on a post-COVID breakout?
A: It looks like it’s already moved, so maybe kind of late on that. The problem is that in China, you don’t know what you are buying and the locals have a huge advantage in reading Beijing.
Q: What do you think about the Biden administration wanting to ban gas stoves?
A: That’s actually not a federal issue, it’s a state issue. California has already banned gas pipes for all new construction. It looks like New York will follow and that’s one-third of the US population. The goal is to replace them with electrical appliances which emit no carbon. I have a non-carbon house myself, I went down that path about 10 years ago, and it seems to be the only way to reduce carbon emissions—is to either price gasoline or oil out of the market, or to make it illegal, and they’re already making gasoline cars illegal, so gas and oil won’t be far behind. From 1900, we went from a hay powered economy to a gasoline-powered one in only 20 years so it should be doable.
Q: How can the push for all electric work well when we have so many shutdowns, much higher electricity cost, and cannot keep up with the demand already here?
A: Buy lots of copper for new local electric powerlines at the house level and buy lots of aluminum for the long-distance transmission lines. Global demand for both aluminum and copper has to triple to accommodate the grid buildout that is already planned. As far as hurricanes in Florida, there’s nothing you can do to stop those on a hundred-year view; I would move to higher ground, which is hard to do in Florida as the highest point in the state is only 345 feet and that’s a garbage dump.
Q: Can I get a copy of all these slides?
A: Yes, we post the PowerPoint on the website at www.madhedgefundtrader.com usually two hours after the production.
Q: Are you recommending buying precious metals right now (GLD), (GDX), (SLV), (and WPM) even after the upside breakout?
A: On upside breakouts, you buy the dips. A perfect dip would be a retest of the 200-day moving average. But we may not get that, since it seems to be everyone’s number-one choice right now. By the way, I haven’t been telling people to buy gold and LEAPS on all the gold plays since October—that’s where the big move has already been made.
To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in to www.madhedgefundtrader.com, go to MY ACCOUNT, click on GLOBAL TRADING DISPATCH or TECHNOLOGY LETTER, then WEBINARS, and all the webinars from the last 12 years are there in all their glory.
Good Luck and Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
CLICK HERE to download today's position sheet.
With the Israeli Army in Jerusalem in 1979
Global Market Comments
December 12, 2022
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or HOW MARKETS WORK),
(SPY), (TLT), (TSLA), (GLD), (XOM), (OXY), (FXI), (JPM)
Last week, I spoke about the “smart” market and the “dumb” market.
Looking across asset class behavior over the last couple of years, it’s become evident, there is another major driver.
Liquidity.
Hedge fund legend George Soros was an early investor in my hedge fund because he was looking for a pure Japan play. But I learned a lot more from him than he from me.
No shocker here: it’s all about the money.
Follow the flow of funds and you will always know where to invest. If you see a sustainable flow of money into equities, you want to own stocks. The same is true with bonds.
There is a corollary to this truism.
The simpler an idea, the more people will buy it. One can think of many one or two-word easy-to-understand investment themes that eventually led to bubbles: the Nifty Fifty, the Dotcom Boom, Fintech, Crypto Currencies, and oil companies.
Spot the new trend, get in early, and you make a fortune (like me and Soros). Join in the middle, and you do OK. Join the party at the end and it always ends in tears, as those who joined crypto a year ago learned at great expense.
If I could pass on a third Soros lesson to you, it would be this. Anything worth doing is worth doing big. This is why you have seen me frequently with a triple position in the bond market, or the double short I put on with oil companies two weeks ago, clearly just ahead of a meltdown.
Which brings me back to liquidity.
There are only two kinds of markets: liquidity in and liquidity out. Liquidity was obviously pouring into markets from 2009. This is why everything went up, including both stocks and bonds. That liquidity ended on January 4, 2022. Since then, liquidity has been pouring out at a torrential rate and everything has been going down.
So, what happened on October 14, 2022?
The hot money, hedge funds, and you and I started betting that a new liquidity in cycle will begin in 2023 and continue for five, or even ten years. This is why we have made so much money in the past two months.
Notice that liquidity out cycles are very short when compared with liquidity in cycles, one to two years versus five to ten years. That’s because populations expand creating more customers, technology advances creating more products and services, and economies get bigger.
When I first started investing in stocks, the U.S. population was only 189 million, the GDP was $637 billion, and if you wanted a computer, you had to buy an IBM 7090 for $3 million. Notice the difference with these figures today: $25 trillion for GDP, a population of 335 million, and $99 for a low-end Acer laptop, which has exponentially more computer power than the old IBM 7090.
What did the stock market do during this time? The Dow Average rocketed by 54 times, or 5,400%. And you wonder why I am so long term bullish on stocks. The people who are arguing that we will have a decade of stock market returns are out of their minds.
Which reminds me of an anecdote from my Morgan Stanley days, in my ancient, almost primordial past. In September 1982, I met with the Head of Investments at JP Morgan Bank (JPM), Mr. Carl Van Horn. I went there to convince him that we were on the eve of a major long term bull market and that he should be buying stocks, preferably from Morgan Stanley.
Every few minutes he said, “Excuse me” and left the room to return shortly. Years later, he confided in me that whenever he left, he placed an order to buy $100 million worth of stock for the bank’s many funds every time I made a point. That very day proved to be the end of a decade-long bear market and the beginning of an 18-year bull market that delivered a 20-fold increase in share prices.
But there is a simpler explanation. Liquidity in markets are a heck of a lot more fun than liquidity out ones, where your primary challenge is how to spend your newfound wealth.
I vote for the simpler explanation.
Yes, this is how markets work.
My performance in December has so far tacked on another robust +4.85%. My 2022 year-to-date performance ballooned to +88.53%, a spectacular new high. The S&P 500 (SPY) is down -17.0% so far in 2022.
It is the greatest outperformance on an index since Mad Hedge Fund Trader started 14 years ago. My trailing one-year return maintains a sky-high +92.92%.
That brings my 14-year total return to +601.09%, some 2.73 times the S&P 500 (SPX) over the same period and a new all-time high. My average annualized return has ratcheted up to +46.23%, easily the highest in the industry.
I took profits in my oil shorts in (XOM), (OXY), (SPY), and (TSLA). I am keeping one long in (TSLA), with 90% cash for a 10% long position.
Producer Prices Come in High, up 0.3% in November, driven by rising prices for services. It sets up an exciting CPI for Tuesday morning.
Emerging Markets Saw Massive Inflows in November, some $37.4 billion, the most since June 2021. Chinese technology stocks were two big beneficiaries, down 80%-90% from their highs. This could be one of the big 2023 performers if the US dollar and interest rates continue to fall. Buy (EEM) on dips.
Oil is in Free Fall, with 57 fully loaded Russian tankers about to hit the market. Nobody wants it ahead of a recession. All mad hedge short plays in energy are coming home. When will the US start refilling the Strategic Petroleum Reserve?
Turkey Blocks Russian Oil at the Straights of Bosporus, checking insurance papers, which are often turning out to be bogus. Insurance Russian tankers are now illegal in western countries. Many of these tankers are ancient, recently diverted from the scrapyard and in desperate need of liability insurance. Oil spills are expensive to clean up. Just ask any Californian.
Tesla Cuts Production in China, some 20% at its Shanghai Gigafactory for its Model Y SUV, or so the rumor goes. The short sellers are back! These are the kind of rumors you always hear at market bottoms.
US Unemployment to Peak at 5.5% in Q3 of 2023, according to a survey from the University of Chicago Business School. A tiny handful expects a higher 7.0% rate. Some 85% of economists polled expect a recession next year. After that, the Fed will take interest rates down dramatically to bring unemployment back down. No room for a soft landing here.
Home Mortgage Demand Plunges in another indicator of a sick housing market, which is 20% of the US economy. New applications are down a stunning 86% YOY despite a dive in the 30-year rate to 6.41%, but nobody is selling. Refis are now nonexistent.
Gold Continues on a Tear, hitting new multi-month highs. With interest rates certain to plummet in 2023 as the Fed reacts to a recession, Gold could be one of the big trades for next year. Buy (GLD), (GDX), and (GOLD) on dips.
Services PMI Hits New Low for 2022 at a recessionary 46.2. Nothing but ashes in this Christmas stocking. It didn’t help bonds, which sold off two points yesterday.
Demand Collapse Hits China (FXI), with US manufacturing there down 40% and many factories closing early for the New Year. Container traffic from the Middle Kingdom is down 21% over the past three months, astounding ahead of Christmas.
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, December 12 at 8:00 AM, the Consumer Inflation Expectations for November is published.
On Tuesday, December 13 at 8:30 AM EST, the Core Inflation Rate for November is out
On Wednesday, December 14 at 11:00 AM EST, the Federal Reserve Interest rates decision is announced. The Press Conference follows at 11:30.
On Thursday, December 15 at 8:30 AM EST, the Weekly Jobless Claims are announced. Retail Sales for November are printed.
On Friday, December 16 at 8:30 AM EST, the S&P Global Composite Flash PMI for December is disclosed. At 2:00 PM, the Baker Hughes Oil Rig Count is out.
As for me, in 1978, the former Continental Airlines was looking to promote its Air Micronesia subsidiary, so they hired me to write a series of magazine articles about their incredibly distant, remote, and unknown destinations.
This was the only place in the world where jet engines landed on packed coral runways, which had the effect of reducing engines lives by half. Many had not been visited by Westerners since they were invaded, first by the Japanese, then by the Americans, during WWII.
That’s what brought me to Tarawa Atoll in the Gilbert Islands, and island group some 2,500 miles southwest of Hawaii in the middle of the Pacific Ocean. Tarawa is legendary in the US Marine Corps because it is the location of one of the worst military disasters in American history.
In 1942, the US began a two-pronged strategy to defeat Japan. One assault started at Guadalcanal, expanded to New Guinea and Bougainville, and moved on to Peleliu and the Philippines.
The second began at Tarawa, and carried on to Guam, Saipan, and Iwo Jima. Both attacks converged on Okinawa, the climactic battle of the war. It was crucial that the invasion of Tarawa succeed, the first step in the Mid-Pacific campaign.
US intelligence managed to find an Australian planter who had purchased coconuts from the Japanese on Tarawa before the war. He warned of treacherous tides and coral reefs that extended 600 yards out to sea.
The Navy completely ignored his advice and in November 1943 sent in the Second Marine Division at low tide. Their landing craft quickly became hung up on the reefs and the men had to wade ashore 600 yards in shoulder-high water facing withering machine gun fire. Heavy guns from our battleships saved the day but casualties were heavy.
The Marines lost 1,000 men over three days, while 4,800 Japanese who vowed to keep it at all costs, fought to the last man.
Some 35 years later, it was with a sense of foreboding that I was the only passenger to debark from the plane. I headed for the landing beaches.
The entire island seemed to be deserted, only inhabited by ghosts, which I proceeded to inspect alone. The rusted remains of the destroyed Marine landing craft were still there with their twin V-12 engines, black and white name plates from “General Motors Detroit Michigan” still plainly legible.
Particularly impressive was the 8-inch Vickers canon the Japanese had purchased from England, broken in half by direct hits from US Navy fire. Other artillery bore Russian markings, prizes from the 1905 Russo-Japanese War transported from China.
There were no war graves, but if you kicked at the sand human bones quickly came to the surface, most likely Japanese. There was a skull fragment here, some finger bones there, it was all very chilling. The bigger Japanese bunkers were simply bulldozed shut by the Marines. The Japanese are still in there. I was later told that if you go over the area with a metal detector it goes wild.
I spend a day picking up the odd shell casings and other war relics. Then I gave thanks that I was born in my generation. This was one tough fight.
For all the history buffs out there, one Marine named Eddie Albert fought in the battle who, before the war, played “The Tin Man” in the Wizard of Oz. Tarawa proved an expensive learning experience for the Marine Corps, which later made many opposed landings in the Pacific far more efficiently and with far fewer casualties. And they paid much attention to the tides and reefs, developing Underwater Demolition Teams, which later evolved into the Navy Seals.
The true cost of Tarawa was kept secret for many years, lest it speak ill of our war planners, and was only disclosed just before my trip. That is unless you were there. Tarawa veterans were still in the Marine Corps when I got involved during the Vietnam War and I heard all the stories.
As much as the public loved my articles, Continental Airlines didn’t make it and was taken over by United Airlines (UAL) in 2008 as part of the Great Recession airline consolidation.
Tarawa is still visited today by volunteer civilian searchers looking for soldiers missing in action. Using modern DNA technology, they are able to match up a few MIAs with surviving family members every year. I did the same in Guadalcanal.
As much as I love walking in the footsteps of history, sometimes the emotional price is high, especially if you knew people who were there.
Stay healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Tarawa November 1943
Broken Japanese Cannon
Armstrong 8-Inch Cannon 1900
US Landing Craft on the Killer Reef
How to Get to Tarawa
Roving Foreign Correspondent on Tarawa in 1978
Second Marine Division WWII Patch
Global Market Comments
November 18, 2022
Fiat Lux
Featured Trade:
(NOVEMBER 16 BIWEEKLY STRATEGY WEBINAR Q&A),
(TSLA), (JNK), (HYG) or (TLT), (UUP), (FXE), (FXC), (FXA), (ALB), (FCX), (PYPL), (FXI), (GLD), (CCJ), (BHP), (RCL)
Below please find subscribers’ Q&A for the November 16 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Silicon Valley in California.
Q: What do you see Tesla (TSLA) moving to from here until next year?
A: Not much; I mean if you’re lucky, Tesla won’t move at all. The problem is Twitter is looking like a disaster of huge proportions—firing half the staff on day one? Never good for building a business. Tesla has also been tied to the rest of big tech, which has been in awful condition and may not see a continuous move upward until the Fed actually starts lowering interest rates in the second quarter of next year. Tesla could be dead money here for a while; eventually, a company growing at 50% a year will go up—especially when it’s just had a 50% decline in the share price. As to when that is, I don’t know, and asking me 15 more times will get you just the same answer.
Q: Should we start piling into iShares 20 Plus Year Treasury Bond ETF (TLT) longs now or wait?
A: You go now. Every day you waited meant paying one point more in TLT. I think the bottom is in; we have a 20-30 point move ahead of us. Everybody in the world is now trying to get into this trade, just like I spent all this year trying to get out of it. And if anything, November CPI could be a long term-term top in inflation, especially if we came in with another cold number. So, I would start scaling in now, even though we’re over $100 in the (TLT) today and I first recommended this around $95.
Q: If the Fed keeps raising interest rates, will the US Treasury market fall?
A: Probably not because the Fed only has control of overnight interest rates—the discount rate, the interbank rate—whereas the (TLT) is a 10-to-20-year maturity bond. No matter what short term rates do, the inversion will just keep getting bigger, but in fact, the bond market itself was yielding 4.46%, yielding 8% with junk, has bottomed and will probably start going up from here. So that is the difference between the Fed and what the actual market does.
Q: Do you prefer Junk (JNK), (HYG), or (TLT)?
A: I always go for the highest risk. Junk has about an 8% yield here compared to 3.75% for the TLT. By the way, if you want to do one trade and go to sleep, buy the junk on 2 to 1 margin, get your 16% yield next year, and just take a one-year vacation. That’s what some people do.
Q: When you say the dollar is going to go down what do you mean?
A: I mean the US dollar, while Canadian (FXC) and Australian dollars (FXA) will go up.
Q: What is the best time to buy US dollars?
A: Maybe in five years, as it could go down for five or 10 years from here, now that it’s going to imminently give up its yield advantage.
Q: What's the forecast for casinos?
A: I think casinos do better. Las Vegas was absolutely packed, you couldn’t get into the best hotels—people are spending money like crazy.
Q: What’s the best way to play (TLT)?
A: With a one-year LEAP. I put out the $95/$100 last week for my concierge members. Here, you probably want to do the $100/$105; that’ll still give you a one-year return of 100%.
Q: How do you short the dollar?
A: There are loads of short dollar ETFs out there, or you can just sell short the Invesco DB US Dollar Index Bullish Fund (UUP), which is the dollar basket, or buy the (FXA) or (FXE).
Q: Freeport McMoRan (FCX) just went from 25 to 38; is it time to take a profit and re-enter at a lower point?
A: Short term yes, long term no. My long-term target for (FCX) is $100 because of the exponential growth of copper demand caused by EV production going from 1.5 million to 20 million a year in the next 10 years. Each EV needs 200 pounds of copper, so by 2030, annual copper demand for EVs only will be 20 billion pounds. In 2021, the total annual global copper production was 46.2 billion pounds. In order words, global copper production has to double in eight years just to accommodate EV growth only.
Q: Do you think there’ll be a rail worker strike?
A: I have no idea, but it will be a disaster if there is. There’s your recession scenario.
Q: What strike prices do you like for a Tesla LEAP?
A: Anything above here really. You could be cautious and do something like a $200/$210 two years out—that has a double in it. Or you could be more adventurous and go for a 400% return with like a $250/$260 in two years. I’m almost sure that we’ll have a major recovery in Tesla within two years.
Q: What’s your opinion on PayPal (PYPL) and Albemarle (ALB)?
A: I’m trying to stay away from the fintech area, partly because it’s tech and partly because the banks are recapturing a lot of the business they were losing to fintech a couple of years ago by moving into fintech themselves. That is the story and we’re clearly seeing that in the share prices of both banks and PayPal. I like Albemarle because the demand for lithium going forward is almost exponential.
Q: What’s your thought on the Australian dollar (AUD)?
A: Buy it with both hands as it is going to parity. Australia is a great indirect play on trade with China (FXI), gold (GLD), uranium (CCJ), and iron ore (BHP). It’s a great play on the recovery of the global economy, which will start next year.
Q: What do you think about Royal Caribbean Cruises Ltd (RCL)?
A: Probably a buy but remember all the cruise lines will be impaired to some extent by the massive debts they had to take on to survive two years of shutdown with the pandemic. I took the Queen Victoria last July on their Norwegian Fjord cruise, and it had not been operated for two years. None of the staff had any idea what to do. I had to show them.
Q: Will big tech have a good second half?
A: Probably, but it’s going to be a slow first quarter, and I think if we start getting actual cuts in interest rates, then it’s going to be off to the races for tech and they’ll all go to all-time highs as they always do.
Q: How come you haven’t issued any trade alerts yet on the currencies?
A: Calling a five-year turnaround is a big job. Now that we have the turnaround in play, we’re in dip-buying mode. So, you will see these in the future. But I also have to look at what currency trades are offering compared to other trades in other asset classes. And for the last year or two, the big opportunities have all been in stocks. You had volatility constantly visiting the mid $30s, you didn’t get that in the currencies, and more money was to be made in stock trades than foreign currency trades. That is changing now; let's see if we have a sustainable trend and if we get a good entry point. There’s a lot that goes into these trade alerts that you don’t always get to see. We only get a 95% success rate by being very careful in sending out trade alerts and that means long periods of doing nothing when the risk/reward is mediocre at best, which is right now. The services that guarantee you a trade alert every day all lose money.
Q: What is the recommended minimum portfolio size to amortize the cost of the concierge service?
A: I tell people to have a half a million in assets because we want people who are financially sophisticated to understand what we’re telling them. That said, we do have people with as little as 100,000 in the concierge service and they usually make the money back on the first trade. This is a very sophisticated high-return, very active service. You get my personal cell phone number and all that, plus your own dedicated website, and specific concierge-only research. It’s a much higher level of service. It’s by application only and we currently have no places available for new concierge members. However, if you’re interested, we can put you on the waitlist so that when another millionaire retires, we can open up a space.
Q: Despite recent moves, the algo looks bearish. There are lots of mixed signals.
A: Yes, it does. And yes, that’s often the case when the market timing index hangs around 50.
Q: Do concierges go for short term moves?
A: No, concierges are looking for the big, long-term trades that they can just buy and forget about. That is where the big money is made. At least 90% of the people that try day trading lose money but make all the brokers rich.
To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in to www.madhedgefundtrader.com, go to MY ACCOUNT, click on GLOBAL TRADING DISPATCH or Technology Letter, then WEBINARS, and all the webinars from the last 12 years are there in all their glory.
Good Luck and Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
