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The Market Outlook for the Week Ahead, or The Melt Up is On!

I have a new roommate.

Her name is Goldilocks. The neighbors have been sneaking peeks at her through the curtains at night and raising their eyebrows because she is slightly older than my kids, or about 50 years younger than me.

I have no complaints. Suddenly, the world looks a brighter place, I’m getting up earlier in the morning, and there is a definite spring in my step. My doctor asks me what I’ve been taking lately.

It helps a lot too that the value of my stock portfolio is going up every day.

I don’t know how long Goldilocks will stay. The longer the better as far as I am concerned. After all, I’m a widower twice over, so anyone and anything is fair game. But two or three months is reasonable and possibly until the end of 2021.

That’s the way it is with these May-December relationships, or so my billionaire friends tell me, who all sport trophy wives 30 years younger.

At my age, there are no long-term consequences to anything because there is no long-term. I don’t even buy green bananas.

I have been expecting exactly this month’s melt-up for months and have been positioning both you and me to take maximum advantage. I am making all my pension fund and 401k contributions early this year to get the money into the stock market as fast as possible.

So far so good.

More money piled into stocks over the past five months than over the previous 12 years. And this pace is set to continue. Those who sold a year ago are buying back. $2 trillion in savings enforced by the pandemic are also going into stocks. And after all, there is nothing else to buy.

If all this sounds great, it’s about to get a lot better. Europe and Asia are still missing in action, thanks to a slower vaccine rollout. When they rejoin the global economy in the fall, it will further throw gasoline on the fire. Exports will boom.

The money supply is growing at an astonishing 26% annual rate, thanks to QE forever and massive government spending. That’s the fastest rate on record. In ten years, a PhD will write a paper on how much of this ended up in the stock market. Today, I can tell you it is quite a lot.

In the meantime, make hay while the sun shines. What am I supposed to talk to about with Goldilocks at night anyway?

Do you suppose she trades stocks?

50 Years of Money Supply Growth is Going Vertical

A face-ripping rally is on for April, or so says Strategas founder Lee. A Volatility Index with a $17 handle is sending a very strong signal that you should be loading up on energy, industrials, consumer discretionary, and travel-related stocks. Avoid “stay at home” stocks like Covid-19, which are extremely overcrowded. I’m using dips to go 100% long.

It’s all about infrastructure, 24/7 for the next three months, or until the $2.3 trillion spending package is passed. It might have to take a haircut first. Biden has set a July 4 target to close thousands of deals and horse-trading. With the S&P 500 breaking out above $4,000 and the financial markets drowning in cash, the plan could be worth another 10% of market upside. Would your district like a new bridge? Maybe a freeway upgrade? The possibilities boggle the mind.

US Manufacturing hits a 37-year high in March, driven by massive new orders front-running the global economic recovery. The Institute for Supply Management publishes a closely followed index that leaped from 60.8 to 64.7. Buy before the $10 trillion hits the market.

US Services Industry hits record high, with the Institute of Supply Management Index soaring from 55.3 to 63.7 in March. The ending of Covid-19 restrictions was the major factor. Roaring Twenties here we come!

US Job Openings are red-hot, coming in at 7.4 million compared to an expected 7 million, according to the JOLTS report. It’s the best report in 15 months. It's a confirmation of the ballistic March Nonfarm Payroll report out on Friday.

US Auto Sales surge in Q1, shaking off the 2020 Great Recession. It’s a solid data point for the recovery, despite a global chip shortage. General Motors (GM) was up 4%, thanks to recovering Escalade sales, and strong demand is expected for the rest of 2021. Toyota (TM) was up 22% and Fiat Chrysler 5%. “Pent-up demand” is a term you’re going to hear a lot this year.

The Economic boom will run through 2023, says JP Morgan chairman Jamie Diamond, one of the best managers in the country. In his letter to shareholders, he says 10% of his workforce will work permanently from home. Zoom (ZM) is here to stay. Fintech is a serious threat to legacy banks, which is why we love Square (SQ) and PayPal (PYPL). Keep buying (JPM) on dips. Interest rates will rise for years, but not fast enough to kill the bull market.

IMF predicts 6.0% Global Growth for 2021, the highest in 40 years. China will grow at 8.4%. It’s a big improvement since their January prediction. The $1.9 trillion US Rescue is stimulating not just America’s economy, but that of the entire world. Expect a downgrade to the 3% handle in 2022, which is still the best in a decade.

Fed Minutes say Ultra Dove Policy to Continue, so say the minutes from the March meeting. Rates won’t be raised on forecasts, predictions, or crystal balls, but hard historic data. That’s another way of saying no rate hikes until you see the whites of inflation’s eyes. $120 billion of monthly bond buys will continue indefinitely. Bonds dropped $1.25 on the news. Sell all (TLT) rallies in serious size. It’s still THE trade of 2021.

Disneyland in LA to open April 30 after a one-year hiatus. It’s time to dust off those mouse ears. The last time the Mouse House was closed this long, antiwar protesters took to Tom Sawyer’s Island and raised the Vietcong flag (I was there). Some 10,000 cast members have been recalled. Only 15% capacity will be allowed to California residents only. The new Avengers Campus will open on June 4. The company is about to make back the 25% of revenues it lost last year, but with a much lower cost base. Buy (DIS) on dips.

Was that inflation? The Producer Price Index jumped by 1.0% in March compared to an expected 0.40%. It’s the second hot month in a row. Basically, the price of everything went up. The YOY rate is an astonishing 4.04% a near-decade high. If it looks like a duck and quacks like a duck….Stocks didn’t like it….for about 15 minutes.

When we come out the other side of pandemic, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 400% to 120,000 or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 120,000 here we come!

My Mad Hedge Global Trading Dispatch profit reached 5.80% gain during the first nine days of April on the heels of a spectacular 20.60% profit in March.

It was a very busy week for trade alerts, with five new positions. Sensing an uncontrolled market melt-up for the entire month piled on aggressive long in Visa (V), JP Morgan (JPM), and Microsoft (MSFT). I also poured on a large short position in bonds (TLT) with a distant May expiration.

My now large Tesla (TSLA) long expires in 4 trading days. Half of my even larger short in the bond market (TLT) also expires then.

That leaves me 100% invested for the sixth time since last summer. Make hay while the sun shines.

My 2021 year-to-date performance soared to 49.89%. The Dow Average is up 11.60% so far in 2021.

That brings my 11-year total return to 472.44%, some 2.00 times the S&P 500 (SPX) over the same period. My 11-year average annualized return now stands at an unbelievable 41.68%, the highest in the industry.

My trailing one-year return exploded to positively eye-popping 128.94%. I truly have to pinch myself when I see numbers like this. I bet many of you are making the biggest money of your long lives. Every time I think these numbers can’t be topped, that increases by another 10% during the following two weeks.

We need to keep an eye on the number of US Coronavirus cases at 30.6 million and deaths topping 563,000, which you can find here.

The coming week will be dull on the data front.

On Monday, April 12, at 11:00 AM, the US Consumer Inflation Expectations for March is released.

On Tuesday, April 13, at 8:30 AM, US Core Inflation for March is published.

On Wednesday, April 14 at 2:00 PM, the Federal Reserve Beige Book is out.

On Thursday, April 15 at 8:30 AM, the Weekly Jobless Claims are printed. We also learn US Retail Sales for March.

On Friday, April 16 at 8:30 AM, we get the Housing Starts for March. At 2:00 PM, we learn the Baker-Hughes Rig Count.

As for me, the whole Archegos blow-up reminds me that there are always a lot of con men out there willing to take your money. As PT Barnum once said, “There is a sucker born every minute.”

I’ll tell you about the closest call I have ever had with one of these guys.

In the early 2000s, I was heavily involved in developing a new, untried, untested, and even dubious natural gas extraction method called “fracking.” Only a tiny handful of wildcatters were even trying it.

Fracking involved sending dynamite down old, depleted wells, fracturing the rock 3,000 feet down, and then capturing the newly freed up natural gas. If successful, it meant that every depleted well in the country could be reopened to produce the same, or more gas than it ever had before. America’s gas reserves would have doubled overnight.

A Swiss banker friend introduced me to “Arnold” of Amarillo, Texas who claimed fracking success and was looking for new investors to expand his operations. I flew out to the Lone Star state to inspect his wells, which were flaring copious amount of natural gas.

Told him I would invest when the prospectus was available. But just to be sure, I hired a private detective, a retired FBI man, to check him out. After all, Texas is notorious for fleecing wannabe energy investors, especially those from California.

After six weeks, I heard nothing, so late on a Friday afternoon, I ordered $3 million sent to Arnold’s Amarillo bank from my offshore fund in Bermuda. Then I went out for a hike. Later that day, I checked my voice mail and there was an urgent message from my FBI friend:

“Don’t send the money!”

It turns out that Arnold had been convicted of check fraud back in the sixties and had been involved in a long series of scams ever since. But I had already sent the money!

I knew my fund administrator belonged to a certain golf club in Bermuda. So, I got up at 3:00 AM, called the club Starting Desk and managed to get him on the line. He said I had missed the 3:00 PM Fed wire deadline on Friday and the money would go out first thing Monday morning. I told him to be at the bank at 9:00 AM when the doors opened and stop the wire at all costs.

He succeeded, and that cost me a bottle of Dom Perignon Champaign, which fortunately in Bermuda is tax-free.

It turned out that Arnold’s operating well was actually a second-hand drilling rig he rented with a propane tank buried underneath that was flaring the gas. He refilled the tank every night to keep sucking in victims. My Swiss banker friend went bust because he put all his clients into the same project.

I ended up making a fortune in fracking anyway with much more reliable partners. No one had heard of it, so I bought old wells for pennies on the dollar and returned them to full production. Then gas prices soared from $2/MM BTU to $17. America’s gas reserves didn’t double, they went up ten times.

I sold my fracking business in 2007 for a huge profit to start the Diary of a Mad Hedge Fund Trader.

It is all a reminder that if it is too good to be true, it usually is.

Stay healthy.

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

April 1, 2021

Diary, Newsletter, Summary

Global Market Comments
April 1, 2021
Fiat Lux

Featured Trade:

(MARCH 31 BIWEEKLY STRATEGY WEBINAR Q&A),
(FB), (ZM), ($INDU), (X), (NUE), (WPM), (GLD), (SLV), (KMI), (TLT), (TBT), (BA), (SQ), (PYPL), (JNP), (CP), (UNP), (TSLA), (GS), (GM), (F)

March 31 Biweekly Strategy Webinar Q&A

Diary, Newsletter, Research

Below please find subscribers’ Q&A for the March 31 Mad Hedge Fund Trader Global Strategy Webinar broadcast from frozen Incline Village, NV.

Q: Would you buy Facebook (FB) or Zoom (ZM) right here?

A: Well, Zoom was kind of a one-hit wonder; it went up 12 times on the pandemic as we moved to a Zoom economy, and while Zoom will permanently remain a part of our life, you’re not going to get that kind of growth in stock prices in the future. Facebook on the other hand is going to new highs, they just announced they’re laying a new fiber optic cable to Asia to handle a 70% increase in traffic there. So, for the longer term and buying here, I think you get a new high on Facebook soon; there's maybe another 20-30% move in Facebook this year.

Q: I can’t really chase these trades here, right?

A: Correct; if you wait any more than a day or 2 on executing a trade alert, you’re missing out on all of the market timing value we bring to the game. So that's why I include an entry price and the “don’t pay more than” price. And we never like to chase, except last year, when we did it almost all the time. But last year was a chase market, this year not so much.

Q: How are LEAP purchase notifications transmitted?

A: Those go out in the daily newsletter Global Trading Dispatch when I see a rare entry point for a LEAP, then we’ll send out a piece and notify everybody. But it’s very unusual to get those. Of course, a year ago we were sending out lists of LEAPS ten at a time when the Dow Average ($INDU) is at 18,000. But that is not now, you only wait for those once or twice a year. On huge selloffs to get into two-year-long options trades, and that is definitely not now. The only other place I've been looking out for LEAPS right now are really bombed out technology stocks begging for a rotation. Concierge members get more input on LEAPS and that is a $10,000 a year upgrade.

Q: What are your thoughts on silver (SLV) and long-term gold (GLD)?

A: I see silver going to $50 and eventually $100 in this economic cycle, but it's out of favor right now because of rising interest rates. So, once we hit 2.00% in the ten years, it’s not only off to the races for tech but also gold and silver. Watch that carefully because your entry point may be on the horizon. That makes Wheaton Precious Metals (WPM) a very attractive “BUY” right now.

Q: Are you going to trade the (TLT)?

A: Absolutely yes, but I’m kind of getting picky now that I’m up 42% on the year; and I only like to sell 5-point rallies, which we got for about 15 minutes last week. And I also only like to buy 5- or 10-point dips. Keep your trading discipline and you’ll make a ton of money in this market. Last year we made about 30% trading bonds on about 30 round trips.

Q: How much further upside is there for US Steel (X) and Nucor Corp. (NUE)?

A: More. There's no way you do infrastructure without using millions of tons of steel. And I kind of missed the bottom on US Steel because it had been a short for so long that it kind of dropped off the radar for me. I think we have gone from $4 to 27 since last year, but I think it goes higher. It turns out the US has been shutting down steel production for decades because it couldn't compete with China or Japan, and now all of a sudden, we need steel, and we don’t even make the right kind of steel to build bridges or subways anymore—that has to be imported. So, most of the steel industry here now is working for the car industry, which produces cold-rolled steel for the car body panels. Even that disappears fairly soon as that gets taken over by carbon fiber. So enough about steel, buy the dips on (X) and (NUE).

Q: What stocks should I consider for the infrastructure project?

A: Well, US Steel (X) and Nucor Corp (NUE) would be good choices; but really you can buy anything because the infrastructure package, the way it’s been designed, is to benefit the entire economy, not just the bridge and freeway part of it. Some of it is for charging stations and electric car subsidies. Other parts are for rural broadband, which is great for chip stocks. There is even money to cap abandoned oil wells to rope in Texas supporters. All of this is going to require a massive upgrade of the power grid, which will generate lots of blue-collar jobs. Really everybody benefits, which is how they get it through Congress. No Congressperson will want to vote against a new bridge or freeway for their district. That’s always the case in Washington, which is why it will take several months to get this through congress because so many thousands of deals need to be cut. I’ve been in Washington when they’ve done these things, and the amount of horse-trading that goes on is incredible.

Q: Is it a good thing that I’ve had the United States Treasury Bond Fund (TLT) LEAPS $125 puts for a long time.

A: Yes. Good for you, you read my research. Remember, the (TLT) low in this economic cycle is probably around $80, so you probably want to keep rolling forward your position….and double up on any ten-point rally.

Q: Do you think we get a pop back up?

A: We do but from a lower level. I think any rallies in the bond market are going to be extremely limited until we hit the 2.00%, and then you’re going to get an absolute rip-your-face-off rally to clean out all the short term shorts. If you're running put LEAPS on the (TLT) I would hang on, it’s going to pay off big time eventually.

Q: If we see 3.00% on the 10-year this year, do you see the stock market crashing?

A: I don’t think we’ll hit 3.00% until well into next year, but when we do, that will be time for a good 10% stock market correction. Then everyone will look around again and say, “wow nothing happened,” and that will take the market to new highs again; that's usually the way it plays out. Remember, then year yields topped all the way up at 5.00% when the Dotcom Bubble topped in April 2020.

Q: Has the airline hospitality industry already priced in the reopening of travel?

A: No, I think they priced in the hope of a reopening, but that hasn’t actually happened yet, and on these giant recovery plays there are two legs: the “hope for it” leg, which has already happened, and then the actual “happening” leg which is still ahead of us. There you can get another double in these stocks. When they actually reopen international travel to Europe and Asia, which may not happen this year, the only reopening we’re going to see in the airline business is in North America. That means there is more to go in the stock price. Also coming back from the brink of death on their financial reports will be an additional positive.

Q: Do you think a corporate tax increase will drive companies out of the US again and raise the unemployment rate?

A: Absolutely not. First of all, more than half of the S&P 500 don’t even pay taxes, so they’re not going anywhere. Second, I think they will make these offshoring moves to tax-free domiciles like Ireland illegal and bring a lot of tax revenues back to the US. And third, all Biden is doing is returning the tax rate to where it was in 2017; and while the corporate tax rate was 35%, the stock market went up 400% during the Obama administration, if you recall. So stocks aren't really that sensitive to their tax rates, at least not in the last 50 years that I’ve been watching. I'm not worried at all. And Biden was up on the polls a year ago talking about a 28% tax rate; and since then, the stock market has nearly doubled. The word has been out for a year and priced in for a year, and I don't think anybody cares.

Q: What about quantum computers?

A: I’m following this very closely, it’s the next major generation for technology. Quantum computers will allow a trillion-fold improvement in computing power at zero cost. And when there's a stock play, I will do it; but unfortunately, it’s not (IBM), because we’re not at the money-making stage on these yet. We are still at the deep research stage. The big beneficiaries now are Alphabet (GOOGL), Microsoft (MSFT), and Amazon (AMZN).

Q: Is it time to buy Chinese stocks?

A: I would say yes. I would start dipping in here, especially on the quality names like Tencent (TME), Baidu (BIDU), and Alibaba (BABA), because they’ve just been trashed. A lot of the selloff was hedge fund-driven which has now gone bust, and I think relations with China improve under Biden.

Q: Your timing on Tesla (TSLA) has been impeccable; what do you look for in times of pivots?

A: Tesla trades like no other stock, I have actually lost money on a couple of Tesla trades. You have to wait for things to go to extremes, and then wait two more days. That seems to be the magic formula. On the first big selloff go take a long nap and when you wake up, the temptation to buy it will have gone away. It always goes up higher than you expect, and down lower than you expect. But because the implied volatilities go anywhere from 70% to 100%, you can go like 200 points out of the money on a 3-week view and still make good money every month. And that’s exactly what we’re going to do for the rest of the year, as long as the trading’s down here in the $500-$600 range.

Q: Is Editas Medicine (EDIT), a DNA editing stock, still good?

A: Buy both (EDIT) and Crisper (CRSP); they both look great down here with an easy double ahead. This is a great long-term investment play with gene editing about to dominate the medical field. If you want to learn more about (EDIT) and (CRSP) and many others like them, subscribe to the Mad Hedge Fund Biotech & Healthcare Letter because we cover this stuff multiple times a week (click here).

Q: Is the XME Metals ETF a buy?

A: I would say yes, but I'd wait for a bigger dip. It’s already gone up like 10X in a year, but the outlook for the economy looks fantastic. (XME) has to double from here just to get to the old 2008 high and we have A LOT more stimulus this time around.

Q: What about hydrogen?

A: Sorry, I am just not a believer in hydrogen. You have to find someone else to be bullish on hydrogen because it’s not me. I've been following the technology for 50 years and all I can say is: go do an image Google for the name “Hindenburg” and tell me if you want to buy hydrogen. Electricity is exponentially scalable, but Hydrogen is analog and has to be moved around in trucks that can tip over and blow up at any time. Hydrogen batteries are nowhere near economic. We are now on the eve of solid-state lithium-ion batteries which improve battery densities 20X, dropping Tesla battery weights from 1,200 points to 60 pounds. So “NO” on hydrogen. Am I clear?

Q: Why do you do deep-in-the-money call and put spreads?

A: We do these because they make money whether the stock goes up down or sideways, we can do them on a monthly basis, we can do them on volatility spikes, and make double the money you normally do. The day-to-day volatility on these positions is very low, so people following a newsletter don’t get these huge selloffs and sell at bottoms, which is the number one source of retail investor losses. After 13 years of trade alerts, I have delivered a 40.30% average annualized return with a quarter of the market volatility. Most people will take that.

Q: Is ProShares Ultra Short 20 Year Plus Treasury ETF(TBT) still a play for the intermediate term?

A: I would say yes. If ten-year US Treasury bonds Yields soar from 1.75% to 5.00% the (TBT) should rise from $21 to $100 because it is a 2X short on bonds. That sounds like a win for me, as long as you can take short term pain.

Q: What is the timing to buy TLT LEAPS?

A: The answer was in January when we were in the $155-162 range for the (TLT). Down here I would be reluctant to do LEAPS on the TLT because we’ve already had a $25 point drop this year, and a drop of $48 from $180 high in a year. So LEAP territory was a year ago but now I wouldn’t be going for giant leveraged trades. That train has left the station. That ship has sailed. And I can’t think of a third Metaphone for being too late.

Q: Would you buy Kinder Morgan (KMI) here?

A: That’s an oil exploration infrastructure company. No, all the oil plays were a year ago, and even six months ago you could have bought them. But remember, in oil you’re assuming you can get in and out before it crashes again, it’s just a matter of time before it does. I can do that but most of you probably can’t, unless you sit in front of your screens all day. You’re betting against the long-term trend. It works if you’re a hedge fund trader, not so much if you are a long-term investor. Never bet against the long-term trend and you always have a tailwind behind you. All surprises work to your benefit.

Q: If you get a head and shoulders top on bitcoin, how far does it fall?

A: How about zero? 80% is the traditional selloff amount for Bitcoin. So, the thing is: if bitcoin falls you have to worry about all other investments that have attracted speculative interest, which is essentially everything these days. You also have to worry about Square (SQ), PayPal (PYPL), and Tesla (TSLA), which have started processing Bitcoin transactions. Bitcoin risk is spread all over the economy right now. Those who rode the bandwagon up will ride it back down.

Q: Is Boeing (BA) a long-term buy?

A: Yes, especially because the 737 Max is back up in the air and China is back in the market as a huge buyer of U.S. products after a four-year vacation. Airlines are on the verge of seeing a huge plane shortage.

Q: What about Ags?

A: We quit covering years ago because they’re in permanent long-term downtrends and very hard to play. US farmers are just too good at their jobs. Efficiencies have double or tripled in 60 years. Ag prices are in a secular 150-year bear market thanks to technology.

Q: Is this recorded to watch later?

A: Yes, it goes on our website in about two hours. For directions on where to find it, log in to your www.madhedgefundrader.com account, go to “My Account,” and it will be listed under there, as are all the recorded webinars of the last 12 years.

Q: Would you buy Canadian Pacific (CP) here, the railroad?

A: No, that news is in the price. Go buy the other ones—Union Pacific (UNP) especially.

Q: What are your thoughts on Bitcoin?

A: We don’t cover Bitcoin because I think the whole thing is a Ponzi scheme, but who am I to say. There is almost ten times more research and newsletters out there on Bitcoin as there is on stock trading right now. They seem to be growing like mushrooms after a spring storm. There are always a lot of exports out there at market tops, as we saw with gold in 2010 and tech stock in 2000.

Q: What do you think about Juniper Networks (JNP)?

A: It’s a Screaming “BUY” right here with a double ahead of it in two years. I’m just waiting for the tech rotation to get going. This is a long-term accumulate on dips and selloffs.

Q: Did the Archagos Investments hedge fund blow threaten systemic risk?

A: No, it seems to be limited just to this one hedge fund and just to the people who lent to it. You can bet banks are paring back lending to the hedge fund industry like crazy right now to protect their earnings. I don’t think it gets to the systemic point, but this is the Long Term Capital Management for our generation. I was involved in the unwind of the last LTCM capital, which was 23 years ago. I was one of the handful of people who understood what these people were even doing. So, they had to bring me in on the unwind and huge fortunes were made on that blowup by a lot of different parties, one of which was Goldman Sachs (GS). I can tell you now that the statute of limitations has run out and now that it's unlikely I'll ever get a job there, but Goldman made a killing on long-term capital, for sure.

Q: Will Tesla benefit from the Biden infrastructure plan?

A: I would say Tesla is at the top of the list of companies the Biden administration wants to encourage. That means more charging stations and more roads, which you need to drive cars on, and bridges, and more tax subsidies for purchases of new electric cars. It’s good not just Tesla but everybody’s, now that GM (GM) and Ford (F) are finally starting to gear up big numbers of EVs of their own. By the way, I don't see any of the new startups ever posing a threat to Tesla. The only possible threats would be General Motors, Ford, and Volkswagen, which are all ten years behind.

Q: Would you put 10% of your retirement fund into cryptocurrencies?

A: Better to flush it down the toilet because there’s no commission on doing that.

Q: Is growing debt a threat to the economy? How much more can the government borrow?

A: It appears a lot more, because Biden has already indicated he’s going to spend ten trillion dollars this year, and the bond market is at a 1.70%—it’s incredibly low. I think as long as the Fed keeps overnight rates at near-zero and inflation doesn't go over 3%, that the amount the government can borrow is essentially unlimited, so why stop at $10 or $20 trillion? They will keep borrowing and keep stimulating until they see actual inflation, and I don’t think we will see that for years because inflation is being wiped out by technology improvements, as it has done for the last 40 years. The market is certainly saying we can borrow a lot more with no serious impact on the economy. But how much more nobody knows because we are in uncharted territory, or terra incognita.

To watch a replay of this webinar just log in to www.madhedgefundtrader.com , go to MY ACCOUNT, click on GLOBAL TRADING DISPATCH, then WEBINARS, and all the webinars from the last ten years are there in all their glory.

Good Luck and Stay Healthy.

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

March 4, 2021

Diary, Newsletter, Summary

Global Market Comments
March 4, 2021
Fiat Lux

Featured Trade:

(THE BARBELL PLAY WITH BERKSHIRE HATHAWAY),
(BRKA), (BRKA), (BAC), (KO), (AXP), (VZ), (BK) (USB),
(TLT), (AAPL), (MRK), (ABBV), (CVX), (GM), (PCC), (BNSF)

The Barbell Play with Berkshire Hathaway

Diary, Newsletter

It’s time to give myself a dope slap.

I have been pounding the table all year about the merits of a barbell strategy, with equal weightings in technology and domestic recovery stocks. By owning both, you’ll always have something doing well as new cash flows bounce back and forth between the two sectors like a ping pong ball.

After all, nobody gets sector rotation right, unless they have been practicing for 50 years, like me.

Full disclosure: I have to admit that after 50 years of following him, I love Buffet. He was one of the first subscribers to my newsletter when it started up in 2008. Some of his best ideas have come from the Mad Hedge Fund Trader, like buying Bank of America for $5 in 2008.

Oh, and he hates Wall Street for constantly fleecing people. Ditto here.

In reading Warren Buffet’s annual letter (click here for the link), it occurred to me that his Berkshire Hathaway (BRKB) shares were in effect a one-stop barbell investment.

For a start, Warren owns a serious slug of Apple (AAPL), some $120 billion worth, or 2.5% of the total fund. That gives (BRKB) some technology weighting. It cost him only $20 billion. The dividends he received entirely paid for the initial cost. So he owns 4% of Apple for free.

I remember the battle over the initial “BUY” five years ago. Warren fought it, insisting he didn’t understand the smart phone business. In the end, he bought Apple for its global brand value alone.

That is Warren Buffet to a tee.

The next five largest publicly listed holdings are Bank of America (BAC), Coca-Cola (KO), American Express (AXP), and Verizon Communications (VZ). These are your classic domestic recovery sectors. And with a heavy weighting in other banks (BK) (USB), Buffet is effectively short the bond market (TLT), another position I hugely favor.

Also included in the package is a liberal salting of pharmaceuticals, Merck (MRK) and AbbVie (ABBV). He has a small energy weighting with Chevron (CVX). He even has a position in old heavy metal America with General Motors (GM).

Berkshire is also one of the world’s largest property & casualty insurance owners. Its current “float” is $138 billion. You all know his flagship holding, GEICO. And the gecko mascot isn’t going anywhere as long as Warren lives. It was Warren’s idea.

It all seems to work for Warren. In 2020, he earned a staggering $42.5 billion. All told, Berkshire’s businesses employ 360,000, second to only Amazon (AMZN), and is the largest taxpayer in the United States, accounting for 3% of government revenues. Berkshire is also the largest owner of capital goods & equipment in the US worth $156 billion, topping (AT&T).

Many of Warrens's early 1956 $1,000 investors are millionaires many times over….and over 100 years old, prompting him to muse if ownership of his shares extended life.

Warren’s annual letter, which he spends practically the entire year working on, is always one of the best reads in the financial markets. There isn’t a better 50,000-foot view out there. He also admits to his mistakes, such as his disastrous purchase of Precision Castparts (PCC) in 2016 for $37 billion, which later suffered from the crash in the aerospace industry. In 2020, Buffet wrote off $11 billion of that acquisition.

He can do worse. In 1993, he bought the Dexter Shoe Company for $433 million worth of Berkshire stock. The company went under, but the Berkshire stock today is worth $8.7 billion.

Buffet’s letters always refer back to some of his “greatest hits,” today legends in the business history of the United States: GEICO, Furniture Mart, Berkshire Hathaway Energy, and See’s Candies, one of the largest employers of women in the US using 150-year-old recipes. Its peanut brittle is to die for.

In 2009, Buffet snatched away from me BNSF for a song, now the most profitable railroad in the country, an amalgamation of 360 railroads over 170 years. I say “snatched away” because it was my favorite railroad trading vehicle for decades until he bought the entire company. I hear its trains run by my home every night as a grim reminder.

Another benefit to owning (BRKB) is that Buffet is far and away the largest buyer of his own shares, soaking up $25 billion worth in 2020. And he is buying the shares of other companies that are also aggressively buying their own shares, like Apple ($200 billion with last year). It all sounds like the perfect money creation machine to me.

It gets better. Berkshires “B” shares trade options, meaning you can buy LEAPS (Long Term Equity Anticipation Securities), which by now, you all know and love. I’ll run some numbers for you.

With (BRKB) now trading at $254, you can buy the January 2023 $300-$310 call spread for $2.50. If the shares close anywhere over $310 by the 2023 expiration, the position will be worth $10.00, giving you a gain of 300%. And you only need an appreciation of $56, or 22% in the shares to capture this blockbuster profit, giving you upside leverage of an eye-popping 13.63X in the best run company in America.

See, I told you you’d like it.

This is how poor people become rich. In fact, my target for (BRKB) is $300 for end of 2021 and $400 for 2022, right when the two-year LEAPS expire.

One question I often get about Berkshire is what happens when Warren Buffet goes to his greater reward, not an impossible concept given that he is 90 years old.

I imagine the shares will have a bad day or two, and then recover. Buffet has been hiring his replacements for a decade or more, and he handed off day-to-day operation years ago (I didn’t want to move to Omaha, no mountains).

When that happens, it will be the best buying opportunity of the year. And another chance to load up on those LEAPS.

February 26, 2021

Tech Letter

Mad Hedge Technology Letter
February 26, 2021
Fiat Lux

Featured Trade:

(EV INDUSTRY GOES FROM HOT TO HOTTER)
(TSLA), (GM), (EV), (SAIC), (PLTR), (ROKU)

EV Industry Goes from Hot to Hotter

Tech Letter

The electric vehicle market is blossoming into a mega tech growth industry and we are just entering the sweet spot of it.

Just take a look at the variety of options now on the market.

China has been doing its best to catch up to the standard bearer Tesla (TSLA) with generous government subsidies spawning a tidal wave of new investment.

A Chinese company partnering with GM has been able to introduce an electric vehicle (EV) selling in China for $4,500 and is now miraculously outselling Tesla's posher cars.

The compact car is proving a home run for state-owned SAIC Motor, China's top automaker.

The Hong Guang Mini EV is being built as part of a joint venture with US car giant General Motors (GM) and yes, this is the same joint venture where Chinese companies “borrow” the proprietary intellectual property.

This is just another example of the breadth of options out there and the insatiable popularity of the mode of transport in a world of climate change and the broad-based pivot to sustainable ecological business.

According to Fortune Business Insights, the global electric vehicle market will be worth $985.72 billion by 2027, growing at a compound annual growth rate (CAGR) of 17.4% over the next six years.

Electric vehicle sales are poised to surpass the highest level on record in 2021.

Edmunds data shows that EV sales made up 1.9% of retail sales in the United States in 2020 and that number is expected to surge to 2.5% this year.

Edmunds analysts anticipate that 30 EVs from 21 brands will become available for sale this year, compared to 17 vehicles from 12 brands in 2020.

Notably, this will be the first year that these offerings represent all three major vehicle categories: Consumers will have the choice among 11 cars, 13 SUVs, and six trucks in 2021, whereas only 10 cars and seven SUVs were available last year.

As it is true that compact vehicles will rule the road in China, Americans have a love affair with trucks and SUVs, to the detriment of compact cars.

Each EV manufacturing decision will need to have localization in mind.

This isn’t to say that China can produce EVs at the quality of Tesla, but it shows that alternative models of EV battery capabilities, range, and performance also have a strong place in the consumer world.

This isn’t just a Tesla world with everyone living in it.

The Chinese government has bet the ranch on EVs as it reduces the smog-induced megacity pollution that has been public enemy one, two, and three.

Clean air is a sensitive topic among Chinese urban dwellers.

The Chinese communist party offers EV license plates for free and they are guaranteed. In many cities, it can take years to receive a license plate for a petrol engine through various lottery systems.

The Tesla Model 3 sells for about $39,000 in China factoring in price cuts due to its local production.

So what does this mean for the short-term future of EVs?

First, they are showing growth numbers that almost every cloud executive would love to put on the radar for many tech investors.

Second, Elon Musk’s Tesla and The Hong Guang Mini EV are primed to be flooded in all markets overseas creating an ironic situation where Europeans are buying a cheaper EV from China instead of the homegrown stalwarts of BMW, Audi, and Mercedes.

China has been adamant that they want to secure higher manufacturing ground and this phenomenon is coming hard and fast for the Europeans and everyone else who have continuously kowtowed to Chinese business.

Reports have linked these Chinese mini EVs to a Latvian automaker who could sell an iteration of the car in Europe. However, the price is likely to be twice as high due to European environmental requirements.

This also paves the way for Tesla to eventually roll out a compact car to sell in the German market and the entire European Union.

Tesla Gigafactory Berlin-Brandenburg is a European manufacturing plant under construction in Grünheide, Germany and the campus is 20 miles south-east of central Berlin on the Berlin–Wrocław railway.

Of course, at first, they will produce the American models of the Tesla, but my guess after that is they will start right-sizing their models for the local market in all shapes and sizes.

This would be the new contact point in terms of funneling Tesla products into Europe and instead of SUV/Pick-up trucks, they will create something more akin to a Fiat-sized car to suit the European market.

Although the EV market is still in its infancy, Tesla not only has first-mover advantage and the best of breed stamp of quality, but has the manufacturing prowess in terms of battery and knowhow that others don’t.

That being said, beneath the robustness of Tesla, a lot of movement is taking place as we speak and we still do not have the 2^nd or 3^rd Teslas emerging from the pack and we will gain more insight into who that is in the next few years.

For the next 10X bagger, potential start-ups that could take the EV market by storm is where readers should put their money, but this comes with great risk.

But I’ve been pretty good at guessing 10 baggers with recommendations such as Roku (ROKU) and Palantir (PLTR) on the way to achieve 10 bagger status.

As many understood from the first pandemic year of 2020, just throw money into Tesla and watch it explode higher.

Tesla is still an incredibly bullish tech story and I wouldn’t want to get in the way of its up moves.

The moment Tesla’s quality starts to erode and Chinese low-quality EVs catch up, that would be the cue to take profits on Tesla, but that day is long off.

December 2, 2020

Diary, Newsletter, Summary

Global Market Comments
December 2, 2020
Fiat Lux

FEATURED TRADE:

(WHAT HAPPENED TO THE DOW?)
($INDU), (EK), (S), (BS), (CVX), (DD), (MMM),
(FBHS), (MGDDY), (FL), (GE), (TSLA), (GM)

What Happened to the Dow?

Diary, Newsletter, Research

When I joined Morgan Stanley some 35 years ago, one of the grizzled old veterans took me aside and gave me a piece of sage advice.

“Never buy a Dow stock”, he said. “They are a guarantee of failure.”

That was quite a bold statement, given that at the time the closely watched index of 30 stocks included such high-flying darlings as Eastman Kodak (EK), Sears Roebuck & Company (S), and Bethlehem Steel (BS). It turned out to be excellent advice.

Only ten of the Dow stocks of 1983 are still in the index (see tables below), and almost all of the survivors changed names. Standard Oil of California became Chevron (CVX), E.I du Pont de Nemours & Company became DowDuPont, Inc. (DD), and Minnesota Mining & Manufacturing became 3M (MMM).

Almost all of the rest went out of business, like Union Carbide Corporation (the Bhopal disaster) and Johns-Manville (asbestos products) or were taken over. A small fragment of the old E.W. Woolworth is known as Foot Locker (FL) today.

Charles Dow created his namesake average on May 26, 1896, consisting of 12 names. Almost all were gigantic trusts and monopolies that were broken up only a few years later by the Sherman Antitrust Act.

In many ways, the index has evolved to reflect the maturing of the US economy, from an 18^th century British agricultural colony, to the manufacturing powerhouse of the 20^th century, to the technology and services-driven economy of today.

Of the original Dow stocks, only one, US Leather, vanished without a trace. It was the victim of the leap from horses to automobile transportation and the internal combustion engine. United States Rubber is now part of France’s Michelin Group (MGDDY).

American Tobacco reinvented itself as Fortune Brands (FBHS) to ditch the unpopular “tobacco” word. National Lead moved into paints with the Dutch Boy brand. It sold off that division when the prospects for leaded paints dimmed in 1970 (they cause mental illness in children).

What was the longest-lived of the original 1896 Dow stocks? General Electric (GE), originally founded by light bulb inventor Thomas Edison. It went down in flames thanks to poor management and was delisted in 2018. It was a 122-year run. Today, it is one of the great turnaround challenges facing American Industry.

Which company is the American Leather of today? My bet is that it’s General Motors (GM), which is greatly lagging behind Tesla (TSLA) in the development of electric cars (99% market share versus 1%). With a product development cycle of five years, it simply lacks the DNA to compete in the technology age.

What will be the largest Dow stock in a decade? Regular readers of the Mad Hedge Fund Trader already know the answer.