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The Market Outlook for the Week Ahead, or Time to Change Strategy

All good things must come to an end.

Mad Hedge has made fortunes for thousands of followers over the last 15 years with its aggressive options spread strategy, which profits mightily from falling market volatility ($VIX). That is what is happening in the market 95% of the time.

However, it doesn’t make sense when the ($VIX) drops below $20, and that may now continue to be the case for a prolonged period of time.

However, just as one window closes, another opens.

While low volatility makes options spreads no longer attractive, it makes two-year LEAPS the bargain of the century. With volatility this low, you essentially get the second year for free. That is more than adequate time to go into any recession that may or may not happen and then come back out the other side at max profit.

If the underlying stock suddenly rockets, which is often the case with my recommendations, you can collect 90% of the maximum potential profit in a two-year LEAPS within months, if not weeks.

Better yet, while we used to make 15%-20% on front month options spreads, which benefited from accelerated time decay, the profit on two-year LEAPS can run from 100% to 500%. One client bagged a 5,000%, or 50X profit on an NVIDIA (NVDA) LEAPS he strapped on last October.

He doesn’t work anymore.

The timing for this strategy adjustment is perfect. We have just entered a new bull market for stocks that could run for another decade. With the exception of the “Magnificent Seven,” most US stocks are now just above their bear market bottoms. What better time to increase your leverage tenfold.

I won’t be adding LEAPS to my daily position sheet or P&L. They will remain a front-month trading tool. So the millions you are about to make will just have to remain our little secret. Concierge members will get access to a dedicated website that will keep a running total of all Mad Hedge LEAPS issued.

All good strategies must come to an end. Market conditions change or the copycats and wannabees squeeze the life out of them. I have seen too many good traders go out of business clinging to strategies that worked yesterday, but not today. They were hauled away in straight jackets, kicking and screaming because they lost all their money.

The stock market is like working in a hurricane. If you don’t learn how to bend with the wind, you snap and end up in a pile of debris.

When the ($VIX) gets back above $20, or better yet $30, and the Mad Hedge Market Timing Index plunges down to the $20’s, I’ll be back fully loaded with front month options spreads by the dozens.

Good luck.

So far in June, we are up +0.47%. My 2023 year-to-date performance is still at an eye-popping +62.52%. The S&P 500 (SPY) is up only a miniscule +12.63% so far in 2023. My trailing one-year return reached +101.75% versus +24.19% for the S&P 500.

That brings my 15-year total return to +659.71%. My average annualized return has blasted up to +48.86%, another new high, some 2.54 times the S&P 500 over the same period.

Some 42 of my 46 trades this year have been profitable. Only 23 of my last 24 consecutive trade alerts have been profitable.

I executed no trades last week. Concierge members received a LEAPS trade alert on Crown Castle International (CCI), which regular subscribers should receive shortly. My longs in Tesla (TSLA) and Freeport McMoRan (FCX) expired at max profit, which I easily ran into the June 16 option expiration this week. I now have a very rare 100% cash position due to the lack of high-return, low-risk short-term trades.

A Mad Hedge Market Timing Index at 82 is not exactly encouraging me to bet the ranch. Don’t rush to buy the top.

On another matter, I am proud to say that every Mad Hedge service saw positions expire at their maximum profit at the June 16 quadruple witching options expiration.

Global Trading Dispatch rang the cash register with Tesla (TSLA) and Freeport McMoRan (FCX). The Mad Hedge Technology Letter coined it with Apple (AAPL). The Mad Hedge Biotech & Health Care Letter printed money with Amgen (AMGN). Jacquie’s Post pleased followers with a profit in the (TLT). Finally, Mad Hedge AI, launched only on Monday, saw the shares for its initial trade alert for (UNG) jump a breathtaking 15% in four days.

I must be doing something right.

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!

Tesla Model Y Became World’s Top Selling Car in Q1, the first EV to do so. Some 267,200 Y’s were shifted, edging out Toyota’s Corolla by 10,800 units, which led the field for decades. Elon Musk’s price-cutting volume play is working to the competition’s chagrin. The Model Y is on track to top one million sales this year. Buy (TSLA) on dips

Tesla Drops Model 3 Price to $33,000, net of $7,500 federal EV tax credit. That helped it become the world’s top-selling car. Late to the market EV makers are getting killed, hemorrhaging cash. That took the shares up to a new 2023 high of $231. Keep buying (TSLA) on dips.

Apple Launches $3,497 Vision Pro Headset, in a run at Meta (META) in the virtual headset world. It’s the company’s first new product launch since the Apple Watch in 2014 coining yet another new revenue stream. Apple shares hit a new all-time high on the news. Buy (AAPL) on dips.

Weekly Jobless Claims Jump to 261,000, an increase of 28,000, as the deflationary effects of high-interest rates take hold.

Europe Enters a Recession, with a -0.1% GDP print in Q1. Sharp rises in Euro interest rates get the blame.

General Motors Adopts Tesla’s Charging System, essentially giving a near monopoly to Elon Musk. (GM) is joining Ford’s (F) capitulation from two weeks ago. This should grow into a $20 billion a year profit item for Tesla. All of my outrageous forecasts are coming true. Buy (TSLA) on dips.

US to Send Another $2 Billion Worth of Advanced Missiles to Ukraine. The package includes advanced Raytheon (RTX) Himars and Lockheed (LMT) Patriot 3 missiles. Buy both (RTX) and (LMT) on dips as both missiles now have order backlogs extending for years.

Coinbase Gets Crushed after the SEC throws the book at them. The government agency is intent on destroying the entire crypto infrastructure. Get your money out if you can. Avoid (COIN) on pain of death.

Volatility Index ($VIX) Hits 3 ½ Year Low, at $14.26. Complacency with the S&P 500 is running rampant, which always ends in tears. The level implies a maximum up-and-down range of only 8.2% for 30 days.

Airline Profits to Double in 2023, as service sharply deteriorates with revenge travel accelerating. Looks for this summer to be a perfect travel storm.

On Monday, June 19 is the first-ever Juneteenth National Holiday celebrating the freedom of the slaves in Texas, the last state to do so. Markets are closed.

On Tuesday, June 20 at 8:30 PM EST, US Building Permits for May are announced.

On Wednesday, June 21 at 10:00 AM, Fed Chairman Powell testifies in front of Congress.

On Thursday, June 22 at 8:30 AM, the Weekly Jobless Claims are announced.

On Friday, June 23 at 9:45 AM the S&P Global Flash PMI is printed.
At 2:00 PM the Baker Hughes Rig Count is printed.

As for me, with the shocking re-emergence of Nazis on America's political scene, memories are flooding back to me of some of the most amazing experiences in my life. I thought we were done with these guys I have been warning my long-term readers for years now that this story was coming. The right time is now here to write it.

I know the Nazis well.

During the civil rights movement of the 1960s, I frequently hitchhiked through the Deep South to learn what was actually happening.

It was not usual for me to catch a nighttime ride with a neo-Nazi on his way to a cross burning at a nearby Ku Klux Klan meeting, always with an uneducated blue-collar worker who needed a haircut.

In fact, being a card-carrying white kid, I was often invited to come along.

I had a stock answer: "No thanks, I'm going to another Klan meeting further down the road."

That opened my driver up to expound at length on his movement's bizarre philosophy.

What I heard was chilling. Suffice it to say, I learned to talk the talk.

During 1968 and 1969, I worked in West Berlin at the Sarotti Chocolate factory in order to perfect my German. On the first day at work, they let you eat all you want for free.

After that, you got so sick that you never wanted to touch the stuff again. Some 50 years later and I still can’t eat their chocolate with sweetened alcohol on the inside.

My co-worker there was named Jendro, who had been captured by the Russians at Stalingrad and was one of the 5% of prisoners who made it home alive in 1955. His stories were incredible and my problems pale in comparison.

Answering an ad on a local bulletin board, I found myself living with a Nazi family near the company's Tempelhof factory.

There was one thing about Nazis you needed to know during the 1960s: They absolutely loved Americans.

After all, it was we who saved them from certain annihilation by the teeming Bolshevik hoards from the east.

The American postwar occupation, while unpopular, was gentle by comparison. It turned out that everyone loved Hershey bars. Americans became very good at looking the other way when Germain families were trying to buy food on the black market. That’s why Reichsmarks wasn’t devalued until 1948.

As a result, I got free room and board for two summers at the expense of having to listen to some very politically incorrect theories about race. I remember the hot homemade apple strudel like it was yesterday.

Let me tell you another thing about Nazis. Once a Nazi, always a Nazi. Just because they lost the war didn't mean they dropped their extreme beliefs.

Fast-forward 30 years, and I was a wealthy hedge fund manager with money to burn, looking for adventure with a history bent during the 1990s.

I was mountain climbing in the Bavarian Alps with a friend, not far from Garmisch-Partenkirchen, when I learned that Leni Riefenstahl lived nearby, then in her 90s.

Attending the USC film school decades earlier, I knew that Riefenstahl was a legend in the filmmaking community.

She produced such icons as Olympia, about the 1932 Berlin Olympics, and The Triumph of the Will, about the Nuremburg Nazi rallies. It is said that Donald Trump borrowed many of these techniques during his successful 2016 presidential run.

It was rumored that Riefenstahl was also the one-time girlfriend of Adolph Hitler.

I needed a ruse to meet her since surviving members of the Third Reich tend to be very private people, so I tracked down one of her black and white photos of Nubian warriors, which she took during her rehabilitation period in the 1960s.

It was my plan to get her to sign it.

Some well-placed intermediaries managed to pull off a meeting with the notoriously reclusive Riefenstahl, and I managed to score a half-hour tea.

I presented the African photograph, and she seemed grateful that I was interested in her work. She signed it quickly with a flourish.

I then gently grilled her on what it was like to live in Germany in the 1930s. What I learned was fascinating.

But when I asked about her relationship with The Fuhrer, she flashed, "That is nothing but Zionist propaganda."

Spoken like a true Nazi.

The interview ended abruptly.

I took my signed photograph home, framed it, and hung it on my office wall for a few years. Then I donated it to a silent auction at my kids' high school.

Nobody bid on it.

The photo ended up in storage at my home, and when it was time to make space, it went to Goodwill.

I obtained a nice high appraisal for the work of art and then took a generous tax deduction for the donation, of course.

It is now more than a half-century since my first contact with the Nazis, and all of the WWII veterans are gone. Talking about it to kids today, you might as well be discussing the Revolutionary War.

By the way, the torchlight parade we saw in Charlottesville, VA in 2017 was obviously lifted from The Triumph of the Will, except that they didn't use tiki poolside torches in Germany in the 1930s.

Good Luck and Good Trading

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

Leni Riefenstahl

Olympia

How to Handle the Friday May 16 Options Expiration

Diary, Newsletter

Followers of the Mad Hedge Fund Trader alert service have the good fortune to own a deep in-the-money options position that expires on Friday, June 16, and I just want to explain to the newbies how to best maximize their profits.

This involves the Tesla (TSLA) June 2023 $120-$130 in-the-money vertical bull call debit spread.

Provided that we don’t have another 80-point move down in Tesla in ten trading days, this position should expire at its maximum profit point.

So far, so good.

Your profit can be calculated as follows:

Profit: $10.00 expiration value - $8.80 cost = $1.20 net profit

(12 contracts X 100 contracts per option X $1.20 profit per option)

= $1,440 or 13.63% in 25 trading days.

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, June 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, occasionally machines do make mistakes. 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 understandably 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. Just make sure it’s take-out. I want you to stick around.

Well done, and on to the next trade.

You Can’t Do Enough Research

May 30, 2023

Diary, Newsletter, Summary

Global Market Comments
May 30, 2023
Fiat Lux

Featured Trades:

(MARKET OUTLOOK FOR THE WEEK AHEAD, or A TALE OF TWO MARKETS)
(SPY), (TLT), (TSLA), (NVDA), (TOL), (LEN), (KBH), (PHM), (TLT), (MRVL), (F)

CLICK HERE to download today's position sheet.

The Market Outlook for the Week Ahead, or A Tale of Two Markets

Diary, Newsletter, Research

Investors are so out of position it hurts.

I have always believed that markets will always do whatever they have to do to screw the most people and it is doing that right now with a vengeance.

Some $750 billion has poured into cash and equivalents since January 1. Margin debt is now at the Dotcom bust low of 1.4% of the S&P 500 not seen since 2002. Equity Allocations are at a 15 Year Low, with massive amounts of cash in 90-day T-bills now yielding 5.25%.

The broader market is expensive looking at 19 times 2023 earnings. But take out the top five performing FANGS and we are down to a very reasonable 15 times for the remaining 495 stocks.

I told you this would happen, that the bear market ended on October 15 and that big tech would lead any recovery. I reiterated this view in depth with my 2023 All Asset Class Review on January 4 (click here for the link).

In the meantime, a lot of investors had angry conversations with investment advisors this week as to why they didn’t own NVIDIA (NVDA). They heard it was too expensive, that it had already moved too much (triple since October 15), the government was going default on its debt, and that we were headed into recession.

Suffice it to say that if they lived here with me in Silicon Valley, they wouldn’t take this view. The world is going NVIDIA crazy on a huge earnings beat, taking the shares up 30%. Q1 revenues came in at $7.2 billion versus an expected $6.5 billion. Demand from AI and data centers is surging.

(NVDA) has been a core Mad Hedge holding since it went public a decade ago. It is now up 175-fold and has at least another seven bagger ahead of it. (NVDA) has matched the 175-fold gain we caught with our 2010 recommendation for Tesla. The (NVDA) January 2025 LEAPS I recommended on September 29 at 50 cents is now worth $6.25 and expires worth $10, up 20-fold!

It all vindicates my own long-term vision, unique in the investing community, that in the coming decade, technology profits will more than replace the Fed liquidity we feasted on during the 2010s.

The Internet has created about $10 trillion in value since inception. AI will create a lot more than that. That’s what will take the Dow from 33,000 to 240,000.

In the meantime, new home building is incredibly going from strength to strength and is one of the few domestic sides of the economy that is prospering mightily. New Home Sales hit a 13-Month High, up 4.1% in April. If you had told me five years ago that while 30-year fixed mortgage rates were at a two-decade high of 7.0%, demand for new homes was so strong that builders were running out of inventory, I would have told you that you were out of your mind.

Yet, here we are.

This is because half of the builders that went bust in the 2008 subprime housing crash never came back, creating a structural shortage of homes that will take 20 years to return to balance.

Baby boomers now aged 61 to 78 rushed to buy homes in their late 20s during the prosperity of the 1960s and 1970s. Only 10% paid cash for their homes, many of whom worked on Wall Street, like me.

Some 75 million Millennials are now buying homes in their mid 30’s and are therefore much wealthier than previous generations. Working in tech like my kids, some 35% are paying all cash and are immune to the interest rate cycle. That means they can afford much nicer homes than we boomers could.

Those who do borrow plan to refi quickly in a year or two when mortgages are back below 5.0%. Then the residential real estate will absolutely catch on fire. Buy (TOL), (LEN), (KBH), and (PHM) on dips.

Oh, and buy boatloads of bonds (TLT) too.

There is another angle to the story that is fascinating. High housing prices are turning Yankees into Confederates and Hawaiians into cowboys.

An onslaught of my friends have recently retired from New York for the green hills of North Carolina. The problem is that if I moved there, they’d be burning crosses on my front lawn in the first week.

Natives Hawaiians have fled their green hills for the Nevada deserts because they can’t afford to live there anymore, moving from an $800,000 median homes price to $400,000. When I was in Las Vegas a few weeks ago, I noticed ads for a hula contest, Hawaiian language lessons at the county library, and SPAM at Safeway. Outrigger canoes have been spotted on a disappearing Lake Mead. The chief complaint? Leis wilt a lot faster in the dry desert air.

So far in May, I have managed a modest 1.38% profit. My 2023 year-to-date performance is now at an eye-popping +63.13%. The S&P 500 (SPY) is up only a miniscule +10.53% so far in 2023. My trailing one-year return reached a 15-year high at +108.59% versus +12.02% for the S&P 500.

That brings my 15-year total return to +660.32%. My average annualized return has blasted up to +48.91%, another new high, some 2.72 times the S&P 500 over the same period.

Some 41 of my 44 trades this year have been profitable. My last 22 consecutive trade alerts have been profitable.

I executed no trades last week, content to run my long in Tesla and a short in Tesla, the “short strangle” strategy. I now have a very rare 80% cash position due to the lack of high-return, low-risk trades. I ran a rare loss last week because while my long in Tesla is now at max profit, my short is approaching its near strike. That goes with my philosophy of when you’re wrong, be small. When you’re right, go big.

Ford (F) Cuts Deal with Tesla to Share National Charger Network, putting Elon Musk well on his way to becoming the largest electric utility in the world. It won’t affect the existing 4 million Tesla drivers yet. Ford only sold 62,000 EVs in 2022 and 25,000 the year before. Access will be provided through adapters, the (F) adopting the Tesla charging standard. It kind of screws (GM) left on its own. It was worth a $13 pop for (TSLA). Keep buying (TSLA) on dips.

Divergence Between the S&P 500 and the S&P Equal Weight is the greatest since December 1999. The Dotcom Bubble topped four months later. It’s a function of concentration in the top five tech stocks, my “Five Aces” strategy. Risk is rising. The flight to big tech balance sheets and AI has been huge. You heard it here first.

Marvel Technologies (MRVL) Rockets 25% on Spectacular Earnings Beat, as the AI fever spreads out into infrastructure plays like second-line chip makers. Demand for integrated circuits from data centers, carrier infrastructure, networking, and the auto industry is off the charts. The Internet has to grow 500% quickly to accommodate new AI demand right now. The gold rush is on. Buy (MRVL) on dips.

Inflation Continues to Fall, down 0.4% in April according to the Personal Consumption Expenditures Index Price Index. Food prices rose 6.9% from a year ago while energy fell 6.3%.

Fitch Puts US Debt on Credit Watch, meaning that it is due for a downgrade. It’s the first time since the 2011 Moody’s downgrade from AAA to AA+. Threats of default have real-world consequences.

Pending Home Sales Collapse, unchanged from March, but down 20% YOY on a signed contract basis. Soaring interest rates get the blame. The northeast took the big hit.

Ely Lily Price Target Raised to $500, by Bank of America on the strength of their Ozempic weight loss drug. The stock is up fivefold since Mad Hedge recommended it five years ago. Keep buying (LLY) on tips.

30-Year Fixed Rate Mortgages Jump Back to 7.0%, on the impasse in Washington and default fears. The residential real estate recovery goes back on hold.

(TLT) Approaches 2023 Low. The closer we get to a debt ceiling deal, the lower we go. When a deal is done, it unleashes a new onslaught of bond selling by the Treasury, and lower lows on bonds. In the dream scenario, we fall all the way to $95 in the (TLT) where we will be issuing recommendations for call spreads and LEAPS by the boatload.

My Ten-Year View

On Monday, May 29 is Memorial Day. All markets are closed.

On Tuesday, May 30 at 6:00 AM EST, the S&P Case Shiller National Home Price Index is printed.

On Wednesday, May 31 at 7:00 AM, the JOLTS Job Openings Report is out.

On Thursday, June 1 at 8:30 AM, the Weekly Jobless Claims are announced.

On Friday, June 2 at 2:00 PM, the May Nonfarm Payroll Report is released.

As for me, with the 36^th anniversary of the 1987 crash coming up this year, when shares dove 20% in one day, I thought I’d part with a few memories.

I was in Paris visiting Morgan Stanley’s top banking clients, who then were making a major splash in Japanese equity warrants, my particular area of expertise.

When we walked into our last appointment, I casually asked how the market was doing (Paris is six hours ahead of New York). We were told the Dow Average was down a record 300 points. Stunned, I immediately asked for a private conference room so I could call the equity trading desk in New York to buy some stock.

A woman answered the phone, and when I said I wanted to buy, she burst into tears and threw the handset down on the floor. Redialing found all transatlantic lines jammed.

I never bought my stock, nor found out who picked up the phone. I grabbed a taxi to Charles de Gaulle airport and flew my twin Cessna as fast as the turbocharged engines take me back to London, breaking every known air traffic control rule.

By the time I got back, the Dow had closed down 512 points. Then I learned that George Soros asked us to bid on a $250 million blind portfolio of US stocks after the close. He said he had also solicited bids from Goldman Sachs, Merrill Lynch, JP Morgan, and Solomon Brothers, and would call us back if we won.

We bid 10% below the final closing prices for the lot. Ten minutes later he called us back and told us we won the auction. How much did the others bid? He told us that we were the only ones who bid at all!

Then you heard that great sucking sound.

Oops!

What has never been disclosed to the public is that after the close, Morgan Stanley received a margin call from the exchange for $100 million, as volatility had gone through the roof, as did every firm on Wall Street. We ordered JP Morgan to send the money from our account immediately. Then they lost the wire transfer!

After some harsh words at the top, it was found. That’s when I discovered the wonderful world of Fed wire numbers.

The next morning, the Dow continued its plunge, but after an hour managed a U-turn, and launched on a monster rally that lasted for the rest of the year. We made $75 million on that one trade from Soros.

It was the worst investment decision I have seen in the markets in 53 years, executed by its most brilliant player. Go figure. Maybe it was George’s risk control discipline kicking in?

At the end of the month, we then took a $75 million hit on our share of the British Petroleum privatization, because Prime Minister Margaret Thatcher refused to postpone the issue, believing that the banks had already made too much money.

That gave Morgan Stanley’s equity division a break-even P&L for the month of October 1987, the worst in market history. Even now, I refuse to gas up at a BP station on the very rare occasions I am driving a rental internal combustion engine from Enterprise.

My Quotron Screen on 1987 Crash Day

Good luck and good trading!

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

March 27, 2023

Diary, Newsletter, Summary

Global Market Comments
March 27, 2023
Fiat Lux

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE BANKING CRISIS IS OVER),
(SPY), (TLT), (SCHW), (NFLX), (CS), (GLD), (USO), (BRK/B), (TSLA), (BAC), (C), (JPM), (IBKR), (MS)

CLICK HERE to download today's position sheet.

The Market Outlook for the Week Ahead, or The Banking Crisis is Over

Diary, Newsletter

I think it is safe to say that the banking crisis is now in the market. You saw this in the ritual Friday selloff of bank stocks, which last week made back two-thirds of its losses by the end of the day.

Treasury Secretary Janet Yellen has made it clear that she will use her emergency authority to bail out the depositors of any US banks and leave the shareholders drifting in the wind. That’s OK as long as failures happen in ones and twos and not hundreds.

So after this coming dead, data-less week, we may launch into a serious rally next month, often the strongest of the year, back up to the top of the recent trading range. After that, it will be time to “Sell in May and go away,” and not come back until an interest rate collapse is imminent.

Personally, I have suites on the Queen Mary II and the Orient Express waiting for me. How about you?

And what happens when a crisis winds down? The need for protection ebbs as well. That means that big tech stocks with large balance sheets which had a great March will be due for a rest.

You see this in other flight-to-safety assets, like gold (GLD), which gave up some of its recent gains.

Given the failure of the Volatility Index ($VIX) to maintain a sustainable rally this year, it is clear that something important has changed in that market. That would be same-day options, which are stealing the thunder of the old ($VIX).

Instead of panicking and buying the ($VIX) at market, hedge fund algorithms are now programmed to buy individual same-day stock put options. That vastly increases the volatility of single stocks, with one day 10%-15% moves becoming normal.

When a piece of bad news erupts about the banking system, same-day put options across the entire sector rocket, regardless of whether any individual bank is having problems or not.

Needless to say, as ($VIX) opportunities fade, spectacular new trades are opening up in single stocks which Mad Hedge is happily taking advantage of. As a result, the profitability of our trading strategy has near doubled. This has produced the blowout numbers which I list below.

When panic put buying tanks a stock, we pile on call spreads, as we did two weeks ago with many bank and broker stocks. When fears of recession drive bond prices insanely high, we buy (TLT) put spreads.

Buy low, sell high, it’s my new investment strategy. I’m thinking of patenting it.

With some of the most extreme volatility of the year, Mad Hedge continued on up tear, with March up an eye-popping +12.52%.

My 2023 year-to-date performance is now at an incredible +38.28%. The S&P 500 (SPY) is up a miniscule +0.77% so far in 2023. My trailing one-year return maintains a sky-high +95.52% versus -10.23% for the S&P 500.

That brings my 15-year total return to +635.47%, some 2.8 times the S&P 500 (SPY) over the same period. My average annualized return has recovered to +48.26%, another new high.

I executed only two trades last week, content to leave alone my remaining eight positions that are profitable. I used a bond selloff to take profits with my bond short (TLT). A frenetic 25% rally prompted me to close out my long in Charles Schwab (SCHW) as we were nearing our maximum profit.

Fed Raises Interest Rates 25 basis points, to an overnight range of 4.75% to 5.00%, a 15-year high. But it left the door open to a further 25 basis points on May 3. The statement substantially weakened the prospect for future interest rate hikes, a de facto pause. Stocks loved the move, especially brokerage and technology stocks. Powell said the US banking system is sound and announced further support measures for small banks.

Yellen to Guarantee Deposits if More Banks Fail, which traders are taking to the bank as a nationwide government backstop. That explains the ballistic moves in financials yesterday. Today, Fed governor Jay Powell plays his hand.

Will the Banking Crisis End the Bear Market? I think so, as a drop in interest rates is the only possible solution. The Fed may have to guarantee all US bank deposits for a year to get there. Bank and technology stocks certainly think so, which have been on a tear this week.

Fed Window Increases By $94 Billion on the Week, and $400 billion in two weeks, in its so far successful effort to float the banking system. Some $60 billion went to foreign borrowers. It has to be viewed as a positive and the emergency need for funding is declining.

Netflix (NFLX) Soars 10%, by ending password sharing in Canada. The United States is expected to be next. The move is expected to boost paid subscriptions. I took profits on my long in (NFLX).

Oil (USO) Dives 1%, as the US energy secretary says it may take “years” to refill the Strategic Petroleum Reserve. How about never?

Existing Home Sales Soar 14.5% in February, a three-year high on a signed contract basis. The annualized rate was 4.58 million according to the National Association of Home Builders. Inventories shrink to an incredible 2.6 months or 980,000 homes. The median home prices fell 0.2% to $363,000, the first decline in 11 years. The sharp drop in interest rates last week will further turbocharge sales. Cash sales were 28% of total sales.

Gold (GLD) Tops $2,000 an Ounce, as the flight to safety bid continues. Lower interest rates sooner will also provide less yield competition for precious metals. Silver will provide the higher beta from here, as it always does.

UBS Buys Credit Suisse (CS) for $3.25 Billion, less than half of where it traded on Friday, eliminating another threat to the global financial system. It looks like there were $5 billion in hidden trading losses. Some $17 billion in lower tier bonds were written down to zero, which several US bond funds like Pimco owned. The deal includes a sweetheart $100 billion loan facility from my friends at the Swiss National Bank. The forced marriage will create one of the largest banks in Europe. Some 9,000 CS jobs will get axed.

Berkshire Hathaway Steps up Share Buybacks, totaling $1.8 billion in 2022. The three-year total is an incredible $60 billion. It explains why (BRK/B) was unchanged in an otherwise horrific year. Buffet still holds a stunning $147 billion in cash, most of which is invested in US Treasury short terms bills.

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, March 27 at 7:30 AM EST, the Dallas Fed Manufacturing Index is out.

On Tuesday, March 28 at 6:00 AM, the S&P Case Shiller National Home Price Index is announced.

On Wednesday, March 29 at 7:00 AM, the Pending Home Sales for February are printed.

On Thursday, March 30 at 8:30 AM, the Weekly Jobless Claims are announced. The final read on Q4 GDP is disclosed.

On Friday, March 31 at 8:30 AM, the Personal Income & Spending are released.

As for me, not a lot of people get a chance to board a WWII battleship these days. So when I got the chance, I jumped at it.

As part of my grand tour of the South Pacific for Continental Airlines in 1981, I stopped at the US missile test site at Kwajalein Atoll in the Marshall Islands, a mere 2,000 miles west southwest of Hawaii and just north of the equator.

Of course, TOP SECRET clearance was required and no civilians are allowed.

No problem there, as clearance from my days at the Nuclear Test Site in Nevada was still valid. Still, the FBI visited my parents in California just to be sure that I hadn’t adopted any inconvenient ideologies in the intervening years.

I met with the admiral in charge to get an update on the current strategic state of the Pacific. China was nowhere back then, so there wasn’t much to talk about in the wake of the Vietnam War.

As our meeting wound down, the admiral asked me if I had been on a German battleship. “It’s a bit before my time,” I replied. “How would you like to board the Prinz Eugen?" he responded.

The Prinz Eugen was a heavy cruiser, otherwise known as a pocket battleship built by Nazi Germany. It launched in 1938 at 16,000 tons and with eight 8-inch guns. Its sister ship was the Admiral Graf Spee, which was scuttled in the famous Battle of the River Platte in South America in 1939.

Early in the war, it helped sink the British battleship HMS Hood and damaged the HMS Prince of Wales. The Prinz Eugen spent much of the war holed up in a Norwegian fjord and later provided artillery support for the retreating German Army on the eastern front. At the end of the war, the ship was handed over to the US Navy as a war prize.

The US postwar atomic testing was just beginning so the Prinz Eugen was towed through the Panama Canal to be used as a target. Some 200 ships were assembled, including those from Germany, Japan, Britain, and even some American ships deemed no longer seaworthy like the USS Saratoga. One of the first hydrogen bombs was dropped in the middle of the fleet.

The Prinz Eugen was the only ship to remain afloat. In the Navy film of the explosion, you can see the Prinz Eugen jump 200 feet into the air and come down upright. The ship was then towed back to Kwajalein Atoll and put at anchor. A typhoon came later in 1946, capsizing and sinking it.

It was a bright at sunny day when I pulled up to the Prinz Eugen in a small boat with some Navy divers. There was no way the Navy was going to let me visit the ship alone.

The ship was upside-down, with the stern beached to the bow in 300 feet of pristine turquoise water. The propellers had recently been sent off to a war memorial in Germany. The ship’s eight cannons lay scattered on the bottom, falling out of their turrets when the ship tipped over.

The small part of the Prinz Eugen above water had already started to rust through. But once underwater it was like entering a live aquarium.
A lot of coral, seaweed, starfish, and sea urchins can accumulate in 36 years and every inch of the ship was covered. Brightly tropical fish swam in schools. A six-foot mako shark with a hungry look warily swam by.

My diver friends knew the ship well and showed me the highlights to a depth of 50 feet. The controls in the engine room were labeled in German Fraktur, the preferred prewar script. Broken dishes displayed the Nazi swastika. Anti-aircraft guns frozen in time pointed towards the bottom. No one had been allowed to remove anything from the ship since the war, and in the Navy, most men follow orders.

It was amazing what was still intact on a ship that had been blown up by a hydrogen bomb. You can’t beat “Made in Germany.” Our time on the ship was limited as the hull was still radioactive, and in any case, I was running low on oxygen.

A few years later the Navy banned all diving on the Prinz Eugen. Three divers had gotten lost in the dark, tangled in cables, and downed. I was one of the last to visit the historic ship.

I checked with my friends in the Navy and the Prinz Eugen is still there, but in deteriorating condition. When the ship started leaking oil in 2018 and staining the immaculate beaches nearby, the Navy launched a major effort to drain what was left from the 80-year-old tanks. No doubt a future typhoon will claim what is left.

So if someone asks if you know anybody who’s been on a German battleship, you can say “Yes,” you know me. And yes, my German is still pretty good these days.

Vielen dank!

Good Luck and Good Trading,

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

The Prinz Eugen in 1940

The Prinz Eugen Today

March 24, 2023

Diary, Newsletter, Summary

Global Market Comments
March 24, 2023
Fiat Lux

Featured Trade:

(MARCH 22 BIWEEKLY STRATEGY WEBINAR Q&A),
(IBB), (INTC), (AMD), (XLU), (NVDA), (TSLA), (FRC), (QQQ), (SPY), (TLT), (UNG), (USO), (VLO), (DINO), (SUN), (FCX), (JPM), (RIVN), (DVN), (LNG), (KMI), (DAL)

CLICK HERE to download today's position sheet.

March 22 Biweekly Strategy Webinar Q&A

Diary, Newsletter

Below please find subscribers’ Q&A for the March 22 Mad Hedge Fund Trader Global Strategy Webinar, broadcast from Silicon Valley, CA.

Q: I have big losses in biotech (IBB) but am a long-term believer—do you think it will recover?

A: Yes, I do. But we are still looking at the post-COVID hangover, where Biotechs rocketed for about a year. We’re simply coming off that overbought situation. In the meantime, the industry continues to generate groundbreaking discoveries at the fastest rate in history. When those translate into profit-making products, the stocks will perform, and many of them already have.

Q: Advanced Micro Devices (AMD) appears to be overbought, what are your thoughts?

A: Yes absolutely, the whole chip sector is overbought, because guess what, they benefit from falling interest rates and an economic recovery. That group will absolutely lead going into the future, and it’s hard to get into—these things just go up in a straight line. Look at Nvidia (NVDA), it has more than doubled since the October low and you barely get pullbacks. It’s looking like Nvidia is going to take over the world; we’d love to get into it but it seems like it will only be a high-risk/high-reward stock. They are now having the tailwind with Chat GPT—which everyone has to own now or go out of business—and buy Nvidia chips to make it work.

Q: Would you recommend banks and brokerages here?

A; Yes, because of the banking crisis, they’ll be the best performers as we come out of it. The end of the interest rate rising cycle is now in sight, and we are about to enter the golden age of banking. Institutions are buying stocks for that now. And your next entry point will be Friday because the pattern has been to sell off everything on Fridays in expectation of a new bank going under on the weekend. If nothing happens, then you have a big rally on Monday morning. So that you can probably play.

Q: Are there recordings of this webinar?

A: Yes, to find all past recordings, just go to www.madhedgefundtrader.com and log in.

Q: When does Intel (INTC) become a buy, if ever?

A: It’s probably a “BUY” right here. You never want to buy a tech company run by a salesman, and that’s what happened with Intel. As soon as you had a salesman guaranteeing he’d turn the company around, the stock dropped by half. So down here, it’s looking more likely that they’ll fire the head of Intel, get an engineer back in charge, and the stock should double. But clearly, it’s the only value left in the semiconductor area.

Q: Would you double up on the United States Natural Gas Fund (UNG)?

A: Yes, and I'd be doing 2-year (UNG) LEAPS. There’s no way you have an economic recovery over the next two years that will get us a double, triple, or quadruple in the price of natural gas, and (UNG) will catch that move less 35% for the contango (the 1-year differential between front month and one-year futures contracts).

Q: What’s your favorite tech stock to buy on the dip?

A: It has to be Tesla (TSLA). And I’m in the middle of writing a massive opus on the Tesla Investors Day, which included far more news and content than people realize. That's because you have journalists covering investors' day, not engineers. So I’ll get to the engineers’ and scientists view, which is much more interesting.

Q: Buy bitcoin after the financial contagion?

A: No, bitcoin is what you bought at the market top because there was nothing else to buy because everything else was so expensive. Now everything else is cheap when you can buy Apple (AAPL) at $160, Nvidia at $272 (NVDA), or Tesla (TSLA) at $200. Those are far better choices than a purely speculative asset class which you may never see again once you send in your money. That has been the experience of a lot of people.

Q: Should I sell short the Utility ETF (XLU) if investors head into growth stocks?

A: No, utilities are very heavy borrowers with big capital requirements, and also will benefit heavily from falling interest rates. Basically, everything goes up on an economic recovery. So, your short ideas were great a year ago, not so much now. Now we’re looking for long plays, and just a few hedges, like in bonds, to control risk.

Q: What's the net entry point for Freeport McMoRan (FCX)?

A: I would say here, and my target for this year for Freeport is at the very least hitting $50 again; someday we hit $100, once we get another ramp-up for EV production and the demand for copper sores accordingly.

Q: I hear China has a battery that will go 600 miles and is coming soon.

A: Tesla has a battery that will go 1,000 miles now, but it can only be recharged once. It turns out that the military is very interested in using these, converting Humvees to EVs; then you could parachute them charged batteries which you just pop in. That eliminates having to move these giant bladders of gasoline which easily explode. So yes, the 1,000-mile battery has actually been around for 10 years but can’t be mass-produced. That is the issue.

Q: How will Tesla deal with hydrogen?

A: It will ignore it. Hydrogen will never go mainstream—it can’t compete with an existing electric power grid. But there are fleet or utility applications that make sense; so other than a small, limited fleet confined to a local area, I don't see hydrogen ever catching up. And Saudi Arabia can easily convert their entire oil supply into hydrogen to create a “green” carbon-free fuel. Remember, the cost of electric power cars is dropping dramatically—at about 20% a year—so hydrogen has to keep up with that too which they’re not.

Q: Please explain a bank LEAPS.

A: You buy a call option, you sell short a call option higher up, and you do it with a maturity of one year longer, or more. That’s what makes it a LEAPS. If you want more details, just go to www.madhedgefundtrader.com, and search LEAPS and a full explanation of how to execute these will come up.

Q: What do you think of Rivian (RIVN)?

A: It’s a long-term play—they got knocked down by half on their latest $1.2 billion capital raise, which everybody knew was coming, but still seemed to surprise some traders. It’s a long-term hold, not a short term trade. That said, it’s tempting to do LEAPS on Rivian right here going out two years. The stock is down 95% from the highs.

Q: What level LEAPS do you do on JP Morgan (JPM)?

A: I sent that out to everybody last week—that would be to buy the $130 call option and sell short the $135 call option for January of 2024. That way the stock only has to go up 4% for you to make a 100% return on that investment. That’s why we love LEAPS.

Q: I had First Republic Bank (FRC) at $30, took a bath, and got rid of it. Should I have held on?

A: Yes. There's nothing wrong with First Republic's business, and that’s what's new in all of this current round of bank failures—the assets are fine. Usually when a bank goes under it’s because they extended too many dubious loans that defaulted. First Republic not only has a great loan book, but a great asset base in high-net-worth individuals. This is not a bank you would normally expect to go under. Which is why private banks are pouring money into it to save it. I’d be a buyer at the $10 level if we get down that far again. And I actually bought a little bit of First Republic myself on Monday, the meltdown day at $15, with the theory that it will get bailed out and the stock goes up ten times.

Q: Would you do vertical credit spreads on the SPDR S&P 500 ETF Fund (SPY) or Invesco QQQ ETF (QQQ) with the $2 spread?

A: No, the big money is made on single stocks, which have double or triple the volatility of indexes, and you know which single stocks to buy right now—the ones that just had a big selloff. You want more volatility at market bottoms, not less; and I would recommend doing all the financial and call spreads and LEAPS right here. They will have higher volatility and deliver much better risk/reward ratios. That is basic trading 101: you short indexes on the way down, you buy single stocks on the way up. That's what every hedge fund worth its salt does.

Q: Do you have an opinion on Zero Days to Expiration causing greater volatility?

A: Absolutely, it is—especially on Fridays. And I'm not doing these because they are basically lottery tickets. But, if it's a coin toss on whether you make money or not, and you write off the bad ones and make a nice profit on the good ones, that could be a profitable trade. I actually have several followers experimenting with that type of strategy, so I'll let you know if they make any money on it.

Q: What do you think about oil in this environment?

A: It’s discounting a recession which is never going to happen; so oil and oil plays are probably a good trade here, especially with front-month calls. I would be going for Valero Energy (VLO) and the refiners like Sinclair (DINO) and Sunoco (SUN), rather than the big producers because they have already had big moves which they have held onto mostly. Expect oil to go up—I’d be buying the commodity here (USO) and I’d be buying the United States Natural Gas Fund (UNG).

Q: What's the maximum downside in the next 30 days?

A: Well I showed you on that S&P 500 (SPY) chart at the beginning—$350 is the worst-case scenario with a deep recession, and that assumes the banking crisis doesn’t go away and gets worse. I think the banking crisis is done and getting better so we won’t test the downside, but the unanticipated can happen, so you have to be ready for anything. The non-recessionary low looks to be $375.

Q: What if you can’t do spreads in an IRA, like for iShares 20 Plus Year Treasury Bond ETF (TLT)?

A: Just buy the (TLT) outright, or buy it on 2:1 margin. (TLT) is probably a great buy around 100 or 101. ProShares has the 2X long Ultra Treasury ETF (UBT), but the fees are high, the spreads are wide, and the tracking error is large, as is standard for these kinds of instruments.

Q: When taking a position in LEAPS, how do you decide the position size per holding?

A: I send out all the LEAPS assuming one contract, then you can adjust your size according to your own experience level and risk tolerance. Keep in mind that if I’m wrong on everything, the value of all LEAPS goes to zero, so it may not be for you. On the other hand, if I am right on my one-year and two-year views, all these LEAPS will deliver a 100-120% return. You decide.

Q: Are you expecting a seasonal rally in oil?

A: Yes I am, and we’re coming off very low levels. Buy the United States Oil ETF (USO) and buy the United States Natural Gas Fund (UNG).

Q: Is a recession still on the table with all the banking crises?

A: No, if anything, it brings the end of any possibility of a recession because it’s bringing interest rate cuts sooner than expected, which brings a recovery that’s sooner than expected. And that’s why you’re getting interest-rate-sensitive stocks holding here and starting to rally.

Q: My retirement account won’t let me buy (UNG)—Are there any other good companies I can buy?

A: Yes, Devon Energy (DVN) is big in the gas area. So are Cheniere Energy (LNG) and Kinder Morgan (KMI).

Q: If the market is oversupplied with oil, why is gasoline so expensive?

A: Endless middlemen add-ons. This is one of the greatest continuing rip-offs in human history—gasoline prices always take the elevator up and the escalator down, it’s always that way. And that's how oil companies make money—by squeezing consumers. I’ve been tracking it for 50 years and that’s my conclusion. The State of California has done a lot of research on this and learned that only half of their higher prices are from taxes to pay for roads and the other half comes from a myriad of markups. Also, a lot of businessmen just don’t want to be in the gasoline retailing business and will only enter when the returns are very high. Plus, oil companies are trying to milk companies for all their worth right now because the industry may disappear in 10 years. Go electric, that’s my solution. I haven’t bought gasoline for 13 years, except for my kids. I only buy cars for my kids at junkyards and fix them up. If they want to do better they can go out and earn it.

Q: Do we need to worry about China supporting Russia in the war against Ukraine?

A: Not really, because all we have to do to cut off Chinese supplies for Russia is to cut off trade with China, and their economy will completely collapse. China knows this, so they may do some token support for Russia like send them sweatshirts or something like that. If they start a large arms supply, which they could, then the political costs and the trade costs would be more than it’s worth. And at the end of the day, China has no principles, it really is only interested in itself and its own people and will do business with anybody.

Q: What do you think about the recovery in solar?

A: What’s been going on in solar is very interesting because for the last 20 years, solar has moved one to one with oil. So, you would expect that from collapsing oil prices and more price competition from oil, solar would collapse too. Instead, solar has had tremendous moves up and is close to highs for the year. The difference has to be the Biden alternative energy subsidies, which are floating the entire industry and accelerating the entire conversion of the United States to an all-electric economy. So they've had great runs. I wouldn’t get involved here, but it’s nice to contemplate what this means for the long-term future of the country.

Q: Should I buy the airline stocks here?

A: Yes, I’d go for Delta (DAL). Again, it’s one of the sectors that’s discounting a recession that’s not going to happen. They’re going to have the biggest airline boom ever this summer as the reopening trade continues on for another year, and a lot of pent-up travel demand hits the market.

Q: Do you like platinum?

A: I do—not because of EVs but because of hydrogen. You need platinum for hydrogen fuel cells to work. That’s a brand new demand, and there’s supposed to be a shortage of half a million ounces of platinum this year.

To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in to www.madhedgefundtrader.com, go to MY ACCOUNT, click on GLOBAL TRADING DISPATCH or TECHNOLOGY LETTER, then WEBINARS, and all the webinars from the last 12 years are there in all their glory.

Good Luck and Stay Healthy,

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

March 20, 2023

Diary, Newsletter, Summary

Global Market Comments
March 20, 2023
Fiat Lux

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD, or QE IS BACK!)
(SPY), (BITCOIN), (GLD), (SLV), (ARKK), (NVDA), (AAPL), (GOOGL), (META), (SCHW), (MS), (FRC), (TLT), (KBWH)

CLICK HERE to download today's position sheet.

The Market Outlook for the Week Ahead, or QE is Back!

Diary, Newsletter

Remember the endless flood of the money supply that went on for a decade, floating all boats?

It's back!

One need look no further than the Fed balance sheet, which ratcheted up a breathtaking $297 billion last week. That offsets three months worth of quantitative tightening if it even still exists.

This is further confirmed by the classic QE asset classes, which saw their best week in a year. Bitcoin jumped by 30%, gold (GLD) gained 8%, silver (SLV) popped 12%, and technology stocks went on a tear. Even bonds did well, with the (TLT) up $8.00 from the previous week’s low.

Big tech stocks like (NVDA), (AAPL), (GOOGL), and (META) are now seen as the new “safe “stocks, thanks to their gigantic balance sheets and immense cash flows. Tech funds have seen net inflows for the past four consecutive weeks, delivering the largest new investment in three years. The ARK Innovation Fund (ARKK) saw its biggest inflows since the 2021 peak.

It's the regional banking crisis that is reverting the Fed to its old habits, all prompted by the mindless management of Silicon Valley Bank. All California assets were dumped as California was about to fall into the ocean, like Charles Schwab (SCHW), Bank of America (BAC), and First Republic Bank (FRC).

That puts the Fed in a quandary, which renders its interest rate decision on Wednesday, March 22 at 2:00 PM EST, because the last thing you do in a financial crisis is raise interest rates. That’s what the Fed did in 1929, extending the Great Depression from 10 days to 10 years.

My bet is that they raise by 25 basis point one more time because it’s already in the mail. The regional banking crisis has pulled forward any recession and therefore the recovery.

After that, there will be no interest rate rises for a decade, which the Fed may hint at in its statement and the following press conference. The cuts will start in June and continue rapidly after that. That’s when the economic data catch up with the reality that is happening right now, which is hugely deflationary.

(NVDA) and (TSLA) already know this, which are rising sharply on Friday.

The action certainly caught the attention of the US Treasury, which seemed willing to jump in with guarantees at the drop of a hat. There has been a massive flight of capital from the heartland to the coasts where the top 20 “too big to fail” banks live.

It’s another example of an industry deregulating itself out of existence, which obtained looser capital requirements after heavy lobbying in 2018. At one point, JP Morgan bank, the safest of the safe, was turning down new account applications. This means that the trade of the decade is setting up for the banks. In the wake of the 2008 financial crisis, the Invesco Bank ETF (KBWB) rose 75% in a year. I expect the same to happen this time around. It has already plunged by 30% in 2023, so it has to rise by 50% just to get back to where it was in January, but with bank deposits now guaranteed and more safeguards in place.

And if you are worried about hidden unrealized losses on bank balance sheets, I list below the safest banks ranked by capital ratios NET of losses when marked to market.

14.5% Goldman Sachs (GS)
13.4% Morgan Stanley (MS)
11.5% JP Morgan Bank (JPM)
11.3% Citigroup (C)
8.7% State Street
5.9% Bank of America (BAC)

No surprise that (GS) and (MS) is at the top where the mark-to-market culture is strong. A strong dose of regulation from the SEC helps too. (BAC) takes a big hit because of the largest holdings of low-yielding mortgages which can’t be marked to market unless they are sold or defaulted.

The crisis brought the traditional recession indicators out of the closet last week. A big one is crude oil prices, which hit a 2 ½ year low at $65 a barrel. It turns out that not only banks but oil producers are hurt by high interest rates as well. Some 120 million barrels have gone into storage in the beast nine months and the market is oversupplied by 300,000 barrels a day.

Only OPEC Plus can put in a floor by cutting production, which they are loathed to do as it brings immediate spending cuts. Or the greatest oil trader in history, Joe Biden of Delaware, can cover his short in the Strategic Petroleum which he sold at $90 last year. You may have to wait for a future Republican administration for that to happen.

While markets crashed, investors have been jumping out of windows, the world appeared to be ending, and the rain continuing incessantly, Mad Hedge continued on up tear with March up +5.61%.

My 2023 year-to-date performance is now at an eye-popping +31.37%. The S&P 500 (SPY) is up +2.63% so far in 2023. My trailing one-year return maintains a sky-high +87.76% versus -15.55% for the S&P 500.

That brings my 15-year total return to +628.56%, some 2.87 times the S&P 500 (SPX) over the same period. My average annualized return has recovered to +47.76%, another new high.

At the market lows, I covered shorts in my Tesla and March NVIDIA positions. I religiously adhered to my stop loss discipline, stopping out of my April short in NVIDIA (NVDA) when the melt-up ensued, my only remaining equity short. I also established a new short in (TLT) at the market high, my first since August.

Silicon Valley Bank fails to sell, but the FDIC stepped in to guarantee all deposits. The FDIC took over Signature Bank in New York as well. If they hadn’t, there would be lines snaking out the doors of every small bank in America Monday morning. The cost is being born by steeper deposit insurance premiums for the banking industry, which will no doubt cause some grumbling. There are 100 banks that would leap to buy Silicon Valley Bank to gain a franchise in the world’s fastest growing technology center. They just need a few hours to get a handle on the bank’s loan portfolio, which only the former management really understand. Buy banks and brokers on dips (SCHW).

Is Platinum the Precious Metals Play of 2023? I am told by the insiders who know that platinum (PPLT) could be the big precious metals play of 2023. The white metal has become the principal metal used in the manufacture of catalytic converters for conventional internal combustion cars of which 15 million a year is still made in the US. There is rising demand for hydrogen fuel cells and the green hydrogen movement. The world’s second largest producer of platinum is Russia, whose supplies have been cut off. As a result, there is expected to be a 556,000-ounce shortage this year after two years of surpluses.

Say Goodbye to the 50 Basis Point Rate Hike, at the Fed meeting on March 22 in the wake of a regional banking Crisis. It’s now a quarter point….or nothing at all. In 48 hours, we have gone from “higher rates for longer” to “maybe the next rate rise is the last one.” Tech stocks are buying it after holding up incredibly well. Buy tech and big banks on dips (JPM), (BAC), (C), (SCHW).

Core Inflation Comes in Moderate, up 0.4% and 0.5% without food and energy. That is a 6.0% YOY rate, down from the 2023 high of 8.7%. Stocks extended a 300-point rally on the news. Inflation has been running at a 3.5% annual rate for the past four months, my yearend target.

Mortgage Rates Dive, off the back of a three-day, $8.00 rally in the bond market. Mortgage rates plunged by 50 basis points to 6.50% and may have more to go. Will this kick off the spring residential real estate market?

Gold (GLD) Breaks Out, crossing a key technical level and setting the options market on fire. Some gold minders saw options volume up 400%. Did the regional banking crisis put the top in interest rates, which have been weighing heavily on gold? Or maybe it’s just an old fashioned flight to safety triggered by the financial crisis. It could be presaging a global economic recovery and a coming commodity boom. (GOLD) LEAPS on the way.

Ron Baron Loaded the Boat with Charles Schwab (SCHW) Shares on Friday, as all the smart money did, including Mad Hedge. My old friend was also an early investor in Tesla (TSLA) and is now one of the largest outside shareholders. When someone offers you a dollar for 40 cents, you take it!

Swiss National Bank Steps in to Bail Out Credit Suisse, taking pressure off US market. I knew they would come in as I was a director of UBS for a year, The Swiss take care of their own. More importantly, the rolling global bank crisis has put the fear of God into the Fed, meaning that the 25 basis point hike next week may be the last for a decade. Buy “RISK ON”, especially banks.

Europe Raises Interest Rates by 50 Basis Points, catching up with the US. It’s an overreaction given the fragility of the banking system. The markets didn’t like the move. Europe has inflation at 2% higher than the US so they really had no choice

Weekly Jobless Claims Drop to 192,000, a surprising fall. The worker shortage continues unabated. It’s the biggest decline since July. If the Fed were looking for a reason to continue quantitative tightening this is it.

First Republic Bank is for Sale, the next bailout target. The mere fact that it is based in California is the problem, which many investors now apparently believe is about to break off of the North American Continent and fall into the Pacific Ocean. You never see a bank with $70 billion in cash and equivalents get in trouble. Morgan Stanley (MS) and JP Morgan are thought to be in the bidding. A group of banks deposited $30 billion into (FRC) to firewall the rest of the banking system.

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, March 20, there are no data points of note.

On Tuesday, March 21 at 7:00 AM, the Existing Home Sales are announced.

On Wednesday, March 22 at 7:00 AM, the Federal Reserve Open Market Committee announces its interest rate decision. A hike of 25 basis points is in the market. The published statement and following press conference will be the most important of the year, indicating whether they recognize the seriousness of the regional banking crisis and are now leaning hawkish or dovish.

On Thursday, March 23 at 8:30 AM, the Weekly Jobless Claims are announced.

On Friday, March 17 at 8:30 AM, the Durable Goods are released.

As for me, I recall my last trip around the world in 2018. I took the trip because I feared climate change would soon make visits to the equator impossible because of intolerable temperatures and the breakdown of civilization. As it turned out, the global pandemic came six months later, making such travel out of the question for two years.

I beat Phileas Fogg by 55 days, who needed 88 days to complete his trip around the world to settle a gentleman’s bet. But then, he had to rely on elephants, sailing ships, and steam engines to complete his epic voyage, or at least, the one imagined by Jules Verne.

I actually took a much longer route, using a mix of Boeings and Airbuses to fly 80 hours over 40,000 miles on 18 flights through 12 countries in only 33 days. Incredibly, our baggage made it all the way, rather than see its contents sold on the black markets of Manila, New Delhi, or Cairo.

It was a trip around the world for the ages, made even more challenging by dragging my 13 and 15-year-old girls along with me. I have always considered my most valuable asset to be the trips I took to Europe, Africa, and Asia in 1968. The comparisons I can make today some 55 years later are nothing less than awe-inspiring. I wanted to give the same gift to them.

It began with a 12 ½ hour flight from San Francisco to Auckland, New Zealand. Straight out of the airport, I rented a left-hand drive Land Rover and drove three hours to high in the steam-covered mountains of Rarotonga where we were dinner guests of a Māori tribe. To earn my dinner of pork and vegetables cooked underground, I had to dance the haka, a Māori war dance.

The Haka

Of course, with kids in tow, a natural stop was the Hobbit Village of Hobbiton 1½ hours outside of Auckland. I figured the owners of the idyllic sheep farm were earning at least $25 million a year showing tourists the movie set.

In all, I put 1,000 miles on the car in four days, even crossing New Zealand’s highest mountain range on a dirt road. The thick forests were so primeval my daughter expected to see a dinosaur around every curve. We reached our southernmost point at Mt. Ruapehu, a volcano used as the inspiration for Mt. Doom in Peter Jackson’s Lord of the Rings.

The Real Mount Doom

The focus of the Australia leg were ten strategy lectures which I presented around the country. I was mobbed at every stop, with turnouts double what I expected. The Mad Hedge Fund Trader and the Mad Hedge Technology Letter picked up 100 new subscribers in the Land Down Under in five days.

Maybe it was something I said?

My kids’ only requirements were to feed real kangaroos and koala bears, which we duly accomplished on a freezing cold morning outside Melbourne. We also managed to squeeze in a tour of the incredible Sydney Opera House in between lectures, dashing here and there in Uber cabs.

I hosted five Mad Hedge Global Strategy Luncheons for existing customers in five days. The highlight was in Perth, where eight professional traders and I enjoyed a raucous, drunken meal. They had all done well off my advice, so I was popular, to say the least. Someone picked up the tab without me even noticing.

After that, it was a brief ten-hour flight to Manila in the Philippines, with a brief changeover in Hong Kong, where massive protest demonstrations were underway. Ever the history buff, I booked myself into General Douglas MacArthur’s suite at the historic Manila Hotel. The last time I was here, I interviewed President Ferdinand Marcos and his lovely wife Imelda. After a lunch with my enthusiastic Philippine staff and I was on my way to the airport.

I took Malaysian Airlines to New Delhi, India, which has lost two planes over the last five years and where the crew was definitely on edge. I asked why a second plane was lost somewhere over the South Indian Ocean and the universal response was that the pilot had gone insane. Security was so tight that they confiscated a bottle of Jamieson Irish Whiskey that I had just bought in duty free.

India turned out to be a dystopian nightmare. If climate change continues, this is your preview. With temperatures up to 120 degrees in 100% humidity, people were dying of heat stroke by the hundreds. Elephants had to be hosed down to keep them alive. It was so hot you couldn’t stray from the air conditioning for more than an hour. The national radio warned us to stay indoors.

In Old Delhi, the kids were besieged by child beggars pawing them for food and there were mountains of trash everywhere. In the Taj Mahal, my older daughter passed out and we had to dump our remaining drinking water on her to cool her down and bring her back to life. We spent the rest of the day sightseeing indoors at the most heavily air-conditioned shops.

If global temperatures rise by just a few more degrees, you’re going to lose a billion people in India very soon.

On the way to Abu Dhabi, we flew directly over the tanker war at the Straits of Hormuz, one of my old flight paths during my Morgan Stanley days. It was too dusty to see any action there. We got a much better view of Sinai and the Red Sea, which, I told the kids, Moses parted 5,000 years ago (they’ve seen Charlton Heston in The Ten Commandments many times).

The Red Sea

Upon landing at Cairo, Egypt’s ever-vigilant military intelligence service immediately picked me up. Apparently, I was still in their system dating back to my coverage of Henry Kissinger’s shuttle diplomacy for The Economist in 1976. That was all a long time ago. Having two kids with me meant I was not there to cause trouble, so they were very friendly. They even gave us a free ride to the downtown Nile Hilton.

After India, Cairo, and the Sahara Desert were downright pleasant, a dry and comfortable 100 degrees. We did the standard circuit, the pyramids, and the Sphynx followed by a camel ride into the desert.

If you are the least bit claustrophobic, don’t even think about crawling into the center of the Great Pyramid on your hands and knees as we did. I was sore for two days. We spent the evening on a Nile dinner cruise, looking for alligators, entertained by an unusually talented belly dancer.

The next stage involved a one-day race to Greece, where we circled the Acropolis in all its glory, and then argued with a Greek taxi driver on how to get back to the airport. We ended up taking an efficient airport train, a remnant of the 2000 Athens Olympics. If impoverished and bankrupt Athens has such great airport train, why doesn’t New York or San Francisco?

It was a quick hop across the Adriatic to Venice Italy, where we caught an always exciting speed boat from the Marco Polo to our Airbnb near St. Mark’s Square. We ran through the ancient cathedral and the Palace of the Doges, admiring the massive canvases, the medieval weaponry, and of course, the dungeon.

One of the high points of the trip was a performance of Vivaldi’s Four Seasons in the very church it was composed for. A ferocious thunderstorm hit, flooding the plaza outside and causing the lead violinist’s string to break, halting the concert (rapid humidity change I guess).

When we got home with soggy feet, the Carabinieri had cordoned off our block with police tape because a big chunk of our 400-year-old roof had fallen into the street. It taxed my Italian to the max to get into our apartment that night. The Airbnb host asked me not to mention this in my review (I didn’t).

The next day brought a circuitous trip to Budapest via Brussels. Budapest was a charm, a former capital of the Austria-Hungarian Empire and the architecture to prove it. The last time I was here 55 years ago, the Russian Army was running the place and it was grim, oppressive, and dirty.

Today, it is a thriving hot spot for Europe’s young, with bars and night clubs everywhere. Dinners dropped from $150 in Venice to $30. We topped the night with a Danube dinner cruise with a folk dancing troupe. I’m telling you, you can live there like a king for $1,000 a month.

Visiting the Golden Age in Budapest

The next morning, we drew closer to our final destination of Switzerland. A four-hour train ride brought us to my summer chalet in Zermatt and some much-needed rest. At the end of a long valley and lacking any cars, Zermatt is one of those places where you can just give the kids 50 Swiss francs and tell them to get lost. I spent mornings hiking up from the valley floor and afternoons getting caught up on the markets and my writing.

There’s nothing like recharging my batteries in the clean mountain air of the Alps. The forecast was rain every day for two weeks, but it never showed. As a result, I ended up hiking ten miles a day to the point where my legs were made of lead by the end.

The only downer was watching helicopters pick up the bodies of two climbers who fell near the top of the Matterhorn. As temperatures rise rapidly, the ice holding the mountain together is melting, leading to a rising tide of fatal accidents.

I caught my last flight home from Milan. Anything for one more great dinner in Italy, which I enjoyed in the Galleria. At the train station, I chatted with a troop of Italian Boy Scouts in blue uniforms headed for the Italian Alps. The city was packed with Chinese tour groups, and there was a one-month wait to buy tickets for Leonardo DaVinci’s The Last Supper. Another Airbnb made sure I stayed up all night listening to the city’s yellow trolleys trundle by.

Finally, an 11-hour flight brought me back to the City by the Bay. Thanks to two sleeping pills of indeterminate origin I went to sleep over England and woke up over Oregon, preparing for a landing. It seems that somewhere along the way I proposed marriage to the Arab woman sitting next to me, but I have no memory of that whatsoever. At least that’s what the head flight attendant thought.

I am now planning this summer trip. After the Queen Mary and the Orient Express should I climb the Matterhorn again? Or should I summit Mount Kilimanjaro in Africa first? No transatlantic trip should ever be wasted. And I have to get home in time to join a 50-mile hike with the Boy Scouts in New Mexico and then cart two kids off to college.

What a great problem to have.

Good Luck and Good Trading,

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