(SPY) Archives

The Market Outlook for the Week Ahead, or the “Endless Bid” Market

I am usually hiking at Lake Tahoe this time of year, doing the deep research, hiking ten miles a day, and the stripping down to jump into the lake at the end.

This year, climate change had other ideas.

So I am visiting a childhood haunt in Newport Beach, CA, where my late uncle used to live. Remember him? He was the former CFO of Penn Central Railroad in 1970 who made a fortune buying puts just before the company went bankrupt. I guess that was allowed back then.

He lived next door to John Wayne, and we kids used to wave at him, astonished at his bald head. I still miss The Duke.

I am still typing one finger at a time, my left wrist in a brace and elbow in a huge bandage. I told the doctor I couldn’t get to Reno for him to take the stitches out because of the wildfires, so I would do it myself with a pocketknife with Jack Daniels as a sterilizer. He said, “Knock yourself out.”

Traders are so frustrated waiting for the normal summer correction they are starting to call “The Endless Bid Market.” That has left them underweight, trying to catch up, which is why we didn’t get a drop of more than 4% this summer.

Of course, they are also getting rich with what they already have, but they all want to get richer. Greed is trouncing fear big time. Forget about investing.

You can’t buy the dip anymore because there are no dips. You simply use new cash flows to add to your winners, the more they have gone up, the better.

That’s why large-cap tech stocks have been on an absolute tear, hitting new all-time highs. Of course, I am just as guilty as the rest, with a retirement fund loaded with big tech. Google (GOOG) is now my largest position, not through savvy stock selection but purely because of price appreciation.

Of course, it helps that the higher stocks go, the cheaper they get.

Earnings are melting up maintaining the same price-earnings multiple and stock prices are simply following suit. There is nothing overheated about it.

Company profit margins are soaring to record highs as companies make enormous productivity investments to deal with chronic labor shortages. If you live here in Silicon Valley, you see this happening around you every day.

If you don’t, stock valuations are fantasies coming from a faraway land, therefore the surprise at market strength.

Haven’t you noticed how hard it is to get a human on the phone outside of the Philippines, where workers feel rich when they are making $300 a month?

If anything, the market is still undervaluing stocks rather than overvaluing relative to their upside earnings potential.

An S&P 500 target of $500 is now my easy target for 2022.

Any credit crunch that could trigger a recession is years off, and one Fed governor away. A delta variant that won’t quit, or the upcoming Mu variant is another worry.

Consensus forecasts constantly lagging the market has the effect of leaving institutions and individuals under-invested and trying to get in, hence no real dips for almost a year.

Afghanistan proves the market could care less about any geopolitical surprise.

You heard it from me first. If the market can’t selloff over the next two weeks when poor seasonals start to fade away, the they wont for all of 2021.

Nonfarm Payroll Report bombs, coming in at only 235,000 versus an expected 720,000, a huge miss. The headline Unemployment Rate fell 0.2% to 5.2% a new post-pandemic low. Mysteriously, both stocks and bonds hated it. Manufacturing was up 37,000, while Leisure & Hospitality was zero and Retail at -28,000. Education LOST -25,000 during the back-to-school season. Average Hourly Earnings rose an astonishing 0.6% MOM, or 4.3% YOY. The U6 long term unemployment rate fell to 8.8%. Goodbye taper. A shortage of workers was to blame, but the economic data has been worsening for a while now. Delta is taking a bigger bite than we thought.

Stocks hit new August highs the most in history, surpassing the 1929 record of 11 times. The only negative three-month period seen since 1929 are August, September, and October. Remember what happened in 1929? If that doesn’t scare the living daylights out of you, then nothing will. So, it seems we are in for some kind of correction, even if it’s just the 5% kind. Looks like the month end will be hot.

Bitcoin leads crypto, but Ethereum is catching up. Cardano has doubled in a month making it the number three crypto and Avalanche has tripled. Newly minted online broker Robinhood (HOOD) says 60% of its option trading is now in crypto. MicroStrategy’s (MSTR) Michael J. Saylor sees a 50-fold increase in Bitcoin to a total market value of $100 trillion. That is five times the US M3 money supply of $20 trillion. It’s become a financial system of "get crypto or go home."

Oil jumps on Hurricane IDA, with a sharp 8.9% rally. Some 91% of Gulf Production shut in, or 1.65 million barrels a day. Don’t expect it to continue. Sell into the rally on this future buggy whip industry.

SEC is cracking down on Market Gaming by multiple apps aimed at Millennials. It’s shopping for a new set of market rules aimed at regulating those who foster runaway volatility in single stocks like (AMC).

PayPal to enter stock trading, sending the stock up a ballistic $15 in two days. If they pull it off, it will open a huge new profit stream for them, possibly becoming another Robinhood (HOOD), cashing in on the retail trading boom. Earning: regulation costs a lot. Buy (PYPL) on dips.

S&P Case Shiller soars to new highs in June, the National Home Price Index jumping 18.6% YOY, breaking all records. Prices are now 41% higher than the bubble top in 2006. This is the sharpest gain in the 34-year history of the index. Prices in Phoenix leaped 29.6%, followed by San Diego at 27.1% and Seattle by 25.0%. Supply and demand will be seriously out of whack for years.

Pending Home Sales drop for the second straight month on a signed contract basis, down 1.8% in July. Summer slowdown, delta slowdown, or market top? However, supply and demand are still far out of balance.

Your next Apple purchase may be a satellite phone, bypassing local cell phone networks. A Chinese analyst made this prediction for the iPhone 13 out in 2022. The report says that the iPhone 13 includes a Qualcomm X60 baseband modem chip, which includes LEO satellite comms capabilities. If accurate, this means that the upcoming iPhone will have the hardware capability to act as a satellite phone. It certainly would upend the rush to build private satellite networks, like Viasat and Tesla’s Starlink. Enough investors believed the story to send the stock to a new all-time high. Buy (AAPL) on dips.

Air Travel is falling off, with airport security screening dropping to only 1.35 million, the lowest since May 11. Delta is taking its toll, but back to school is a factor as well.

Bond king Bill Gross says treasuries are trash. He sees ten-year yields hitting 2.00% sometime in 2022. The 77-year-old drove bond prices for a decade and also made a fortune collecting stamps. Sometimes Bill is early, but he is always right.

One billion Asians to join middle class by 2030 on top of the existing 3.75 billion today. That will create a vastly larger market for all online services, which the stock market seems to be telling us today. Indonesia, Pakistan, and Bangladesh are expected to see the largest increases. There is a lot of “hope” in this number, i.e., no more covid, no ward, and no depressions.

The next market correction won’t come until the Fed makes a mistake and that might be years off, says Wharton finance professor and long-term bull Jeremy Siegel. That will be when the Fed finds itself behind the inflation curve. Until then, the slow grind up continues. Stocks are the best defense against inflation.

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!

My Mad Hedge Global Trading Dispatch saw a robust +9.31% gain in August. My 2021 year-to-date performance soared to 78.57%. The Dow Average was up 15.82% so far in 2021.

That leaves me 80% in cash at 20% in short (TLT) and long (SPY). Although we have maxed out the profits with these two positions, I’ll keep them as there is nothing else to do. I’m keeping positions small as long as we are at extreme overbought conditions. The “endless bid” market is not giving anyone entry points as long as the Volatility Index (VIX) remains at $16.

That brings my 12-year total return to 501.12%, some 2.00 times the S&P 500 (SPX) over the same period. My 12-year average annualized return now stands at an unbelievable 42.48%, easily the highest in the industry.

My trailing one-year return popped back to positively eye-popping 120.48%. I truly have to pinch myself when I see numbers like this. I bet many of you are making the biggest money of your long lives.

We need to keep an eye on the number of US Coronavirus cases at 40 million and rising quickly and deaths topping 645,000, which you can find here.

The coming week will be slow on the data front.

On Monday, September 6 markets are closed for the US Labor Day.

On Tuesday, September 7, there are no special data releases. Everyone will be recovering from hurricanes in the south and east, wildfires in the west, and Covid everywhere.

On Wednesday, September 8 at 9:30 AM, we get API crude oil stocks.

On Thursday, September 9 at 8:30 AM, Weekly Jobless Claims are announced.

On Friday, September 10 at 8:30 AM, we learn the Producers Price Index for August. At 2:00 PM, the Baker Hughes Oil Rig Count is disclosed.

As for me, a few years ago, I was visited in London by an old friend who had once served on the British Army staff of General Bernard Law Montgomery, the hero of Alamein, who was known to his friend as “Monty” (he had no friends).

I asked if there was anything I could do for him and he said, “Actually, I haven’t had a dish of moules mariniere (steamed mussels in white wine sauce) on the Grand Square in Brussels for a while. I said, “No problem, let’s go.”

We drove my Mercedes 6.0 to an old Battle of Britain hanger (one-inch-thick bombproof steel doors) on the outskirts of London where I kept a twin-engine Cessna 340 with turbocharged engines with a maximum speed of 225 kts. We landed in Brussels in an hour.

We savored the mussels on the square, as good as ever, the national dish of Belgium. The autumn air was brisk, tourists gawked, we drank, and everyone had a good time.

I left my fried there talking to some Belgian beauty for an early return to England. I wanted to park my plane at the grass airfield in Salisbury in Wiltshire, home of the tallest cathedral in England, which I nearly took out several time. The problem was that the runway had no lights.

Unfortunately, I ran into an Atlantic headwind and was running late, so I skipped a refueling stop at Ostend. When My instruments showed I was right over the airfield, I saw nothing but black.

I did, however, remember the radio frequency of the pub at the end of the field which constantly kept a speaker on. I radioed the pub, “if anyone will roll up some newspapers set them on fire and line the runway, I will buy them a pint of beer.”

The entire pub emptied out and within secondss I had a perfectly lighted runway on both sides. Landing was a piece of cake.

When I taxied up to the pub, the starboard engine ran out of gas. I walked in and made good on my promise, even buying a second round for my rescuers. I then crawled back into my airplane and went to sleep, waking up the next day with the worst hangover ever.

My flying these days is much more sedentary. The FAA requires me to do three take offs and landings every three months to keep my license current, and I usually bring along my kids for this chore. On the last landing, I always shut off my engine and glide in.

I warn the kids and they always say, “No dad, don’t,” but I do it anyway. I tell them it’s the only way to practice engine failures.

As I said before, I crash better than anyone I know.

I think I’ll watch the John Wayne classic “The Searchers” one more time tonight.

US Corporate Profits Through End 2020

August 16, 2021

Diary, Newsletter, Summary

Global Market Comments
August 16, 2021
Fiat Lux9

(MARKET OUTLOOK FOR THE WEEK AHEAD, or MY REVOLUTIONARY NEW STRATEGY,
(SPY), (TLT), (NVDA), (ROKU), (HOOD), (GS), (JPM)

The Market Outlook for the Week Ahead, or My Revolutionary New Strategy

Diary, Newsletter, Summary

Friday saw the stock market’s lowest volume day of the year, and shares rose almost every day last week to new all-time highs.

The way this usually ends is that the slow grind explodes into a high-volume spike marking an interim market top. That makes new investment now extremely risky.

August usually markets the best buying opportunity of the year with a cataclysmic selloff. Remember the 2010 flash crash, down 1,100 points in two hours? So far, no cigar.

I have tons of people asking me what to buy right now. That is usually another market-topping indicator. I tell them to keep their cash. Cash is a position. A dollar at a market top is worth $10 at a market bottom.

Under an index that is making excruciatingly slow gains are constant sector rotations bring pretty dramatic moves. Play those dramatic moves.

May saw money suddenly shift into tech stocks, with the best, like NVIDIA (NVDA) leaping 56%.

The day the ten-year US Treasury yield (TLT) bottomed at 1.10%, tech went back to sleep. While big tech ground sideways, small tech brought more heart-rending downside moves, such as the 27% plunge in Roku (ROKU).

In the meantime, financials and commodities have moved to the fore. Goldman Sachs (GS) melted up 20% off of blockbuster earnings, while Freeport McMoRan popped 26%, thanks to a Chilean copper union strike.

Let me propose a revolutionary new investment strategy to you. It’s called “buy low, sell high.” Everybody talks about it but actually executes the opposite.

I employ this money-making ploy through my “barbell” strategy, with equal weightings in technology and domestic recovery stocks like financials, industrials, and commodities.

It's quite simple. You just sell whatever has just delivered the most recent spectacular upside gains and roll that money into what has recently become ignored, cheap, and out of favor.

It is a market approach that is really devoid of the thought process.

All eyes will be on Jackson Hole, Wyoming next week, the annual meeting of the world’s top central bankers. That is when we get the next hint about the intentions of the Federal Reserve as to, not "if", but "when" they reduce quantitative easing.

You would think that a 6.5% GDP growth rate and a 5.4% inflation rate would do it, but these days, nothing is certain. A hot jobs report in September would do it for sure.

We may have to wait until then before we see any serious move in stocks and a return of volatility (VIX). In the meantime, catch up on reading your research, pay your bills, and work on your golf swing.

Bitcoin staged a recovery for the ages, rallying 55% in two weeks. The “battle of $30,000” is over and the cryptocurrency won. It really is becoming too big to fail. I might have to do something about that.

July Inflation Read at a hot 5.4%, but core inflation showed a small decline. In June, used car prices accounted for a third of the total price increases, but last month, it was zero. So far, there is no move in rents, but it’s coming. All Fed eyes will remain laser-focused on this number.

Taper talk is back! With the ballistic increase in the July Nonfarm Payroll report and the 2 ½ point dive in the bond market. I think the top is in for finds and the bottom for long term rates. It means tech stocks will lag from now, while interest rate sensitives like banks, brokers, and fund managers will lead. Buy (JPM), (MS), (V), and (GS) on dips.

US Budget Deficit hits a record $302 Billion in July. Covid benefits are remaining high, while tax revenues are lagging YOY. Keep selling those (TLT) rallies. The generational crash may have just begun.

Fed’s Rosengren Says QE is not creating jobs, causing bonds to drop a full point in the after-market. No kidding. I have been arguing that our nation’s central bank has been pushing on a string all year. Atlanta Fed governor Bostic couldn’t agree more. Time for more action than words?

Gold Hits four-month low, breaking key support. Bitcoin is clearly stealing its thunder, which has risen by 50% in two weeks. If you’re considering gold, go take a long nap first.

Oil dives on delta surge, off $9, or 12% in a week, the lowest in three weeks. Delta is now rampaging throughout China, the world’s largest consumer of Texas tea., putting $63 in play.

Weekly Jobless Claims hit 375,000, down 12,000 on the week. Moving in the right direction but still incredibly high.

Berkshire Hathaway announces solid earnings, but scales back share buybacks at these elevated levels. Oracle of Omaha Warren Buffett bought back $6 billion of his own stock in Q2, leaving him with a staggering $144 billion in cash. Almost no stocks meet Buffett’s value standards in the current environment. Buy (BRKB) on dips. It’s a high-class problem to have.

Ed Yardeni is bullish, along with David Kostin, and is the only manager who comes close to my own $475 target for the (SPY) by the end of the year. The U.S. economy will be in nominal terms around 8% higher this year than pre-pandemic 2019. Sales for the S&P 500 companies will be 15% higher and earnings will be 34% higher. That is a representation of the operating leverage that exists in so many companies. The Roaring Twenties lives!

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!

My Mad Hedge Global Trading Dispatch saw a modest +4.86% in July. My 2021 year-to-date performance appreciated to 74.07%. The Dow Average was up 16.00% so far in 2021.

I stuck with three positions, a long in (JPM) and a double short in the (TLT), all of which expire on Friday. My double short in the (SPY) punched me in the nose, forcing me to stop out for losses when I hit the lowest strike prices.

I then jumped into a very deep in-the-money call spread in Robinhood (HOOD) made possible only by the stock’s astronomically high volatility. Its 44% drop helped too. I also added a third short in the bond market.

That leaves me 30% in cash. I’m keeping positions small as long as we are at extreme overbought conditions.

That brings my 11-year total return to 496.62%, some 2.00 times the S&P 500 (SPX) over the same period. My 12-year average annualized return now stands at an unbelievable 12.56%, easily the highest in the industry.

My trailing one-year return retreated to positively eye-popping 106.69%. I truly have to pinch myself when I see numbers like this. I bet many of you are making the biggest money of your long lives.

We need to keep an eye on the number of US Coronavirus cases at 36.7 million and rising quickly and deaths topping 622,000, which you can find here at https://coronavirus.jhu.edu.

The coming week will bring our monthly blockbuster jobs reports on the data front.

On Monday, August 16 at 7:00 AM, the New York Empire State Manufacturing Index is out.

On Tuesday, August 17 at 7:30 AM, US Retail Sales for July are published.

On Wednesday, August 18 at 5:30 AM, the Housing Starts for July are printed. At 2:00 PM, the minutes from the last FOMC are released.

On Thursday, August 19 at 8:30 AM, Weekly Jobless Claims are announced. Square (SQ) reports.

On Friday, August 20 at 2:00 PM, the Baker Hughes Oil Rig Count are disclosed.

As for me, upon graduation from high school in 1970, I received a plethora of scholarships, one of which was for the then astronomical sum of $300 in cash from the Arc Foundation.

By age 18, I had hitchhiked in every country in Europe and North Africa, more than 50. The frozen wasteland of the North and the Land of Jack London beckoned.

After all, it was only 4,000 miles away. How hard could it be? Besides, oil had just been discovered on the North Slope and there were stories of abundant high-paying jobs.

I started hitching to the Northwest, using my grandfather’s 1892 30-40 Krag & Jorgenson rifle to prop up my pack and keeping a Smith & Wesson .38 revolver in my coat pocket. Hitchhikers with firearms were common in those days and they always got rides. Drivers wanted the extra protection.

No trouble crossing the Canadian border either. I was just another hunter.

The Alcan Highway started in Dawson Creek, British Columbia, and was built by an all-black construction crew during the summer of 1942 to prevent the Japanese from invading Alaska. It had not yet been paved and was considered the great driving challenge in North America.

The rain started almost immediately. The legendary size of the mosquitoes turned out to be true. Sometimes, it took a day to catch a ride. But the scenery was magnificent and pristine.

At one point, a Grizzley bear approached me. I let loose a shot over his head at 100 yards and he just turned around and lumbered away. It was too beautiful to kill.

I passed through historic Dawson City in the Yukon, the terminus of the 1898 Gold Rush. There, abandoned steamboats lie rotting away on the banks, being reclaimed by nature. The movie theater was closed but years later was found to have hundreds of rare turn-of-the-century nitrate movie prints frozen in the basement, a true gold mine.

Eventually, I got a ride with a family returning to Anchorage hauling a big RV. I started out in the back of the truck in the rain, but when I came down with pneumonia, they were kind enough to let me move inside. Their kids sang “Raindrops keep falling on my head” the entire way, driving me nuts. In Anchorage, they allowed me to camp out in their garage.

Once in Alaska, there were no jobs. The permits required to start the big pipeline project wouldn’t be granted for four more years. There were 10,000 unemployed.

The big event that year was the opening of the first McDonald’s in Alaska. To promote the event, the company said they would drop dollar bills from a helicopter. Thousands of homesick showed up and a riot broke out, causing the stand to burn down. It was rumored their burgers were made of moose meat anyway.

I made it all the way to Fairbanks to catch my first sighting of the wispy green contrails of the northern lights, impressive indeed. Then began the long trip back.

I lucked out catching an Alaska Airlines promotional truck headed for Seattle. That got me free ferry rides through the inside passage. The driver wanted the extra protection as well. The gaudy, polished tourist destinations of today were back then pretty rough ports inhabited by tough, deeply tanned commercial fishermen and loggers who were heavy drinkers always short of money. Alcohol features large in the history of Alaska.

From Seattle, it was just a quick 24-hour hop down to LA. I still treasure this trip. The Alaska of 1970 no longer exists, as it is now overrun with summer tourists. It now has more than one McDonald’s. And with runaway global warming, the climate is starting to resemble that of California than the polar experience it once was.

Good Luck and Good Trading.

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

The Alcan Highway Midpoint

The Alaska-Yukon Border in 1970

August 13, 2021

Diary, Newsletter, Summary

Global Market Comments
August 13, 2021
Fiat Lux9

(AUGUST 11 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPY), (DIS), (FDX), (AMZN), (PAVE), (NUE), (X), (FCX), (AA), (AMD), (GLD), (SLV), (GDX), (WPM), (COIN)

August 11 Biweekly Strategy Webinar Q&A

Diary, Newsletter, Summary

Below please find subscribers’ Q&A for the August 11 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Silicon Valley, CA.

Q: If we see a correction in stocks, what would you do?

A: Buy more stocks (SPY). All of our positions expire next week, and we go 100% into cash. I’m looking for just a 5% correction and then I’m just going to go piling in 100% invested with a barbell portfolio since everything is working now and some of the best tech stocks like Amazon have already had 10% corrections.

Q: Time for LEAPS again on Amazon (AMZN)?

A: Yes, but let Amazon have more time to bottom out. It may just be a “time” correction where it goes sideways for a month or two. The company is still growing at an incredible rate.

Q: What about FedEx (FDX) and Walt Disney (DIS) LEAPS?

A: Those LEAPS I would do, right here, right now. We’ve had our corrections already in those sectors and they’re ready to take off. It’s just a matter of time before these sectors come back into favor. These are both delta peaking plays.

Q: It seems that the US government is taking the stance that they can tax their way out of the fiscal hole; is this true?

A: No, they don’t need to tax their way out of the fiscal hole; deflation will wipe out all US government debt on a 30-year view, and this is what’s happened to not only all the government debt in US history but all government debts all over the world starting with France in the 1600s. By the time the government has to pay back its 30-year bonds, the purchasing power of that dollar will have fallen by 80% or 90%, meaning that essentially the bonds get deflated away to nothing. And this is why we have governments, so they can borrow that money now, spend it now to rescue the economy, and then they never have to pay it back in real dollars. This is why governments borrow. The investors who really have to pick up the bill for this are bond owners, who see the purchasing power of the bonds decline by 2%-3% a year.

Q: When do you see a correction, and what would you do?

A: It’s either going to be in the next couple of weeks or never. If we get one, I would load the boat again with more long positions. Of the five positions out of 100 I’ve lost money this year, four have been short positions, so you can see why we’re really trying to limit the short positions here.

Q: Visa (V) is going ex-dividend tomorrow—is there a risk of early assignment?

A: There is, but if you get an early assignment, just say thank you very much, Mr. Market, call your broker to tell them to exercise your long call position to cover your call short position, and you will get the maximum profit several days earlier than expiration. This happens sometimes as hedge funds try to get the quarterly dividend on the cheap, but you have to act fast, otherwise, you’ll end up with a short position in Visa on your hands, and most likely a margin call. Brokers are not allowed to automatically exercise longs to meet calls anymore. You have to call them and order them to exercise that long. So, pay attention going into quarterly option expirations.

Q: I don’t trust your COVID information any more than I trust the government line.

A: All of my Covid data comes from Johns Hopkins University and is interdependently collated from every country in the United States. If you have any complaints you can go to them. All I can say is there are 620,000 bodies in the country that died of something. Oh, and we had the lowest population growth last month in 50 years. I’ve had family members die from it so I believe that.

Q: If the Republicans win in 2022 and 2024, will the bull market continue?

A: Absolutely not. We get a new recession and another bear market. Everything that’s going well now reverses, the entire environmental infrastructure strategy goes down the toilet, and Covid makes a huge recovery. I would go with what’s working, and 6.5% economic growth now and a market going up 30% a year totally works for me. Of course, I would make another fortune on the short side.

Q: How should you play infrastructure?

A: There is an infrastructure ETF called the Global X Funds Infrastructure ETF (PAVE) that has already had a big move, up 176% in 17 months. Other than that you can just play your basic commodity stocks like US Steel (X), Nucor (NUE), and Freeport McMoRan (FCX).

Q: How long will the hot housing market continue?

A: Ten more years. That's how long it will take to digest the current 85 million strong millennial generation who are now buying first-time homes or upgrading what they’ve got. And remember, we’re still operating with half of the new home construction capacity that we had 15 years ago before the last financial crisis.

Q: What's your prognosis for semiconductors?

A: They just had a super-heated spike; I expect them to take a break. That's why I took profits on Advanced Micro Devices (AMD). We’ll find a new bottom, and then I want to buy back into it. It’s taking a break with the rest of technology right now, which is perfectly normal.

Q: Would you take this dip to add to mRNA and BioNTech?

A: I would say yes. This is an industry that’s on the eve of a biotech revolution—the cure of all human diseases. And these two companies with their mRNA technologies are in the best place to take advantage of that.

Q: Will there be a big spike down in August?

A: It looks like it’s not happening. Like I said, if it doesn’t happen in the next few weeks, it’s not going to happen. Excess liquidity is just driving all investment decisions. If it doesn’t go down now, what’s the reason for it to go down in October? I just see no negatives at all on the horizon except for another out-of-the-blue variant like a Lambda or an Epsilon variant.

Q: Does slow population growth include illegal immigration?

A: It does, immigration both legal and illegal has been constant for decades and decades, it’s about a million people a year. But Americans are not reproducing like they used to, the birth rate hit a 50-year low last year because women did not want to go to the hospitals which were full of COVID patients. A lower population growth over the long term is very bad for economic growth. That is why Japan has essentially been in a nonstop recession for the last 32 years, because of their baby bust.

Q: Do you have political debt ceiling concerns?

A: No, these are always last-minute before midnight deals. I don't see this being any different, never underestimate the ability of Congress to spend more money, no matter who is in power.

Q: What do you think of oil in the short run?

A: Short term it may go sideways, we may even have a rally to new highs, but the long-term trade for oil is that it’s going out of business. EVs, mean you lose 50% of demand for oil in the next 10 years, and they will start discounting that now in the price of oil.

Q: Why is silver down so much?

A: It’s being dragged down by Gold (GLD), and silver (SLV) always moves twice as fast as gold.

Q: How are muni bonds going forward?

A: I don’t see them going much further. They had a massive rally, discounting an increase in taxes which hasn’t happened. So even if they do raise taxes which may be next year’s business, that is fully discounted in the Muni market already.

Q: What am I missing? You’ve been saying for months not to get involved with Bitcoin but then I heard you say you bought LEAPS.

A: No, I didn’t buy the LEAPS. I tried to buy the LEAPS but missed them and it ran away and they ended up tripling in two weeks. It’s just not like buying a normal stock. Once these things turn, they just start going up every day for weeks with no pullbacks whatsoever. This is valuation-free security with no dividend, interest, or earnings. It’s driven by pure supply and demand.

Q: What do you think of the precious metal miners like the Van Eck Vectors Gold Miners ETF (GDX)?

A: Let the current meltdown burn out and then go into long term LEAPS.

Q: What’s the best way to buy silver?

A: The best way is doing 2-year LEAPS on Wheaton Precious Metals (WPM) at current levels.

Q: What do you think about Coinbase (COIN)?

A: It’s definitely a candidate, but you want to get it on a down day. Coinbase is in the “selling shovels to the gold miners” business which is always a fantastic business model and we here in California know all about it. It’s just a question of when and where to get involved. It’s been gyrating this week because of their new burden of doing the tax reporting on all crypto buyers among their customers. That will definitely be a drag on the business.

Q: What's your short-term view on the big commodity plays like Freeport McMoRan (FCX), Alcoa Aluminum (AA), and US Steel (X)?

A: I would say they’re all going up. Maybe half the infrastructure bill has been discounted into the metals prices, but not all of it, therefore they have more to go to the upside.

Q: What are the best real estate buys?

A: There are none anywhere; maybe somewhere in eastern Europe, but still unlikely. It’s the best time ever now to rent. Buying here would be madness. And by the way, I predicted this property boom 10 years ago, if you go back in my research because 2021 was when the millennials would show up as massive buyers in the housing market, right when there was going to be a demographic shortage. That’s why I think the real estate boom goes on for another 10 years. But you won't see the gains that we’ve seen this year. You will maybe see 5% or 10% gains a year, definitely not 50% or 100% gains that we’ve just seen.

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

Good Luck and Stay Healthy.

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

August 12, 2021

Diary, Newsletter, Summary

Global Market Comments
August 12, 2021
Fiat Lux9

(A NOTE ON OPTIONS CALLED AWAY)
(SPY), (TLT), (V), (GS), (JPM)

A Note on Assigned Options, or Options Called Away

Diary, Newsletter, Summary

I know all of this may sound confusing at first. But once you get the hang of it, this is the greatest way to make money since sliced bread.

I still have six positions left in my model trading portfolio, they are all deep in-the-money, and about to expire in six trading days. That opens up a set of risks unique to these positions.

I call it the “Screw up risk.”

As long as the markets maintain current levels, ALL of these positions will expire at their maximum profit values.

They include:

Risk On (World is Getting Better)

(TLT) 8/$157-$160 put spread 10.00%

(TLT) 8/$156-$159 put spread. 10.00%

(JPM) 8/$300-$320 call spread 10.00%

(V) 8/$220-$225 call spread 10.00%

(GS) $355-$365 call spread 10.00%

Risk Off (World is Getting Worse)

(SPY) 8/$445-$450 put spread -10.00%

Total Net Position 40.00%

With the August 20 options expiration upon us, there is a heightened probability that your short position in the options may get called away.

If it happens, there is only one thing to do: fall down on your knees and thank your lucky stars. You have just made the maximum possible profit for your position instantly.

Most of you have short option positions, although you may not realize it. For when you buy an in-the-money vertical option spread, it contains two elements: a long option and a short option.

The short options can get “assigned,” or “called away” at any time, as it is owned by a third party, the one you initially sold the put option to when you initiated the position.

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

Let’s say you get an email from your broker telling you that your call options have been assigned away.

I’ll use the example of the Goldman Sachs (GS) call spread.

For what the broker had done in effect is allow you to get out of your call spread position at the maximum profit point days before the August 20 expiration date. In other words, what you bought for $8.60 on August 4 is now worth $10.00, giving you a near-instant profit of 16.27%!

In the case of the Goldman Sachs (GS) August 20 $200-$210 in-the-money vertical Bull Call spread, all you have to do is call your broker and instruct them to “exercise your long position in your (GS) August 20 $355 calls to close out your short position in the (GS) August 20 $365 calls.”

You must do this in person. Brokers are not allowed to exercise options automatically, on their own, without your expressed permission.

This is a perfectly hedged position, with both options having the same name and the same expiration date, so there is no risk. The name, number of shares, and number of contracts are all identical, so you have no exposure at all.

Calls are a right to buy shares at a fixed price before a fixed date, and one options contract is exercisable into 100 shares.

Short positions usually only get called away for dividend-paying stocks or interest-paying ETFs like the (TLT). There are strategies out there that try to capture dividends the day before they are payable. Exercising an option is one way to do that.

Weird stuff like this happens in the run-up to options expiration like we have coming.

A call owner may need to buy a long (GS) position after the close, and exercising his long (GS) $365 call is the only way to execute it.

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

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

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

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

And here’s another possible outcome in this process.

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

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

There may not even be an evil motive behind the bad advice. Brokers are not investing a lot in training staff these days. In fact, I think I’m the last one they really did train.

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

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

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

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

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

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

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

Calling All Options

August 9, 2021

Diary, Newsletter, Summary

Global Market Comments
August 9, 2021
Fiat Lux9

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE WALL OF MONEY CONTINUES)

(INDU), (TLT), (SPY), (FCX), (JPM), (V), (GS)

The Market Outlook for the Week Ahead, or The Wall of Money Continues

Diary, Newsletter, Research

The wall of money continues.

According to the legendary economist John Maynard Keynes: “Markets can remain irrational longer than you can remain liquid.”

Keynes should know. After making a fortune trading foreign currency, he was almost wiped out by the 1929 crash when markets fell 90%.

I keep that quote taped to my monitor to instill humility, discipline, self-control, and to avoid hubris. It works most of the time. It is the father of my aggressive stop-loss strategy.

However large the wall of money was before; it is getting bigger. People are making more money, their home values have soared, more are working, the Fed’s quantitative easing continues unabated, and Washington deficit spending is breaking all records, and federal benefits continue to pour through the system.

A very large part of this new money has gone into the stock market, and it will continue to do so. August usually presents the best buying opportunity of the year with a frightful, gut-churning selloff. It’s not happening this time, baby.

If we get another hot payroll report for August, then happy days are here again and it’s off to the races for the rest of 2021. A 100% trading profit for the year comes into range for me, as well as you.

It gets better.

The delta variant has taken new Covid cases from 15,000 a day to 100,000, pushing back the reopening and slowing the economy. ALL of that growth gets pushed back into 2022, making it another hot year. We won’t see the current historic 12% growth rate, but 5% could be doable. Stocks will love it.

Could 2022 be another 100% return year? Maybe.

One thing is for sure. The market could care less about Covid, closing at an all-time high on Friday. Covid is now a known quantity. A year ago, it looked like the end of the world.

If you are vaccinated, it’s now just an inconvenience. It’s currently only killing unvaccinated Republicans and sadly, children.

The next big thing to happen will be for new cases to peak out and begin a sharp decline, causing stocks to rocket. That’s how traders are positioning themselves now.

July Nonfarm Payroll Report explodes to 943,000, taking the Headline Unemployment Rate down an amazing half-point to 5.4%. Leisure & Hospitality was up a staggering 380,000. Bonds (TLT) were crushed, down two full points and yields up 19 basis points from the low to 1.29%, gold (GLD) was destroyed, and the US dollar (UUP) popped. The hot number could bring forward a Fed tapper and interest rate rise. Certainly, makes this month’s Jackson Hole meeting interesting.

New Covid Cases hit 100,000 daily, 86% of which are the delta variant, 1,000 times more powerful than the original strain. That’s still a fraction of the 2.5 million cases a day seen in January. The vaccines seem powerless against the onslaught, although they eliminate the possibility of death. The unvaccinated are the walking dead. Companies like Wells Fargo, Amazon, and JP Morgan have delayed reopening. We’re all helpless until a new booster shot comes out in months.

Infrastructure Deal to be signed, at $550 billion worth of road, bridge, water, and power projects. It should generate 2.75 million jobs, if you can find the workers. Expect your local freeways to start getting tied up in a few months when the projects begin in all 50 states. Per capital, Alaska and Hawaii will get the most money.

Copper Unions Vote to strike in Chile, cutting off 33% of the global supply. This is just when the green economy, especially electric cars, is driving demand through the roof. Great news for Freeport McMoRan, which predominantly mines in the US. By (FCX) on dips.

US Treasury to sell $126 billion in bonds this week. It also sees rising demand for Treasury Inflation-Protected Securities (TIPS). Am I the only one seeing the contradiction? Fed governor Clarida said the taper could start in November. Don’t buy bonds here on pain of death.

ADP disappoints in its monthly read of private job openings, coming in at only 330,000 instead of an expected 690,000. Leisure & Hospitality saw the biggest decline, with only 139,000. Could Friday’s July Nonfarm Payroll report be a bust?

Weekly Jobless Claims come in at 385,000, taking another run at post-pandemic lows. This number should really collapse once kids go back to school for the first time in 17 months. Most large companies are now requiring proof of vaccination to return to the office. The same will soon be true for airlines.

Think the market is expensive now? After the last pandemic ended in 1919, price earnings multiple for the S&P 500 soared 3.09 times from 5.74X to 17.77X. So, today’s 34.39X looks rich indeed but is only half of the 70.91 peak seen at the bottom of the 2009 Great Recession, back when investors were throwing stocks out the window with both hands. The Index started at a lowly 11.1X back when America was still an emerging market. Could we get the 3X move up seen in the last pandemic? One can only hope.

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!

My Mad Hedge Global Trading Dispatch saw a healthy gain of +3.36% so far in August. My 2021 year-to-date performance appreciated to 72.57%. The Dow Average is up 15.06% so far in 2021.

I stuck with my four positions, a long in (JPM) and a short in the (TLT) and a short in the (SPY). Since stocks refused to go down, I added longs in Goldman Sachs (GS) and Visa (V). I doubled up my short in the (TLT) after it spiked to a 1.10% yield. The market surge off the back of the July Nonfarm Payroll report also forced me to stop out of my second (SPY) short for a loss.

That brings my 11-year total return to 495.12%, some 2.00 times the S&P 500 (SPX) over the same period. My 12-year average annualized return now stands at an unbelievable 42.43%, easily the highest in the industry.

My trailing one-year return retreated to positively eye-popping 110.12%. I truly have to pinch myself when I see numbers like this. I bet many of you are making the biggest money of your long lives.

We need to keep an eye on the number of US Coronavirus cases at 35.8 million and rising quickly and deaths topping 617,000, which you can find here.

The coming week will be slow one on the data front.

On Monday, August 9 at 8:00 AM, US Consumer Inflation Expectations are out. AMC (AMC) reports.

On Tuesday, August 10 at 7:30 AM, the NFIB Business Optimism Index for July is printed. Coinbase (COIN) and Softbank (SFTBY) report.

On Wednesday, August 11 at 5:30 AM, the US Core Inflation Rate is released. eBay (EBAY) reports.

On Thursday, August 12 at 8:30 AM, Weekly Jobless Claims are announced. Disney (DIS) and Airbnb (ABNB) report.

On Friday, August 13 at 7:00 AM, we get the University of Michigan Consumer Expectations.

As for me, with the 34^th anniversary of the 1987 crash coming up, 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 it! 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 an internal combustion engine.

Good Luck and Good Trading.

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