Global Market Comments
October 17, 2022
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or BLUNDER 3.0)
(RIVN), (TSLA), (V), (JPM), (AMAT), (HPE), (DELL), (KBH), (LEN)
Tag Archive for: (JPM)
There is no doubt whatsoever that the stock market tried to break down last week and failed. At worst, the Dow Average double bottomed at $29,600, the same level it reached on September 28.
And even that low was a mere 800 points lower than the one we set on June 14.
And that’s how it’s going to go.
Incremental new lows, followed by violent “rip your face off” rallies on enormous volume.
Until it ends.
That happens when markets start speculating about coming interest rate cuts sometime in 2023. And remember, you’re buying stocks for not what the economy is doing today, but for how well it will be performing in six to nine months.
You’re buying the future, not the present, or heaven forbid, the past.
That means you should use these throw-up-on-your-shoes days to scale into your favorite long-term companies. When markets inevitably rally, you can either sell for a short-term profit and rewind the video once again or keep it as part of a long-term holding.
It's a nice choice to have. I’ve been doing it all year.
With some of the greatest market volatility in market history, my October month-to-date performance ballooned to +5.00%.
I used last week’s extreme volatility to roll down strike prices for Tesla (TSLA) and JP Morgan (JPM) option spreads to manage my risk. I was still able to hang on to a 40% long position and threw out a new short in the S&P 500 at the end of Thursday.
My 2022 year-to-date performance ballooned to +75.06%, a new high. The Dow Average is down -18.48% so far in 2022. With the coming Friday options expiration, I will be up +76.49%.
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 +78.54%.
That brings my 14-year total return to +587.62%, some 3.03 times the S&P 500 (SPX) over the same period and a new all-time high. My average annualized return has ratcheted up to +44.23%, easily the highest in the industry.
Remember that old 60/40 equity/bond investment strategy? The idea was that whenever stocks went down, the losses would be offset by the profits from rising bonds.
This year, it delivered the worst performance in 100 years, down 34.4% year-to-date. That is the inevitable end result of a decade of zero interest rates and free money that took everything up.
So what is the best strategy you could probably employ right now? A 60/40 strategy. Even I find myself checking out bond yields these days, where I got my start in life as a trader 50 years ago. Yes, before there were stocks, there were bonds. Junk is now yielding 10%. Remember, that means a holding doubles in value every six years.
The market is clearly in a mood to throw out the babies with the bathwater. I would be remiss not to mention the recent decline of Tesla posing one of its periodic tests of the faithful, now approaching a once unheard-of price earnings multiple of 30X.
Up until September 20, Elon Musk’s creation was almost immune to the bear market.
Then Twitter (TWTR) happened.
Musk agreed to take majority control of a $44 billion company, of which Elon himself is only contributing $16 billion. He sold Tesla shares last July to fund this. But the market wiped $333 billion, or 34.6%, off the market capitalization of the company. It is a wild overreaction to the move.
This has nothing to do with Tesla itself, as the richest man in the world is buying Twitter with his own pocket change. But it is undeniable that it will be a distraction of management time.
And here is all you need to know about Tesla. Tesla is the fastest growing large company in the world. Profit margins are increasing, thanks to the recent collapse of commodity prices. Unit sales will rise by 40% this year. Every time Tesla opens a new factory at a cost of $7 billion, it generates $15 billion of profit per year, forever!
Remember also, that the stock market gets an 800-pound gorilla off its back with the end of the midterm elections on November 8. It makes no difference who wins, a major uncertainty will be gone. That much IS certain.
And what happens when the Fed keeps interest rates too low for long, then raises them too much? It lowers them again too much, igniting a monster bull market in stocks. That’s also what you’re buying down here. That's what you get when you appoint a central bank governor with a political science major rather than PhDs and Nobel Prizes in Economics like the last ones.
Call it blunder 3.0.
Consumer Price Index Rockets Up to 8.6%, up 0.4% on the month and a new 40-year high. Stocks, bonds, crypto, and currencies were crushed and the US Dollar Soared. Look for new lows in stocks. Growth really took it on the nose. Expect another month of volatility until the next CPI report comes out.
Stocks Mount Historic Rally, gaining $1,420 points, or 5% of the intraday low. Stocks were down 500 in the wake of the CPI report, then up $1,420. It was mostly hedge short covering, as most institutions are too slow to react. Still, we now have a low to trade against.
The Fed Minutes are Out, and our central bank is clearly worried about doing too little than too much, when they are doing too much. At least they did six weeks, or 4,000 Dow points ago. The inflation goal is still 2.0%. Interest rates will go higher before they go lower.
Equity Inflows Hit a Record Last Week, the third highest week since 2008. Long term investors are willing to bottom fish here, even if the final bottom isn’t found for months.
Bond Liquidity Issues Haunting the Fed, and bids dry up in an endlessly falling market. The matter has been greatly exacerbated by a Fed that is now selling $95 billion a month as part of its quantitative tightening policy. It’s becoming increasingly difficult to move big blocks of bonds in a zero-bid market. Spreads are widening and size is shrinking. The bad news is that the worst is yet to come.
You Just Got an 8.7% Raise, if you are older than 61 and collecting Social Security. That is the payment increase that kicks in from January. Fortunately, some thoughtful person eons ago tied payments to the CPI, which is now going through the roof. I’m going to Hawaii with my money, even if the increase means that Social Security goes bankrupt by 2034, when I’m 82.
PC Sales Dive 19.5% in Q3, reaching only 68 million units. It’s the steepest decline since PC data collection began 30 years ago. And you wonder why they are selling the chip stocks so aggressively. High inventories are also a big problem. Lenovo was the top seller in the world at 20.2 million units, followed by Hewlett Packard’s (HPE) 17.6 million, and Dell (DELL) at 15.2 million.
Applied Materials Cuts Estimates, in line with everyone else in the industry. The new government export restrictions will cost it $250-$500 million in the current quarter. But how much is already in the price? Buy (AMAT) on dips.
Home Financing Pours into 5/1 ARMS, which can be had for a doable 5.56%. That compares to over 7.0% for the 30-year fixed, the highest since 2006. It will be low enough to keep homebuilders on life support for a couple of years Avoid (LEN) and (KBH).
REITS are Still Getting Slaughtered, with the plunge in the bond market today to multidecade lows. The REIT Index is down 30% this year, while the (SPY) is off only 21%. Real Estate Investment Trusts do best when interest rates are low. Too many investors piled into REITS in a desperate reach for yield. There’s a great trade here someday, but not yet.
My Ten-Year View
When we come out the other side of pandemic and the recession, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With oil in a sharp decline and technology hyper-accelerating, there will be no reason not to. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The America coming out the other side will be far more efficient and profitable than the old. Dow 240,000 here we come!
On Monday, October 17 at 8:30 AM, the New York Empire State Manufacturing Index for September is released.
On Tuesday, October 18 at 7:00 AM, the D for September is out.
On Wednesday, October 19 at 8:30 AM, Housing Starts and Permits for September are published.
On Thursday, October 20 at 8:30 AM, Weekly Jobless Claims are announced. At 10:00 AM, we get Existing Home Sales for September.
On Friday, October 21 at 2:00 PM, the Baker Hughes Oil Rig Count is out.
As for me, it was in 1986 when the call went out at the London office of Morgan Stanley for someone to undertake an unusual task. They needed someone who knew the Middle East well, spoke some Arabic, was comfortable in the desert, and was a good rider.
The higher-ups had obtained an impossible-to-get invitation from the Kuwaiti Royal family to take part in a camel caravan into the Dibdibah Desert. It was the social event of the year.
More importantly, the event was to be attended by the head of the Kuwait Investment Authority, who ran over $100 billion in assets. Kuwait had immense oil revenues, but almost no people, so the bulk of their oil revenues were invested in western stock markets. An investment of goodwill here could pay off big time down the road.
The problem was that the US had just launched air strikes against Libya, destroying the dictator, Muammar Gaddafi’s royal palace, our response to the bombing of a disco in West Berlin frequented by US soldiers. Terrorist attacks were imminently expected throughout Europe.
Of course, I was the only one who volunteered.
My managing director didn’t want me to go, as they couldn’t afford to lose me. I explained that in reviewing the range of risks I had taken in my life, this one didn’t even register. The following week found me in a first-class seat on Kuwait Airways headed for a Middle East in turmoil.
A limo picked me up at the Kuwait Hilton, just across the street from the US embassy, where I occupied the presidential suite. We headed west into the desert.
In an hour, I came across the most amazing sight - a collection of large tents accompanied by about 100 camels. Everyone was wearing traditional Arab dress with a ceremonial dagger. I had been riding horses all my life, camels not so much. So, I asked for the gentlest camel they had.
The camel wranglers gave me a tall female, which was more docile and obedient than the males. Imagine that! Getting on a camel is weird, as you mount them while they are sitting down. My camel had no problem lifting my 180 pounds.
They were beautiful animals, highly groomed, and in the pink of health. Some were worth millions of dollars. A handler asked me if I had ever drunk fresh camel milk, and I answered no, they didn’t offer it at Safeway. He picked up a metal bowl, cleaned it out with his hand, and milked a nearby camel.
He then handed me the bowl with a big smile across his face. There were definitely green flecks of manure floating on the top, but I drank it anyway. I had to lest my host to lose face. At least it was white. It was body temperature warm and much richer than cow’s milk.
The motion of a camel is completely different from a horse. You ride back and forth in a rocking motion. I hoped the trip was short, as this ride had repetitive motion injuries written all over it. I was using muscles I had never used before. Hit your camel with a stick and they take off at 40 miles per hour.
I learned that a camel is a super animal ideally suited for the desert. It can ride 100 miles a day, and 150 miles in emergencies, according to TE Lawrence, who made the epic 600-mile trek to Aquaba in only four weeks in the heat of summer. It can live 15 days without water, converting the fat in its hump.
In ten miles, we reached our destination. The tents went up, clouds of dust rose, the camels were corralled, and the cooking began for an epic feast that night.
It was a sight to behold. Elaborately decorated huge five wide bronze platers were brought overflowing with rice and vegetables, and every part of a sheep you can imagine, none of which was wasted. In the center was a cooked sheep’s head with the top of the skull removed so the brains were easily accessible. We all ate with our right hands.
I learned that I was the first foreigner ever invited to such an event, and the Arabs delighted in feeding me every part of the sheep, the eyes, the brains, the intestines, and gristle. I pretended to love everything, and lied back and thought of England. When they asked how it tasted, I said it was great. I lied.
As the evening progressed, the Johnny Walker Red came out of hiding. Alcohol is illegal in Kuwait, and formal events are marked by copious amounts of elaborate fruit juices. I was told that someone with a royal connection had smuggled in an entire container of whiskey and I could drink all I wanted.
The next morning I was awoken by a bellowing camel and the worst headache in the world. I threw a rock at him to get him to shut up and he sauntered over and peed all over me.
The things I did for Morgan Stanley!
Four years later, Iraq invaded Kuwait. Some of my friends were kidnapped and held for ransom, while others were never heard from again.
The Kuwaiti government said they would pay for the war if we provided the troops, tanks, and planes. So they sold their entire $100 million investment portfolio and gave the money to the US.
Morgan Stanley got the mandate to handle the liquidation, earning the biggest commission in the firm’s history. No doubt, the salesman who got the order was considered a genius, earned a promotion, and was paid a huge bonus.
I spent the year as a Marine Corps captain, flying around assorted American generals and doing the odd special opp. I got shot down and still set off airport metal detectors. No bonus here. But at least I gained insight and an experience into a medieval Bedouin lifestyle that is long gone.
They say success has many fathers. This is a classic example.
You can’t just ride out into the Kuwait desert anymore. It is still filled with mines planted by the Iraqis. There are almost no camels left in the Middle East, long ago replaced by trucks. When I was in Egypt in 2019, I rode a few mangy, pitiful animals held over for the tourists.
When I passed through my London Club last summer, the Naval and Military Club on St. James Square, who’s portrait was right at the front entrance? None other than that of Lawrence of Arabia.
It turns out we were members of the same club in more ways than one.
Stay healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
John Thomas of Arabia
Checking Out the Local Camel Milk
This One Will Do
Traffic in Arabia
Global Market Comments
October 13, 2022
Fiat Lux
Featured Trade:
(BUY the JP Morgan (JPM) January 2025 $175-$180 out-of-the-money
vertical Bull Call spread LEAPS at $0.50 or best)
Opening Trade
10-13-2022
expiration date: January 17, 2025
Number of Contracts = 1 contract
JP Morgan Chase is now trading at a price earnings multiple of only 8X, lower than the worst days of the pandemic low and the 2009 crash low. In order words (JPM) is the cheapest that it has been this century.
The banking sector has been beaten like the proverbial red-headed stepchild this year. However, it should be at the core of any long-term LEAPS portfolio.
The best time to pick up this position will be during a market meltdown day when the (SPX) is trading under $3,500 and the Volatility Index is over $34.
If you are looking for a lottery ticket, then here is a lottery ticket.
While the chance of winning a real lottery is something like a million to one, this one is more like 2:1 in your favor. And the payoff is 12:1. That is the probability that JP Morgan shares will double over the next two years and four months.
(JPM) is the class act in the global banking sector, and CEO Jamie Diamond is the best CEO in the country. Not only that, with rocketing interest rates, we are just entering the golden age of the banking sector.
I believe that massive government borrowing and spending will drive US interest rates up through the roof. Banks love high interest rates because they vastly improve profit margins.
And here is the sweet spot. Fears of a recession increasing loan default rates have knocked $66, or 39% off the $170 high in (JPM) shares this year. We are now only $20 above the 2020 pandemic low. When recession fears fade in 2023, interest rates will still remain historically high and (JPM) profits and share price should rocket.
To learn more about the company, please visit their website at https://www.jpmorganchase.com.
I am therefore buying the JP Morgan (JPM) January 2025 $175-$180 out-of-the-money vertical Bull Call spread LEAPS at $0.50 or best.
Don’t pay more than $1.00 or you’ll be chasing on a risk/reward basis.
January 2025 is the longest expiration currently listed. Please note that these options are illiquid, and it may take some work to get in or out. Executing these trades is more an art than a science.
Let’s say the JP Morgan (JPM) January 2025 $175-$180 out-of-the-money vertical Bull Call spread LEAPS are showing a bid/offer spread of $0.50-$1.50, which is typical. Enter an order for one contract at $0.50, another for $0.60, another for $0.70, and so on. Eventually, you will enter a price that gets filled immediately. That is the real price. Then enter an order for your full position at that real price.
Notice that the day-to-day volatility of LEAPS prices is miniscule since the time value is so great. This means that the day-to-day moves in your P&L will be small. It also means you can buy your position over the course of a month just entering new orders every day. I know this can be tedious but getting screwed by overpaying for a position is even more tedious.
Look at the math below and you will see that a 73% rise in (JPM) shares will generate a 900% profit with this position, such is the wonder of LEAPS. That gives you an implied leverage of 12:1 across the $175-$180 space.
(NVDA) doesn’t even have to get to a new all-time high to make the max profit. It only has to get back to $180, $10 higher than it traded last March.
Only use a limit order. DO NOT USE MARKET ORDERS UNDER ANY CIRCUMSTANCES. Just enter a limit order and work it.
This is a bet that JP Morgan will not fall below $180 by the January 17, 2025 options expiration in 2 years and 3 months.
Here are the specific trades you need to execute this position:
Buy 1 January 2025 (JPM) $175 calls at………….………$3.00
Sell short 1 January 2025 (JPM) $180 calls at…………$2.50
Net Cost:………………………….………..………......….….....$0.50
Potential Profit: $5.00 - $0.50 = $4.50
(1 X 100 X $4.50) = $450 or 900% in 2 years and 3 months
If you are uncertain on how to execute an options spread, please watch my training video by clicking here.
The best execution can be had by placing your bid for the entire spread in the middle market and waiting for the market to come to you. The difference between the bid and the offer on these deep in-the-money spread trades can be enormous.
Don’t execute the legs individually or you will end up losing much of your profit. Spread pricing can be very volatile on expiration months farther out.
Keep in mind that these are ballpark prices at best. After the alerts go out, prices can be all over the map.
Global Market Comments
October 10, 2022
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or EATING YOUR SEED CORN),
(SPY), (TLT), (PANW), BRKB), (JPM), (MS), (V),
(USO), (MU), (RIVN), (TWTR), (TSLA)
You know that 10% downside risk I talked about? In other words, you may have to eat a handful of your seed corn.
We may have to eat into some of that 10% this week. With the September Consumer Price Index out on Thursday, and the big bank earnings are out Friday, there is more than a little concern about the coming trading week.
That’s why all my remaining positions are structured to handle a 10% correction or more and still expire at their maximum profit point in nine trading days.
Even in the worst-case Armageddon scenario, which we are unlikely to get, the S&P 500 is likely to fall below 3,000, or 627.90 points or 17.25% from here.
That’s what you pay me for and that’s what you are getting.
I shot out of the gate with an impressive +3.25% gain so far in October. My 2022 year-to-date performance ballooned to +72.93%, a new high. The Dow Average is down -19.3% so far in 2022 or a gob-smacking -7,000 points. 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 +81.35%.
That brings my 14-year total return to +585.49%, some 3.03 times the S&P 500 (SPX) over the same period and a new all-time high. My average annualized return has ratcheted up to +45.62%, easily the highest in the industry.
It is the greatest outperformance on an index since Mad Hedge Fund Trader started 14 years ago.
I used last week’s extreme volatility to rearrange positions, adding longs in Morgan Stanley (MS), JP Morgan (JPM), and Visa (V). That takes me to 80% long, 20% short, and 0% cash. I wisely rolled down the strikes on my Tesla position from $230-$240 to $200-$210. I covered one short in the S&P 500 (SPY). All of my options positions expire in only nine trading days.
I know that you’re probably getting boatloads of advice the sell all your stocks now, sell your house, and head for those generous 5% short term interest rates, and 8% in junk. Even I went 100% cash….in December last year. The problem is that these other gurus are giving you advice that is only a year late with perfect 20/20 hindsight.
To bail now, you risk giving up on the 100% gains in years to come. If I’m wrong, you lose 10%, if I’m right, you get a double or more. Sounds like a pretty good bet to me.
People always want to know how I pick market bottoms, something I have been doing since the Dow Average was at a miniscule $753.
The lower the market is, the less aggressive the Fed is going to be
Every single input into the Consumer Price Index is now turning down sharply, especially rents and housing costs, meaning we can expect a blockbuster decline when the next report comes out on October 13
We now have two outsiders doing the Fed’s job for it, the British economy, which is clearly collapsing, and a strong US dollar that is rapidly shrinking the foreign revenues of our multinationals, like big tech.
Capitulation indicators, occasionally spotted here and there, are now coming in volleys, the Volatility Index at $35, the (VIX) curve inversion, the RSI below 30, the ten-year US Treasury yield hit 4.0% and then instantly backed off, the British pound plunged to $1.03, and we saw absolutely massive retail selling in September.
The froth is now out of all tech stocks.
All of this brings forward the last Fed hike in interest rates and the next bull market in stocks. If the last Fed rate hike is two months away on December 14, then the reasons to sell stocks are disappearing like the last sands in an hourglass.
In my mere half century in the market, every time the CPI starts to fall, stock market “V” bottoms and begins classic “rip your face off’ rallies as the shorts panic to cover. It happened in 1970, 1974, 1980, 1990, and 2009. It will happen again in 2022. The market will smell that inflation is done, the Fed is done, and volatility becomes a distant memory.
And I hate to be so obvious, but if you sell in May, what do you do in October? You buy with both hands. Just do it on the right day. That could get you a 10% to 20% move by yearend. The S&P 500 earnings multiple has collapsed by eight points in nine months and that is too far, too fast.
How do midterm years perform? October is the best month of the year followed by November. Of the entire 16-month presidential election cycle, the coming first quarter of 2023 is the best of the entire lot.
Nonfarm Payroll Falls Short at 263.000 in September. The headline unemployment rate matched a 2022 low at 3.5%. The long-term unemployment rate, the U-6 also matched this year’s low at 6.7%. The report keeps the Fed on its current interest raising schedule. Stocks, bonds, and gold sold off 500-points.
JOLTS Drops Sharply, from an expected 11.0 million to only 10.05 million. This is the job openings report from the Department of Labor. It’s one of the sharpest declines in history. The jobs market is finally starting to deteriorate, which is just what the Fed wanted. Factory Orders for August were unchanged.
OPEC+ Cuts Quotas by 2 million, and production by 1 million, in one of the largest reductions in history. It’s an effort to maintain oil prices at current prices in the face of falling demand from a global recession. The Arabs are not your friends. It’s also a slap in the face of the anti-oil posture, pro-climate posture of the Biden administration, which responded with a further release of 10 million barrels from the Strategic Petroleum Reserve. Energy stocks soar across the board. Don’t get caught standing when the music stops playing. Avoid (USO).
Why Did Russia Blow Up Their Own Pipeline? International analysts are puzzled by Putin’s latest hostile move. Is this a prelude to limited nuclear war in Ukraine? My view is that Putin expects to be deposed soon and wants to make it difficult for the next government to resume relations with Europe. Others argue that the true motivation is to enable Nordstream to file a $10 billion insurance claim. Good luck collecting on that one.
Advanced Micro Devices Bombs on weak PC sales and supply chain problems, taking the stock down 5% aftermarket. Profit margins were cut. The news could take the stock down to new lows, which didn’t really participate in this week’s monster rally. The rest of the tech sector sold off in sympathy.
Tesla Breaks Production Records in Q3, manufacturing 365,000 EVs and delivering 365,000, a record high. Sales prices have risen three times this year, while commodity costs have fallen dramatically, widening profit margins. This is the most volatile stock in the market, with one 52% correction so far this year, and another 23% correction in recent weeks. It’s the reason we just saw a “buy the rumor, sell the news” type correction that took us to the bottom of a three-month range.
Another factor is that now that big tech is rallying again, people are rotating out of Tesla, which held up well in Q3. Below here, long term Tesla bulls like my friend Ron Baron, Cathie Wood, and I start adding to big positions. With OPEC+ threatening a million barrel a day production cut, taking crude up 6%, oil alternative Tesla should be rising.
Elon Musk Pays Full Price for Twitter at $54.20 a share, completely caving on pending litigation. Wall Street consensus is that the company is worth $15 a share. It may be years before we learn what’s really going on here, leaving many scratching their heads, including me. Tesla (TSLA) plunged $15 on the news, killing off a nascent rally. The distraction of management time will be huge. Avoid (TWTR).
Rivian Raises 2025 Production Goal, from 20,000 to 25,000, after a better-than-expected 7,363 third quarter. Mass production is reaching the sweet spot for the next Tesla. The company is planning a $5 billion investment in non-union Georgia. Buy (RIVN) on dips, sell short puts and buy LEAPS.
Micron Technology to Invest $100 Billion in New York Plant. It’s all part of a retreat from China and paring war risk in Taiwan. Massive government subsidies from the Chips Act helped. Biden also expanded restrictions on the export of key semiconductor manufacturing equipment, America’s crown jewels. It means more expensive buy safer supplied chips for US industry. Buy (MU) on dips.
Hurricane Ian to Cost Insurers $63 Billion, and deaths, and the federal government may be on the hook for more. The storm double-dipped, cutting a wide swath across Florida and the Carolinas. Some 95% of the costs are carried by foreign insurers through the reinsurance market. There are too many billionaire mansions on the beach which are fully insured. This paves the way for major rate increases by insurance companies, which is why Warren Buffet loves the insurance business. Many thanks to the many foreign Mad Hedge subscribers who expressed sympathy over the storm losses.
My Ten-Year View
When we come out the other side of pandemic and the recession, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With oil in a sharp downtrend and technology hyper-accelerating, there will be no reason not to. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The America coming out the other side will be far more efficient and profitable than the old. Dow 240,000 here we come!
On Monday, October 10, no data of note is released.
On Tuesday, October 11 at 7:00 AM, the 6:00 AM, the NFIB Business Optimism Index for September is released.
On Wednesday, October 12 at 8:30 AM, Producer Price Index for September is published. At 11:00 AM, the FOMC minutes from the last Fed meeting is released.
On Thursday, October 13 at 8:30 AM, Weekly Jobless Claims are announced. We also get the blockbuster Consumer Price Index.
On Friday, October 14 at 8.30 AM, US Retail Sales for September is disclosed. At 2:00 the Baker Hughes Oil Rig Count is out.
As for me, with the 35th anniversary of the October 19, 1987 crash coming up, when shares dove 22.6% in one day, I thought I’d part with a few memories.
I was in Paris visiting Morgan Stanley’s top banking clients, who then were making a major splash in Japanese equity warrants, my particular area of expertise.
When we walked into our last appointment, I casually asked how the market was doing (Paris is six hours ahead of New York). We were told the Dow Average was down a record 300 points.
Stunned, I immediately asked for a private conference room so I could call the equity trading desk in New York to buy some stock.
A woman answered the phone, and when I said I wanted to buy, she burst into tears and threw the handset down on the floor. Redialing found all Transatlantic lines jammed.
I never bought my stock, nor found out who picked up the phone. I grabbed a taxi to Charles de Gaulle airport and flew my twin Cessna as fast as the turbocharged engines could take me back to London, breaking every known air traffic control rule.
By the time I got back, the Dow had closed down a staggering 512 points, taking the Dow average down to $1,738.74. Then I learned that George Soros asked us to bid on a $250 million blind portfolio of US stocks after the close. He said he had also solicited bids from Goldman Sachs, Merrill Lynch, JP Morgan, and Solomon Brothers, and would call us back if we won.
We bid 10% below the final closing prices for the lot. Ten minutes later he called us back and told us we won the auction. How much did the others bid? He told us that we were the only ones who bid at all!
Then you heard that great sucking sound. Oops!
What has never been disclosed to the public is that after the close, Morgan Stanley received a margin call from the exchange for $100 million, as volatility had gone through the roof, as did every firm on Wall Street.
We ordered JP Morgan to send the money from our account immediately. Then they lost it! After some harsh words at the top, it was found. That’s when I discovered the wonderful world of Fed wire numbers.
The next morning, the Dow continued its plunge, but after an hour managed a U-turn, and launched on a monster rally that lasted for the rest of the year. We made $75 million on that one trade from Soros.
It was the worst investment decision I have seen in the markets in 53 years, executed by its most brilliant player. Go figure. Maybe it was George’s risk control discipline kicking in?
At the end of the month, we then took a $75 million hit on our share of the British Petroleum privatization, because Prime Minister Margaret Thatcher refused to postpone the issue, believing that the banks had already made too much money.
That gave Morgan Stanley’s equity division a break-even P&L for the month of October 1987, the worst in market history. Even now, I refuse to gas up at a BP station on the very rare occasions I am driving an internal combustion engine.
Good Luck and Good Trading,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
September 23, 2022
Fiat Lux
Featured Trade:
(SEPTEMBER 21 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPY), (INTC), (NVDA), (AMD), (MU) (TBT), (TLT), (AMGN),
(VIX), (CHPT), (TSLA), (GS), (BAC), (MS), (JPM), (USO), (TLT)
Below please find subscribers’ Q&A for the September 21 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Silicon Valley in California.
Q: What would cause you to look for a lower bottom than $330 on the (SPY)?
A: Nuclear war with Russia would certainly do the trick—they’re now threatening to use tactical nuclear weapons in Ukraine—and higher-than-expected interest rates. If we get another 75 basis points after this one today, then I think you’re looking at new lows, but we won’t find that out until November 2. So, the market may just bounce along the bottom here for a while until it sees what the Fed is going to do, not on this rate hike but the next one after that. Other than that, a few dramatically worse earnings from corporations would also allow us to test a lower low.
Q: Is it time to nibble on Nvidia Corporation (NVDA)?
A: Nvidia is one of the most volatile stocks in the market. You don’t want to go into it until you’re absolutely sure the bottom is in. If that means you miss the first 10% of the following move up, that’s fine because when this thing moves, you get a double or triple out of it. I would wait for the indecision in the market to resolve itself before you get too aggressive on the most volatile stocks in the market. The same is true for the rest of the semiconductor sector.
Q: What does a final capitulation look like?
A: The Volatility Index (VIX) ever $40. We’ve had a high of VIX at $37 so far this year. If really get over $40, that would be a new high for the year. That would signal people that are throwing in the towel, giving up the market, selling everything—of course that is always the best time to buy.
Q: How do we get LEAPS guidance?
A: We send our LEAPS recommendations first to our concierge members—we only have a small number of those—and then after that, they go out to all subscribers to the Mad Hedge Global Trading Dispatch. Everyone gets exposure to the LEAPS. By the way, with LEAPS, you can take up to a month to execute a position. What I do is literally buy 1 contract a day, so I get a nice average over the period of a month when the market is most likely bottoming.
Q: Do you see Intel Corporation (INTC) as a good candidate for a Taiwan invasion hedge?
A: Well, first of all, China’s not going to invade Taiwan. I’ve been waiting for this for 70 years and it’s not going to happen. Also, Intel’s new management has yet to prove itself. You have a salesman running the company; I never like companies run by a salesman. I’d prefer to have an engineer run an engineering company. The court is still out on Intel and whether they can turn that company around or not; so, I would much rather buy the market leaders, Nvidia (NVDA), Advanced Micro Devices (AMD), and Micron Technology (MU) in the semiconductor space.
Q: You talked dollar/cost averaging before. Should we pause on averaging in?
A: No, that's why I say buy one contract a day and put it in order to buy at the bid side of the market. That way, any sudden swoosh down in the market and you’ll get filled. The spreads on these LEAPS are quite wide, so you want to try to buy as close to the middle or bottom end of the spread, and putting in single contract orders over a month, of course, will do that to you.
Q: Does that mean it’s time to sell the ProShares UltraShort 20+ year Treasury Yield (TBT)?
A: I would say yes; (TBT) hit $30.30 yesterday, which is a new multi-year high. I would be taking profits on that because on the next turnaround in bonds, you could get a very rapid move in (TBT) from $30 back down to $20. I’d rather have you keep that profit than try to squeeze the last dollar out of it. Remember, the (TBT) has a negative cost of carry now of 8% a year and that is a big nut to cover.
Q; Market outlook for mid-2023?
A: We could hit my $4,800 target by mid-2023; that is up 28% from here.
Q: Can we buy LEAPS on Amgen (AMGN)?
A: Absolutely yes, you can. Go for the highest listed strike prices on the call side with the longest possible maturity. I would do the January 17, 2025 $350-$360 vertical bull call spread which you can buy now for $1.00. That gives two years and four months to get a tenfold return. That’s enough time for a full-bore recession to happen and then a recovery where markets take off like a rocket. The call spread you bought for $1.00 becomes worth $10.00.
Q: Is there a long position on the beneficiary of government plans to build EV charging stations?
A: There is, but I'm not recommending EV charging stations because it’s a low value-added business. You buy electric power from the local utility, add 10 cents and resell it. The margins are small, the competition is heating up. There are much smarter ways to play EVs than the charging station. ChargePoint (CHPT) is certainly one of them, but it’s not a great investment idea. Look at how ChargePoint (CHPT) has performed over the last six months compared to Tesla (TSLA) and you see what I mean.
Q: Given the very poor investor sentiment, why don’t we get a testing of the lows and result in a (VIX) pop?
A: Absolutely yes—that is what everybody in the market is waiting for. And it could happen as soon as this afternoon. If it doesn’t happen this afternoon, allow for a little rally and then a meltdown on the next piece of bad news.
Q: I’m not able to get an email response from customer support.
A: Try emailing filomena@madhedgefundtrader.com. If that doesn’t work, you can try calling at (347) 480-1034. Filomena will always be happy to take care of you.
Q: What maturity of US Treasury securities would you buy now?
A: I would buy the 30-year. You’re getting close to a 4% yield on that—that is starting to look attractive to people who don’t want to work for a living picking stocks on a daily basis. We are about to see the rebirth of bond investing.
Q: What about banks?
A: Banks will be a screaming buy and a three-year double once recession fears end, which could be in a couple of months. We now have sharply rising interest rates, which banks love, but the bear market in stocks has killed off the IPO business, credit risk is rising, and of course, the Bitcoin business has gone to zero also. So, I would wait for fears of credit quality to end, and then you’ll get a double in the banks very quickly, and notice how they’re all flatlining at a bottom, they’re not actually going down anymore.
Q: Which banks are good choices?
A: Goldman Sachs (GS) and Bank of America (BAC) are two great ones, along with Morgan Stanley (MS) and JP Morgan (JPM).
Q: Do you think the market will bottom by the midterms?
A: I do, I think we will bottom a few weeks before the midterms, or the day after. Sometimes that’s the way it goes, and then it will be off like a rocket for the rest of the year. If we can do this from a much lower level in the SPYs, so much the better. Remember, the next Fed meeting is six days before the election. Yikes!
Q: If OPEC cuts production (USO), won’t the supply/demand cause oil prices to start rising again, increasing inflation and people’s prices at the pump?
A: Yes, but OPEC needs the money. Not necessarily Saudi Arabia, but all the other members of OPEC are starved for cash, and that is always how these shortages end. The smaller members cheat on quotas and bust the price. That's clearly what’s driven us down $50 since the February high, small member cheating. And that will continue. It is a cartel with some serious internal conflicts that will never resolve.
Q: Does it cost $17,000 to mine a Bitcoin?
A: It did four months ago. My guess is it’s more expensive now because of the higher cost of electricity around the world. We may even be up to $20,000 cost, which is why it tends to hang around the $20,000 level on the low side. Below that, miners lose money and the supply dries up, just like you see in the gold market.
Q: Do you have an opinion on Real Estate Investment Trusts (REIT)?
A: Yes; credit risk is rising, as are the yields. In a real estate recession, you start to get more defaults on REITS, but the yields on them are very high; so if you are going to play, buy a basket to spread your risk.
Q: Would you buy ProShares UltraShort 20+ year Treasury Yield (TLT) calls spreads now?
A: Yes, but I would go farther in the money, like the mid $90s, because I don’t think we’ll get that low in this cycle. I would also go out another month; instead of a one-month call spread in the mid $90s, I would do a two-month maturity. You could probably take in about $2,000 on a $10,000 position in the mid $90s.
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, 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
Back at Lake Tahoe
Global Market Comments
June 14, 2022
Fiat Lux
Featured Trade:
(THE MAD HEDGE TRADERS & INVESTORS SUMMIT IS ON FOR JUNE 14-16)
(MARKET OUTLOOK FOR THE WEEK AHEAD,
or WHAT HAPPENS WHEN YOUR BEST FRIEND BECOMES YOUR WORST ENEMY?)
(SPY), (TLT), (TSLA), (CCJ), (TGT), NVDA), (JPM), (BAC), (C)
Of course, I am talking about the Federal Reserve.
The Fed was the best friend of share owners, pressing interest rates lower from March 2009. That remained the case for 12 years until November 2021 when its notorious pivot took place, flipping overnight from an easing to a tightening posture.
It's actually worst than that. In fact, our nation’s central bank morphed overnight from the easiest monetary policy in history to the most aggressive tightening.
Stock markets have noticed, the Dow average giving up 20% in six months, and the final lows are probably not in yet.
I would bet money that you are expecting the worst-case scenario to happen. After all, the last serious selloff in 2008-2009 took the index down a heart-palpitating 52%.
What’s more, every oil shock of the last 50 years was followed by a recession, and we are clearly in one now. So, you are right to fear for your net worth and retirement security.
However, my work suggests that the best-case scenario will happen. Who is right, you or me?
You already know the answer.
Let me tell you what is already priced in the stock market: a Russian invasion of Ukraine, inflation at a 40-year high and climbing, a doubling of mortgage interest rates in a half year, peaking of the housing bubble, popping of technology and Bitcoin bubbles, and 200 basis points of Fed interest rate hikes.
With all this negativity already in the market, I would say that it is impossible for stocks NOT to go up. All that is left is to suck in one last round of non-believers on the short side before the indexes start a move to new all-time highs. That could take months at the most.
The only question now is whether a further 5% decline to an S&P 500 of 3,600, or a final puke out low of 3,500, down 7.5%. That means you should start scaling into your favorite longs now, the Cadillacs at Volkswagen prices.
So, let’s do some thinking outside the box here.
Tech stocks are cheaper now than after the low point of the Great 2000 Dotcom Bust. But they are still expensive compared to the main market. The S&P without technology stocks is now valued at earnings multiple of 13X versus 17x main market.
That is well into decade-low territory. That’s why I have included financials like (JPM), (BAC), and (C) in my list of “must own sectors'.
It's clear that inflation will bedevil the market for months to come given the dramatic acceleration we saw in May, from 0.3% to 1%. Let me tell you that there are only two ways to end inflation, and they could be done overnight.
*End all US support for Ukraine and throw in with Vladimir Putin. That would shave $50 off the price of oil immediately and get gas prices below $3.00 a gallon. You might have a hard time selling this to the thousands of Americans going over to Ukraine to volunteer.
*Cause a sharp recession immediately. The Fed is already well on their way to doing this with three guaranteed 50 basis point rate hikes by September. The first thing to collapse in a recession is oil demand. In the last recession, it went to negative $37 in the futures market (I got stopped out at -$5). This is why the oil industry isn’t interested in investing a dime at these oil prices. They are responsible to their shareholders, not Biden’s reelection prospects.
If there is a recession, it’s an invisible one. It’s a recession where you can’t hire anyone, can’t buy anything, subcontractors give you a six-month timeline with a straight face, and it takes a year to get delivery of a damn sofa. This recession miserably fails my “look out the window test.”
But at my advanced age, I don’t get surprised anymore.
Boba tea anyone? Who knew?
Consumer Price Index slaughters stocks, taking the Dow Average down 1,600 points, or 5% in two days, the worst move in two years. It’s typical bear market action. May inflation hit 8.6%, a new 40-year high. But you have to more than double to hit the old 1980s peak. New stock lows are in easy reach.
Lumber crashes, down 50% from the highs in months, with the near-complete cessation of new orders from builders. They see a recession just around the corner with higher interest rates and no new home buyers. It’s proof that the current inflation is spiking and setting up for a big fall.
Luxury Home Sales are plunging in New York, in numbers, but not in prices. Anyone who needed debt to trade up is out of the picture.
US drop Covid Testing Requirement for international travelers. Too many Americans trying to get home were getting stranded overseas for weeks because they failed a Covid test. Wheww!! That was a close call!
Americans will spend an extra $730 Billion on energy this year. That’s a heck of a lot to take out of consumer spending. So far, there has been no decline in demand. Much of this money ended up in Russian coffers.
Amazon (AMZN) splits 20:1, triggering an avalanche of new retail buyers. The company is also at the low end of its valuation range anger a gut-punching 41% decline in the share price this year. It may be early, but (AMZN) is definitely a BUY.
Target (TGT) warns of more margin squeeze, with too much inventory and flagging demand. (TGT) has become a bellwether for all of retail, which points to inflation, labor, and supply chain problems.
Uranium Stocks soar on Biden’s plan to buy $4.3 billion worth of enriched uranium, or yellow cake. The move is aimed to replace Russian imports where Russia is one of the world’s largest suppliers. It is the most unexploited form of non-carbon energy out there. Mad Hedge recommended Cameco (CCJ), the world’s second-largest supplier, a month ago. It was up 15% yesterday at the high.
New Home Mortgages hit a 22-year low. With 30-year fixed-rate loans soaring from 2.8% to 5.58% in six months, how can they not? Refis have crashed 75% YOY. Now that the Fed has quit buying, investors won’t touch mortgage-backed securities with a ten-foot pole.
Weekly Jobless Claims pop 29,000 to a five-month high in another hint toward a recession. Continuing Claims are at 1.306 million. The preemptive layoffs by ultra-cautious companies have begun, especially in technology.
Tesla (TSLA) gets an upgrade by UBS, which sees 51% of upside from here to $1,200. Total sales should top 1.4 million vehicles in 2022, up 40% YOY, and that includes lost production of 60,000 in Shanghai. A new Gigafactory in Indonesia is planned with a locked-up supply of Nickel, where the world’s largest supply of the metal resides. Cheap labor helps a lot where 5,000 need to be hired. The company will need six gigafactories to reach 20 million annual production.
My Ten-Year View
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 historically cheap, oil peaking out soon, and technology hyper-accelerating, there will be no reason not to. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The America coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 240,000 here we come!
With some of the greatest market volatility seen since 1987, my June month-to-date performance recovered to +2.57%.
My 2022 year-to-date performance ratcheted up to 44.44%, a new all-time high. The Dow Average is down -13.52% 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 66.63%.
That brings my 14-year total return to 557%, some 2.56 times the S&P 500 (SPX) over the same period and a new all-time high. My average annualized return has ratcheted up to 44.56%, easily the highest in the industry.
We need to keep an eye on the number of US Coronavirus cases at 85.6 million, up 200,000 in a week, and deaths topping 1,011,200 and have only increased by 2,000 in the past week. You can find the data here.
On Monday, June 13 at 8:00 AM EDT, US Consumer Inflation Expectations are out.
On Tuesday, June 14 at 8:30 AM, the Producer Price Index for May is published.
On Wednesday, June 15 at 10:30 AM, Retails Sales for May are announced. The Fed interest rates decision is out at 11:00 AM. The press conference follows at 11:30.
On Thursday, June 16 at 8:30 AM, Weekly Jobless Claims are out. We also get Housing Starts and Building Permits for May.
On Friday, June 10 at 8:15 AM, Industrial Production for May is published. At 2:00, the Baker Hughes Oil Rig Count is out.
As for me, I have benefited from many mentors and role models over the years, but Al Pinder, last of the New York-based Shipping and Trade News, is one of my favorites. Short with blown hair, glasses, and an always impish smile, he was a regular at lunch where we always played an old dice game called “ballout.”
I sat next to Al for ten years at the Foreign Correspondents Club of Japan high up in Tokyo’s Yukakucho Denki Building, we were pounding away on our antiquated Royal typewriters. At the end of the day, our necks would be stiff as boards. Al’s idea of work was to type for five minutes, then tell me stories for ten.
Saying that Al lived a colorful life would be the understatement of the century.
Al covered the Japanese invasion of China during the 1930s, interviewing several key generals like Hideki Tojo and Masaharu Homma, later executed for war crimes. He told me of child laborers in Shanghai silk processors who picked cocoons out of boiling water with their bare hands.
Al could see war with Japan on the horizon, so he took an extended tour of every west-facing beach in Japan during the summer of 1941, taking thousands of black and white pictures. The trick was how to get them out of the country without being arrested as a spy.
So he bought an immense steamer trunk and visited a sex shop in Tokyo’s red-light district where he bought a life-sized, blow-up doll of a Japanese female. His immensely valuable photos were hidden below a false bottom in the trunk and the blow-up doll placed on top.
When he passed through Japanese customs on the ship home from Yokohama, the inspectors opened the trunk, had a good laugh, and then closed it. These photos later became the basis of Operation Coronet, the American invasion of Japan in 1945.
Al was working for the Honolulu Star Bulletin when the Japanese attacked Pearl Harbor on December 7, 1941. Many antiaircraft shells fired at the attacking zeros landed in Honolulu causing dozens of casualties. Al told me every woman on the island wanted to get laid that night because they feared getting raped by the Japanese Army the next day.
Since Al knew China well, he was parachuted into western Yunan province to act as a liaison with Mao Zedong, then fighting a guerrilla war against the Japanese with his Eighth Route Army. Capture by the Japanese then meant certain torture and certain death.
In 1944, Al received a coded message in Morse code to pick up an urgent communication from Washington. So, he hiked a day to the drop zone and when the Army Air Corps DC-3 approached, he lit three signal fires.
A package parachuted to the ground, which he grabbed and then he fled for the mountains. Dodging enemy patrols all the way, he returned to his hideout in a mountain cave and opened the package. It was a letter from the Internal Revenue Service asking why he had not filed a tax return in three years.
When the second atomic bomb fell on Nagasaki, the war ended on August 15. Since Al was the closest man on the spot, he flew to Korea where he accepted the Japanese surrender there.
Al was one of the first to move into the Press Club, which housed war correspondents in one of the only buildings still standing in a city that had been bombed flat.
Al never left Japan because, as with many other war correspondents who arrived with the US military, it was the best thing that ever happened to him. After some initial hesitation, they were treated like conquering heroes, it was incredibly cheap at 800 yen to the dollar, and the women were beautiful.
During the Japanese occupation when the people were starving, Al bought an acre of land in Tokyo’s burned-out prime Akasaka district for a ten-pound can of ham. He spent the rest of his life living off this investment, selling one piece at a time, until it eventually became worth $10 million.
Al went to work for the Shipping and Trade News, an obscure industry trade publication which no one had ever heard of. I sat next to him when he artfully lifted every story out of an ancient book, Ships of the World. But Al always had plenty of money to spend.
When Al passed away in the early 2000s, an official from the American embassy in Tokyo showed up at the Press Club asking if anyone knew all Pinder. We eventually traced a bank branch which held a safe deposit box in his name. In it was proof that the CIA had been bribing every Japanese prime minister of the 1950s. He kept the evidence as an insurance policy against the day when his lucrative deal with the Shipping and Trade News was ever put at risk.
I flew in for Al’s wake and his Japanese wife was there along with most of the foreign press. Everyone was crying until I told the IRS story, then they had a good laugh.
A few years ago, I was invited to give the graduation speech at Defense Language Institute in Monterey, California. The latest bunch of graduates, including my nephew, were freshly versed in Arabic and headed for the Middle East.
The school was founded in 1941 to train Americans in Japanese to gain an intelligence advantage in the Pacific war.
General 'Vinegar Joe' Stillwell said their contribution shortened the war by two years. General Douglas MacArthur believed that an army had never before gone to war with so much advance knowledge about its enemy.
To this day, the school's motto is 'Yankee Samurai'. There on the wall with the school’s first graduates was a very young Al Pinder, still with that impish grin.
Al lived a full life and I still miss him to this day. I hope I can do as well.
Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Al Pinder
Press Club 1976
