Occasionally, I get a call from Concierge members asking what to do when their short positions options were assigned or called away. The answer was very simple: fall down on your knees and thank your lucky stars. You have just made the maximum possible profit for your position instantly.
We have the good fortune to have FOUR spreads that are deep in the money going into the May 17 option expiration in 8 days. They include:
Risk On
(GLD) 5/$200-$205 call spread 10.00%
(SLV) 5/$21-$23 call spread 10.00%
Risk Off
(NVDA) 5/$980-$990 put spread -10.00%
(MSFT) 5/$430-$440 put spread -10.00%
Total Net Position 0.00%
Total Aggregate Position 40.00%
In the run-up to every options expiration, which is the third Friday of every month, there is a possibility that any short options positions you have may get assigned or called away.
Most of you have short-option positions, although you may not realize it. For when you buy an in-the-money vertical option debit spread, it contains two elements: a long option and a short option.
The short options can get “assigned,” or “called away” at any time, as it is owned by a third party, the one you initially sold the put option to when you initiated the position.
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 correctly.
Let’s say you get an email from your broker telling you that your call options have been assigned away. I’ll use the example of the in-the-money SPDR Gold Shares SPDR (GLD) May $200-$205 vertical BULL CALL debit spread, which you bought at $4.55 or best.
For what the broker had done in effect is allow you to get out of your call spread position at the maximum profit point 8 trading days before the May 17 expiration date. In other words, what you bought for $4.55 on April 30 is now $5.00!
All have to do is call your broker and instruct them to exercise your long position in your (GLD) May 200 calls to close out your short position in the (GLD) May $205 calls.
This is a perfectly hedged position, with both options having the same expiration date, and the same number of contracts in the same stock, so there is no risk. The name, number of shares, and number of contracts are all identical, so you have no net exposure at all.
Calls are a right to buy shares at a fixed price before a fixed date, and one option contract is exercisable into 100 shares.
To say it another way, you bought the (GLD) at $200 and sold it at $205, paid $4.55 for the right to do so for 13 days, so your profit is $0.45 cents, or ($0.45 X 100 shares X 25 contracts) = $1,125. Not bad for a 13-day defined limited-risk play.
Sounds like a good trade to me.
Callaways most often happen in the run-up to a dividend payout. If you can collect a full monthly or quarterly dividend the day before the stock registration dates by calling away someone’s short option position, why not? If fact, a whole industry of this kind of strategies has arisen in recent years in response to the enormous growth of the options market.
(GLD) and most tech stocks don’t pay dividends so callaways are rare.
Weird stuff like this happens in the run-up to options expirations like we have coming.
A call owner may need to buy a long (GLD) position after the close, and exercising his long May 205 call is the only way to execute it.
Adequate shares may not be available in the market, or maybe a limit order didn’t get done by the market close.
There are thousands of algorithms out there that may arrive at some twisted logic that the calls need to be exercised.
Many require a rebalancing of hedges at the close every day which can be achieved through option exercises.
And yes, options even get exercised by accident. There are still a few humans left in this market to make mistakes.
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. They’ll tell you to take delivery of your long stock and then post an additional margin to cover the risk.
Or they will tell you to sell your remaining long option position at whatever price you can get, wiping out most, if not all of your great profit. This generates the maximum commission for your broker.
Either that, or you can just sell your shares on the following Monday and take on a ton of risk over the weekend. This generates a oodles of commission for the brokers but impoverishes you.
There may not even be an evil motive behind the bad advice. Brokers are not investing a lot in training staff these days. It doesn’t pay. In fact, I think I’m the last one they did train 50 years ago.
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 legal ways to steal money 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.
Calling All Options!
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This earnings season is chugging along exactly like I thought it would play out.
The haves are covering for the have-nots.
Sadly, the pixie dust isn’t encompassing all tech stocks, but just enough sprinkles so investors don’t start selling.
That is what matters most and sure, investors can knit-pick all they want, but there have been just enough positive numbers to be repackaged as a win for AI and the advancement of tech even if the proverbial goalposts are widening.
Competition has reared its ugly head as tech services fight for the extra consumer and enterprise dollar in a global economy where demand is being squeezed by sticky inflation.
That’s not good news for many of the smaller companies that are unproven and tap debt by delivering a promising story to prospective investors.
Remember that Mr. Market is undefeated and price will always find its natural equilibrium.
The question is how long will it take to find that natural equilibrium?
Since 2020, many would say that the irresponsible monetary policy in many areas of the world has contributed to markets unable to match up buyers and sellers at a reasonable price.
There is some truth to that but let’s see who that benefits.
My belief is that strong tech companies have overly benefited from this type of fiscal backdrop because they can always fall back on a strong balance sheet like in Google’s case where it suddenly issued a dividend.
View it as a rainy day fund if you will where they can wield when need be.
The extra buffer zone of safety has allowed a company like Microsoft to focus on Azure growth, of which 7% was related to AI, up from 6% of impact in the previous quarter.
Microsoft provides cloud services for the ChatGPT chatbot from startup OpenAI, and companies have been increasingly adopting Azure AI services to develop their capabilities for summarizing information and writing documents.
It’s a good problem to have when capacity bottleneck cuts into the AI portion of Azure growth.
Companies tapping that AI story are the only tech companies in 2024 that Mr. Market is keeping safe and that must scare or enthrall you depending on who you are.
Meta (META) materially lifted its full-year capital expenditures guidance and signaled even bigger spending in 2025 — all because of unknown AI projects. Running tech businesses isn’t getting cheaper so imagine how small companies feel about that.
It’s Ford (F) losing lots of money on EVs because of higher-than-expected costs.
Meanwhile, IBM (IBM) CFO Jim Kavanaugh struck a more cautious note when asked about soft sales at its lucrative consulting business blaming the macroeconomic backdrop.
It’s not all smooth sailing in tech land and readers need to be vigilant.
It’s not the time to take some speculative Hail Mary on some far reach.
Don’t draft a 7th-round prospect in the 1st round.
Price action has been unkind to tech firms with poor balance sheets in 2024 and I believe that trend to continue until the Fed can finally tamper inflation back to reasonable levels.
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(MARKET OUTLOOK FOR THE WEEK AHEAD, or DIGESTION TIME)
(NVDA), (FCX), (META), (MSFT), (TLT), (TSLA), (AAPL), (VISA), (FCX), (COPX), (GOOGL),
(A TRIP TO CUBA)
Before you even ask, I’ll give you the answer you’ve all been waiting for: It’s too late to sell and too early to buy.
Stocks may still have some digesting to do having soared by 27% in six months. Nobody wants to look like an idiot by buying a market top. As I have learned over the decades, investors fear looking stupid more than they fear losing money, especially if they are professionals.
Everyone knows the market is eventually going higher so they are not selling in any meaningful way unless they are short-term, algos, or day traders.
This means we may have a whole lot of nothing going on in the coming weeks or months.
That leaves us time to examine the most interesting trends going on in the markets right now, especially the new bull market in commodities. Believe it or not, we are still unwinding the long-term effects of Covid 19 and commodities have only recently come to the fore.
Remember Covid?
Since October, copper prices have risen by 22%, oil by 23%, gold by 34%, and uranium by a gobsmacking 83%. What’s causing this sudden new interest? It’s not a recovering Chinese economy, that’s for sure. Investors have been waiting for a bounce back in the Middle Kingdom seemingly forever. But China remains hobbled by the bitter fruit of a 40-year one-child policy and an ineffective government. History tells us that the United States does not make a great enemy.
So what’s driving the new demand? Remember Covid? Believe it or not, we are still unwinding the long-term effects of Covid 19 and commodities have only recently started to play catch up.
Commodities are unique in that they have such a long lead time to add new supply. It can take 5-10 years, to map out new sites, get government approvals, deliver heavy equipment, and mine, process, refine, and ship the final product.
In the meantime, enormous new demand has arisen. There have been 10 million EVs manufactured in recent years and each one needs 200 pounds of copper. AI means the electric power grid has to double in size quickly. Commodity markets are unable to meet the supply. Therefore, prices can only go up.
That enabled Freeport McMoRan (FCX), the world’s largest copper producer,to handily beat its earnings expectations, helped by higher production and easing costs. The mining giant said its quarterly production of copper rose to 1.1 billion pounds from 965 million pounds a year earlier, helped by a 49% jump in output from its Indonesia operations. (FCX) said it was working with the Indonesian government, which has put a ban on raw material exports, to obtain approvals to continue shipping copper concentrates and anode slimes. Its current license is set to expire in May. Buy (FCX) and (COPX) on dips.
Corporate raiders have taken notice.
Activist Elliot is taking a Run at Mining Giant Anglo American, accumulating a $1 billion stake. BHP, the largest iron ore miner, is also making a takeover bid here on the coattails of which Elliot is trying to ride. It just highlights the global interest in mining shares.
Anglo American plc is a British multinational mining company that is the world's largest producer of platinum, with around 40% of world output, as well as being a major producer of diamonds, copper, nickel, iron ore, polyhalite, and steelmaking coal. On a side note, copper hit a two-year high above $10,000 per metric tonne in the London Market last week.
Needless to say, the commodity boom could continue for another decade.
So far in April, we are up +4.24%. My 2024 year-to-date performance is at +13.61%.The S&P 500 (SPY) is up +6.50%so far in 2024. My trailing one-year return reached +32.40%versus +23.14% for the S&P 500. That brings my 16-year total return to +690.24%.My average annualized return has recovered to +51.77%.
Some 63 of my 70 round trips were profitable in 2023. Some 25 of 33 trades have been profitable so far in 2024.
Tesla Delivers Worst Earnings in 12 Years, with a 9% revenue drop, but the stock rallies big as the disappointment was well telegraphed. Revenue declined from $23.33 billion a year earlier and from $25.17 billion in the fourth quarter. Net income dropped 55% to $1.13 billion, or 34 cents a share, from $2.51 billion, or 73 cents a share, a year ago. The drop in sales was even steeper than the company’s last decline in 2020, which was due to disrupted production during the Covid-19 pandemic. Tesla’s automotive revenue declined 13% year over year to $17.38 billion in the first three months of 2024. I’ll watch (TSLA) from the sidelines from now.
Personal Consumption Expenditures (PCE) Comes in Warm for March, up 2.8% YOY, the same as for February. Service prices led. But the numbers were not as hot as feared so both bonds and stocks rose.
Big Tech Crashes, with all of the Magnificent Seven breaking 50-day moving averages. (NVDA) alone gave up 10% on Friday. The next stop is the 200-day moving averages, which are far, far away. If those hold this is just a correction. If they don’t the bear market is back.
Biggest Treasury Bill Auction in History is a Huge Success, at $69 billion for a two-year paper with a 4.898% yield. That is almost a risk-free government-guaranteed 10% yield in two years. Another $70 billion of five-year notes go on sale today. Half of this is going to foreign investors and central banks. Faith in America and the US dollar remains strong. Who else’s bonds would you rather buy? Passage of the Ukraine aid bill was probably a help. Wait for (TLT) to bottom.
Visa Pops on Earnings Beat, continuing as the powerhouse that it has been for years.Reported at $4.7 billion, showing a 10% increase year-over-year, slightly above the estimate of $4.943 billion. Visa is a call option on the growth of the Internet. Buy (V) on dips.
Apple China Sales Dive, by 19% as Chinese switch to cheaper Huawei phones for nationalism reasons. It’s also another sign of a slow Chinese economy. China remains one of the company’s biggest markets, but business there has grown harder after Beijing escalated a ban on foreign devices in state-backed firms and government agencies. Avoid (AAPL) until the turnaround.
Alphabet Earnings Beat Delivers Monster 10% Move, recovering a $2 trillion market cap. It also announced its first-ever dividend and a $70 billion share back, the second largest after Apple. Buy (GOOGL) on dips.
March New Home Sales Jump, by 8.1% when only 1.1% is expected, to 693,000. The median price of a home sold fell to $430,700 as builders pulled back on incentives like those cherry cabinets. It’s an uphill slog with those 7.0% mortgage rates.
CDC Birth Data Fall to Lowest Level Since the Great Depression, 1.1 births per 1,000 people. That is well below the Great Depression levels. Only 3,664,292 new Americans were born in 2021. It means there will be a shortage of consumers in 20 years so be out of stock by then. The good news is that Covid deaths have fallen from 4,000 per day to only 19 a day since January 2020.
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, April 29, at 10:30 AM EST, the Dallas Fed Manufacturing Index is announced.
On Tuesday, April 30 at 9:00 AM, S&P Case Shiller National Home Price Index is released.
On Wednesday, May 1 at 2:00 PM, the ADP Private Employment Change report will be published
On Thursday, May 2 at 8:30 AM, the Weekly Jobless Claims are announced.
On Friday, May 3 at 8:30 AM, the April Nonfarm Payroll Report is announced. At 2:00 PM, the Baker Hughes Rig Count is printed.
As for me, I have wanted to visit Cuba for decades. But relations with the US have run hot and cold over the years and whenever I had the time and money to go, the was a chill on, sometimes an extreme one.
So when I arrived in Key West and learned they were offering Cuba tour packages, I jumped at the chance. Unfortunately, you need to book three months in advance so that option was out.
Then I thought, “Why not fly there myself?” After payment of some hefty fees, commissions, and some outright bribes, I scored a Cuban visa and an aging Britten-Norman Islander twin built in the UK some 40 years ago. It was perhaps the smallest twin I have ever flown, with two minuscule 270 horsepower engines.
Although it was only 90 miles to Cuba, I had to load up with full tanks. Cuban aviation fuel is often contaminated with sludge or water and is unsafe to use. Losing both engines over shark-infested waters doesn’t fit in with my retirement plan. So I needed enough 100LL avgas to make the round drip, which meant skipping breakfast to stay within my weight limitations.
It was a clear and balmy morning when I received my clearance for takeoff, the sky dotted with fluffy white cumulus clouds. Of course, I had to skirt the Bermuda Triangle to get there, but no worries.
Amazingly Cuban air traffic control spoke English. Soon, the green hills of Cuba appeared on the horizon, and I received the words I will never forget: “N686KW you are cleared for landing in Havana.” I haven’t felt like that since I last landed in Moscow.
Much to my surprise, I found other US aircraft there as I was parked near jets from Southwest and American Airlines. I was greeted by an immigration officer who escorted me into the country, putting my Spanish skills to the test.
I had some concerns that I might be arrested in case Russia put me on a wanted list due to my recent work in Ukraine. But my fears proved unwarranted. You see, you get paranoid in your old age. A private car, a French Citroen van, a driver, and a government guide were waiting for me outside the airport.
Suddenly, I found myself in a strange new world. A darkly tanned people wore tired polyester clothes. Everyone was rail thin and the only obese people I saw were foreign tourists. There was an incredible variety of vehicles on the road, including ancient cars from Russia, China, Poland, and Japan. Apparently, Chevrolet had a great year in Cuba in 1956 because no American cars have entered the country since then and they are everywhere.
We headed straight for Earnest Hemingway’s Cuban home, known as Finca Vigia, or “Lookout Farm” built in 1886 on a hilltop overlooking Havana. The building was falling apart and showed large cracks, but going inside I was transported in time back to 1960, when Hemingway left the property ahead of the Cuban Revolution.
Finca Vigia has been untouched since. The walls are covered with an assortment of hunting trophies from Africa, including springboks, cape buffalo, lions, and leopards. They were collections of African spears and gun cases. Mounted on the walls were paintings of bullfights in Spain, cartoons about Hemingway, and family photos.
Magazine racks were stuffed with the 1960 issues of Life, Look, and The Saturday Evening Post. The National Geographic issues looked positively prehistoric. And there were thousands of books. Anyone who read his books would recognize all of this.
Hem, as his friends called him, bought the property in 1940 for $8,000, living there with wife three for five years, the famed war correspondent Martha Gellhorn, and wife four, Time magazine reporter Mary Welsch, who became his widow.
After passing on a Che Guevara T-shirt in the gift shop, I enjoyed a glass of freshly squeezed sugar cane juice. Then I headed into Havana, escorted by my guide, Eliar. The trip turned into a Hemingway bar crawl. I visited the well-known La Floridita, which made Hem’s favorite Daiquiri, La Bodegita, which mixed the best mojito and had lunch at his favorite roof terrace restaurant.
Cuba has long been one of the worst-managed countries in the world, second only to North Korea, and I learned why after grilling my guide all day about economic conditions. It’s 11.2 million people earn a per capita of $11,255, with 71% living below the poverty line. The real figure is a third of that as there are now 300 pesos to the US dollar, not the fictitious 120 that the government pretends.
When the Soviet Union collapsed in 1992, generous subsidies ended and Cuba quickly lost 33% of its GDP. With some of the richest farmland in the world, it imports 80% of its food and is currently suffering a food crisis. Even the bottled water I drank came from Panama.
Oil accounts for 100% of its energy supply which mostly comes from Russia and is paid for with raw sugar. Cuba’s largest exports are tobacco, nickel, and zinc most of which are exported to China. China also provided $11 billion in loans which Cuba promptly defaulted on.
The country would have been much better off if only Fidel Castro had accepted an offer from the Washington Senators to play US major league baseball in the early 1950s. Cuba is officially one of the last communist countries in the world, with Russia and China abandoning it years ago. After reforms in the 1990s, what they now practice is an odd mixture of communism and capitalism, with the government and the private sector competing side by side.
With thousands fleeing the country every year the real estate market has collapsed. You can buy a two-bedroom apartment in Havana for $30,000. Flying over the countryside at low altitude you fund vast expanses of agricultural land undeveloped for want of machinery and parts. There is unused labor everywhere. Cuba should be one of the richest countries in the world with all those beaches. The tourism possibilities are enormous. But with a 60-year trade and investment ban from the US, nothing can happen.
American credit cards and cell phones don’t work, so I brought in $200 in ones. You can’t bring back to the US the country’s only two worthy exports, rum and cigars. But there are buskers everywhere and by the end of the trip, I ended up giving it all away in tips. I did OK with the food, but only ate overcooked meals in high-end restaurants. Salads were out of the question but drink all the local beer and rum you can.
I ended my trip with a tour of the enormous Revolution Square where Fidel Castro used to give four-hour speeches to one million. One area the government did not skimp on spending was on the massive ministry buildings that surround the square. It seems the image of a strong government, especially the police, is essential in a workers’ socialist paradise.
Then it was back to the airport where surprisingly I obtained immediate clearance for takeoff. No passport stamps, as the government wanted to leave no evidence of my visit in an American passport. I returned to Key West just in time to catch a magnificent sunset over the Gulf of Mexico. US customs recognized my face and waved me right through.
Damn! Should have picked up some of those $5 bottles of rum.
It's all just another day in the life of John Thomas.
At Hemingway’s Cuban Home
A Look Back into 1960
Where Hem Wrote “Old Man and the Sea”, Standing
Hemingway’s Office
I passed on Che
Meeting an Old Friend for a Round at Floridita
Mixing it up with the Locals
One of Cuba’s Only Exports
Looks Like Chevy had a Great Year in 1956
Good Luck and Good Trading,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
https://www.madhedgefundtrader.com/wp-content/uploads/2024/04/local-cubans.png1012918april@madhedgefundtrader.comhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngapril@madhedgefundtrader.com2024-04-29 09:02:282024-04-29 12:13:14The Market Outlook for the Week Ahead, or Digestion Time
Tech is getting real political and that’s a problem for tech valuations.
On one side, there are foreign companies hoping to make a buck stateside and they are finding out it is not always smooth sailing.
The cradle of capitalism isn’t unfettered access to unlimited Benjamin’s.
The difficulties and examples are sprinkled through the sub-sectors of tech.
For example, to secure the EV battery plant subsidies from the US federal government, Korean companies have to produce the battery inside the United States.
Being a Korean company, Hyundai and Kia, pulling this off delivered painful financial expenses related to the companies.
Another Asian company grappling with additional political fallout is the social media app TikTok.
The most recent House bill easily passed meaning that if Senate approved the bill, TikTok might need to divest or be banned from the US.
TikTok told employees it will fight in the courts if a US bill forcing a ban or divestiture of the Chinese-owned app is signed into law.
US President Joe Biden has said he will sign the legislation promptly if it reaches his desk.
TikTok’s 170 million American users and 7 million small businesses would need to find a different platform.
ByteDance, the Chinese communist party-sponsored owner of TikTok, intends to fight the US ban in court and exhaust all legal actions before it considers any kind of divestiture, people familiar with the matter have said.
Beijing, in the meanwhile, will have to green light any TikTok deal on the tech-export ground, and it has reiterated it opposes a forced sale.
The environment for trading tech stocks has nudged into this ferocious backdrop of trading barbs and its increasingly disturbing tech companies from carrying out their duty to serve the end customer.
Tech customers don’t like that and it doesn’t matter if it’s waiting on an iPhone or software product that can’t be delivered in full, the product gets watered down or withheld.
Irreparable harm is being caused if customers don’t have full faith that tomorrow they will wake up and see an app not disappear from the app store or a device become obsolete because of regulation or government saber-rattling.
Part of this is the angst in which traders are seeing the market now as highly fraught, and tech stocks have run into a logjam at these higher levels because profit-taking is the best recipe of the day.
There needs to be a great reason for incremental investors to jump in, because let’s not kid ourselves, tech stocks are expensive at this point.
We pile into them because there are more or less 5 stocks growing robust earnings while many zombie companies don’t punch above their weight.
This is why traders are piling into Nivida, Meta, Microsoft, Amazon, and Google. I would put Super Micro Computers (SMCI) on that list too as a volatile super growth stock.
Tech still is the place to be, but the geopolitical strife is exacerbating the short-term consolidation of tech and we are experiencing larger selloffs than would be otherwise.
Tech readers must be patient as expectations for this earning season must be scaled back and we wait to unload on the next move up.
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There comes a time in every trader’s life when it’s time to face harsh reality and admit that you’re just dead wrong.
As much as I thought a I had strong case for the best stocks to move sideways before continuing their upward drive, the markets decided otherwise. One thing I have learned over my half-century of trading is that you never argue with Mr. Market. He is always right.
So it was with some dismay that on Friday, I watched NVIDIA (NVDA) shares slice through its 50-day moving average at $840 like a hot knife through butter putting the shares into a free-fall. Virtually the next print was the low of the day at $760, down 10% on the day.
There was no new news about (NVDA). Its prospects look as bright as ever, and there are a series of conferences of earnings reports over the coming month to remind us of that. But sometimes, the market just doesn’t care.
(NVDA) has had a great run, up some 144% since October. During this time, I executed a dozen profitable long-side trades. But when you’re that aggressive you know in advance that the last trade is going to kill you and that is the case today. (NVDA) is falling because of the sheer weight of its price.
New flash: while (NVDA) is still the cheapest big tech stock in the market, cheap stocks can get cheaper as we all know.
With the advantage of 20/20 hindsight, I should have been paying more attention to the Magnificent Seven 50-day moving averages which have been falling like dominoes. First went Tesla (TSLA) in February and Apple in March. The S&P 500 (SPY) gave it up on Monday and Microsoft (MSFT) on Wednesday. Amazon (AMZN), (META), and (NVDA) were the last to go on Friday.
Sure you can blame the April 19 option expiration when traders were loaded to the hilt with expiring longs with all these stocks they had to dump. The dreaded month of May, when traders go to die, and the summer doldrums are just two weeks away. Algorithms poured gasoline on the fire exaggerating the moves, as they always do. But still, wrong is wrong.
And there’s my mea culpa for 2024. I am human after all. I’m not right all the time, I just act like it. If the horrific market action last week has one silver lining, it’s that it sets up the next great trades, for which there will be many. With my Mad Hedge AI Market Timing Index down to a lowly 31 that may not be far off.
Your next question is “How far down is down?” In the worst-case scenario, the 200-day moving average is in play for all of these. That is pegged at $463 for the S&P 500, $569 for (NVDA), $377 for (MSFT), $150 for (AMZN), and $308 for (META). (AAPL) and (TSLA) already lost their 200-days a long time ago. In other words, the market is in the process of giving up all its 2024 gains and then some.
Sure, the 200 days are all rising sharply so it's unlikely we’ll hit these dire numbers. Still, it's best to prepare your boss for the worst and then let serendipity work its magic.
Remarkably, my commodity and precious metal stocks, where I had eight of ten long positions, stuck to the script and moved sideways instead of down. If you throw bad news on a stock and it refuses to fall, you buy the hell out of it. So that will be my next move in the market, once I clean all the mud off my face and pull the arrows out of my rear.
Those of us who have been trading gold for a long time, I’ve been doing it for 50 years and 60 if you count the Kennedy silver dollars I collected, will tell you that this new bull market in the barbarous relic is a very strange one.
None of the traditional factors that drive gold up are present. Interest rates have lately been rising, not falling. ETF financial demand fell all last year, and much of that money was diverted to Bitcoin. Retail demand, especially from Asia, has also been falling off a cliff. Gold miners have in no way been leading the price of the yellow metal because of their excess leverage as they usually do. But gold has seen a 34% rally off the October low.
Go figure.
It turns out that central bank buying has increased dramatically, especially from China, enough to offset all the other no-shows. The conflict in the Middle East is also drawing in more flight to safety demand. The good news is that the Chinese buying will continue. The bad news is that this might be a precursor to the invasion of Taiwan as it flees the Western financial system.
What does all this mean? When the traditional demand for gold returns, interest rates, ETFs, and retail, the price of gold will move a lot higher. The barbarous relic can easily reach $2,800 this year and possibly $3,000. The miners will play catch up. Buy (GLD) on dips and silver (SLV) as well, which has a lot of catching up to do.
I just thought you’d like to know.
So far in April, we are down a heartbreaking -6.69%. My 2024 year-to-date performance is at +14.47%.The S&P 500 (SPY) is up +2.68%so far in 2024. My trailing one-year return reached +33.69% versus +29.71% for the S&P 500. That brings my 16-year total return to +676.63%.My average annualized return has recovered to +50.94.
Some 63 of my 70 round trips were profitable in 2023. Some 20 of 28 trades have been profitable so far in 2024.
I stopped out of my long in Tesla last week at cost, expecting further downside, which happened. A week early the position had been at max profit. I let my April longs expire at a max profit on April 19 in Freeport McMoRan (FCX), Occidental Petroleum, ExxonMobile (XOM), Wheaton Precious Metals (WPM), and Gold (GLD).
That leaves me with my remaining May longs in (TLT) and (FCX) a double long in (NVDA) and 60% in cash. Volatility Index ($VIX) Hits Six-Month High, on threats of a New Iran War, Oil Supply Cut-offs, and topping stocks. It’s been a long and dry desert crossing, but we are finally back to reach the $20 handle. The volatility trade is back. For a double bonus, the Mad Hedge Market Timing Index also dropped below 50 for the first time since October. Options traders will love it!
Junk Bonds See Biggest Outflows in a Year, as the Federal Reserve’s hawkish approach to inflation makes investors wary, sending yields soaring to 6.33%. Yields won’t peak until the Fed actually cuts rates. Buy (JNK) and (HYG) on dips.
Netflix (NFLX) Adds 9.33 Million New Subscribers, nearly double analyst forecasts, including my five kids who aren’t allowed to share my password anymore. But the shares dropped on weak Q2 guidance. Netflix has rebounded from a slowdown in 2021 and 2022 to grow at its fastest rate since the early days of the coronavirus pandemic. That is due in large part to its crackdown on people who were using someone else’s account. The company estimated more than 100 million people were using an account for which they didn’t pay.
Mortgage Rates Top 7.0% for the first time in 2024, adding dead weight to the housing market. Most borrowers are now taking out adjustable 5/1 ARMS and then praying for a Fed rate cut later this year.
Existing Home Sales Dive by 4.3% in March to 4.19 million units on a sign-contract basis. Inventories rose 4.47% to a 3.2-month supply, up 14% YOY. The median price of an existing home sold in March was $393,500, up 4.8% from the year before. Regionally, sales fell everywhere except in the North, where they rose 4.2% month-to-month. Sales fell hardest in the West, down 8.2%. Prices are highest in the West. Housing Starts Plunge, down 14.5% in March. Permits for future construction of single-family houses fell to a five-month low. Residential investment rebounded in the second half of 2023 after contracting for nine straight quarters, the longest such stretch since the housing market collapse in 2006. But the recovery appears to be losing steam. China Surprises with Q1 GDP Growth at 5.3%, but who knows how real these numbers really are? They don’t line up with individual data like international trade. Peak China is behind us. Avoid (FXI).
Tariff Wars Heat Up, US President Joe Biden is threatening China again, and this time he wants to triple the China tariff rate on steel and aluminum imports. On Wednesday, the president will visit the United Steelworkers headquarters in Pittsburgh and has vowed his saber-rattling is not just empty threats. His rhetoric on China could make relations between the US and the Middle Kingdom that much frostier as we enter into the heart of the US election race.
Biden Boosts the Cost of Alaska Oil Drilling Leases, from $10,000 to $160,000, the first increase since 1920. There is also a bump in the royalty on extracted oil, from 12.25% to 16.27%. The government is no longer giving away oil found on its land for free. Coddling of the oil companies is over. Oil companies will no longer bid for cheap oil leases with the intention of sitting on them for decades. The US is currently the largest oil (USO) producing country in history at 13 million barrels/day and hardly needs any subsidies, which date back to the Great Depression. Buy energy stocks on dips, like (XOM) and (OXY), which are posting record profits.
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, April 22, at 7:00 AM EST, the Chicago Fed National Activity Index is announced.
On Tuesday, April 23 at 8:30 AM, New Home Sales are released.
On Wednesday, April 24 at 2:00 PM, Mortgage applications come out.
On Thursday, April 25 at 8:30 AM, the Weekly Jobless Claims are announced.
On Friday, April 26 at 8:30 AM, Consumer Expectations. At 2:00 PM, the Baker Hughes Rig Count is printed.
As for me, I spent a decade flying planes without a license in various remote war zones because nobody cared.
So, when I finally obtained my British Private Pilot’s License at the Elstree Aerodrome, home of the WWII Mosquito twin-engine bomber, in 1987, it was cause for celebration.
I decided to take on a great challenge to test my newly acquired skills. So, I looked at an aviation chart of Europe, researched the availability of 100LL aviation gasoline in Southern Europe, and concluded that the farthest I could go was the island nation of Malta.
Caution: new pilots with only 50 hours of flying time are the most dangerous people in the world!
Malta looms large in the history of aviation. At the onset of the Second World War, Malta was the only place that could interfere with the resupply of Rommel’s Africa Corps, situated halfway between Sicily and Tunisia. It was also crucial for the British defense of the Suez Canal.
So, Malta was mercilessly bombed, at first by Mussolini’s Regia Aeronautica, and later by the Luftwaffe. By April 1942, the port at Valletta became the single most bombed place on earth.
Initially, Malta had only three obsolete 1934 Gloster Gladiator biplanes to mount a defense, still in their original packing crates. Flown by volunteer pilots, they came to be known as “Faith, Hope, and Charity.”
The three planes held the Italians at bay, shooting down the slower bombers in droves. As my Italian grandmother constantly reminded me, “Italians are better lovers than fighters.” By the time the Germans showed up, the RAF had been able to resupply Malta with as many as 50 infinitely more powerful Spitfires a month, and the battle was won.
So Malta it was.
The flight school only had one plane they could lend me for ten days, a clapped-out, underpowered single-engine Grumman Tiger, which offered a cruising speed of only 160 miles per hour. I paid extra for an inflatable life raft.
Flying over the length of France in good weather at 500 feet was a piece of cake, taking in endless views of castles, vineyards, and bright yellow rapeseed fields. Italy was a little trickier because only four airports offered avgas, Milan, Rome, Naples, and Palermo. Since Italy had lost the war, they never experienced a postwar aviation boom as we did.
I figured that if I filled up in Naples, I could make it all the way to Malta nonstop, a distance of 450 miles, and still have a modest reserve.
Flying the entire length of Italy at 500 feet along the east coast was grand. Genoa, Cinque Terra, the Vatican, and Mount Vesuvius gently passed by. There was a 1,000-foot-high cable connecting Sicily with the mainland that could have been a problem, as it wasn’t marked on the charts. But my US Air Force charts were pretty old, printed just after WWII. But I spotted them in time and flew over.
When I passed Cape Passero, the southeast corner of Sicily, I should have been able to see Malta, but I didn’t. I flew on, figuring a heading of 190 degrees would eventually get me there.
It didn’t.
My fuel was showing only a quarter tank left and my concern was rising. There was now no avgas anywhere within range. I tried triangulating VORs (very high-frequency omnidirectional radar ranging).
No luck.
I tried dead reckoning. No luck there either.
Then I remembered my WWII history. I recalled that returning American bombers with their instruments shot out used to tune in to the BBC AM frequency to find their way back to London. Picking up the Andrews Sisters was confirmation they had the right frequency.
It just so happened that buried in my pilot’s case was a handbook of all European broadcast frequencies. I looked up Malta, and sure enough, there was a high-powered BBC repeater station broadcasting on AM.
I excitedly tuned in to my Automatic Direction Finder.
Nothing. And now my fuel was down to one-eighth tanks and it was getting dark!
In an act of desperation, I kept playing with the ADF dial and eventually picked up a faint signal.
As I got closer, the signal got louder, and I recognized that old familiar clipped English accent. It was the BBC (I did work there for ten years as their Tokyo correspondent).
But the only thing I could see were the shadows of clouds on the Mediterranean below. Eventually, I noticed that one of the shadows wasn’t moving.
It was Malta.
As I was flying at 10,000 feet to extend my range, I cut my engines to conserve fuel and coasted the rest of the way. I landed right as the sun set over Africa.
While on the island, I set myself up in the historic Excelsior Grand Hotel. Malta is bone dry and has almost no beaches. It is surrounded by 100-foot cliffs. I paid homage to Faith, the last of the three historic biplanes, in the National War Museum in Valetta.
The other thing I remember about Malta is that CIA agents were everywhere. Muammar Khadafy’s Libya was a major investor in Malta, recycling their oil riches, and by the late 1980s owned practically everything. How do you spot a CIA agent? Crewcut and pressed, creased blue jeans. It’s like a uniform. What they were doing in Malta I can only imagine.
Before heading back to London, I had to refuel the plane. A truck from air services drove up and dropped a 50-gallon drum of avgas on the tarmac along with a pump. Then they drove off. It took me an hour to hand pump the plane full.
My route home took me directly to Palermo, Sicily to visit my ancestral origins. On takeoff to Sardinia, wind shear flipped my plane over, caused me to crash, and I lost a disk in my back.
But that is a story for another day.
Who says history doesn’t pay!
Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
“Faith”
The Andrews Sisters
Spitfire
Grumman Tiger
https://www.madhedgefundtrader.com/wp-content/uploads/2024/04/andrews-sisters.png582506april@madhedgefundtrader.comhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngapril@madhedgefundtrader.com2024-04-22 09:02:302024-04-22 12:00:50The Market Outlook for the Week Ahead, or Facing Harsh Reality
It’s been a slap in the face lately in the tech market as the market has realized that rate cuts are not imminent.
The party is over in the short term until a catalyst re-ignites the bull market rally.
The softness has put a real dent into the momentum and trajectory of tech stocks.
Now we are confronted with the sad reality that inflation is here to stay because hot report after hot report is confirming tech investors' greatest fear, that inflation is not transitory like the Fed once said.
In fact, inflation has been a serious problem now for over 4 years and the same Fed that botched the transitory inflation issue is still in charge.
My bet is that they won’t ease prematurely with all the heat they received from the failed transitory inflation call.
Yet here we are with the tech market selling off in the short-term and healthily pulling back.
Even AI chip stock Super Micro Computer (SMCI) is back around $750 per share after skyrocketing past $1,200 per share.
The froth for now is ebbing.
Readers had to expect that a consolidation of some kind was in the cards and that is what we are going through right now.
In the near term, earnings are our best hope for a positive catalyst to offset all the negativity about inflation and interest rates.
There is a good chance we don’t even get one rate cut this year with all the hot job numbers, because the data is just too good to ignore.
In the recent stretch of the bull run, investors looked past higher rates, based in part on their belief that policy cuts were around the corner.
With wage growth starting to cool and excess savings draining, asset markets have seemingly stepped in to help sustain US consumption, adding more than $10 trillion to household net worth in the past year.
Companies need to show that they’re capitalizing on economic strength to expand earnings.
The tech market needs to show in the upcoming earnings season that the artificial intelligence optimism that started with the launch of ChaptGPT is more than hype.
Not all earnings outlooks are created equal, of course, and one can imagine a scenario in which AI darlings Nvidia and Microsoft fan optimism.
Consensus is that we will experience about 5% earnings growth for the S&P 500 from the same period last year excluding the volatile energy sector.
Meanwhile, the economy probably grew about 2.9% in the first quarter, according to the Atlanta Fed’s GDP Now tracker, and that should translate into encouraging earnings and outlooks.
I am of the opinion that all the heavy lifting will be done by several tech behemoths that also double-dip in the AI narrative.
This has also created a massive vacuum of weakness after the likes of MSFT and NVDA.
The narrowness of leadership is a result of a winner takes all of the economy and just several corporations consolidating at the top.
Competition is so fierce that it has left Apple and Tesla by the wayside.
We will reach that 5% earnings growth, but strip out a few tech stocks, and that number is likely to be flat or minus.
I believe the narrowness of leadership will be a hallmark of the future bull market and not just some one-off exception.
Some readers have no idea how ultra-competitive it is at the top of the stock market pyramid with companies fighting for the incremental investment dollar.
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