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The Market Outlook for the Week Ahead, or The Battle of the 50-Day

Diary, Newsletter

The next long-term driver of financial markets will be rising interest rates.

It’s not a matter of if, but when. Is it this month, or next month? One way or the other it’s coming.

Which means you should be rearranging your portfolio right now big time.

In a rising interest rate regime seven big things will happen:

1) Bonds (TLT) will collapse.
2) Domestic recovery and commodity stocks (FCX) will soar.
3) Technology stocks (QQQ) will move sideways to down 10%
4) The US dollar (UUP) craters
5) Foreign stock markets (EEM) do better than American ones.
6) Bitcoin (BLOK), (MSTR) and other cryptocurrencies go through the roof.
7) Residential real estate keeps appreciate, but at a slower rate.

These trends will continue for six months, or until long-term interest rates hit an interim peak, such as at 2.00%.

The delta variant gave us a secondary recession. Its demise will give us a secondary recovery, and the same sectors will prosper as with the first. According to the Johns Hopkins University of Medicine, this is happening right now.

The only caution here is that long-term investors should probably keep their technology stocks. Once rates hit the next interest rate peak again, it will be off to the races for tech once again. In the long term, tech always comes back, and tech always wins.

Of course, the major event of the coming week will be the Federal Reserve’s Open Market Committee meeting where interest rates are decided and the press conference with Jay Powell that follows.

Interest rates won’t move. It’s the press conference that is crucial, where we gain insights into the taper. What’s different this time is that the European Central Bank has already begun their taper with an economy far weaker than ours. Will Jay take the cue?

Far and away, the most reliable indicator for “BUY” timing since the presidential election has been the 50-day moving average for the S&P 500. Increasing stock weightings there and you were golden.

The problem now is that we have not seen the index close below the 50-day for two consecutive days for a record 221 days. This has not happened for 31 years.

We all know the reasons: Record low-interest rates making cash trash, seven years of quantitative easing, and a global liquidity glut. Exploding equity in homes and stock portfolios helps too. Still, 31 years is a long time to be this bullish.

I saw all this coming a mile off.

Since the election, I have relentlessly pursued this market with a super aggressive 100% weighting. Then I started paring back risk in June. In July and August, I cut back further to the bone, running minuscule 20% long weightings against a few shorts.

And this is how you manage your risk control.

When markets are rigged in your favor and the lunch is free, you bet the ranch. When they aren’t, you cower on the sidelines and watch others take insane risks.

But who am I to know? I’ve only been doing this for 51 years, and 58 years if you count the (IBM) shares I bought with my paperboy earnings.

Antitrust Comes Home to Roost at Apple, sending the stock down $9 in two days. A judge ruled that Apple will no longer be allowed to prohibit developers from providing links or other communications that direct users away from Apple in-app purchasing. Apple typically takes a 15% to 30% cut of gross sales. It’s a slap on the wrist, as Apple’s main revenue stream is still from iPhones. The judge ruled in favor of Apple on nine of ten other issues. It creates massive new opportunities for hundreds of other Silicon Valley start-ups. Still, if you were looking for an excuse to take profits, this is it. Buy (AAPL) on dips.

Tesla to get EV Tax Credit Restored in a new overhaul of alternative energy subsidies. Both Tesla (TSLA) and General Motors (GM) lost their $7,500 per car subsidies when sales topped 200,000. GM will get an extra $5,000 discount for union-made cars. Tesla is ferociously non-union. Maybe this explains the 36% rally since May. It should help (TSLA) get reach its million-vehicle target for 2021 if it can get enough chips. Buy (TSLA) on dips.

China Inflation Hits 13 Year High, up 9.5% YOY. Soaring commodity and coal prices are the issue. Coal is up 57% YOY, reflecting an energy shortage during the covid economic rebound. It predicts a hot CPI for the US on Tuesday.

The Consumer Price Index rose by 5.3% YOY and up 0.3% in August. It was a seven-month low, with delta clearly a drag. Food and energy came in lighter than expected. Prices for used cars, air tickets, and insurance fell. Stocks loved it, rising triple digits, and bond prices halved losses. St next week’s FOMC we’ll see how Jay really feels.
House Looking at a Top 26.5% Corporate Tax Rate, well up from the current 21% but not as high as the 28% that was feared. Capital gains would rise from 20% to 25%. The goal is to raise $2.5 trillion to get the $3.5 trillion spending package into law. It’s all a trial balloon for what might be possible. Stocks loved it.

Amazon to Hire 125,000 and boost wages to $18 an hour. They are also paying $3,000 signing bonuses and taking pay up to $22.50 in prime areas like New York and California. It’s all part of a strategy to make (AMZN) the “best employer in the world”. Buy (AMZN) on dips as its dominance on online commerce grows.

China Destroys Casino Stocks, threatening to increase oversight of their Macao operations. The concern is that China will pull the gaming licenses of foreign companies when they come up for renewal in June. Buy (WYNN) and (LVS) on the dip.

Weekly Jobless Claims Come in at 332,000, a new post-pandemic low. The previous week was revised down even lower, to 312,000. The end of pandemic unemployment benefits is no doubt a factor, driving people off of their couches and back to the salt mines. Is this the light at the end of the tunnel?

Bitcoin Charts are Showing a Golden Cross, which usually presages upside breakouts in the cryptocurrency. A golden cross is where the 50-day moving average pierces the 200-day to the upside. This is crucial because technicals are more important in crypto than in any other financial instrument. In the meantime, (AMC) has started accepting Bitcoin for online movie ticket purchases. Buy (MSTR) on dips.

My Ten-Year View

When we come out the other side of the 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 +1.10% loss so far in September following a blockbuster 9.36% profit in August. My 2021 year-to-date performance soared to 77.47%. The Dow Average is up 13.02% so far in 2021.

That leaves me 70% in cash, 10% short in the (TLT), and 20% long in the (SPY) and (DIS). Both of our September option positions expired at max profits.

I’m keeping positions small as long as we are at extreme overbought conditions. However, a Volatility Index (VIX) above $20 shows there may be a light at the end of the tunnel.

That brings my 12-year total return to 500.02%, some 2.00 times the S&P 500 (SPX) over the same period. My 12-year average annualized return now stands at an unbelievable 42.86%, easily the highest in the industry.

My trailing one-year return popped back to positively eye-popping 109.26%. 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 42 million and rising quickly and deaths topping 673,000, which you can find here.

The coming week will be all about the Fed meeting on Wednesday.

On Monday, September 20, at 11:00 AM, the NAHB National Housing Market Index for September is out.

On Tuesday, September 21 at 9:30 AM, Housing Starts for August are printed.

On Wednesday, September 22 at 11:00 AM, Existing Home Sales for August are announced. At 2:00 PM, the Fed interest rate decision is released and an important press conference about taper issues follows.

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

On Friday, September 24 at 8:30 AM, we learn US Durable Goods for August. At 2:00 PM, the Baker Hughes Oil Rig Count is disclosed.

As for me, with the shocking re-emergence of Nazis on America's political scene, memories are flooding back to me of some of the most amazing experiences in my life.

I have been warning my long-term readers for years now that this story was coming. The right time is now here to write it.

I know the Nazis well.

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

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

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

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

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

What I heard was chilling.

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

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

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

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

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

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

The American postwar occupation, while unpopular, was gentle by comparison. It turned out that everyone loved Hershey bars.

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

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

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

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

Attending the USC film school with a young kid named Steven Spielberg decades earlier, I knew that Riefenstahl was a legend in the filmmaking community.

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

It was rumored that Riefenstahl was also the onetime girlfriend of Adolph Hitler.

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

It was my goal to get her to sign it.

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

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

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

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

Spoken like a true Nazi.

The interview ended abruptly.

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

Nobody bid on it.

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

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

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

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

Leni Riefenstahl

Olympia

Former Paperboy

September 13, 2021

Diary, Newsletter, Summary

Global Market Comments
September 13, 2021
Fiat Lux

Featured Trade:

(THE MAD HEDGE TRADERS & INVESTORS SUMMIT IS ON FOR SEPTEMBER 14-16),
(MARKET OUTLOOK FOR THE WEEK AHEAD, or VENTURING INTO THE METAVERSE
(SPY), (TLT), (VIX),

The Market Outlook for the Week Ahead, or Venturing Into the Metaverse

Diary, Newsletter

Watch out for the term “Metaverse.”

It refers to the virtual world where all things exist in a virtual world.

And here is the great thing about the metaverse. The real world can only grow at an analog rate and is finite. The virtual world can grow at an exponential, viral rate and is infinite.

Infinite markets with infinite customers? That is something that companies and share prices really like to hear about.

We’re getting a peek into the Metaverse right now with the movement of many companies to a virtual world triggered by the pandemic. With employees working at home, a headquarters at a PO Box in Montana to meet regulatory minimums, selling digital services to a digital market, these companies effectively exist only in terms of electrons and bytes.

But suddenly, costs have plunged by 40%, productivity has improved by 40%, and profits have increased tenfold. These are companies you want to own.

No wonder the stock market is going up almost every day. It’s because companies like this are worth more, a lot more overnight!

It's how Silicon Valley leaped from having 80 unicorns to 800 in the span of two years. The future is happening fast.

If you are an old fart who doesn’t want to bother with all this computer mumbo jumbo, invest a few minutes playing Facebook’s (FB) Oculus Rift with your grandkids. Then sit down and watch the 2018 science fiction/fantasy movie Ready Player One. There is a sequel in the works. The second sequel will be you and me.

We have now just suffered the worst trading week since February, with the (SPY) off by a mere $8.5, or 1.9%. We may have a shot at another long-awaited 5% correction this week. If we do, I’ll put half my cash in the market. I’ll put the rest in at a 10% correction.

I highly doubt that stocks will fall by more than that given the massive weight of liquidity in the financial system, even though it’s September. My $475 (SPY) target for end of 2021 still stands and I’m sticking to it. You’re going to have to pry my cold dead fingers off of my forecast.

The only question is which sectors will lead. My bet is on domestic recovery stocks like banks, brokers, hotels, casinos, airlines, cruise lines, and railroads. Delta peaked two weeks ago and is now falling precipitously, especially in the south.

That sets up a second post-Covid recovery trade with the same sector leading the first time.

The way the pandemic ends is that the US gets to 90% immunity, where Covid becomes an annual flu shot. California is already there with 80% of the population vaccinated and 10% getting the disease. Alabama may get there with 60% vaccinations and 30% getting sick. But in a year, the whole country will be at 90%.

Then, we can get on with the rest of our lives.

The August 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.

JOLTS comes in at a blockbuster 10.9 million in July, a new record high. This is the number of job openings in the private sector. Anyone who wants a job can get a job. Blame the education gap. The problem is that there is demand for 10.9 million website designers, computer programmers, and internet marketers, and an endless supply of waiters and other restaurant workers.

The Fed says growth downshifted during the summer, thanks to delta and a worker shortage according to the Beige Book release. We already knew that, and a five-point selloff in bonds is telling us that Covid is declining and growth is back on.

Europe tapers, cutting back monthly Eurobond purchases 160-170 billion a month. Governor Christine Lagarde believes any inflation is temporary and the time for emergency stimulus is over. Can the Fed be far behind?

Seven million lose Unemployment Benefits. This should make available more workers whose shortage have been a drag on the economy. Accelerating growth can only be good for stocks.

El Salvador launches Bitcoin as a national currency, creating a national wallet, and offering every citizen $30 to open an account. Most of the accounts will be accessed via cell phones. The central bank bought 400 bitcoins worth $20 million as part of the rollout. The country’s president is helping to sort out technical glitches. Is Bitcoin the next global currency? Bitcoin dropped 10% on the news.

Tesla to make its own whips in a dramatic response to a structural global chip shortage that could last years. The news was good for a $30 pop in the stock this morning. Tesla is already one of the world’s largest chip users, and their needs are expected to jump 50-fold in the next ten years. The move justifies a much larger premium for the stock. It’s all about training the neural network.

Will a Bitcoin ETF approval spike the Market? There are a dozen applications with SEC for the first US-approved crypto ETF. When approved, billions of new cash will pile into Bitcoin off the back of the new improved legitimacy. Buy before the IPO, it’s a classic trading strategy.

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 is down 1.09% in September, thanks to a shortage of low-risk/high-return trading opportunities. My 2021 year-to-date performance soared to 77.48%. The Dow Average was up 13.10% so far in 2021.

That leaves me 60% in cash at 40% in short (TLT), and long (SPY) and (DIS). My last two positions expire in four trading days.

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 Volatility Index (VIX) now over $20 shows that an entry point may be near.

That brings my 12-year total return to 500.03%, some 2.00 times the S&P 500 (SPX) over the same period and a new all-time high. My 12-year average annualized return now stands at a new high of 42.85%, easily the highest in the industry.

My trailing one-year return popped back to positively eye-popping 115.05%. 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 41 million and rising quickly and deaths topping 670,000, which you can find here.

The coming week will be slow on the data front.

On Monday, September 13, at 12:00 noon, US Inflation Expectations are released.

On Tuesday, September 14, at 8:30 AM, US Core Inflation is published, now the second biggest number of the month.

On Wednesday, September 15 at 9:15, Industrial Production for July is disclosed. At 9:30 AM, we get the New York Empire State Manufacturing Index for September.

On Thursday, September 16 at 8:30 AM, Weekly Jobless Claims are announced. We also get Retail Sales for August.

On Friday, September 17 at 8:30 AM, we learn the University of Michigan Consumer Sentiment for September. At 2:00 PM, the Baker Hughes Oil Rig Count is disclosed.

As for me, one of the great shortcomings of San Francisco is that we only have a theater district with two venues and it is in the Tenderloin, the worst neighborhood in the city, an area beset with homeless, drug addicts, and prostitution.

I was walking to a parking lot after a show one evening when I passed a doorway. Three men were violently attacking a blond woman. Never one to miss a good fight, I dove in, knocking two unconscious in 15 seconds (thank you Higaona Sensei!). Unfortunately, number three jumped to my side, pulled a knife, and stabbed me.

The attacker and the woman ran off, leaving me bleeding in a doorway. I drove over the Golden Gate Bridge to Marin General Hospital, bleeding all over the front seat of my car, where they sewed me up nicely and put me on some strong drugs.

The doctor said, “You shouldn’t be doing this at your age.”

I responded that “good Samaritans are always rewarded, even if the work is its own reward.”

Fortunately, I still had my Motorola Flip Phone with me, so I called Singapore from my hospital bed for a market update. I liked what I saw and bought 100 futures contracts on Japan’s Nikkei 225. This was back in 1999 when anything you touched went straight up.

Then, I passed out.

An hour later, I woke up, called Singapore again and bought another 100 futures contracts, not remembering the earlier buy. This went on all night long.

The next morning, I was awoken by a call from my staff who excitedly told me that the overnight position sheets had just come in and I had made 40% on the day.

Was there some mistake?

Then I got a somewhat tense call from my broker. I had a margin call. I had also exceeded the exchange limits for a single contract and owned the equivalent of $200 million worth of Nikkei. I told them to sell everything I had at market and go 100% cash.

That was exactly what they wanted to hear.

That left me up 60% on the year and it was only May.

I then called all of the investors in my hedge fund. I told them the good news, that I wouldn’t be doing anymore trades for the fund until I received my performance bonus the following January and was taking off on a long vacation. With a 2%/20% payout in those days, that meant I was owed 14% of the underlying assets of the fund at a very elevated valuation.

They said that’s great, have fun, by the way, how did you do it?

I answered, “Great drug selection.” No further questions were asked.

Then I launched on the mother of all spending sprees.

I flew to Germany and picked up a new Mercedes S600 V12 Sedan at the factory in Stuttgart for $160,000. I then immediately road-tested it on the Autobahn at 130 mph. I made it to Switzerland in only two hours. After all, my old car needed a new seat.

Next, I bought all new furniture for the entire house, each kid selecting their own unique style.

Then, I took the family to Las Vegas where we stayed in the “Rain Man Suite” at the Bellagio Hotel for $10,000 a night, where both the 1988 Rain Man and 2009 The Hangover were filmed.

I bought everyone in the family black wool Armani suits, plus a couple of Brioni’s for myself at $8,000 a pop. For good measure, I chartered a helicopter for a tour of the Grand Canyon the next day.

At the end of the year, I sold my hedge fund based on the incredible strength of my recent performance for an enormous premium. I then left the stock market to explore a new natural gas drilling technology I had heard about called “fracking.”

Four months later, the Dotcom Crash ensued in earnest.

I still have the scar on my right side, and it always itches just before it rains, which is now almost never. But it was worth it, every inch of it.

It’s all true, every word of it and I’ll swear to it on a stack of bibles.

September 8, 2021

Diary, Newsletter, Summary

Global Market Comments
September 8, 2021
Fiat Lux

Featured Trade:

(A NOTE ON ASSIGNED OPTIONS, OR OPTIONS CALLED AWAY)
(SPY), (TLT)

A Note on Assigned Options, or Options Called Away

Diary, Newsletter

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 two positions left in my model trading portfolio, they are all deep-in-the-money, and about to expire in seven 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:

(TLT) 9/$155-$158 put spread	10.00%
(SPY) 9/$410-$420 call spread	10.00%

With the September 17 options expirations 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 options 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 S&P 500 (SPY) $410-$420 in-the-money vertical BULL 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 September 17 expiration date. In other words, what you bought for $8.90 on August 17 is now worth $10.00, giving you a near-instant profit of $1,210 or 12.35%!

All you have to do is call your broker and instruct them to “exercise your long position in your (SPY) September 17 $410 calls to close out your short position in the (SPY) September 17 $420 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 expirations like we have coming.

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

There are thousands of algorithms out there that may arrive at some twisted logic that the 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.

There is a further annoying complication that leads to a lot of confusion. Lately brokers have resorted to sending you warnings that exercises MIGHT happen to help mitigate their own legal liability.

They do this even when such an exercise has zero probability of happening, such as with a short call option in a LEAPS that has a year or more left until expiration. Just ignore these, or call your broker and ask them to explain.

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!

September 7, 2021

Diary, Newsletter, Summary

Global Market Comments
September 7, 2021
Fiat Lux

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE “ENDLESS BID” MARKET),
(VIX), (SPY), (TLT)

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

Diary, Free Research, Newsletter

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

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

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