September 16, 2019

Global Market Comments
September 16, 2019
Fiat Lux

Featured Trade:

(SPY), (TLT), (FB), (GOOGL), (M), (C),
 (XOM), (NFLX), (DIS), (FXE), (FXI)

September 9, 2019

Global Market Comments
September 9, 2019
Fiat Lux

Featured Trade:

(FXB), (M), (XOM), (BAC), (FB), (AAPL),
 (AMZN), (ROKU), (VIX), (GS), (MS),


August 19, 2019

Global Market Comments
August 19, 2019
Fiat Lux

Featured Trade:

(SPY), (TLT), (VIX), (VXX), (M),
(WMT), (FB), (AMZN), (GOOGL), (IWM)

The Market Outlook for the Week Ahead, or What a Roller Coaster Ride!

I like roller coasters. The Giant Dipper at the Santa Cruz Boardwalk is tough to beat, the last operating wooden coaster in the United States. And I’ll always have fond memories of the Cyclone at Coney Island in New York.

I especially liked this week in the financial markets, which provided more profitable trading opportunities, both on the long and the short side, that any other week of the past decade.

Perhaps the highpoint was on Thursday when I was staring at my screens watching ten year US Treasury bond yields (TLT) bottom at a near historic 1.46%, and my own Mad Hedge Market Timing Index plunging to a lowly 19.

Impulsively, I covered the last of my short positions and started piling on longs in the FANGs. The next morning, the Dow Average opened up 300 points. But then, it’s easy to be bold and decisive when you’re up 30% on the year, compared to only 11% for the Dow Average.

And guess what? The best may be yet to come!

As long as the Volatility Index stays over $20, you will be able to print all the money you want with options spreads. I’m talking 10%-15% A MONTH!

All eyes are now on September 1 when the Chinese announce their own retaliation to our tariff increase. Will they target ag again? Or does the bond market (TLT) take the hit this time (the Chinese government owns $900 billion worth of our debt).

And now for the question that everyone is asking: How far will the stock market fall in this cycle. We have already plunged 10% from the highs on an intraday basis. Could we drop another 10% in this period of high anxiety? Certainly. However, I tend to think it will be less than that.

The initial market pop on Monday came when the new Chinese tariffs were delayed, from September 1 to December 15, on some items. Tell me who saw this one coming. The potential costs of the tariffs are hitting the US more than China. It was worth a 550-point rally in the Dow Average. In 50 years, I’ve never seen such blatant market manipulation.

Gold hit a new six-year high, with the collapse of the Argentine Peso a new factor. A poor election result drove the beleaguered currency down 15% in one day, a massive move.

Now you have to worry about what’s happening in China AND Argentina. For the first time in history, gold now has a positive yield versus the Europe and the Japanese Yen, which both offer negative interest rates.

Hong Kong is becoming a factor driving US markets down. If there is a repeat if the 1989 Tiananmen Square massacre where thousands died, global markets could collapse. The hit to growth will be more than it currently can stand in its present weakened state.

Inflation is taking off, with Core Consumer Inflation for July coming in at a red hot 0.3%, delivering the strongest two-month price burst since 2006. If it keeps up, you can kiss those future interest rate cuts goodbye.

Germany is in recession. That is the only conclusion possible when you see Q2 at -0.1% growth and the economy still in free fall. The ZEW’s figures regarding Germany yesterday were nothing short of horrific as the Economic Sentiment Index fell to -44. When you damage China’s economy, it puts the rest of the world into recession. The global economy has become so interlinked, it can’t become undone without another great recession.

Bonds rates bottomed yesterday, at least for the short term, the intraday low for the ten-year US Treasury yield hitting 1.46%. Welcome to inversion land, where long term interest rates are below short-term ones. Confidence in the economy is melting like an Alaskan glacier. But with three more 25 basis point rate cuts to come, an eventual break below 1.0% is inevitable. Watch for stocks to remake half their recent losses.

Consumer Sentiment cratered in August from 97.0 estimated to 92.1. And that was before the stock market sold off. Consumer spending remains strong. The last time it was this strong was at the market top in 2008, the market top in 1999, and the market top in 1987.

July Housing Starts plunged 4.0%, to 1.191 million units as homebuilders move into recession mode. Not even record low-interest rates can get them to stick their necks out this time. Those that did last time got wiped out.

It’s been pedal to the metal all month with the Mad Hedge Trade Alert Service, with no less than 31 Trade Alerts going out so far. Some 18 or the last 19 round trips have been profitable, generating one of the biggest performance jumps in our 12-year history.

Since July 12, we have clocked a blistering 15.15% in profits or $15,150 for the model $100,000 trading portfolio.

My Global Trading Dispatch has hit a new all-time high of 330.65% and my year-to-date shot up to +30.51%. My ten-year average annualized profit bobbed up to +34.20%. 

I have coined a blockbuster 12.18% so far in August. All of you people who just subscribed in June and July are looking like geniuses. My staff and I have been working to the point of exhaustion, but it’s worth it if I can print these kinds of numbers.

The coming week will be a snore on the data front. Believe it or not, it could be quiet.

On Monday, August 19, nothing of note is released.

On Tuesday, August 20 at 10:30 AM, we get API Crude Oil Stocks.

On Wednesday, August 21, at 10:00 the Existing Home Sales are published for July.

On Thursday, August 22 at 8:30 AM, the Weekly Jobless Claims are printed. The Jackson Hole conference of global central bankers and economists begins.

On Friday, August 23 at 8:30 AM the July New Home Sales are announced.

The Baker Hughes Rig Count follows at 2:00 PM.

As for me, I will be attending the Pebble Beach Concourse d’Elegance vintage car show where I will be exhibiting my 1925 Rolls Royce Phantom I, the best car ever made.

I don’t mind the wooden brakes, but it’s too bad they didn’t make adjustable seats in those days to fit my 6’4” frame. However, its price appreciation has been better than Apple’s (AAPL) which I bought as a fixer upper in England during the 1980s for $20,000. My average cost on Apple is a split adjusted 25 cents.

My Rolls will be shown alongside James Bond’s 1964 Aston Martin which sold for $6.3 million, a 1939 Volkswagen Type 64 priced at more than $20 million, and a $13 million 1958 Ferrari 250 GT BBT.

And what am I doing next weekend? Taking the Boy Scouts to the Six Flags roller coaster farm in Vallejo.

Good luck and good trading.

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








My Phantom I


1939 Volkswagen


1954 Ferrari

Emergency Notice on Macy’s Options Called Away

I have received emails today from several followers indicating that their short position in the Macy’s August 16 $23 put options have been called away. These are one leg of the Macys (M) August 2019 $23-$25 in-the-money vertical BEAR PUT spread which I recommended on August 6.

I am responding with an EMERGENCY ALERT because some brokers, notably Charles Schwab, are advising their customers exactly the wrong thing to do. They are telling their customers to take out a huge leveraged margin positions to cover a long position in Macy’s shares at $23 a share. YOU SHOULD NOT FOLLOW THIS ADVICE!

Instead, you should simply tell your broker to exercise you long Macy’s August 16 $25 put options to cover your short Macy’s August $23 put options and take home the maximum potential profit one day before expiration.

Your long Macy’s August 16 $25 put options more than covers any losses in the short Macy’s August $23 put options plus a handsome profit.

Remember, when you are short a put option and it get exercised against you or called away, you automatically own the shares. In the case of the Macy’s August 16 $23 put options, you now own 100 shares for each option contract you were short. Short 57 contracts means you are now long 5,700 shares, worth $91,200 shares in a plunging market.

Most of you have short option positions, although you may not realize it. For when you buy an in-the-money put option spread, it contains two elements: a long put and a short put. The short put can get assigned, or called away at any time.

You have to be careful here because the inexperienced can blow their newfound windfall if they take the wrong action, so here’s how to handle it.

Puts are a right to sell shares at a fixed price before a fixed date, and one option contract is exercisable into 100 shares.

Sounds like a good trade to me.

Weird stuff like this happens in the run-up to options expirations.

Ordinary shares may not be available in the market, or maybe a limit order didn’t get done by the stock market close.

There are thousands of algorithms out there which may arrive at some twisted logic that the puts need to be exercised.

Many require a rebalancing of hedges at the close every day which can be achieved through option exercises.

And yes, puts even get exercised by accident. There are still a few humans left in this market to blow it.

And here’s another possible outcome in this process.

Your broker will call you to notify you of an option called away, and then give you the wrong advice on what to do about it.

This generates tons of commissions for the broker but is a terrible thing for the trader to do from a risk point of view, such as generating a loss by the time everything is closed and netted out.

Avarice could have been an explanation here but I think stupidity and poor training and low wages are much more likely.

Brokers have so many ways to steal money legally that they don’t need to resort to the illegal kind.

This exercise process is now fully automated at most brokers but it never hurts to follow up with a phone call if you get an exercise notice. Mistakes do happen.

Some may also send you a link to a video of what to do about all this.

If any of you are the slightest bit worried or confused by all of this, come out of your position RIGHT NOW at a small profit! You should never be worried or confused about any position tying up YOUR money.

Professionals do these things all day long and exercises become second nature, just another cost of doing business.

If you do this long enough, eventually you get hit. I bet you don’t.


August 14, 2019

Global Market Comments
August 14, 2019
Fiat Lux

Featured Trade:

(CRM), (FB), (M), (VIX)

How to Handle the Friday, August 16 Options Expiration

Followers of the Mad Hedge Technology Letter have the good fortune to own three deep in-the-money options position that expires on Friday, August 16, and I just want to explain to the newbies how to best maximize their profits.

This involves the:

the Salesforce (CRM) August 2019 $125-$130 in-the-money vertical BULL CALL spread at $4.50 which will expire at $5.00

the Macy’s (M) August 2019 $23-$25 in-the-money vertical BEAR PUT spread at $1.74 which will expire at $2.00

the Facebook (FB) August 2019 $167.50-$172.50 in-the-money vertical BULL CALL spread at $4.50 which will expire at $5.00

The total profit on all three positions will increase the value of our $100,000 model trading portfolio by 3.68%, or $3,680. This position only became possible due to the extreme volatility (VIX) seen in the market in recent weeks.

Provided that we don’t have a monster “RISK OFF” move in the market this week (more failure of the China trade talks? War with Iran? A massacre in Hong Kong?) which causes stocks to collapse and volatility to rocket, these positions should expire at its maximum profit points. So far, so good.

I’ll do the math for you on the Salesforce (CRM) position. Your profit can be calculated as follows:

Profit: $5.00 expiration value – $4.50 cost = $0.50 net profit

(22 contracts X 100 shares per option X $0.50 net profit)

= $1,100 or 11.11% in 7 trading days.

One of the reasons that I run these positions into expiration is that with volatility high, and therefore the implied volatility on the options, we get paid much more to run these into expiration than we have in the past.

Many of you have already emailed me asking what to do with these winning positions.

The answer is very simple. You take your left hand, grab your right wrist, pull it behind your neck, and pat yourself on the back for a job well done.

You don’t have to do anything.

Your broker (are they still called that?) will automatically use your long position to cover your short position, canceling out the total holdings.

The entire profit will be credited to your account on Monday morning August 19 and the margin freed up.

Some firms charge you a modest $10 or $15 fee for performing this service.

If you don’t see the cash show up in your account on Monday, get on the blower immediately and find it.

Although the expiration process is now supposed to be fully automated, mistakes occasionally do occur. Better to sort out any confusion before losses ensue.

If you want to wimp out and close the position before the expiration, it may be expensive to do so. You can probably unload them pennies below their maximum expiration value.

Keep in mind that the liquidity in the options market disappears, and the spreads substantially widen when a security has only hours or minutes until expiration on Friday. So, if you plan to exit, do so well before the final expiration at the Friday market close.

This is known in the trade as the “expiration risk.”

One way or the other, I’m sure you’ll do OK as long as I am looking over your shoulder, as I will be, always. Think of me as your trading guardian angel.

I am going to hang back and wait for good entry points before jumping back in. It’s all about keeping that “Buy low, sell high” thing going.

I’m looking to cherry-pick my new positions going into the next quarter end.

Take your winnings and go out and buy yourself a well-earned dinner. Or use it to put a down payment on a long cruise.

Well done, and on to the next trade.


Sometimes the Old Tricks Work the Best

August 7, 2019

Global Market Comments
August 7, 2019
Fiat Lux

Featured Trade:

(AMZN), (WMT), (M), (JWN), (KOL)

Why I Sold Short Macy’s

Sorry, the Trade Alert to sell short Macys’ (M) went out late yesterday. I was speaking to a retail expert and his list of things wrong with the marquee name was so long that I couldn’t get off the phone. New Yorkers are going to have to find something else to do on Thanksgiving Day than attend their famous parade.

His bottom line? Retail is in a death spiral from which it will never recover. Trying on clothes in a shopping mall will soon become a thing of the past, going the way of the buggy whip, black and white TV, and six-track tapes.

If you had to pick the biggest loser of our ongoing trade wars, which have just been ratcheted up in intensity, it would be the retail industry (XRT). Higher costs and tariffs can’t be passed on, minimum wages are rising in the big cities, lower selling prices are lower, and a massive inventory glut is NOT what money-making is all about.

The stocks have delivered as expected, providing one of the worst-performing sectors of 2019. Half of them probably won’t even make it until 2020.

In fact, Sears (S) and Macy’s (M) have announced more store closings nationwide. The overhead is killing them in a micro margin world.

So, I stopped at a Walmart (WMT) the other day on my way to Napa Valley to find out why.

I am not normally a customer of this establishment. But I was on my way to a meeting where a dozen red long-stem roses would prove useful. I happened to know you could get these for $10 a dozen at Walmart.

After I found my flowers, I browsed around the store to see what else they had for sale. The first thing I noticed was that half the employees were missing their front teeth.

The clothing offered was out of style and made of cheap material. It might as well have been the Chinese embassy. Most concerning, there was almost no one there, customers OR employees.

The Macy’s downsizing is only the latest evidence of a major change in the global economy that has been evolving over the last two decades.

However, it now appears we have reached both a tipping point and a point of no return. The future is happening faster than anyone thought possible. Call it the Death of Retail.

I remember the first purchases I made at Amazon 20 years ago. Even though I personally knew the founder, Jeff Bezos, from my Morgan Stanley days, the idea sounded so dubious that I made my initial purchases with a credit card with only a low $1,000 limit. That way, if the wheels fell off, my losses would be limited.

And how stupid was that name Amazon, anyway? At least, he didn’t call it “Yahoo” because it was already taken.

Today, I do almost all of my shopping at Amazon (AMZN). It saves me immense amounts of time while expanding my choices exponentially. And I don’t have to fight traffic, engage in the parking space wars, or wait in line to pay.

It can accommodate all of my requests, no matter how bizarre or esoteric. A WWII reproduction Army Air Corps canvas flight jacket in size XXL? No problem!

A used 42-inch Sub Zero refrigerator with a front-door icemaker and water dispenser? Have it there in two days, with free shipping at one fifth the $17,000 full retail price.

So I was not surprised when I learned this morning that Amazon accounted for 25% of all new online sales in 2018 in a market that is already growing at a breathtaking 20% YOY.

In 2000, after the great “Y2K” disaster that failed to show, I met with Bill Gates Sr. to discuss his foundation’s investments.

It turned out that they had liquidated their entire equity portfolio and placed all their money into bonds, a brilliant move coming mere months before the Dotcom bust and a 16-year bull market in fixed income.

Mr. Gates (another Eagle Scout) mentioned something fascinating to me. He said that unlike most other foundations their size, they hadn’t invested a dollar in commercial real estate.

It was his view that the US economy would move entirely online, everyone would work from home, emptying out city centers and rendering commuting unnecessary. Shopping malls would become low-rent climbing walls and paintball game centers.

Mr. Gates’ prediction may finally be occurring. Some counties in the San Francisco Bay area now see 25% of their workers telecommuting.

It is becoming common for staff to work Tuesday-Thursday at the office, and from home on Monday and Friday. Productivity increases. People are bending their jobs to fit their lifestyles. And oh yes, happy people work for less money in exchange for personal freedom, boosting profits.

The Mad Hedge Fund Trader itself may be a model for the future. We are entirely a virtual company with no office. Everyone works at home in four countries around the world. Oh, and we all use Amazon to do our shopping.

The downside to this is that whenever there is a snowstorm anywhere in the country, it affects our output. Two storms are a disaster, and at three, such as last winter, we grind to a virtual halt.

You may have noticed that I can work from anywhere and anytime (although sending a Trade Alert from the back of a camel in the Sahara Desert was a stretch), so was sending out an Alert while hanging on the cliff face of a Swiss Alp, but they both made money.

Moroccan cell coverage is better than ours, but the dromedary’s swaying movement made it hard to hit the keys.

The cost of global distribution is essentially zero. Profits go into a bonus pool shared by all. Oh, and we’re hiring, especially in marketing.

It is happening because the entire “bricks and mortar” industry is getting left behind by the march of history.

Sure, they have been pouring millions into online commerce and jazzed up websites. But they all seem to be poor imitations of Amazon with higher prices. It is all “Hour late and dollar short” stuff.

In the meantime, Amazon soared by 49% from December to the May high, and was one of the top performing stocks of 2018. There are now a cluster of Amazon analyst forecasts around the $3,000 mark.

And here is the bad news. Bricks and Mortar retailers are about to lose more of their lunch to Chinese Internet giant Alibaba (BABA), which is ramping up its US operations and is FOUR TIMES THE SIZE OF AMAZON!

There’s a good reason why you haven’t heard much from me about retailers. I made the decision 30 years ago never to touch the troubled sector.

I did this when I realized that management never knew beforehand which of their products would succeed, and which would bomb, and therefore were constantly clueless about future earnings.

The business for them was an endless roll of the dice. That is a proposition in which I was unwilling to invest. There were always better trades.

I confess that I had to look up the ticker symbols for this story as I never use them.

You will no doubt be enticed to buy retail stocks as the deal of the century by the talking heads on TV, Internet research, and maybe even your own brokers, citing how “cheap” they are.

Never confuse a low stock price with “cheap.”

It will be much like buying the coal industry (KOL) a few years ago, another industry headed for the dustbin of history. That was when “cheap” was on its way to zero for almost every company.

So the next time someone recommends that you buy retail stocks, you should probably lie down and take a long nap first. When you awaken, hopefully the temptation will be gone.

Or better yet, go shopping at Amazon. The deals are to die for.

To read “An Evening with Bill Gates Sr.”, please click here. 




June 7, 2019

Global Market Comments
June 7, 2019
Fiat Lux

Featured Trade:

(AMZN), (WMT), (M), (JWN),