Global Market Comments
June 23, 2021
Fiat Lux
Featured Trade:
(WHY YOU MISSED THE TECHNOLOGY BOOM AND WHAT TO DO ABOUT IT NOW),
(AAPL), (AMZN), (MSFT), (NVDA), (TSLA), (WFC), (FB)
Posts
I often review the portfolios of new concierge subscribers looking for fundamental flaws in their investment approach and it is not unusual for me to find some real disasters.
The Armageddon scenario was quite popular a decade ago. You know, the philosophy that said that the Dow ($INDU) was plunging to 3,000, the US government would default on its debt (TLT), and gold (GLD) was rocketing to $50,000 an ounce?
Those who stuck with the deeply flawed analysis that led to those flawed conclusions saw their retirement funds turn to ashes.
Traditional value investors also fell into a trap. By focusing only on stocks with bargain basement earnings multiples, low price to book values, and high visible cash flows, they shut themselves out of technology stocks, far and away the fastest-growing sector of the economy.
If they are lucky, they picked up shares in Apple a few years ago when the earnings multiple was still down at ten. But even the Giant of Cupertino hasn’t been that cheap for years.
And here is the problem. Tech stocks defy analysis because traditional valuation measures don’t apply to them.
Let’s start with the easiest metric of all, that of sales. How do you measure the value of sales when a company gives away most of its services for free?
Take Google (GOOG) for example. I bet you all use it. How many of you have actually paid money to Google to use their search function? I would venture none.
What would you pay Google for search if you had to? What is it worth to you to have an instant global search function? Probably at least $100 a year. I would pay $10,000 as I use it all day long. With 92.05% of the global search market comprising 2 billion users, that means $200 billion a year of potential Google revenues are invisible.
Yes, the company makes a chunk of this back by charging advertisers access to these search users, generating some $55.31 Billion in revenues and $17.93 billion in net income in the most recent quarter.
But much of the increased value of this company is passed on to shareholders not through rising profits or dividend payments but through an ever-rising share price. If you’re looking for dividends, Google doesn’t exist. It is also very convenient that unrealized capital gains are tax-free until the shares are sold, which may be never.
I’ll tell you another valuation measure that investors have completely missed, that of community. The most successful companies don’t have just customers who buy stuff, they have a community of members who actively participate in a common vision, which is then monetized. There are countless communities out there now making fortunes, you just have to know how to spot them.
Facebook (FB) has created the largest community of people who are willing to share personal information. This permits the creation of affinity groups centered around specific interests, from your local kids’ school activities to municipality emergency alerts, to your preferred political party.
This creates a gigantic network effect that increases the value of Facebook. Each person who joins (FB) makes it worth more, raising the value of the shares, even though they haven’t paid it a penny. Again, it’s advertisers who are footing your tab.
Tesla (TSLA) has one million customers willing to lend it $400 billion for free in the form of deposits on future car purchases because they also share in the vision of a carbon-free economy. When you add together the costs of initial purchase, fuel, and maintenance savings, a new Tesla Model 3 is now cheaper than a conventional gasoline-powered car over its entire life.
REI, a privately held company, actively cultivates buyers of outdoor equipment, teaches them how to use it, then organizes trips. It will then pursue you to the ends of the earth with seasonal discount sales. Whole Foods (WFC), now owned by Amazon (AMZN), does the same in the healthy eating field.
If you spend a lot of your free time in these two stores, as I do, The United States is composed entirely of healthy, athletic, good-looking, and long-lived, intelligent people.
There is another company you know well that has grown mightily thanks to the community effect. That would be the Diary of a Mad Hedge Fund Trader, one of the fastest-growing online financial services firms of the past decade. What is the value of our community? To give you a hint, the price of my Global Trading Dispatch has soared from $29 a month to $3,000 a year.
We have succeeded not because we are good at selling newsletters, but because we have built a global community of like-minded investors with a common shared vision around the world, that of making money through astute trading and investment.
We produce daily research services covering global financial markets, like Global Trading Dispatch, the Mad Hedge Technology Letter, and the Mad Hedge Biotech & Healthcare Letter. We teach you how to monetize this information with our books like Stocks to Buy for the Coming Roaring Twenties and the Mad Hedge Options Training Course.
We then urge you to action with our Trade Alerts. If you want more hands-on support, you can upgrade to the Concierge Service. You can also meet me in person to discuss your personal portfolios and my Global Strategy Luncheons.
The luncheons are great because long-term Mad Hedge veterans trade notes on how best to use the service and inform me on where to make improvements. It’s a blast.
The letter is self-correcting. When we make a mistake, readers let us know in 60 seconds and we can shoot out a correction immediately. The services evolve on a daily basis.
It all comes together to enable customers to make up to 20% to 100% a year on their retirement funds. And guess what? The more money they make, the more products and services they buy from me. This is why I have so many followers who have been with me for a decade or more. And some of my best ideas come from my own subscribers.
So, if you missed technology now what should you do about it? Recognize what the new game is and get involved. Microsoft (MSFT) with the fastest-growing cloud business offers good value here. Amazon looks like it will eventually hit my $5,000 target. You want to be buying graphics card and AI company NVIDIA (NVDA) on every 10% dip. It’s going to $1,000.
You can buy the breakouts now to get involved or patiently wait until the 10% selloff that usually follows blowout quarterly earnings.
My guess is that tech stocks still have to double in value before their market capitalization of 26% matches their 50% share of US profits. And the technologies are ever hyper-accelerating. That leaves a lot of upside even for the new entrants.
I Finally Found Tech Stocks!
Global Market Comments
June 21, 2021
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or IT’S CORRECTION TIME),
(SPY), (TLT), (JPM), (BRKB), (AMZN), (ADBE), (NVDA)
OK, I’ll give it to you straight.
The market has just entered a correction that will take the Dow Average down precisely 7.81% from the recent 35,050 high down to 32,515. That just so happens to be the 150-day moving average.
During this time, interest rates will rise, possibly taking the ten-year US Treasury bond yield to 1.30% and the United States Treasury Bond Fund (TLT) to $151.
Technology stocks will take the lead this summer. After not moving for nearly a year, Amazon (AMZN) will take the lead, discounting last year’s 44% growth in sales. NVIDIA (NVDA) and Adobe will follow.
Bank stocks and other financials like JP Morgan Chase (JPM) and Berkshire Hathaway (BRKB) will suffer, dropping 10% so far and 20% before the crying is all over.
In other words, we just flipped from one half of the barbell to the other in a heartbeat. That will last until late summer to the fall. After that, we shift to the other side of the barbell.
That means the best opportunity to buy financials and sell short bonds in a year is setting up in the coming weeks, if not months.
That takes us until the end of 2021 when I expect another liquidity surge to take everything up. Then we all walk together hand in hand into the sunset signing glory halleluiah. It doesn’t get any easier than that.
I saw all of this coming at the beginning of the year, which is why I raced to rack up a 68.60% profit in the first half of the year and went 100% cash with the June 18 option expiration. I succeeded right on the money.
As for 2022, that is a different story entirely.
The big view here that the stock market is transitioning from an 80% gain to a 30% gain to a more normal average annualized 15% gain. The big game is how far in advance stocks will discount these smaller gains.
It will take a lot to get me off the bench and risk any of this hard-won profit. A Volatility Index (VIX) of over $35 would help (we closed at $20.70 on Friday). So would a Mad Hedge Market Timing Index under 20. So would JP Morgan under $127.
The Fed Takes a Turn, leaning towards more inflation. It is keeping interest rates unchanged at 0%-0.25% and continuing bond purchases at $120 billion a month. It is still sticking with the “transitory” argument on inflation but raised its full-year target from 2.4% to 3.4%, more than most expected. It went more specific on rate rises, predicting two 0.25% increases by the end of 2023. Bonds and technology stocks crashed, and inflation plays like banks, Bitcoin, and Berkshire Hathaway soared. The barbell strategy wins again!
The Big Rotation is On, with traders moving out of inflation plays and into big tech. That is the outcome of the shocking bond market spike that came out of last week’s 5% print for the Consumer Price Index. The Fed is telling the world that any inflation is temporary, and the world is believing them. It could give us a bond and tech rally that lasts a couple of months.
Commodities Crash, on a soaring US dollar and shrinking interest rates. The 15-month bull move is taking a summer vacation, unwinding 2X-10X moves racked up since the 2020 lows. Palladium took an 11% hit, with platinum off 7%, corn 6%, and copper 4%. Banks also sold off big as the whole inflation trade unwinds. Buy all of these on the next bottom for a rebound.
Shipping Costs are out of control for everything from everywhere to everywhere else. Transporting a 40-foot steel container of cargo by sea from Shanghai to Rotterdam now costs a record $10,522, up a whopping 547%. Tens of thousands of containers are on the wrong side of the Pacific. Shortages of truck drivers are extreme, with $50,000 signing bonuses rampant. It is one thing that could make continuing inflation pernicious.
If Copper sells off, it won’t be by much. Conventional internal combustion cars use 40 pounds of copper for wiring. EVs use 200 pounds for the heavy copper rotors in each wheel, in addition to two ounces of silver (SLV). EV production will rise from 700,000 units last year to 25 million by 2030. You do the math. There aren’t enough copper mines in the world to accommodate this demand and it takes five years to build a new one. Buy (FCX) on the next big dip. It’s going to $100 in five years.
Paul Tudor Jones says the Taper Tantrum is coming, despite last week’s perverse reaction by the bond market to the red hot 5% inflation rate. The Fed’s obsession with jobs only and not inflation will end in tears. My old client and legendary investor has 20% of his assets in inflation plays, including gold (GLD), Bitcoin, commodities, and short US Treasury bonds (TLT). When Paul is wrong, it’s usually not for very long.
Housing Starts up only 3.6% in May, to a seasonally adjusted 1.57 million units, with sky-high lumber and other materials prices a major drag. New Permits hit a seven-month low.
Weekly Jobless Claims jump to 412,000, the largest increase since March. Could the economy be slowing?
Tech Soars, getting a new lease on life with the collapse of interest rates last week. My favorite, Amazon (AMZN), picked up a healthy $80 yesterday on a 44% YOY gain in sales. Even Apple (AAPL) is coming back from the dead, up $2.00. I sent out long-term at-the-money LEAPS on these last week. It's hard to hold quality down for the long term.
Factory activity fell in June, for the second month in a row according to the Philly Fed, backing off from an all-time high in the spring. Parts and materials shortages are plaguing manufacturers everywhere as the economy struggles to escape from its pandemic torpor.
My Ten-Year View
When we come out the other side of pandemic, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 400% to 120,000 or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 120,000 here we come!
My Mad Hedge Global Trading Dispatch profit reached 0.71% gain so far in June on the heels of a spectacular 8.13% profit in May. That leaves me 100% in cash.
My 2021 year-to-date performance appreciated to 68.60%. The Dow Average is up 8.8% so far in 2021.
I spent the week taking profits on the 40% in remaining positions either by selling or running them into the Friday expiration. My goal was to go 100% before the market completely fell to pieces and I succeeded handily. It’s going to be a grim summer.
I rang the cash register on Berkshire Hathaway (BRKB) and the S&P 500 (SPY), and my short in the (SPY). Perhaps my best trade of the year was stopping out of my short in the (TLT) for an $800 loss when it topped $140.
That brings my 11-year total return to 491.15%, some 2.00 times the S&P 500 (SPX) over the same period. My 11-year average annualized return now stands at an unbelievable 42.70%, easily the highest in the industry.
My trailing one-year return exploded to positively eye-popping 126.07%. I truly have to pinch myself when I see numbers like this. I bet many of you are making the biggest money of your long lives.
We need to keep an eye on the number of US Coronavirus cases at 33.1 million and deaths topping 600,000, which you can find here. Some 33.1 million Americans have contracted Covid-19.
The coming week will be a weak one on the data front.
On Monday, June 21 at 8:30 AM, the Chicago Fed National Activity Index is out.
On Tuesday, June 22 at 10:00 AM, Existing Home Sales for May is released
On Wednesday, June 23 at 10:00 AM, New Home Sales for May is published.
On Thursday, June 24 at 8:30 AM, the Weekly Jobless Claims are published. We also get US Durable Goods Orders for May.
On Friday, June 25 at 8:30 AM, US Personal Income & Spending for May are disclosed. At 2:00 PM, we learn the Baker-Hughes Rig Count.
As for me, with all the recent violence in the Middle East, I am reminded of my own stint in that troubled part of the world. I have been emptying sand out of my pockets since 1968, when I hitchhiked across the Sahara Desert, from Tunisia to Morocco.
During the mid-1970s, I was invited to a press conference given by Yasser Arafat, founder of the Al Fatah terrorist organization and leader of the Palestine Liberation Organization, at the Foreign Correspondents Club of Japan. His organization then rampaging throughout Europe, attacking Jewish targets everywhere.
Japan recognized the PLO to secure their oil supplies from the Persian Gulf, on which they were utterly dependent.
It was a packed room on the 20th floor of the Yurakucho Denki Building, and much of the world’s major press were represented, as the PLO had few contacts with the west.
Many placed cassette recorders on Arafat’s table in case he said anything quotable. Then Arafat ranted and raved about Israel in broken English.
Mid-sentence, one machine started beeping. A journalist jumped up to turn his tape over. Suddenly, four bodyguards pulled out Uzi machine guns and pointed them directly at us.
The room froze.
Then a bodyguard deftly set his Uzi down on the table, flipped over the offending cassette, and the remaining men stowed their weapons. Everyone sighed in relief. I thought it was interesting that the PLO was using Israeli firearms.
The PLO was later kicked out of Jordan for undermining the government there. They fled Lebanon for Tunisia after an Israeli invasion. Arafat was always on the losing side, ever the martyr.
He later shared a Nobel Prize for cutting a deal with Israel engineered by Bill Clinton in 1993, recognizing its right to exist. He died in 2004.
Many speculated that he had been poisoned by the Israelis. My theory is that the Israelis deliberately kept Arafat alive because he was so incompetent. That is the only reason he made it until 75.
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
The Middle East Does Have Some Advantages
Mad Hedge Technology Letter
May 28, 2021
Fiat Lux
Featured Trade:
(THIS CUTTING-EDGE CHIPS STOCK IN HYPERGROWTH MODE)
(NVDA)
Nvidia (NVDA) is another multilayered business with revenues coming from east and west and basically everywhere and really at a time when the gaming market is the largest ever.
Let’s make this clear: Nvidia isn’t a gaming stock, but its best business is centered around the secular gaming trend.
They have this massive installed base of GeForce users (Nvidia branded graphics processing units).
They have reinvented computer graphics as well as resetting the install base — created a pipeline of profits that take advantage of the boom in gaming which many as you know went gangbusters because of the shelter-at-home conditions.
There has been substantial development on the gaming front — at a time when gaming market is expanding fast, and peeling back the layers it sports — eSports — it's infused into art.
It is infused into social.
And so, gaming has such a large cultural footprint now, even to the point that it’s the largest form of entertainment in the world.
The emphasis of this experience is going to resonate for the long term and not only that, the phenomenon called crypto — Nvidia’s Crypto graphic cards named CMP will funnel GeForce supply to gamers.
The Nvidia CMP 30HX is a dedicated crypto mining card. The CMP 30HX is essentially a mid-range graphics card powered by Nvidia’s TU116 processor.
There is strong demand for this product, and I expect to see elevated sales for quite some time because of the dynamics of crypto and the avalanche of capital gravitating towards it not only institutional but from retail too.
And hopefully, in the combination of gaming, crypto, and data, Nvidia is primed to experience strong growth in core businesses through the year.
The data backs up Nvidia’s ambition with Q1 exceptionally strong with revenue of $5.66 billion and year-on-year growth accelerating to 84%.
They set a record in total revenue in Gaming, Data Center, and Professional Visualization, driven by their best product lineups and structural tailwinds across our businesses.
Starting with Gaming, revenue of $2.8 billion was up 11% sequentially and up 106% from a year earlier.
Channel inventories are still leading and Nvidia expects to remain supply-constrained into the second half of the year.
Now Laptops continue to drive strong growth this quarter with all major PC original equipment manufacturers (OEM) launching GeForce RTX 30 Series laptops based on the 3080, 3070, and 3060, as part of their spring refresh.
This is the largest ever wave of GeForce gaming laptops, over 140 in total as OEMs address the rising demand for gamers, creators, and students for NVIDIA's powered laptops.
They believe gaming also benefited from crypto mining demand, and Nvidia is separately addressing mining demand with cryptocurrency mining processors or CMPs.
The crypto CMP revenue was $155 million in Q1, reported as part of the OEM and other category. And our Q2 outlook assumes CMP sales of $400 million.
Data Center continues to be a growth driver with revenue topping $2 billion for the first time, growing 8% sequentially and up 79% from the year-ago quarter, which did not include acquisition Mellanox.
And then lastly, supercomputing; supercomputing centers all over the world are building out and Nvidia is in a great position to fuse together time simulation-based as well as data-driven-based approaches, which are called artificial intelligence.
Across the board, data center is gaining momentum and is the largest segment of computing and will continue to train deep neural networks with rising computational intensity led by two of the fastest growing areas of AI; natural language understanding.
Demand is booming across Nvidia’s markets and readers can expect increase in CMP, but they still expect the lion share of growth to come from Data Center and Gaming.
In Data Center business, their product lineup couldn't be better and they have a strong overall portfolio both for training and inferencing and they are experiencing strong demand across hyperscales and vertical industries.
The foundation has been laid to be a three-chip data center scale computing company with GPUs, DPUs and CPUs.
Fortunately for Nvidia, AI is the most powerful technology force of our time.
Nvidia partners with cloud and consumer Internet companies to scale out and commercialize AI-powered services.
They are democratizing AI for every enterprise and every industry.
With pre-trained models for conversational AI, language understanding, recommender systems, and broad partnerships across the IT industry, Nvidia is removing the barriers for every enterprise to access state-of-the-art AI.
From gaming, metaverses, cloud computing, AI, robotics, self-driving cars, genomics, computational biology, Nvidia is engaging in important work and innovating in the fastest-growing markets today.
Now to look at our outlook for Q2, revenue is expected to be $6.3 billion, and remember that the prior year when Q2 revenue was $3.87 billion.
This company is mesmerizing, growing from $11 billion in annual revenue to $16.68 billion in just one year says it all.
Growing revenue in the mid-80% means it will easily surpass the $9 billion in the first two quarters of the year paving the way for an almost $20 billion per year business.
Sure it’s not Apple or Microsoft but for what it does, they are best in show in an industry that is going through a massive supply headwinds.
The quarterly performance only reinforces the thesis that chip companies are a great place to allocate funds to and the support is there for a buy the dip investor attitude because of growing EPS which promotes share buy backs and capital returns to shareholders.
It’s hard to believe that investors could put their money elsewhere because tech still secures the vast majority of earnings in the business world and that train isn’t slowing down and the bullet train is clearly the chip sector in 2021.
Global Market Comments
May 28, 2021
Fiat Lux
Featured Trade:
(MAY 26 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPY), (DIS), (AMZN), (FCX), (X), (PLTR), (FXE), (FXA), (TLT), (TBT), (AMC), (GME), (ZM), (DAL), (AXP), (LEN), (TOL), (KBH), (DOCO), (ZM), (TSLA), (NVDA), (ROM)
Below please find subscribers’ Q&A for the May 26 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Lake Tahoe, NV.
Q: Do you expect a longer pullback for the (SPY) through the summer and into the last quarter?
A: No, this market is chomping at the bit and go up and won’t do any more than a 5% correction. We’ve already tested this pullback twice. We could stay in this 5% range for a few more weeks or months, but no longer. If we make it to August before we take off to the upside, that would be a miracle. It seems to want to break out right now and if you look at the tech stocks charts you can see what I'm talking about.
Q: Why do day orders with spreads not good ‘til canceled (GTC)?
A: Actually, you can do good ‘til canceled on these spreads, it just depends on how your platform is set up. Good ‘til canceled won't hurt you—only if we get a sudden reversal on a stop out which has only happened four times this year.
Q: Disney (DIS) seems to be struggling to get back over $180; am I still safe with my January 2023 $250 LEAPS?
A: Yes, out to 2023 we’ll have two summers until those expire, so those look pretty good—that's a pretty aggressive trade, and I’m betting you’re looking at a 500% profit on those LEAPS. And by the way, I always urge people to go out long on these LEAPS, because the second year is almost free when you check the pricing. So, take the gift and that will also greatly reduce your risk. We could have a whole recession and recovery, and still have those LEAPS make it to $250 in Disney.
Q: Should I add to Freeport McMoRan (FCX)?
A: (FCX) I would not add—in fact, I would have a stop loss if we closed below $40 on (FCX) if you’re a short-term trader. There is a slowdown in the Chinese economy going on as well as a clampdown on commodity speculation. This has affected the whole base metal space, including steel and palladium. If you have the long-term LEAPS, keep them, because I think (FCX) doubles from here. The whole “green revolution story” is still good.
Q: Do you think the United States Treasury Bond Fund (TLT) is going up?
A: No, I think the (TLT) has been going down. I've been buying puts spreads like crazy, and I have a huge chunk of my own retirement fund in long-dated (TLT) LEAPS, so I am praying it will go down. We’ll talk about that when we get to the bond section.
Q: Prospects for U.S. Steel (X)?
A: It’s tied in with the whole rest of the base commodity complex—I think it is due for a rest after a terrific run, which is why I have such tight stop losses on Freeport McMoRan (FCX).
Q: Do you buy the “transitory” explanation for the hot inflation read two weeks ago that the Fed is handing out, or do you think inflation is bad and here to stay?
A: I go with the transitory argument because you’re getting a lot of one-time-only price rises off of the bottom a year ago when the economy completely shut down. Once those price rises work through the system, the inflation rate should go from 4.2% back down to 2% or so. So, I don't see inflation as a risk, which is why I think the stock markets can reach my 30% up target this year. You may get another hot month as the year-on-year comparisons are enormous. But betting on inflation is betting on the reversal of a 40-year trend, which usually doesn’t work out so well.
Q: On your spread trade alerts can we buy less than 25 contracts?
A: You can buy one contract. In fact, I recommend people start with one contract and test out where the real market is. Put a bid for one contract in the middle of the market, and if it doesn’t get done, raise your bid 5 cents, and eventually, your order gets done. Then you can add more if you want to. I always recommend this even for people who buy thousands of contracts, that they test the market with one contract order just to make sure the market is actually there.
Q: Can you recommend a LEAPS for Amazon (AMZN)?
A: The Amazon LEAPS spread is the January 2022 $3150-3300 vertical call debit spread going out 8 months.
Q: When you short the (TLT), how do you do it?
A: I do vertical bear put debit spreads. I buy a near-money put and sell short and an out-of-the-money put so I can reduce the cost, and therefore triple my size. This strategy triples the leverage on the most likely part of the stock move to take place, which is the at the money. For example, a great one to buy here would be a January 2021 (TLT) $135/140 vertical bear put debit spread where you’re buying the $140 and selling short the $135. The potential 8-month profit on this is around 100%. You’ll make far more money on that kind of trade than you ever would just buying puts outright. Some 80% of the time the single option trades expire worthless. You don’t want to become one of those worthless people.
Q: What’s your best idea for avoiding a U.S. Dollar drop?
A: Buy the Invesco Currency Shares Euro Trust (FXE) or buy the Invesco Currency Shares Australian Dollar Trust Trust (FXA), the Australian Dollar to hedge some of your US Dollar risk. The Australian dollar is basically a call option on a global economic recovery.
Q: I’m a new subscriber, but I don’t get all the recommendations that you mention.
A: Please email customer support at support@madhedgefundtrader.com , tell them you’re not getting trade alerts, and she'll set you up. We have to get you into a different app in order for you to get all those alerts.
Q: How about the ProShares UltraShort 20 Year Treasury ETF (TBT)—is that a bet on declining (TLT)?
A: Absolutely yes, that is a great bet and we’re at a great entry point right now on the (TBT) so that is something I would start scaling into today.
Q: Do you still like Palantir (PLTR)?
A: Yes, but the reason I haven't been pushing it is because the CEO says he could care less about the stock market, and when the CEO says that it tends to be a drag on the stock. Palantir has an easy double or triple on it on a three-year view though. However, small tech has been out of favor since February as it is overpriced.
Q: How far down can the (TLT) go in the next 30 days?
A: It could go down to $135 and maybe $132 on an extreme move, especially if we get another hot CPI read on June 10. However, if you hear the word “taper” from a Fed official, then you’re looking at high $120’s in days.
Q: With the TLT going up, why have you not sent out an alert to double up on put spreads?
A: I tend to be a bit of a perfectionist since I’m a scientist and an engineer, so I’m hanging on for an absolute top to prove itself and start on the way down. On the shorts, I like selling them on the way down, and buying my longs on the way up, because there are always surprises, there’s always the unknown, and heaven forbid, I might actually be wrong sometimes! So, I’m still waiting on this one. And we do already have one position that is fairly close to the money now, the June 2021 $141-144 vertical bear put debit spread, so I don't want to double up on that until we have a reversal in the intermediate term trend.
Q: I see GameStop (GME) is spiking again now up to $230—should I get in for a short-term profit?
A: No. With these meme stocks, the trading is totally random. If anything, I would be selling short, but I would do it in a limited risk way by buying a put spread. However, the implied volatility in the options on these meme stocks are so high that it's almost impossible to make any money on options; you’re paying enormous amounts of money up front, so that's my opinion on GameStop and on AMC Entertainment Holdings (AMC), the other big meme stock.
Q: Will business travel come back after the world is vaccinated?
A: Absolutely. Companies don't want to send people on the road, but customers will demand it. All you need is one competitor to land an order because they visited the customer instead of doing a Zoom (ZM) meeting, and all of a sudden business travel will come roaring back. So that's why I was dabbling in Delta Airlines (DAL) and that's why I like American Express (AXP), where 8% of transactions are for first class airline tickets.
Q: As the work-from-home economy stops and workers go back to the office, do you see a 10% correction in the housing market?
A: Actually, in the housing market with real houses, I don't see prices dropping for years, because 30% of the people who went home to work are staying there for good—that the trend out of the cities into the hinterlands is a long-term trend that will continue for decades, now that Zoom has freed us of the obligations to commute and be near big cities. And of course, I’m a classic example of that; I've been working either in my basement in San Francisco or at Lake Tahoe for the last 14 years. Housing stocks on the other hand like Lennar (LEN), Toll Brothers (TOL) and KB Home (KBH) have had a tremendous run and are basically out of homes. Could they have a 10% correction at any time? Absolutely, yes.
Q: Should I avoid buying dips in last year's work-from-home stocks?
A: Yes I would. DocuSign (DOCO) and Zoom (ZM) are the two best ones because they were both up 12X from their lows, and I tend not to chase things that are up 12X unless they are a Tesla (TSLA) or an Nvidia (NVDA) or something like that. In the end, Tesla went up 295 times.
Q: Are you looking at the carbon credits market?
A: No, but I probably should. That market shut down last year. It’s alive again, and it looks like it's growing like crazy.
Q: What’s the ideal volatility for individual options? What do you use to compare?
A: Always look at the implied volatility of the option compared to the realized volatility of the underlying stock; and when the difference gets too big, you get ideal conditions for putting on call and put spreads, which take advantage of this. These are almost volatility neutral because you’re long on one batch of volatility and short on the other.
Q: Is it too late to get involved in the ProShares Ultra Technology ETF (ROM), the 2X long ETF in a spread?
A: The November 2021 $121-125 vertical bull call spread, the farthest expiration you can get for the (ROM), was kind of aggressive—I would go closer to the money. We’re right around mid $80s right now, so maybe do a January 2022 $95-100, and even that will get you something like a 400% gain by November.
To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in to go to MY ACCOUNT, click on GLOBAL TRADING DISPATCH (or Tech Letter as the case may be), then WEBINARS, and all the webinars from the last ten years are there in all their glory.
Good Luck and Stay Healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Summit of Mount Rose at 10,778 feet with Lake Tahoe on the Right
Global Market Comments
April 26, 2021
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE CORRECTION IS OVER)
(PAVE), (NFLX), (AAPL), (AMD), (NVDA), (ROKU), (AAPL), (AMZN), (MSFT), (FB), (GOOGL), (TSLA), (KSU), (CP), (GS), (UNP) (LEN), (KBH), (PHM)
This is a classic example of if it looks like a duck and quacks like a duck, it’s definitely not a duck….it’s a giraffe.
In stock market parlance, that means we have just suffered an eight-month correction which is now over. Look at the charts and a correction is nowhere to be found. The largest pullback we have seen in the past year has been a scant 12% dip right before the presidential election.
If that’s all the pain we have to suffer to be rewarded with an 80% gain, I’ll take that all day long.
Instead, what we have seen has been a series of sector-specific rolling corrections that were masked by the indexes that were steadily grinding up.
During this time, the best quality stocks endured pretty dramatic hits, like Netflix (NFLX) (-21%), Apple (AAPL) (-26%), Advanced Micro Devices (AMD) (-25%), NVIDIA (NVDA) (-28%), and Roku (ROKU) (-40%).
Stocks sold off hard after Q1 earnings. They are doing the same now with Q2 earnings. That ends on Tuesday after the close when the 800-pound gorilla of them all announces on Wednesday, April 28.
After that, we could be in for another leg in the bull market that could take us up by 10% by the summer.
Some 85% of all companies are now beating forecasts handily. But half are seeing shares fall after the announcement. That shows how professional the market is getting. So, if you eliminate the earnings announcement, you eliminate the share falls?
This is all in the face of economic growth predictions of lifetime proportions. Analysts are now looking for 43% earnings growth in Q2, 55% in Q3, and 75% in Q4. These are WWII-type numbers.
And the Fed put is still good at the bank. Jerome Powell is promising no rate rises until 2023 on an almost daily basis.
It all sets up a continuing pattern of sideways “time” corrections like we’ve just seen followed by frenetic legs up to new highs. This could go on for years.
It worked last time.
The coming week should be quite a blockbuster. It is only the fifth time in history that the five largest stocks in the S&P 500 accounting for 25% of the market cap all report in the same week. These are Apple (AAPL), Amazon (AMZN), Microsoft (MSFT), Facebook (FB), and Alphabet (GOOGL).
That’s going to leave a mark! Biden’s rumored proposal that high-end earners will see doubled capital gains taxes knocked 500 points of the Dow in seconds. The new tax would apply to Americans earning a net income of $1 million or more. Never mind that congress would have to approve the move first, as Trump found out to his chagrin. It’s a trial balloon that was shot down immediately. Trump had planned to cut capital gains to a 15% rate and run a bigger deficit.
It would only apply to Americans who own stocks and never sell. Guess why? To avoid taxes, dummy!
US Stock Funds take in a record $157 billion in March. That beats the record $144 billion that came in during February. Warning: these massive cash flows are consistent with short-term market tops. Vanguard and iShares index funds took in far and away the most money. The Global X US Infrastructure Fund (PAVE) was one of the most popular directed funds.
The labor shortage is on, with companies engaging in mass hiring and paying signing bonuses for low-end jobs. I was awoken by workers putting up a fence next door on a Saturday morning. They’re working weekends to pay back the debts they ran up last year to keep eating. If you are planning any jobs this year, buy the materials now. The country will be out of everything in three months, with current quarter GDP topping a historic 10%.
SPACS have crashed, with the average SPAC down 23% since the February top, and some like Virgin Galactic Holdings off by 50%. Don’t touch these things with a ten-foot pole, as 80% will go under or shut down with no investments. It reminds me of five online pet food companies at the Dotcom Bubble top. It's all a symptom of too much cash flooding the financial system.
Takeover battle for Kansas City Southern (KSU) ensues, with Canadian Nation making a sweeter $33.7 billion offer than Canadian Pacific’s (CP) $30 billion bid. It just shows how valuable railroads really are in a booming economy that urgently needs to move a lot of stuff. Good thing I’m long (UNP). Is the Reading Railroad still available? How about the B&O or the Short Line?
Yellen sets Zero Emissions Target for 2035. That sets up one of the biggest investment opportunities of the century. The trick is to find companies that have viable technologies that can make a stand-alone profit that haven’t already gone up ten times, like Tesla (TSLA). Most of the new EV IPOs aren’t going to make it. This will be a major focus of Mad Hedge research going forward. I hope I live that long!
Existing Home Sales down 12.3% YOY, down 3.7% in March, to 6.03 million units. Prices are up 17.02% YOY, the highest on record. Sales of homes over $1 million are up 108%. Inventory is still the issue, down to only 1.07 million units, off 28% in a year. Truly stunning numbers.
New Home Sales up a ballistic 20.7% YOY in March on a signed contracts basis. This is in the face of rising home mortgage interest rates. The flight to the suburbs continues. Homebuilder stocks took off like a scalded chimp. Buy (LEN), (KBH), and (PHM) on dips.
When we come out the other side of pandemic, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 400% to 120,000 or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 120,000 here we come!
My Mad Hedge Global Trading Dispatch profit reached 9.48% gain during the first half of April on the heels of a spectacular 20.60% profit in March.
I used the dip early in the week to add two more positions in Goldman Sachs (GS) and Union Pacific (UNP). I suffered a day of buyer’s remorse on Thursday when Biden floated his capital gains plan and tanked the Dow by 500 points. Then everything took off like a rocket to new highs on Friday.
That leaves me 80% invested and 20% in cash. The markets went up too fast to get the last match of money in the market.
My 2021 year-to-date performance soared to 53.57%. The Dow Average is up 12.3% so far in 2021.
That brings my 11-year total return to 476.12%, some 2.00 times the S&P 500 (SPX) over the same period. My 11-year average annualized return now stands at an unbelievable 42.01%, the highest in the industry.
My trailing one-year return exploded to positively eye-popping 132.09%. I truly have to pinch myself when I see numbers like this. I bet many of you are making the biggest money of your long lives.
We need to keep an eye on the number of US Coronavirus cases at 31.9 million and deaths topping 570,000, which you can find here.
The coming week will be big on the data front, with a couple of historic numbers expected.
On Monday, April 26, at 8:30 AM, US Durable Goods for March are out. Earnings for Tesla (TSLA) and NXP Semiconductors (NXP) are out.
On Tuesday, April 27, at 9:00 AM, we learn the S&P Case Shiller National Home Price Index for February. We also get earnings for Alphabet (GOOGL), Microsoft (MSFT), and Visa (V).
On Wednesday, April 28 at 2:00 PM, The Fed Open Market Committee releases its Interest Rates Decision. The following press conference is more important. Apple (AAPL), Boeing (BA), and QUALCOMM (QCOM) earnings are out.
On Thursday, April 29 at 8:30 AM, the Weekly Jobless Claims are printed. We also obtain the blockbuster US GDP for Q1. Amazon (AMZN), Caterpillar (CAT, and Merck (MRK) release earnings.
On Friday, April 30 at 8:30 AM, we get US Personal Income and Spending for March. Exxon Mobile (XOM) and Chevron (CVX) release earnings. Berkshire Hathaway (BRK/B) announces the next day. At 2:00 PM, we learn the Baker-Hughes Rig Count.
As for me, after telling you last week why I walked so funny, let me tell you the other reason.
In 1987, to celebrate obtaining my British commercial pilot’s license, I decided to fly a tiny single-engine Grumman Tiger from London to Malta and back.
It turned out to be a one-way trip.
Flying over the many French medieval castles was divine. Flying the length of the Italian coast at 500 feet was fabulous, except for the engine failure over the American airbase at Naples.
But I was a US citizen, wore a New York Yankees baseball cap, and seemed an alright guy, so the Air Force fixed me up for free and sent me on my way. Fortunately, I spotted the heavy cable connecting Sicily with the mainland well in advance.
I had trouble finding Malta and was running low on fuel. So I tuned into a local radio station and homed in on that.
It was on the way home that the trouble started.
I stopped by Palermo in Sicily to see where my grandfather came from and to search for the caves where my great-grandmother lived during the waning days of WWII. Little did I know that Palermo was the worst wind shear airport in Europe.
My next leg home took me over 200 miles of the Mediterranean to Sardinia.
I got about 50 feet into the air when a 70-knot gust of wind flipped me on my side perpendicular to the runway and aimed me right at an Alitalia passenger jet with 100 passengers awaiting takeoff. I managed to level the plane right before I hit the ground.
I heard the British pilot say on the air “Well, that was interesting.”
Giant fire engines descended upon me, but I was fine, sitting on my cockpit, admiring the tree that had suddenly sprouted through my port wing.
Then the Carabinieri arrested me for endangering the lives of 100 Italian tourists. Two days later, the Ente Nazionale per l’Avizione Civile held a hearing and found me innocent, as the wind shear could not be foreseen. I think they really liked my hat, as most probably had distant relatives in New York.
As for the plane, the wreckage was sent back to England by insurance syndicate Lloyds of London, where it was disassembled. Inside the starboard wing tank, they found a rag which the American mechanics in Naples had left by accident.
If I had continued my flight, the rag would have settled over my fuel intake vavle, cut off my gas supply, and I would have crashed into the sea and disappeared forever. Ironically, it would have been close to where French author Antoine de St.-Exupery (The Little Prince) crashed in 1945.
In the end, the crash only cost me a disk in my back, which I had removed in London and led to my funny walk.
Sometimes, it is better to be lucky than smart.
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Antoine de St.-Exupery on the Old 50 Franc Note
