A major Wall Street Bank has delivered us a stunning report telling us Artificial intelligence (AI) will replace the equivalent of 300 million full-time jobs.
Has science fiction finally arrived to jostle elbow-to-elbow with the working class?
I believe that report has been manufactured out of hyperbole.
Don’t forget that Wall Street is usually wrong in many of their predictions so take their analysis with a grain of salt.
Many of JP Morgan’s (JPM) top equity analysts have been publically telling us for the whole of 2023 that the stock market will fall to pieces because of an “earnings recession.”
I won’t name names but they couldn’t have been more wrong if they tried.
I do visualize AI taking jobs out of the US economy, but the truth is a lot more nuanced than that.
This report said that AI could replace a quarter of work tasks in the US and Europe but may also mean new jobs and a productivity boom.
And it could eventually increase the total annual value of goods and services produced globally by 7%.
Generative AI, able to create content indistinguishable from human work, is "a major advancement", the report says.
The report notes AI's impact will vary across different sectors - 46% of tasks in administrative and 44% in legal professions could be automated but only 6% in construction and 4% in maintenance, it says.
What ChatGPT does, for example, is allow more people with average writing skills to produce essays and articles which is completely accurate.
However, articles produced with no “voice” or individualism lack authenticity.
So it’s not fair to say that journalists will face more competition, which would drive down wages unless we see a very significant increase in the demand for such work. Funnily enough, journalism is quickly dying in 2023 because of a human element instead of an artificial one as mass journalism has turned into activism that does the bidding of whoever is sponsoring the newspaper.
Consider the introduction of GPS technology and platforms like Uber (UBER). Suddenly, knowing all the streets in London had much less value - and so incumbent drivers experienced large wage cuts in response, of around 10% according to our research.
The result was lower wages, not fewer drivers. However, GPS systems have nothing to do with creating unions which is another human element that AI cannot predict. If Uber drivers around the world could unite through human solidarity and muster up a functional workers union, then Uber would need to pay through the roof for benefits like paid time off, health care insurance, and sick leave.
I am not going to sit out here and talk about AI as if the human element is stripped out of anything AI is related to.
That analysis would be utterly incomplete.
And if generative AI is like previous information-technology advances, the report concludes, it could reduce employment in the near term.
Oddly enough, the jobs largely at risk to AI are white-collared jobs that are repeatable. This type of job stretches the gamut from clerical secretaries to computer programmers and interior designers.
The 300 million jobs estimated to be replaced is not something I agree with wholeheartedly.
A lot needs to go right to get anywhere close to that number.
The more interesting part of the technology is deploying the best parts of it to supercharge existing jobs like economic analysis and stock market prediction.
This is where the Mad Hedge Fund Trader comes in where I might be performing in the future at 500X of what I do now and even though that’s not an official “replacement” job, it would net the economy +500 because of the productivity gains.
Similarly, there will be outsized winners who deploy this technology who will net more than 1,000,000X increased productivity of pre-generative artificial intelligence.
Therefore, this technology is much more interesting at the top end of the job market than the lower end and this phenomenon will certainly supercharge tech stocks that jump into this groundbreaking technology AT THE TOP END.
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2023-07-03 15:02:322023-07-10 00:09:46Will AI Destroy the Job Market?
Recently, I have been touting a 2022 track record of +84.63%.
I have a confession to make.
I lied.
In actual fact, my performance was far higher than that. In reality, I generated a multiple of that +84.63% figure.
That is because my published performance is only for my front-month short-term trade alerts. It does not include the LEAPS recommendations (Long Term Equity Anticipation Securities) issued in 2022, the details of which I include below.
LEAPS have the identical structure as a front month vertical bull call debit spread. The only difference is that while front-month call spreads have expiration dates of less than 30 days, LEAPS go out to 18-30 months.
LEAPS also have strike prices far out of-the-money instead of deep in-the-money, giving you infinitely more upside leverage. LEAPS are actually synthetic futures contracts on the underlying stock.
Of the 12 LEAPS executed in 2022, eight made money and four lost. But the successful trades win big, up to 1,260% in the case of NVDIA (NVDA). With the losers, you only write off the money you put up.
And you still have 18 months until expiration for my four losers, ample time for them to turn around and make money. In the case of my biggest loser for Rivian (RIVN), Tesla launched an unprecedented EV price way shortly after I added this position. Never take on Tesla in a price war. Black swans happen.
Of course, timing is everything in this business. I only add LEAPS during major market selloffs as the leverage is so great, over 20X in some cases, of which there were four in 2022.
If you would like to receive more extensive coverage of my LEAPS service, please sign up for the Mad Hedge Concierge Service where you can excess a separate website devoted entirely to LEAPS. Be aware that the Concierge Service is by application only, has a limited number of places, and there is usually a waiting list.
Given the numbers below, it is easy to understand why most professional full-time traders only invest their personal retirement funds in LEAPS.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
The Sweet Taste of LEAPS
https://www.madhedgefundtrader.com/wp-content/uploads/2023/06/john-thomas-red-wine.jpg292317Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2023-06-29 09:02:042023-06-29 12:30:12My 2022 LEAPS Track Record
As I write this to you, I am flying at 30,000 feet over the red clay of Georgia. The azure blue of the Gulf of Mexico is on the left and the Golden State of California lies straight ahead.
I am returning from a five-day whirlwind tour of Florida, which saw me speak at three Strategy Luncheons and countless private meetings.
It was a blast!
Not only did I learn the local lay of the land, I often pick up some great trading ideas.
I first hitchhiked across the Sunshine State in 1967. Except for a few small towns on the coasts, there was nobody there. The entire inland of the state was covered with small cattle ranches and the odd tourist trap (mermaids, alligator wrestling, snake shows etc).
People thought the extensive freeway system was only built because the state was just 90 miles away from Cuba, then a Cold War flash point (it is officially called the “Dwight D. Eisenhower National System of Interstate and Defense”). Suddenly, somebody secretly started buying up land around Orlando. The locals thought General Motors (GM) was going to build a car plant there.
Then Walt Disney Corp (DIS) swept in and announced they were building a second Disneyland to cater to the east coast, creating an astonishing 70,000 jobs and the freeways started to fill up (click here for the video).
Today, driving around the state is a dystopian nightmare. The US population has doubled since the first Interstates were built in the 1950s, and the US GDP has increased by ten times, a byproduct of the Interstates. That means ten times more heavy truck traffic which has been mercilessly beating the life out of the roads. In Florida, the population has risen by more than fourfold as well, from 5 million to 22.2 million so you get the picture.
You lurch from one traffic jam to the next, even in the middle of the night. Whatever time Google Maps says it will take to get somewhere, triple it. The only consolation is that the traffic is worse in California.
I loved Key West where a very happy Concierge member made available an 1859 mansion close to the waterfront, restored and modernized down to the studs. By this time of the year, anyone with money has decamped for New England leaving only the retirees and beach bums.
I made the pilgrimage to Earnest Hemmingway’s home where he produced 70% of his published writings in only seven years. Another two boxes of manuscripts were discovered in the basement of his favorite bar last year.
It’s ironic that this state is now known for banning books that include sex and violence. Steinbeck’s work has already hit the dustbin, so old Earnest can’t be far behind.
What’s next? The Bible? It has lots of sex and violence.
As for me, Hemingway’s granddaughter, Mariel, stands out as the only Playboy cover girl I ever dated (April, 1982, I think). She is now happily married with three grown kids.
And yes, I did prove that it is possible to eat Key Lime Pie four days in a row.
As for the stock market last week, there really isn’t much to say. The concentration of wealth at the top continues unabated, as it is in the rest of the country. Stocks are still discounting a soft landing, while commodities, energy, and bonds expect a recession.
Go figure.
The top five stocks continues to suck all the money out of the rest of the market, (AAPL), (GOOGL), (AMZN), (MSFT), and (NVIDIA), the early beneficiaries of AI, accounting for 80% of this year’s market gains. Of the other 495 stocks, 250 are below their 200-day moving averages, meaning they are still in bear markets.
This is what has crushed volatility, taking the ($VIX) from $34 down to $15. The last time volatility was this low was just before the Long Term Capital Management fiasco where it languished around $9 (read Liar’s Poker by my friend Michael Lewis). When LTCB went bust, volatility rocketed to $40 overnight and stayed there for two years.
Options traders made fortunes.
Mad Hedge has nailed every trend this year. We bought tech and Tesla (TSLA) in January when we should have. We shorted ($VIX) every time it approached $30. Then we bought the banking bottom in March (JPM), (BAC), (C) and carried those positions into April.
We’ve been shorting Tesla strangles every month. And now we are 80% in cash waiting for the world to end one more time in Washington DC so we can load the boat with LEAPS and replay the movie one more time.
By the way, Mad Hedge has issued 25 LEAPS over the past year and 24 made money with an average profit of about 300%. Our sole loser has been with Rivian (RIVN), but even it still has 18 months to run. Never own an EV stock during a price war.
So far in May I have managed a modest 2.43% profit. My 2023 year-to-date performance is now at an eye-popping +64.18%. The S&P 500 (SPY) is up only a miniscule +9.00% so far in 2023. My trailing one-year return reached a 15-year high at +113.84% versus +10.87% for the S&P 500.
That brings my 15-year total return to +661.37%. My average annualized return has blasted up to +48.99%, another new high, some 2.74 times the S&P 500 over the same period.
Some 41 of my 44 trades this year have been profitable. My last 22 consecutive trade alerts have been profitable.
I closed out only one trade last week, a long in the (TLT) just short of max profit a day before expiration. That just leaves me with a long in Tesla and a short in Tesla, the “short strangle”. I now have a very rare 80% cash position due to the lack of high return, low risk trades.
There’s a 1,000 Point Drop in the Market Begging to Happen. That’s what happens when the market rallies on a Biden McCarthy debt ceiling deal, which McCarthy’s own party then votes down. After all, it took McCarthy 15 votes to get his job. Just watch volatility, it’s a coming.
Weekly Jobless Claims Fall to 242,000, down from 264,000. It’s a surprise slowdown. The rumor is that last week’s highpoint was the result of a surge in fraudulent online claims in Massachusetts.
NVIDIA Could Rise Fivefold in Ten years, say fund managers. I think that’s a low number. The Silicon Valley company makes the top performing GPU’s in the industry selling up to $60,000 each. (NVDA) is seeing a perfect storm of demand from the convergence of AI and Internet growth. The shares have already tripled off of the October low.
Tesla is Considering an India Factory, as part of its eventual build out to 10 plants worldwide. The country’s 100% import duty on cars has been a major roadblock. India is now pushing a “Made in India” initiative. Good luck getting anything done in India.
Homebuilder Sentiment Up for 10th Straight Month, as it will be for the next decade. There is no easy escape from a demographic wave. New homebuilders have figured out the new model.
India’s Tata to Build iPhones for Apple, in an accelerating diversification away from China. Apple has had too many of its eggs in one basket, especially given the recent political tensions between the US and the Middle Kingdom.
US Dollar Soars to Three Month High, as investors flee to safe haven short term investments. Rapidly worsening economic data is sparking recession fears. Ten consecutive months of falling inflation is another indicator of a slowdown.
My Ten-Year View
When we come out the other side of the recession, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. The economy decarbonizing and technology hyper-accelerating, creating enormous investment opportunities. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The new America will be far more efficient and profitable than the old.
Dow 240,000 here we come!
On Monday, May 22 there is nothing of note to report.
On Tuesday, May 23 at 4:00 PM EST, the inaugural launch of Mad Hedge Jacquie’s Post takes place. Please click here to attend this strategy webinar. The Federal Reserve Open Market Committee minutes are out at 2:00 PM.
On Wednesday, May 24 at 2:00 PM, the Federal Reserve Open Market Committee minutes are out.
On Thursday, May 25 at 8:30 AM, the Weekly Jobless Claims are announced. The US GDP Q2 second estimate is also published.
On Friday, May 26 at 2:00 PM, the University of Personal Income & Spending and Durable Goods are released.
As for me, I am reminded of my own summer of 1967, back when I was 15, which may be the subject of a future book and movie.
My family summer vacation that year was on the slopes of Mount Rainier in Washington State. Since it was raining every day, the other kids wanted to go home early.
So my parents left me and my younger brother in the firm hands of Mount Everest veteran Jim Whitaker to summit the 14,411 peak (click here for this story ). The deal was for us to hitchhike back to Los Angeles as soon as we got off the mountain.
In those days, it wasn’t such an unreasonable plan. The Vietnam War was on, and a lot of soldiers were thumbing their way to report to duty. My parents figured that since I was an Eagle Scout, I could take care of myself anywhere.
When we got off the mountain, I looked at the map and saw there was this fascinating-sounding country called “Canada” just to the north. So, it was off to Vancouver. Once there I learned there was a world’s fair going on in Montreal some 2,843 away, so we hit the TransCanada Highway going east.
We ran out of money in Alberta, so we took jobs as ranch hands. There we learned the joys of running down lost cattle on horseback, working all day at a buzz saw, artificially inseminating cows, and eating steak three times a day.
I made friends with the cowboys by reading them their mail, which they were unable to do since they were all illiterate. There were lots of bills due, child support owed, and alimony demands.
In Saskatchewan, the roads ran out of cars, so we hopped a freight train in Manitoba, narrowly missing getting mugged in the rail yard. We camped out in a box car occupied by other rough sorts for three days. There’s nothing like opening the doors and watching the scenery go by with no billboards and the wind blowing through your hair!
When the engineer spotted us on a curve, he stopped the train and invited us to up the engine. There, we slept on the floor, and he even let us take turns driving! That’s how we made it to Ontario, the most mosquito-infested place on the face of the earth.
Our last ride into Montreal offered to let us stay in his boat house as long as we wanted so there we stayed. Thank you, WWII RAF Bomber Command pilot Group Captain John Chenier!
Broke again, we landed jobs at a hamburger stand at Expo 67 in front of the imposing Russian pavilion with the ski jump roof. The pay was $1 an hour and all we could eat.
At the end of the month, Madame Desjardin couldn’t balance her inventory, so she asked how many burgers I was eating a day. I answer 20, and my brother answered 21. “Well, there’s my inventory problem” she replied.
And then there was Suzanne Baribeau, the love of my life. I wonder whatever happened to her?
I had to allow two weeks to hitchhike home in time for school. When we crossed the border at Niagara Falls, we were arrested as draft dodgers as we were too young to have driver’s licenses. It took a long conversation between US Immigration and my dad to convince them we weren’t. It wasn’t the last time my dad had to talk me out of jail.
We developed a system where my parents could keep track of us across the continent. Long-distance calls were then enormously expensive. So, I called home collect and when my dad answered, he asked what city the call was coming from.
When the operator gave him the answer, he said he would NOT accept the call. I remember lots of surprised operators. But the calls were free, and Dad always knew where we were. At least he had a starting point to look for the bodies.
We had to divert around Detroit to avoid the race riots there. We got robbed in North Dakota, where we were in the only car for 50 miles. We made it as far as Seattle with only three days left until high school started.
Finally, my parents had a nervous breakdown. They bought us our first air tickets ever to get back to LA, then quite an investment.
I haven’t stopped traveling since, my tally now tops all 50 states and 135 countries.
And I learned an amazing thing about the United States. Almost everyone in the country is honest, kind, and generous. Virtually every night, our last ride of the day took us home and provided us with an extra bedroom, garage, barn or tool shed to sleep in. The next morning, they fed us a big breakfast and dropped us off at a good spot to catch the next ride.
It was the adventure of a lifetime and I profited enormously from it. As a result, I am a better man.
As for my brother Chris, he died of covid in early 2020 at the age of 65, right at the onset of the pandemic. Unfortunately, he lived very close to the initial Washington State hot spot.
People often ask me what makes me so different from others. I answer, “My parents taught me I could do anything with my life, and I proved them right.”
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Summit of Mt. Rainier 1967
McKinnon Ranch Bassano Alberta 1967
American Pavilion Expo 67
Hamburger Stand at Expo 67
Picking Cherries in Michigan 1967
https://www.madhedgefundtrader.com/wp-content/uploads/2023/05/hamburger-stand.jpg970983Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2023-05-22 09:02:142023-05-22 15:47:30The Market Outlook for the Week Ahead, or Concentration of Wealth at the Top
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE GOLDEN AGE OF BIG BANKING HAS JUST BEGUN) (JPM), (FRC), (BAC), (C), (WFC), (AAPL), (GOOGL), (META), (AMZN), (TSLA), (NVDA), (CRM), ($VIX), (USO), (TLT), (QQQ)
The United States is about to change beyond all recognition.
Most investors have missed the true meaning of the JP Morgan takeover of First Republic Bank for sofa change, some $10.6 billion. It in fact heralds the golden age of big banking. The US is about to move from 4,000 banks to four, with all of the profits accruing at the top.
Look at the details of the (JPM)/(FRC) deal and you will become utterly convinced.
(JPM) bought a $90 billion loan portfolio for 87 cents on the dollar, despite the fact that the actual default rate was under 1%. The FDIC agreed to split losses for five years on residential losses and seven years on commercial ones. The deal is accretive to (JPM) book value and earnings. (JPM) gets an entire wealth management business, lock, stock, and barrel. Indeed, CEO Jamie Diamond was almost embarrassed by what a great deal he got.
It was the deal of the century, a true gift for the ages. If this is the model going forward, you want to load the boat with every big bank share out there.
And the amazing thing was that (JPM) made the highest bid among a half dozen contenders.
Along with Health Care, banking is the last unconsolidated US industry. We have five railroads, four airlines, three trucking companies, three telephone companies, two cell phone providers….and 4,000 banks?
Other countries get by with much less. England has five major banks, Australia four, and Germany two, one of which goes bankrupt every decade (I’m not naming names). America’s financial system is an anachronism of its federal system where each of the 50 states is treated like a mini country.
The net net of this will be a massive capital drain from the entire country to New York where the big banks are concentrated. Local economies in the Midwest and the South will collapse for lack of funding. The West Coast will be OK with behemoth technology companies spinning off gigantic cash flows.
The other big story here is the dramatic change in the administration’s antitrust policy. Until now, it has opposed every large merger as an undue concentration of economic power. Then suddenly, the second largest bank merger in history took place on a weekend, and there will be more to come.
All it takes is a Twitter run by depositors. Every weekend has become a waiting game for the foreseeable future.
Needless to say, this makes all the big banks a screaming buy. Hoover up every one of the coming dip, including (JPM), (BAC), (C), and (WFC).
Big is beautiful.
To prove I am not perfect, my position in First Republic Bank (FRC) still sits on my broker statement a week after it filed for bankruptcy, dead, moribund, and worthless as if it is some form of punishment. It’s a very small position but it stings nonetheless.
It’s like they want to punish me for leading them astray. They have been copying my trades for ages without paying for them and I hope they took a big one in (FRC).
So far in May, I have managed a modest +0.55% profit. My 2023 year-to-date performance is now at an eye-popping +62.30%. The S&P 500 (SPY) is up only a miniscule +8.40% so far in 2023. My trailing one-year return reached a 15-year high at +120.45% versus -3.67% for the S&P 500.
That brings my 15-year total return to +659.49%. My average annualized return has blasted up to +48.86%, another new high, some 2.79 times the S&P 500 over the same period.
Some 40 of my 43 trades this year have been profitable. My last 20 consecutive trade alerts have been profitable.
I initiated no new trades last week, content to run off existing profitable ones. With the Volatility Index at a two-year low at 15.78%, opportunities are few and far between. Those include both longs and shorts in Tesla (TSLA), a long in the bond market (TLT), and a short in the (QQQ).
That leaves me with only one remaining position, a short-dated long in the bond market. I now have a very rare 90% cash position due to the lack of high-return, low-risk trades.
The Fed Raises Rates 0.25%, likely the last such move in this cycle. Futures markets are now discounting a 25-basis point CUT by September, the beginning of a new decade-long falling rate cycle. The problem is that AI is creating more jobs than it is destroying, keeping the Fed fixated on the wrong data.
Nonfarm Payroll Jumps by 253,000, another hot number. The headline Unemployment Rate dropped to a half-century low of 3.4%. These figures suggest for rate hikes to come.
The JP Morgan Buys First Republic Bank from the FDIC, for $10.6 billion, thus wiping out the shareholders. It’s a huge win for (JPM), which picked up 87 branches and $90 billion in loans in the wealthiest part of the country, taking the share up $5. What you lost on (FRC) you made pack on (JPM) LEAPS. Live and learn. On to the next trade! The FDIC got out for nearly free, a big win for the government.
Government DefaultDate Moved Up to June 1, by US Treasury Secretary Janet Yellen, smacking the bond market for three points. The House remains an albatross around the bond market’s debt.
Europe Ekes Out 0.1% Growth in Q1, versus a 1.1% rate for the US. This is despite the drag of the Ukraine War, energy shortages, high inflation, and Brexit. What’s the difference between the US and Europe? We allow immigrants who become customers, while the continent doesn’t.
You Only Need to Buy Seven Stocks This Year, as the rest are going nowhere. That include (AAPL), (GOOGL), (META), (AMZN), (TSLA), (NVDA), (CRM). Watch out when the next rotation broadens out to the rest of the market.
Is Volatility Bottoming Now? The Fed announcement of a 25 basis point hike on Wednesday could end the move up in stocks. After that, shares will only have an imminent debt default and US government downgrade to focus on. ($VIX) seven-week fade will end that revisit the old highs in the high $20’s. Great shorting opportunities are setting up.
Oil (USO) Crashes 5% on US debt default fears in the biggest drop since January. This is the worst asset class to own going into a recession. EV competition is also starting to take a bite. No gas needed here. $66 a barrel here we come.
More Tesla Price Cuts to Come, with swelling inventories forcing Musk’s hand. The only consolation is that Detroit will suffer more. Musk is cutting profits while the big three are accelerating losses. Tesla has excess inventory for the first time in its 20-year history.
Apple (AAPL) Earnings Beat, led by stronger than expected Q1 iPhone sales at $53.1 billion. EPS came in at $1.53 versus $1.42 expected, revenues at $94.84 billion versus $92.96. Mac and iPad sales are down YOY. Services rose 5.3%. Apple bought back a stunning $90 billion of its own shares and paid dividends. The shares popped $3. The long-term growth play here is low prices phone in India where second hand phone sales have been burgeoning. That's why Apple is now offering to buy your old phone. Next stop: New Delhi.
My Ten-Year View
When we come out the other side of the recession, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. The economy decarbonizing and technology hyper-accelerating, creating enormous investment opportunities. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The new America will be far more efficient and profitable than the old.
Dow 240,000 here we come!
On Monday, May 8 at 7:30 AM EST, the Consumer Inflation Expectations are out.
On Tuesday, May 9 at 6:00 AM, the NFIB Business Optimism Index is announced. On Wednesday, May 10 at 11:00 AM, the US Inflation rate is printed. On Thursday, May 11 at 8:30 AM, the Weekly Jobless Claims are announced. We also get the Producer Price Index.
On Friday, May 12 at 8:30, the University of Michigan Consumer Sentiment Index for April is released.
As for me, I have been going down memory lane looking at my old travel photos looking for new story ideas and I hit the jackpot.
Most people collect postcards from their foreign travels. I collect lifetime bans from whole countries.
During the 1970s, The Economist magazine of London sent me to investigate the remote country of Nauru, one half degree south of the equator in the middle of the Pacific Ocean.
At the time, they had the world’s highest per capita income due to the fact that the island was entirely composed of valuable bird guano essential for agriculture. Before the Haber-Bosch Process to convert nitrogen into ammonia was discovered, guano was the world’s sole source of high grade fertilizer.
So I packed my camera, extra sunglasses, and a couple of pairs of shorts and headed for the most obscure part of the world. That involved catching Japan Airlines from Tokyo to Hawaii, Air Micronesia to Majuro in the Marshall Islands, and Air Nauru to the island nation in question.
There was a problem in Nauru. Calculating the market value of the bird crap leaving the island, I realized it in no way matched the national budget. It should have since the government owned the guano mines.
Whenever numbers don’t match up, I get interested.
I managed to wrangle an interview with the president of the country in the capital city of Demigomodu. It turns out that was no big deal as visitors were so rare in the least visited country in the world that he met with everyone!
When the president ducked out to take a call, I managed to steal a top-secret copy of the national budget. I took it back to my hotel and read it with great interest.
I discovered that the president’s wife had been commandeering Boeing 727s from Air Nauru to go on lavish shopping expeditions to Sydney, Australia where she was blowing $200,000 a day on jewelry, designer clothes, and purses, all at government expense. Just when I finished reading, there was a heavy knock on the door. The police had come to arrest me.
It didn’t take long for missing budget to be found. I was put on trial, sentenced to death for espionage, and locked up to await my fate. The trial took 20 minutes.
Then one morning I was awoken by the rattling of keys. My editor at The Economist, the late Peter Martin, had made a call and threatened the intervention of the British government. Visions of Her Majesty’s Navy loomed on the horizon.
I was put in handcuffs and placed on the next plane out of the country, a non-stop for Brisbane Australia. When I was seated next to an Australian passenger, he asked “Jees, what did you do mate, kill someone?” On arrival, I sent the story to the Australian papers.
I dined out on that story for years.
Alas, things have not gone well for Nauru in the intervening 50 years. The guano is all gone, mined to exhaustion. It is often cited as an environmental disaster. The population has rocketed from 4,000 to 10,000. Per capita incomes have plunged from $60,000 a year to $10,000. The country is now a ward of the Australian government to keep the Chinese from taking it over.
If you want to learn more about Nauru, which many believe to be a fictitious country, please click here.
As for me, I think I’ll pass. I don’t ever plan to visit Nauru again. Once lucky, twice forewarned.
Stay healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
https://www.madhedgefundtrader.com/wp-content/uploads/2023/05/oceana-may2023.png6861024Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2023-05-08 09:02:522023-05-08 12:00:34The Market Outlook for the Week Ahead, or The Golden Age of Big Banking has Just Begun!
Below please find subscribers’ Q&A for the April 12 Mad Hedge Fund Trader Global Strategy Webinar, broadcast from Incline Village, CA.
Q: Should I “Sell in May and go Away”
Why wait until May? Up 49% YTD, we’ve already picked the low hanging fruit for 2023. The market is now at the top end of the range in the face of a weakening economy. Maybe there is another 100 points of upside potential in the market versus 400 points of downside risk. The markets have pulled forward not only the first quarter’s performance, but possibly that for the entire year. That’s what an $18 (VIX) is telling you. The game from here is to buy the next bottom in big technology stocks for an explosive second half move up to (SPY) $4,800. This is a short-term call only. Keep all your one- and two-year LEAPS. The market won’t fall enough to justify a round trip in these illiquid positions.
Q: How do I avoid assignment risk with these call spreads and put spreads?
A: You don't want to avoid it. You want to be exercised early on the short leg of your call spreads because it allows you to take 100% of the profits well before expiration day. Some people were getting called on the banking call spreads last week because dividends were imminent and I had to explain how lucky they were. The reason hedge funds call away these options is that they want to buy the stock one, two, or three days before the stocks go ex-dividend, so they can get an immediate payoff and then get rid of the position. In the case of JP Morgan (JPM), they paid out a $1 dividend on Monday last week, so we had a lot of exercises right before that. All you have to do is call your broker (they’re not allowed to do this unless you call them), tell them to exercise your long option to meet your short, and you’re out of the position at max profit and you get the money immediately. So that is the issue. Only stocks that pay dividends or interest get called away, so the high dividend things like the banks or the iShares 20 Plus Year Treasury Bond ETF (TLT) will get called away. Zero dividend stocks almost never get called away unless someone is trying to cover a short in aftermarket hours. My experience is that only 1% of your positions ever get called away.
Q: What are your thoughts on the bottom for United States Natural Gas Fund (UNG) and what will trigger the reversal on it?
A: The bottom is somewhere around here—we’re very close to or even below some of the historic bottoms for natural gas over the last 20 years, which is around $2/MM BTU for natural gas. We could bounce around here for a while. The trigger for the recovery will be a stronger economic recovery in China, which is the world's largest natural gas importer. When the Ukraine War broke out, a lot of that gas got diverted to Germany. Those contracts are now expiring and we’re in a position now where we can start re-exporting that gas to China. They’ll take all we can produce. So that should be positive for Nat Gas. Also, because of the damage caused by the explosion at the Cheniere Energy (LNG) export facilities in Texas, our capacity to exported was impaired for many months. Those are coming back online now. This is why you look at Nat Gas now, and is why I put on a two-year LEAPS instead of a one-year.
Q: Would I go into cash with my favorite stocks?
A: Yes, for the short term. No, for the long term. All of my stocks are great long-term holds, but if you’re day trading or weekly trading or monthly trading, now is not a bad place to go cash so you have lots of dry powder on the next meltdown, especially with 90-day T-bills giving you 5%.
Q: Should we purchase gold bullion as a small percentage of our portfolio?
A: Better to buy gold stocks like SPDR Gold Trust (GLD), VanEck Gold Miners ETF (GDX), and Barrick Gold (GOLD) and Newmont Mining (NEM). Gold bullion is expensive to store, is heavy, takes up a lot of space in your safe deposit box, and it can be stolen—that is the problem with physical assets. I prefer the financial assets, the gold miners, to the underlying metal, which should perform at 4x the rate of actual gold.
Q: Have you changed your December 2024 view on bank stocks?
A: No.
Q: Is it true that Warren Buffet thinks the banking crisis is not over?
A: Yes it is, but it will be confined to smaller banks, which are losing their deposits to larger banks like JP Morgan (JPM), Bank of America (BAC), Citibank (C), and Berkshire Hathaway (BRK/B). It’s the regional banks that are going to have a much more difficult time rolling over real estate loans that are coming due. You have a $1.5 trillion of commercial real estate loans coming due in the next year, and these loans originally were taken out at 0% or 2% or 3%. They’re now going to have to refinance at 7%, 8%, 9% or 10%, and that will create a problem because a lot of their borrowers don’t qualify for their loans anymore. That’s going to be a drag but it’s going to hit the Midwest in one-off situations that can be easily ring-fenced. The net effect of the regional banking crisis is going to be to suck money out of the middle part of the US and park it on the coasts where the big banks are, mostly on the east coast.
Q: Based on your view, the market is due for a short-term correction, would you keep long-term LEAPS on the banks?
A: Absolutely yes. First off the banks have already had their correction, thanks to the regional banking crisis. If you have any downside in banks it will be minimal, the upside is maybe 10x greater than the downside in banks. So yes, you keep your LEAPS, and that’s why you have long-term LEAPS—to take the long-term view and just forget about them, don’t even look at them day to day because they won’t change. The time value on those long-dated options is so great that you get very little day-to-day movement in the actual price.
Q: How are you going to be successful with AI?
A: Well you hire only the absolute best software engineers, which we have here in San Francisco and Silicon Valley. How to invest in AI is much harder; there are no pure AI plays. Microsoft bought the frontrunner for $13 billion, ChatGPT, and any other participants in cutting edge AI are all giant companies where it’s just a small part of their business. However, down the road, like in a year or two or three, you will be invited to buy pure AI spinoffs at tremendously inflated multiples, and that will be the only way to get in. That might be the top for the stock. I’ve only seen this happen like 100 times before, why should AI be any different? The best way to benefit from AI is to use it yourself, just like when Microsoft brought out Office—there was no way to get a pure play on Microsoft Office other than buying Microsoft (MSFT) itself. You did a lot better using the apps for your own business and your own investment styles. The big view on AI is that it will double the value of all existing companies that you already own by cutting costs and improving service value. That part of my Dow 240,000 call.
Q: Do you like Chinese solar stocks?
A: No, China has its own unique political risks which I don’t want to get involved with right now. And even the solar companies in the US are hugely overbought. Great long-term businesses for all of these companies, but the stocks have already discounted a decent chunk of that, there are better fish to fry, like bank stocks for example. The best way to play China is to buy the surrounding emerging countries (EEM) it buys from, not China itself.
Q: I hear that India is the next China. How best to play it?
A: That’s true, India is the next China; but it won’t grow at the peak rate that China did in its best days in the 2000s, which is a growth rate of around 13% a year. India might do half of that, and the simple answer is that China is a dictatorship and could order what they needed to do to max out growth. India is a democracy and can’t do things like arbitrary land seizures or big infrastructure projects and so on. So, that will cut the growth rate in India by half but that’ll still be double America’s long term growth rate, which is a mature economy. And the ETFs to play there in India are (FLIN), the (EPI), and the (INDA). Those are three good index ETFs in India.
Q: Do you expect a 2.5% US Treasury yield by year-end?
A: Yes, and in fact we’ve already done half of that move from the 4.60% yield that we have at the peak last October. So yes, the trend is our friend, and the hard thing to do in the bond market is to get into it, because everybody in the world is now expecting lower interest rates.
Q: What options spreads would you do on the iShares 20 Plus Year Treasury Bond ETF (TLT)?
A: Well here, none, because we’re at a high for the year, but wait for a $5 point selloff and then do $5 points in-the-money. That’s what I do like clockwork, don’t even think about it. If we drop more that $5 I’ll just buy more.
Q: Do you expect Natural Gas (UNG) to be higher by the end of the year for the current price?
A: Absolutely, yes, 8 months is more than enough time to get China online again and buying all the natural gas they can get their hands on unless they invade Taiwan.
Q: Any interesting LEAPS on First Republic Corporation (FRC)?
A: You can buy the July 2023 $22.500$25 vertical bull call debit spreads LEAPS for 60 cents and see it expire at $2.50 in 15 months. With an incredible implied volatility at 177% that’s the furthest option maturity that is trading. I think the better trade here is just to buy the stock. You’re going to be limiting your upside with a LEAPS. With a “BUY” in the stock here, you’re looking at 2, 3, 4 times upside potential in a recovery—and remember this thing’s trading at $14, it used to be trading at $100 a month ago. So, don’t limit your upside with an options trade on something that’s clearly extremely oversold after a 90% down-move in a month. That's a rare situation. Full disclosure: I own (FRC). I bought some at $15 and I bought more at $12, just as a go-crazy trade—but I know the (FRC) bank and the management.
Q: How to buy Natural Gas?
A: You buy (UNG), the ETF, to make it really easy. Just remember you have a -35% one-year contango on that so it’s got to go up more than 35% in a year for you to make money.
Q: Any risk of holding banks and brokers through earnings?
A: I would say not much. If they announce surprise losses, they’ll be small. The first quarter was actually a very good quarter for banks and brokers because they made tons of money on their options business, where the volumes have doubled. And the banking crisis didn’t really kick in during the first quarter, at least from a business point of view. So, I don’t expect downside surprises—if there are, it will be small ones, not worth selling and trying to get back in because you’ll just end up paying a higher price.
Q: Are we building new nuclear plants?
A: No, but we had the first expansion in 7 years of the exiting Vogtle plant in Georgia which added a new reactor. The real demand will come from new designs of nuclear plants and the US modernizing its nuclear weapons designs. All of the nuclear fuel that we bought from the Soviet Union after its collapse 30 years ago has all been used up. It ran all of the nuclear power plants in the US for 20 years. That has run out and the prospects of resupplying from Russia now are zero.
Q: Do you foresee China invading Taiwan?
A: Never going to happen. If China (FXI) does invade Taiwan they 1.) lose their entire foreign food supply from the US and 2.) lose all their trade with the US that they need to earn the money to pay for food from other sources like Australia and Russia. So, never going to happen, but they will keep bluffing all year, as they have done continuously since 1949.
Q: Could commercial real estate be a problem for large insurance companies?
A: Only if the default rate goes up; and again, it’s going to be a case-by-case basis where they invested—is it Manhattan or San Francisco where the vacancy rates are at all-time highs at 30%, or is it the Midwest, where the credit quality has deteriorated the most, and is looking at the higher default rates? What is more likely is that interest rates will fall sharply by 2024 bailing these companies out.
To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in to www.madhedgefundtrader.com , go to MY ACCOUNT, click on GLOBAL TRADING DISPATCH or TECHNOLOGY LETTER then WEBINARS, and all the webinars from the last 12 years are there in all their glory.
Good Luck and Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
1976 in Laos
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