Global Market Comments
March 21, 2022
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or FROM QE TO QT),
(SPY), (TLT), (TBT), (TSLA)
Tag Archive for: (SPY)
A client asked me today if, after the 5th worst start to a year since 1927, I thought the stock market had bottomed.
My response? One interest rate rise down, 12 to go, or 3.00% if we stick to the quarter-point pace.
And while the first seven rate rises have already been discounted by the futures market, the additional six we will get in 2023 haven’t.
We have just seen the best week for stocks in nearly two years, but don’t get your hopes up. We are in the process of weaning the markets off of 12 years of free money and we aren’t going to get away with a measly 15% correction.
And when I say markets, I don’t just mean stocks, but for bonds, commodities, foreign exchange, precious metals, energy, and real estate as well. No asset has actually had a real price for more than a decade.
So, how does all this end? You can count on several tradable rallies for the rest of the year, like the one we have just had. Big tech earnings are still racing ahead like a bat out of hell. By yearend, tech should be stupid cheap, cheap enough to take the indexes to new highs, even if they are marginal ones at best.
Eventually, the Fed will take rates high enough to assure a recession. That happens when yield curves are completely flat, i.e, when the two, ten, and 30-year yields are the same, which is about two years off.
That could happen sooner if inflation fails to abate and the Fed has to resort to successive half-point hikes to cool a superheated economy. Currently, Jay Powell doesn’t believe that will be necessary because he expects the inflation rate to drop to 4% by the end of 2022 as wage demands fade, supply chain problems sort themselves out, and the Ukraine war stalemates.
News flash: Fed governors have been known to be wrong.
Here’s an interesting tidbit. I renewed my pilot’s medical this week in case I get a midnight call from Washington DC. Don’t worry, I passed with flying colors, thanks to all my nighttime backpacking.
But you know what the flight surgeon told me? Every medical he had done in the last two weeks was for someone headed to Ukraine.
This could be a really interesting war.
The Fed Raises Interest Rates by a quarter point. The futures markets are already discounting seven rate hikes this year, but not the six in 2023. The Fed is so far behind the curve they may have to resort to half-point rises later this year if inflation doesn’t fade. According to that timetable, the yield curve will be completely flat by then, triggering the next recession.
China Crashes, on fears they may get dragged into the Ukraine war by Russia. Delisting threats from the SEC, a slowing economy, flight from growth tech stocks, and a new Covid outbreak aren’t helping either. Some $2.1 trillion in market cap has been lost since these stocks looked so great a year ago. Not a great place to be when a new iron curtain is descending. Right now, the US is the only safe place to be.
Bonds Collapse on happy talks about Russia/Ukraine talks, making my shorts look even better. Ten-year US Treasury yields hit a three-year high at 2.08% yield. It’s a resumption of a steep downtrend in bond prices that started in November. I used the war-induced rally to ramp up positions. But I don’t think we break $130 in the (TLT) for at least another month. Keep selling big rallies in the (TLT).
The Producer Price Index is Up a Hot 10% YOY, and 0.8% in February, largely driven by soaring energy prices. Food prices are up as Ukraine’s wheat, one-third of the world supply, disappears from the marketplace. It makes the Fed rate hike a sure thing.
Russia has $350 Billion of US stock for Sale at Market. That is the amount Russian oligarchs are thought to own in US hedge funds which the Justice Department is in the process of seizing. It’s part of $1 trillion in foreign assets overall, which include the Chelsea soccer team, several tens of billion worth of US real estate, and a $200 billion stake in Uber.
China has to Choose, whether to have Russia or the US as an ally. Will it be the sanctioned $1 trillion economy in free fall, or a booming $25 trillion economy? Certain the costs of going against the US have been made clear. I’ve been arguing vociferously to the Joint Chiefs from the beginning that standing up to Putin gets you a two for: it forces China to back off from aggressive moves towards Taiwan as well. Russia can stand sanction. Chinese would starve, as the bulk of its wealth over the last 30 years came from trade with the US.
Existing Home Sales Plunge by 7.2% to 6.02 million units in February. Soaring mortgage rates and rock bottom inventories are taking their toll. Many homes are gone only a week after listing.
Nickel Futures are Limit Down in London, off by 12%, indicating that the super spike in commodities prices triggered by the Ukraine war may be over. The price fell by $36,915 per metric tonne, well off the $100,000 high from weeks ago when Chinese speculators covered shorts generating massive losses.
Weekly Jobless Claims Come in at 214,000, a two-month low. The economy is recovering slowly and is on the verge of full employment.
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 800% to 240,000 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 240,000 here we come!
With near record volatility, my March month to date performance catapulted to a blistering 15.23%. My 2022 year-to-date performance ended at a chest beating 29.82%. The Dow Average is down -4.3% so far in 2022. It is the great outperformance on an index since Mad Hedge Fund Trader started 14 years ago.
My five March positions expired at their maximum potential profit with the options expiration on Friday. That leaves me 90% in cash and 10% in a single long bond position which is close to breaking even. Only the next capitulation selloff day I’ll be adding more long positions in technology.
That brings my 13-year total return to 542.38%, some 2.10 times the S&P 500 (SPX) over the same period. My average annualized return has ratcheted up to 44.88%, easily the highest in the industry.
We need to keep an eye on the number of US Coronavirus cases at 80 million and rising quickly and deaths topping 971,000, which you can find here. Growth of the pandemic has virtually stopped, with new cases down 96% in a month.
On Monday, March 21 at 7:30 AM EST, the Chicago Fed National Activity Index is out.
On Tuesday, March 22 at 12:30 PM, API Crude Oil Stocks are released.
On Wednesday, March 23 at 10:00 AM, New Home Sales for February are printed.
On Thursday, March 23 at 7:30 AM, Durable Goods Orders for February are published. Weekly Jobless Claims are out at 8:30.
On Friday, March 25 at 9:00 AM, Pending Home Sales for February are disclosed. At 2:00 PM, the Baker Hughes Oil Rig Count is out.
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 had 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 of the Alitalia jet 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 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 City.
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 has continued my flight, the rag would have settled over my fuel intake valve, 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 his Lockheed P-38 Lightning in 1944.
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
Global Market Comments
March 14, 2022
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or RECESSION FEARS ARISE)
(TLT), (SPY), (VIX), (TSLA), (VXX)
I hate to be the bearer of bad news, but the US is now looking at the ugly face of recession. Both oil shocks of the last 50 years promptly delivered serious recessions and the third one could well do the same.
Q1 is now Looking Like a Write Off, as analysts rush to pare forecasts. Some are cutting predictions from 5% growth to zero, or even negative numbers. There will be no sustainable stock market rally until this situation reverses in H2. Keep selling those rallies.
There is no denying that oil at $132 is starting to seriously drag on the economy. Here in San Francisco, gasoline has topped $7.00 a gallon. The good news is that high prices will pay for the enormous losses big oil will take writing off hundreds of billions of Russian investments. It will also greatly accelerate the move to electric vehicles. No wonder Tesla (TSLA) is holding up so well.
We may duck the bullet this time because the number of barrels needed to produce a unit of GDP has dropped by half since over the past half-century, thanks to conservation, improved technology, and the advent of electric vehicles. That old Lincoln Continental that guzzled 8 miles a gallon now gets 27.
The big issue will be how long it will take Germany to replace Russian gas. The US can do it easily, but it will take years to build out the infrastructure and build the ships. The big Russian strategic mistake is that they launched their war in the spring, just when German gas needs decline dramatically.
A second Cold War, a third oil shock, and a hot shooting war are a lot for markets to take in in only three weeks. It all means lower share prices….for now. It makes my down 20% target look pretty good.
There is one other matter that may save our bacon. The real economy is still hot, and the world is running out of everything. Oil was going to $130 anyway, even without the war.
Food, housing, materials, commodities, aluminum, steel, lumber, you name it. All are in short supply. And you already own the things these commodities make, like your home, you already have a hedge and a great long-term play.
This is not what recessions are made out of.
The US Bans Russian Oil Imports, and the rush is on to see how fast we can replace German imports. It’s also looking like several hundred billion dollars of Russian investment in illiquid long-term investments will be trapped in the US, such as in real estate, joint ventures, and venture capital. I keep pinching myself to see this WWII replay unfold. The Mad Hedge Market Timing Index just hit a one-year low at 13. Defense stocks are soaring.
Commodity Prices are soaring anywhere Russia is a major supplier. Nickel prices are up 90% and oil hit $133 a barrel. It all throws gasoline on the inflation fire.
Gold breaks $2,000, a new 18-month high, on a massive flight to safety bid. Next stop could be $3,000.
Nickel Prices soar 250%, to $100,000 a metric tonne, with Russia as a major producer. Futures trading is halted on the London Metals Exchange. Who is the biggest user of nickel? China at 59% and the rest of Asia for a further 23%, mostly to produce stainless steel. More supply disruptions to come. US automakers are scrambling, the biggest end-users of stainless steel. Car prices are about to rocket accelerating the move to carbon fiber.
Europe to Cut Russian Gas Purchases by Two Thirds This Year, some 45% of their current gas supply. They will essentially bring their renewable targets forward by a decade, which is moving forward much faster than the US. Oil is just too unreliable to depend on. Some are untried on a mass scale, such as using wind and solar power to electrolyze water to make clean hydrogen. It’s great if they can pull it off.
CPI Inflation Data comes in at a Red Hot 7.9% YOY, a new cycle high and a new 40-year high, and 0.8% for the month of February. Wars are highly inflationary, especially when they come on top of already chronic supply shorts and supply chain disruptions. Bonds are getting crushed. Too bad I’m triple short.
Weekly Jobless Claims come in at 227,000, with Continuing Claims at 1,494,000. Hot jobs demand downplays the risk of the Ukraine war creating any real recession. Repatriation of jobs from abroad will accelerate.
Amazon Splits 20:1, mimicking NVIDIA’s and Tesla’s earlier moves. Although it should make no difference, such splits are always a positive, as more retail investors can buy Alphabet at $145 than $2,900. Option traders too. The split takes place in July
Rents Rise at fastest rate in 30 years. The index for rentals of primary residences as collected by the Bureau of Labor Statistics is now the highest since 1987. Rents accounted for 40% of the big jump in the CPI in February. Inflation will get worse before it gets better.
Russian Credit Default Swaps Hit 34% Yields, indicating an extremely high probability of default. Some $100 million in interest payments are due next week, but with virtually all bank accounts frozen and kicked out of SWIFT, they have no means to pay.
The largest holders of Russian debt, like Pimco, Voya, and Capital Group, are taking big hits this morning. Who knows, they might be a BUY here. After all, those defaulted Chinese railroad bonds paid off, pennies on the dollar and 100 years after issue. Are confederate state bonds next?
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 800% to 240,000 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 240,000 here we come!
With near-record volatility, my February month-to-date performance catapulted to a blistering 15.56%. My 2022 year-to-date performance ended at a chest-beating 30.15%. The Dow Average is down -7.6% so far in 2022. It is the great outperformance on an index since Mad Hedge Fund Trader started 14 years ago.
My only new trade this week was to use a $4.00 dive in the (TLT) to go from a single to a double long in the bond market. That leaves me 60% invested and 50% in cash, waiting for the next capitulation selloff. So, I am 3X short the (TLT), 2X long the (TLT), and 1X long Tesla.
That brings my 13-year total return to 538.24%, some 2.10 times the S&P 500 (SPX) over the same period. My average annualized return has ratcheted up to 44.54%, easily the highest in the industry. Five of six of these positions expire on March 18, in four days.
We need to keep an eye on the number of US Coronavirus cases that's close to 80 million and deaths of around 970,000, which you can find here. Growth of the pandemic has virtually stopped, with new cases down 96% in a month.
On Monday, March 14 at 7:00 AM EST, US Consumer Inflation Expectations for February are printed.
On Tuesday, March 15 at 7:30 AM, the Producer Price Index for February is released.
On Wednesday, March 16 at 10:00 AM, the Federal Reserve will announce the first interest rate rise in five years, almost certainly a quarter point.
On Thursday, March 17 at 7:30 AM, Weekly Jobless Claims are published. Housing Starts and Building Permits for February are published.
On Friday, March 18 at 7:00 AM, the Existing Home Sales for February are announced. At 2:00 PM, the Baker Hughes Oil Rig Count is out.
As for me, someone commented that I walk kind of funny the other day, and the memories flooded back.
In 1975, The Economist magazine in London heard rumors that a large part of the population was getting slaughtered in Cambodia. We expected this to happen after the fall of Vietnam, but not in the Land of the Khmers. So my editor, Peter Martin, sent me to check it out.
Hooking up with a right-wing guerrilla group financed by the CIA was the easy part. Humping 100 miles in 100-degree heat wasn’t.
We eventually came to a large village that was completely deserted. Then my guide said, “Over here.” He took me to a nearby cave containing the bodies of over 1,000 women, children, and old men that had been there for months.
I’ll never forget that smell.
With the evidence and plenty of pictures in hand, we started the trek back. Suddenly, there was a large explosion and the man 20 yards in front of me disappeared. He had stepped on a land mine. Then the machine gun fire opened up. It was an ambush.
I picked up an M-16 to return fire, but it was bent, bloody, and unusable. I picked up a second rifle and fired until it was empty. Then everything suddenly went black.
I woke up days chained to a palm tree, covered in shrapnel wounds, a prisoner of the Khmer Rouge. Maggots infested my wounds, but I remembered from my Tropical Diseases class at UCLA that I should leave them alone because they only eat dead flesh and would prevent gangrene. That class saved my life. Good thing I got an “A”.
I was given a bowl of rice a day to eat, which I had to gum because it was full of small pebbles and might break my teeth. Farmers loaded their crops with these so the greater weight could increase their income. I spent my time pulling shrapnel out of my legs with a crude pair of plyers.
Two weeks later, the American who set up the trip for me showed up with cases of claymore mines, rifles, ammunition, and antibiotics. My chains were cut and I began the long walk back to Thailand.
It’s nice to learn your true value.
Back in Bangkok, I saw a doctor who attended to the 50 caliber bullet that grazed my right hip. It was too old to sew up so he decided to clean it instead. “This won’t hurt a bit,” he said as he poured in hydrogen peroxide and scrubbed it with a stiff plastic brush.
It was the greatest pain of my life. Tears rolled down my face.
But you know what? The Economist got their story and the world found out about the Great Cambodian Genocide, where 3 million died. There is a museum in Phnom Penh devoted to it today.
So, if you want to know why I walk funny, be prepared for a long story. I still set off metal detectors.
Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
March 7, 2022
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE WAR CONTINUES),
(SPY), (TLT), (TBT), (TSLA), (BRKB)
With Hot heads and retaliation ruling everywhere, I think it is safe to say that the war in Ukraine will continue indefinitely and that things will get worse before it gets better.
Biden is threatening to ban Russian oil imports, boosting oil to $135 a barrel. That is a symbolic gesture as the US really doesn’t import oil from Russia and is independent. But if other countries ban imports, it is just a matter of time before the Russian economy completely collapses.
And there is a country that is able to replace one third of all the Russian oil supplies in a heartbeat, some four million barrels a day, and that is Iran. All they need is a quicky nuclear treaty to restore things back to the 2016 status quo.
Putin seems on track to threaten a nuclear war but launch a cyberwar. He has already threatened a nuclear war multiple times to no avail. Cyber is a much safer option.
What will target number one be? The US stock market and banking system. So be prepared for hairier $500 point down days, like we are getting today.
Keep cash positions high, existing positions hedged, only trade on the most extreme days, and you will be greatly rewarded for your discipline down the road.
I spent four hours walking around the Alameda Flea Market today. Every retired GI I spoke to said they were thinking of volunteering to go to Ukraine. Some 20,000 foreign volunteers have already joined the fight . Like me, everyone wants to get in one more “good” war in their lifetimes. If you want to volunteer, please click here at https://volunteerforukraine.org
Sorry, I have to keep the letter short today. The CIA is holding on line 2.
Nonfarm Payroll Blows it Away, up an eye-popping 678,000 in February. The Headline Unemployment rate fell to 3.8%. The U-6 discouraged worker unemployment rate came in at 7.2%. Amazingly, Average Hourly Earnings fell. Leisure and Hospitality gained 179,000, Professional & Business Services 95,000, Healthcare 94,000, and Construction 36,000, Lower waged workers return to the job in droves. It was a real Goldilocks report and makes a rise in interest rates a sure thing in 12 days.
Weekly Jobless Claims Drop to 215,000, maintaining a new downtrend. Nonfarm Productivity rose by 6.6%. Continuing Claims rose to 1.48 million.
Berkshire Hathaway (BRKB) Profits Soar as Warren Buffet boosts share buybacks to a record $27 billion. Q1 Operating Earnings of the massive conglomerate jumped by $7.3 billion, up 45% YOY. His widespread old economy industrial holdings are working great. Keep buying (BRKB) on dips.
ADP Private Payrolls Explode by 475,000 in February, trouncing analyst expectations. Small companies showed minor losses. It sets up a red-hot Nonfarm Payroll Report on Friday.
Powell Says Rate Hikes are Still On but may not occur as quickly as once thought. He made the comments during congressional testimony. The labor market is extremely tight, auguring for higher rates, while the Ukraine war has delivered a huge dollop of uncertainty. Bonds crashed an astounding $5 points on the news.
Biden’s State of the Union Address Triggers Monster Two-Day $1,200 point Rally. Greater certainty, strong leadership, and a positive attitude are just what investors were looking for. A big focus on the war in Ukraine gave it a boost. The virtual disappearance of the pandemic in a short month is also a big plus. It was the first in-person State of the Union in two years. Bulls loved it.
Switzerland Joins SWIFT Russian Boycott. It’s the first time in 400 years that the Swiss have taken a side. The move freezes maybe $200 billion worth of Putin’s personal bank accounts. The noose tightens. Next to come is Fastrack membership for Ukraine and war crime trials. Ouch.
Russia Raises Interest Rates to 20% since the central bank is frozen out of accessing reserves to support the currency. The Russian economy is being destroyed from within and without. The end result will be to take Russian per capita income from a pre-invasion $10,000 a year to a Soviet era $1,000. I wouldn’t be writing a life insurance policy on Putin right now. He might become accident-prone.
Tesla to Open Berlin Factory in March, taking the stock up $170, or 24% from last week’s low. $700 is a very impressive and tradable low. It will be worth $10,000 when solid state technology is mass-produced.
Bitcoin Jumps 12.5% on Massive Russian Buying, as the world rushes to dump the rogue country from the western financial system.
Oil is Now Targeting $125 a Barrel from the current $103, especially if other countries join Canada in banning imports from Russia. Amazingly, natural gas is still passing through the Ukraine to Europe. My guess is that the Ukrainians are not attacking it in exchange for 1,000 Javelin missiles from Germany. Or they could be just waiting for spring when demand flags. Strategic Petroleum Reserve releases can make only a token contribution as best. Ironically, the war may move Europe faster towards alternatives.
Russia’s Debt Rating is Cut to Junk, and overnight interest rates in Russia have been boosted to 20%. JP Morgan expects the sanctions to shrink the Russian economy by 35%. If Ukraine can hold out for two weeks, they will last years as foreign food, supplies, and volunteers pour in. All roads going into Ukraine are still open. Ukraine has raised $54 million in crypto donations in a week. Once the shock is over, the war will be fully discounted by the financial markets. People forget that Ukraine fought a brutal guerilla war against the Germans during WWII and won, despite enormous casualties.
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 800% to 240,000 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 240,000 here we come!
With near-record volatility fading fast, my February month-to-date performance rocketed to a blistering 11.09% in only four days. My 2022 year-to-date performance ended at 25.68%. The Dow Average is down -7.4% so far in 2022. It is the great outperformance on an index since Mad Hedge Fund Trader started 14 years ago.
My only new trade this week was to use a $4.00 spike in the (TLT) to go from a double to a triple short in the bond market. That leaves me 50% invested and 50% in cash, waiting for the next capitulation selloff. So, I am 3X short the (TLT), 1X long the (TLT), and 1X long Tesla.
That brings my 13-year total return to 538.24%, some 2.10 times the S&P 500 (SPX) over the same period. My average annualized return has ratcheted up to 44.54%, easily the highest in the industry.
We need to keep an eye on the number of US Coronavirus cases at close to 80 million and rising quickly and deaths at 960,000, which you can find here.
On Monday, March 7 at 8:30 AM EST, Consumer Credit for January is printed.
On Tuesday, March 8 at 8:30 AM, the Balance of Trade is published.
On Wednesday, March 9 at 7:00 AM, The JOLTS private job openings for January is disclosed.
On Thursday, March 10 at 8:30 AM, Weekly Jobless Claims are published. We also get the big number of the week, the Consumer Price Index for February.
On Friday, March 11 at 7:00 AM, the University of Michigan Consumer Sentiment for March is out. At 2:00 PM, the Baker Hughes Oil Rig Count are out.
As for me, I was having lunch at the Paris France casino in Las Vegas at Mon Ami Gabi, one of the top ten grossing restaurants in the United States. My usual waiter, Pierre from Bordeaux, took care of me with his typical ebullient way, graciously letting me practice my rusty French.
As I finished an excellent, but calorie-packed breakfast (eggs Benedict, caramelized bacon, hash browns, and a café au lait), I noticed an elderly couple sitting at the table next to me. Easily in their 80s, they were dressed to the nines and out on the town.
I told them I wanted to be like them when I grew up.
Then I asked when they first went to Paris, expecting a date sometime after WWII. The gentleman responded, “Seven years ago”.
And what brought them to France?
“My father is buried there. He’s at the American Military Cemetery at Colleville-sur-Mer along with 9,386 other Americans. He died on Omaha Beach on D-Day. I went for the D-Day 70th anniversary.” He also mentioned that he never met his dad, as he was killed in action weeks after he was born.
I reeled with the possibilities. First, I mentioned that I participated in the 40-year D-Day anniversary with my uncle, Medal of Honor winner Mitchell Paige, and met with President Ronald Reagan.
We joined the RAF fly-past in my own private plane and flew low over the invasion beaches at 200 feet, spotting the remaining bunkers and floating pier. Pont du Hoc is a sight to behold from above, pockmarked with shell craters like the moon. When we landed at a nearby airport, I taxied over railroad tracks that were the launch site for the German V2 rockets.
D-Day was a close-run thing and was nearly lost. Only the determination of individual American soldiers saved the day. The US Navy helped too, bringing destroyers right to the shoreline to pummel the German defenses with their five-inch guns. Eventually battleships made sure that anything the Germans brought to with 20 miles of the coast was destroyed.
Then the gentleman noticed the gold Marine Corps pin on my lapel and volunteered that he had been with the Third Marine Division in Vietnam. I replied that my father had been with the Third Marine Division during WWII at Bougainville and Guadalcanal, and that I had been with the Third Marine Air Wing during Desert storm.
I also informed him that I had led an expedition to Guadalcanal two years ago looking for some of the 400 Marines still missing in action. We found 30 dog tags and sent them to the Marine Historical Division at Quantico, Virginia for tracing.
When the stories came back, it turned out that many survivors were children now in their 80s who had never met their fathers because they were killed in action on Guadalcanal.
Small world.
I didn’t want to infringe any further on their morning out, so I excused myself. He said Semper Fi, the Marine Corps motto, thanked me for my service, and gave me a fist pump and a smile. I responded in kind and made my way home.
Oh and say “Hi” when you visit Mon Ami Gabi. Tell Pierre that John Thomas sent you and give him a big tip. It’s not easy for a Frenchman to cater to all these loud Americans.
Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Third Marine Air Wing
The American Military Cemetery at Colleville-Sur-Mer
Global Market Comments
February 28, 2022
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or FAREWELL THE PEACE DIVIDEND),
(SPY), (TLT), (TBT), (TSLA), (AAPL)
Remember that great bull market of the Dotcom Boom? Most investors believe it was the result of combining a new Internet, cheap PCs, and the Mosaic Application which made it all work together.
But to Wall Street types usually blind to geopolitics, there was another important factor: The peace dividend paid out by the end of the Cold War. The end result was 30 years of less defense spending, lower taxes, and higher profits for corporate America.
The numbers are pretty compelling. Since the Soviet Union collapsed in 1991, the Dow Average has risen from $2,875 to $34,000, a gain of 12 times. That averages out to an incredible 40% a year. Individual stocks like Monster Beverage (MNST), Tractor Supply (TSCO), and Altria (MO) appreciated a thousandfold or more.
So what happens if the Cold War resumes? Do we have to pay the money back?
In part, yes.
Not that you have to have to write a check anytime soon. But you will have to pay in the form of higher taxes for more defense spending, slower economic growth, fewer corporate profits, and a more modestly appreciating stock market. And that great multiplier of growth, globalization, just suffered a dagger through its heart.
While we have just seen one of the greatest short-covering rallies of all time, $1,800 points or 5.6% in two days, don’t think you’re back on Easy Street yet. A worst-case scenario full-scale Russian invasion of the Ukraine is in the price. So, it's back to focusing on runaway inflation and the certain multiple Fed interest rate hikes to fight it once again.
And guess what? Wars are inflationary. We are already seeing surges in the price of energy, wheat, and nonferrous metals.
So, I think I’ll stick to the short side for the time being. After all, it’s worked pretty well so far in 2022. You’ll still need to maintain some discipline here, only selling rallies.
If the US acts fast, there is an opportunity here for it to create a second War in Afghanistan for Russia. It’s certainly trying. As I write this, there are already long convoys of NATO trucks that carry ammunition and antitank missiles into the Ukraine. If you remember, it was its loss of the first one that led to the demise of the Soviet Union. I think Putin has bit off more than he expected.
For those who are maintaining core long-term portfolios, which are most of you, writing, or selling short front month out-of-the-money call options against your positions is a great idea. It will reduce your risk, lower your average cost, reduce your volatility, and bring in some extra income. Option volatilities are still high, so you can earn a pretty penny with such a strategy.
And if in case we return to happy days again, you will be taken out of your positions at higher prices with bigger profits and will think you have died and gone to Heaven.
What is the other smart trade here? If you have any energy exposure whatsoever this is a generational opportunity to get rid of it. The best-case golden scenario has happened. Even if oil goes to $125 short term, your energy stocks won’t go much higher from here.
If Russia and Saudi Arabia are trying to exit the energy business, maybe you should too.
There has been a lot of speculation about Putin’s timing of his invasion of the Ukraine. The winter, oil inventory shortages, and NATO’s half-century of underinvestment in defense were all factors.
But the most important one is being completely ignored. Putin has to unload his country’s energy resources before they become worthless, which I reckon will happen in about 20 years.
That means in two decades, some 70% of Russia’s total government revenues vaporize. The invasion of the Ukraine allows Putin to get rid of more energy faster at higher prices right now.
As my old friend, Dr. Armand Hammer used to say, “Everything boils down to oil.” (click here for the link).
Without energy, Russia has little to offer the world but a few metals and a lot of unregulated hackers. You see the same motivation in Saudi Arabia’s massive investment in alternative energy in California. And yes, they really did try to buy all of Tesla three years ago (TSLA) before the shares rose fivefold.
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 800% to 240,000 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 240,000 here we come!
With near-record volatility fading fast, my February month-to-date performance rocketed to a blistering 10.51%. It turned out to be a great month to play from the short side in size. My 2022 year-to-date performance ended at 25.10%. The Dow Average is down -6.1% so far in 2022. It is the great outperformance on an index since Mad Hedge Fund Trader started 14 years ago.
I went into the Russian invasion with 90% cash, expecting trouble. I stopped out of a long in Apple (AAPL) in a day for a small loss. The next trade I added was another short in bonds, followed quickly by a new long in Tesla (TSLA) ($700 a share? Really?). Within hours the stock was up $100!
That brings my 13-year total return to 537.66%, some 2.00 times the S&P 500 (SPX) over the same period. My average annualized return has ratcheted up to 43.89%, easily the highest in the industry.
We need to keep an eye on the number of US Coronavirus cases at 79 million and rising quickly and deaths topping 950,000, which you can find here.
On Monday, February 28 at 8:00 AM EST, the president delivers the State of the Union Speech
On Tuesday, March 1 at 8:30 AM, the ISM Manufacturing Index for February is out.
On Wednesday, March 2 at 5:15 AM, the ADP Private Employment Index is released.
On Thursday, March 3 at 8:30 AM, Weekly Jobless Claims are published.
On Friday, March 4 at 8:30 AM, the February Nonfarm Payroll Report is Published. At 2:00 PM, the Baker Hughes Oil Rig Count is out.
As for me, I’m not supposed to be alive right now. In fact, the betting in my extended family is that I would never make it past 30. But here I am 40 years after my “sell by” date and I’m having the last laugh.
There were times when it was a close-run thing. Breaking my neck in a 70 mile per hour head-on collision in Sweden in 1968 didn’t exactly help my odds. Nor did watching a land mine blow up the guy in front of me in Cambodia in 1975, showering me head to toe with shrapnel and bone fragments.
After crashing three airplanes in Italy, Austria, and France, the European Union Aviation Safety Agency certainly wishes I died at a much earlier age. So, no doubt did the tourists at the top of the Eifel Tower one day in 1987, who I just missed hitting by 100 feet (yes, I was the Black Baron).
When I was in high school, the same group of four boys met every day at recess. We were all in the same Boy Scout Troop and became lifelong friends. Since I had been to over 50 countries by the age of 16, I was considered the wild man of the bunch, the risk-taker, always willing to roll the dice. The rest lived vicariously through me. But I was also the lucky one.
For a start, I was not among the 22 from my school who died in Vietnam, 11 officers and 11 draftees. Their names are all on the Vietnam Memorial Wall in Washington DC. My work for the Atomic Energy Commission at the Nuclear Test Site gave me a lifetime draft exception on national security grounds.
But I went anyway, on my own dime, to see who was telling the truth. It turned out no one was.
The other three boys in my group played it safe, pursuing conventional careers and never took any risks.
David Wilson was the first to go. He managed a hotel in Park City, Utah for a national chain. When he was hiking in the Rocky Mountains one day, a storm blew in and he went over a cliff. They didn’t find his body for a week.
Paul Blaine went on to USC and law school. In his mid-fifties, he lost a crucial case and shot himself at his desk at his Newport Bay office. I later learned he had been fighting a lifetime battle against depression. We never knew.
Robert Sandiford spent his entire career working as a computer programmer for the city of Los Angeles. By the time he retired at 65, he was managing 40 people. He pursued his dream to buy a large RV, drive it to Alaska, and play his banjo in a series of blue grass festivals.
Robert was unfamiliar with driving such a large vehicle. Around midnight, he was driving north on Interstate 5 near Modesto, CA when he passed a semi. When he pulled back into the slow lane, he clipped the front of the truck on cruise control with a driver half asleep. The truck pierced a propane tank on the RV, blowing up both vehicles. Robert, his wife Elise, and the truck driver were all burned to death.
At least, this was the speculation by the California Highway Patrol. Robert and Elise went missing for months. We thought that maybe his RV had broken down somewhere on the Alaskan Highway and family members went there to look for him. It was only after the Los Angeles County Coroner discovered some dental records that we learned the truth.
When the bones were returned, the family had them cremated and we scattered the ashes in the Pacific Ocean off Catalina Island where we used to camp as scouts.
I have been rewarded for risk taking for my entire life, so I keep at it. Similarly, I have seen others punished for risk avoidance, as happened to all my friends. The same applies to my trading as well. The price of doing nothing is far greater than doing something, and being aggressive offers the greatest reward of all.
This summer, I am scheduled to fly an 80-year-old Supermarine Spitfire fighter aircraft over the white cliffs of Dover, of Battle of Britain fame. I am spending my evenings memorizing the 1940 operations manual just to be safe, as I always do with new aircraft.
A 70-year-old flying an 80-year-old plane, what could go wrong with that?
Oh, and I am learning the banjo too.
I’ll send you the videos.
Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
That’s a Heck of a Dividend
Global Market Comments
February 22, 2022
Fiat Lux
Featured Trades:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or BUYING AT THE SOUND OF THE CANON),
(SPY), (TLT), (TBT), (BRKB), (MSFT), (GOOGL),
(NFLX), (ZM), (DOCU), (ROKU), (VMEO)
“Buy at the sound of the canon.”
That was the sage advice Nathan Rothschild, ancestor of my former London neighbor Jacob Rothschild, gave to friends about trading stocks during the Napoleonic Wars.
Of course, information moved rather slowly back in 1812, pre-internet. Rothschild relied on carrier pigeons to gain his unfair advantage.
You have me.
Somehow, you have descended into Dante’s seventh level of hell. You have to wake up every morning now, wondering if it will be Jay Powell or Vladimir Putin who is going to eviscerate your wealth, postpone your retirement, and otherwise generally ruin your day.
Every price in the market already knows we’re in a bear market except the major indexes.
The roll call of the dead looks like a WWI casualty report: (NFLX), (ZM), (DOCU), (ROKU), (VMEO). It’s like the bid offer spread has suddenly become 25%. Companies are either reporting great earnings and seeing their shares go through the roof. Or they are sorely disappointing and getting sent to perdition on a rocket ship.
The most fascinating thing to happen last week was a new low in the bond market, since you’re all short up the wazoo, courtesy of a certain newsletter. Ten-year US Treasury yields tickled 2.05%, a two-year high, then retreated to 1.92%. That means bonds have completed their $20 swan dive from their December high, a repeat of the 2021 price action.
Trading has gotten too easy, so I think bonds will stall out here for a while. I even added a small long. And please stop calling me to ask if you should sell short bonds down $20. It’s perfect 20/20 hindsight. You can’t imagine how many such calls I’ve already received.
Our old friend, the barbarous relic, returned from the dead last week too. All it needed was for bitcoin to die a horrible death for gold to recover its bid. A prospective war in the Ukraine helped take it to a one-year high.
However, I think it’s safe to say that has lost its value as an inflation hedge for good. If a move in the CPI from 2% to 7.5% can’t elicit a pulse in the yellow metal now, it never will.
The US dollar was another puzzler last week. While the fixed income markets went from discounting three rate hikes this year to six, the greenback flatlined. It was supposed to go up, as currencies with rapidly rising interest rates usually do.
Maybe the buck just forgot how to go down. Or maybe this is the beginning of the end, when sheer over-issuance destroys the value of the US dollar. Some $30 trillion in the national debt will do that to a currency.
I know you will find this difficult to believe, but there are some outstanding money-making opportunities setting up later in the year. The crappier conditions look now, the better they will become later. But you are going to have to practice some extreme patience to get to the other side.
I hope this helps.
Goldman Sachs Chops 2022 Market Forecast, taking the S&P 500 goal from $5,100 down to $4,900. A tighter interest rate picture is to blame, with the year yields topping 2.05% on Friday. Higher interest rates devalue future corporate earnings and kill the shares of non-earning companies.
Oil Hits Seven-Year High, to $94.44 a barrel, up 3.3% on the day. Putin’s strategy of talking oil prices up with Ukrainian invasion threats is working like a charm. That’s what this is all about. Texas tea accounts for 70% of Russian government revenues.
Fed to Front-Load Rate Rises, says St. Louis Fed president Bullard. The drumbeat for a more hawkish central bank continues. Bonds were knocked for two points.
Wholesale Prices Rocket 1% in January and are up a nosebleed 9.7% YOY. Inflation has clearly not peaked yet. Look for stocks to get punished once the current short-covering rally runs out of gas.
Retail Sales Soar by 3.8%, in January indicating that the economy is stronger than it appears. The rapid shift to an online economy is accelerating. Inflation is the turbocharger. When stocks overshoot on the downside load the boat.
Weekly Jobless Claims Jump, to 248,000. The weird thing is that the economic data says the opposite, that the economy is strengthening. Expect flip-flopping data and markets all year.
US GDP Jumped by 6.9% in Q4, well above estimates. Consumers are spending like drunken sailors. Eventually, the stock market will notice this, but not before we see lower lows first.
Gold Catches a Bid, off the back of the unrelenting Ukraine crisis. This may continue as a drip for months. Watch it collapse when peace is declared.
Existing Home Sales Jump 6.7%, to 6.5 million units, far better than expected. Inventory is down to yet another record low of 16.5%, an incredibly short 1.6-month supply. The Median Home Price has risen to $350,300, with the bulk of sales on the high end. Million-dollar plus homes are up 39% YOY.
Bond Yields Dive to a 1.93% Yield after failing at 2.05%. There is another nice (TLT) put spread setting up here. Let’s see if war breaks out over the weekend. The threats continue.
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 800% to 240,000 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 240,000 here we come!
With seven options positions expiring at max profit on Friday, my February month-to-date performance rocketed to a blistering 10.37%. My 2022 year-to-date performance has exploded to an unbelievable 24.90%. The Dow Average is down -7.9% so far in 2022. It is the great outperformance on an index since Mad Hedge Fund Trader started 14 years ago.
With 30 trade alerts issued so far in 2022, there was too much going on to describe here. Check your inboxes.
That brings my 13-year total return to 537.46%, some 2.00 times the S&P 500 (SPX) over the same period. My average annualized return has ratcheted up to 44.17% for the first time. How long it will keep rising I have no idea, but as long as it is, I’m not complaining. When you’re hot, you have to be maximum aggressive. That’s me to a tee.
We need to keep an eye on the number of US Coronavirus cases at 78.5 million, down 67% from the January peak, and deaths close to 936,000, off 20% in two weeks, which you can find here.
On Monday, February 21 markets are closed for Presidents Day.
On Tuesday, February 22 at 8:30 AM, the S&P Case Shiller National Home Price Index for December is announced.
On Wednesday, February 23 at 1:30 PM, API Crude Oil Stocks are released.
On Thursday, February 24 at 8:30 AM, Weekly Jobless Claims are published. The second estimate for Q4 GDP is also disclosed.
On Friday, February 25 at 7:00 AM, Personal Income & Spending for January is printed. At 2:00 PM, the Baker Hughes Oil Rig Count is out.
As for me, in the seventies, Air America was not too choosy about who flew their airplanes at the end of the Vietnam War. If you were willing to get behind the stick and didn’t ask too many questions, you were hired.
They didn’t bother with niceties like pilot licenses, medicals, or passports. On some of their missions, the survival rate was less than 50% and there was no retirement plan. The only way to ignore the ratatatat of bullets stitching your aluminum airframe was to turn the volume up on your headphones.
Felix (no last name) taught me to fly straight and level so he could find out where we were on the map. We went out and got drunk on cheap Mekong Whiskey after every mission just to settle our nerves. I still remember the hangovers.
When I moved to London to set up Morgan Stanley’s international trading desk in the eighties, the English had other ideas about who was allowed to fly airplanes. Julie Fisher at the London School of Flying got me my basic British pilot’s license.
If my radio went out, I learned to land by flare gun and navigate by sextant. She also taught me to land at night on a grass field guided by a single red lensed flashlight. For fun, we used to fly across the channel and land at Le Touquet, taxiing over the rails for the old V-1 launching pads.
A retired Battle of Britain Spitfire pilot named Captain John Schooling taught me advanced flying techniques and aerobatics in an old 1949 RAF Chipmunk. I learned barrel rolls, loops, chandelles, whip stalls, wingovers, and Immelmann turns, everything a WWII fighter pilot needed to know.
John was a famed RAF fighter ace. Once he got shot down by a Messerschmitt 109, parachuted to safety, took a taxi back to his field, jumped into his friend’s Spit, and shot down another German. Every lesson ended with a pint of beer at the pub at the end of the runway. John paid me the ultimate compliment, calling me “a natural stick and rudder man,” no pun intended.
John believed in tirelessly practicing engine-off landings. His favorite trick was to reach down and shut off the fuel, telling me that a Messerschmitt had just shot out my engine and to land the plane. When we got within 200 feet of a good landing, he turned the fuel back on and the engine coughed back to life. We practiced this more than 200 times.
When I moved back to the US in the early nineties, it was time to go full instrument in order to get my commercial and military certifications. Emmy Michaelson nursed me through that ordeal. After 50 hours flying blindfolded in a cockpit, you get very close with someone.
Then came flight test day. Emmy gave me the grim news that I had been assigned to “One Engine Larry” the most notorious FAA examiner in Northern California. Like many military flight instructors, Larry believed that no one should be allowed to fly unless they were perfect.
We headed out to the Marin County coast in an old twin-engine Beechcraft Duchess, me under my hood. Suddenly, Larry shut the fuel off, told me my engines failed, and that I had to land the plane. I found a cow pasture aligned with the wind and made a perfect approach. Then he asked, “How did you do that?” I told him. He said, “Do it again” and I did. Then he ordered me back to base. He signed me off on my multi-engine and instrument ratings as soon as we landed. Emmy was thrilled.
I now have to keep my many licenses valid by completing three takeoffs and landings every three months. I usually take my kids and make a day of it, letting them take turns flying the plane straight and level.
On my fourth landing, I warn my girls that I’m shutting the engine off at 2,000 feet. They cry “No dad, don’t.” I do it anyway, coasting in bang on the numbers every time.
A lifetime of flight instruction teaches you not only how to fly, but how to live as well. It makes you who you are. Thus, my insistence on absolute accuracy, precision, risk management, and probability analysis. I live my life by endless checklists, both short and long term. I am the ultimate planner and I have a never-ending obsession with the weather.
It passes down to your kids as well.
Julie became one of the first female British Airways pilots, got married, and had kids. John passed on to his greater reward many years ago. I don’t think there are any surviving Battle of Britain pilots left. Emmy was an early female hire as United pilot. She married another United pilot and was eventually promoted to full captain. I know because I ran into them in an elevator at San Francisco airport ten years ago, four captain’s bars adorning her uniform.
Flying is in my blood now and I’ll keep flying for life. I can now fly anything anywhere and am the backup pilot on several WWII aircraft including the B-17, B-24, and B-25 bombers and the P-51 Mustang fighter.
Over the years, I have also contributed to the restoration of a true Battle of Britain Spitfire, and this summer I’ll be taking the controls at the Red Hill Aerodrome for the first time.
Captain John Schooling would be proud.
Stay Healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Captain John Schooling and His RAF 1949 Chipmunk
A Mitchell B-25 Bomber
A 1932 De Havilland Tiger Moth
Flying a P-51 Mustang
The Next Generation
