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The Market Outlook for the Week Ahead, or It’s Correction Time

OK, I’ll give it to you straight.

The market has just entered a correction that will take the Dow Average down precisely 7.81% from the recent 35,050 high down to 32,515. That just so happens to be the 150-day moving average.

During this time, interest rates will rise, possibly taking the ten-year US Treasury bond yield to 1.30% and the United States Treasury Bond Fund (TLT) to $151.

Technology stocks will take the lead this summer. After not moving for nearly a year, Amazon (AMZN) will take the lead, discounting last year’s 44% growth in sales. NVIDIA (NVDA) and Adobe will follow.

Bank stocks and other financials like JP Morgan Chase (JPM) and Berkshire Hathaway (BRKB) will suffer, dropping 10% so far and 20% before the crying is all over.

In other words, we just flipped from one half of the barbell to the other in a heartbeat. That will last until late summer to the fall. After that, we shift to the other side of the barbell.

That means the best opportunity to buy financials and sell short bonds in a year is setting up in the coming weeks, if not months.

That takes us until the end of 2021 when I expect another liquidity surge to take everything up. Then we all walk together hand in hand into the sunset signing glory halleluiah. It doesn’t get any easier than that.

I saw all of this coming at the beginning of the year, which is why I raced to rack up a 68.60% profit in the first half of the year and went 100% cash with the June 18 option expiration. I succeeded right on the money.

As for 2022, that is a different story entirely.

The big view here that the stock market is transitioning from an 80% gain to a 30% gain to a more normal average annualized 15% gain. The big game is how far in advance stocks will discount these smaller gains.

It will take a lot to get me off the bench and risk any of this hard-won profit. A Volatility Index (VIX) of over $35 would help (we closed at $20.70 on Friday). So would a Mad Hedge Market Timing Index under 20. So would JP Morgan under $127.

The Fed Takes a Turn, leaning towards more inflation. It is keeping interest rates unchanged at 0%-0.25% and continuing bond purchases at $120 billion a month. It is still sticking with the “transitory” argument on inflation but raised its full-year target from 2.4% to 3.4%, more than most expected. It went more specific on rate rises, predicting two 0.25% increases by the end of 2023. Bonds and technology stocks crashed, and inflation plays like banks, Bitcoin, and Berkshire Hathaway soared. The barbell strategy wins again!

The Big Rotation is On, with traders moving out of inflation plays and into big tech. That is the outcome of the shocking bond market spike that came out of last week’s 5% print for the Consumer Price Index. The Fed is telling the world that any inflation is temporary, and the world is believing them. It could give us a bond and tech rally that lasts a couple of months.

Commodities Crash, on a soaring US dollar and shrinking interest rates. The 15-month bull move is taking a summer vacation, unwinding 2X-10X moves racked up since the 2020 lows. Palladium took an 11% hit, with platinum off 7%, corn 6%, and copper 4%. Banks also sold off big as the whole inflation trade unwinds. Buy all of these on the next bottom for a rebound.

Shipping Costs are out of control for everything from everywhere to everywhere else. Transporting a 40-foot steel container of cargo by sea from Shanghai to Rotterdam now costs a record $10,522, up a whopping 547%. Tens of thousands of containers are on the wrong side of the Pacific. Shortages of truck drivers are extreme, with $50,000 signing bonuses rampant. It is one thing that could make continuing inflation pernicious.

If Copper sells off, it won’t be by much. Conventional internal combustion cars use 40 pounds of copper for wiring. EVs use 200 pounds for the heavy copper rotors in each wheel, in addition to two ounces of silver (SLV). EV production will rise from 700,000 units last year to 25 million by 2030. You do the math. There aren’t enough copper mines in the world to accommodate this demand and it takes five years to build a new one. Buy (FCX) on the next big dip. It’s going to $100 in five years.

Paul Tudor Jones says the Taper Tantrum is coming, despite last week’s perverse reaction by the bond market to the red hot 5% inflation rate. The Fed’s obsession with jobs only and not inflation will end in tears. My old client and legendary investor has 20% of his assets in inflation plays, including gold (GLD), Bitcoin, commodities, and short US Treasury bonds (TLT). When Paul is wrong, it’s usually not for very long.

Housing Starts up only 3.6% in May, to a seasonally adjusted 1.57 million units, with sky-high lumber and other materials prices a major drag. New Permits hit a seven-month low.

Weekly Jobless Claims jump to 412,000, the largest increase since March. Could the economy be slowing?

Tech Soars, getting a new lease on life with the collapse of interest rates last week. My favorite, Amazon (AMZN), picked up a healthy $80 yesterday on a 44% YOY gain in sales. Even Apple (AAPL) is coming back from the dead, up $2.00. I sent out long-term at-the-money LEAPS on these last week. It's hard to hold quality down for the long term.

Factory activity fell in June, for the second month in a row according to the Philly Fed, backing off from an all-time high in the spring. Parts and materials shortages are plaguing manufacturers everywhere as the economy struggles to escape from its pandemic torpor.

My Ten-Year View

When we come out the other side of pandemic, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 400% to 120,000 or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 120,000 here we come!

My Mad Hedge Global Trading Dispatch profit reached 0.71% gain so far in June on the heels of a spectacular 8.13% profit in May. That leaves me 100% in cash.

My 2021 year-to-date performance appreciated to 68.60%. The Dow Average is up 8.8% so far in 2021.

I spent the week taking profits on the 40% in remaining positions either by selling or running them into the Friday expiration. My goal was to go 100% before the market completely fell to pieces and I succeeded handily. It’s going to be a grim summer.

I rang the cash register on Berkshire Hathaway (BRKB) and the S&P 500 (SPY), and my short in the (SPY). Perhaps my best trade of the year was stopping out of my short in the (TLT) for an $800 loss when it topped $140.

That brings my 11-year total return to 491.15%, some 2.00 times the S&P 500 (SPX) over the same period. My 11-year average annualized return now stands at an unbelievable 42.70%, easily the highest in the industry.

My trailing one-year return exploded to positively eye-popping 126.07%. I truly have to pinch myself when I see numbers like this. I bet many of you are making the biggest money of your long lives.

We need to keep an eye on the number of US Coronavirus cases at 33.1 million and deaths topping 600,000, which you can find here. Some 33.1 million Americans have contracted Covid-19.

The coming week will be a weak one on the data front.

On Monday, June 21 at 8:30 AM, the Chicago Fed National Activity Index is out.

On Tuesday, June 22 at 10:00 AM, Existing Home Sales for May is released

On Wednesday, June 23 at 10:00 AM, New Home Sales for May is published.

On Thursday, June 24 at 8:30 AM, the Weekly Jobless Claims are published. We also get US Durable Goods Orders for May.

On Friday, June 25 at 8:30 AM, US Personal Income & Spending for May are disclosed. At 2:00 PM, we learn the Baker-Hughes Rig Count.

As for me, with all the recent violence in the Middle East, I am reminded of my own stint in that troubled part of the world. I have been emptying sand out of my pockets since 1968, when I hitchhiked across the Sahara Desert, from Tunisia to Morocco.

During the mid-1970s, I was invited to a press conference given by Yasser Arafat, founder of the Al Fatah terrorist organization and leader of the Palestine Liberation Organization, at the Foreign Correspondents Club of Japan. His organization then rampaging throughout Europe, attacking Jewish targets everywhere.

Japan recognized the PLO to secure their oil supplies from the Persian Gulf, on which they were utterly dependent.

It was a packed room on the 20^th floor of the Yurakucho Denki Building, and much of the world’s major press were represented, as the PLO had few contacts with the west.

Many placed cassette recorders on Arafat’s table in case he said anything quotable. Then Arafat ranted and raved about Israel in broken English.

Mid-sentence, one machine started beeping. A journalist jumped up to turn his tape over. Suddenly, four bodyguards pulled out Uzi machine guns and pointed them directly at us.

The room froze.

Then a bodyguard deftly set his Uzi down on the table, flipped over the offending cassette, and the remaining men stowed their weapons. Everyone sighed in relief. I thought it was interesting that the PLO was using Israeli firearms.

The PLO was later kicked out of Jordan for undermining the government there. They fled Lebanon for Tunisia after an Israeli invasion. Arafat was always on the losing side, ever the martyr.

He later shared a Nobel Prize for cutting a deal with Israel engineered by Bill Clinton in 1993, recognizing its right to exist. He died in 2004.

Many speculated that he had been poisoned by the Israelis. My theory is that the Israelis deliberately kept Arafat alive because he was so incompetent. That is the only reason he made it until 75.

Stay healthy.

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

The Middle East Does Have Some Advantages

June 10, 2021

Diary, Newsletter, Summary

Global Market Comments
June 10, 2021
Fiat Lux

Featured Trade:

(A NOTE ON OPTIONS CALLED AWAY),
(MSFT), (TLT), (BA), (GOOGL), (SPY)

May 28, 2021

Diary, Newsletter, Summary

Global Market Comments
May 28, 2021
Fiat Lux

Featured Trade:

(MAY 26 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPY), (DIS), (AMZN), (FCX), (X), (PLTR), (FXE), (FXA), (TLT), (TBT), (AMC), (GME), (ZM), (DAL), (AXP), (LEN), (TOL), (KBH), (DOCO), (ZM), (TSLA), (NVDA), (ROM)

May 26 Biweekly Strategy Webinar Q&A

Diary, Newsletter

Below please find subscribers’ Q&A for the May 26 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Lake Tahoe, NV.

Q: Do you expect a longer pullback for the (SPY) through the summer and into the last quarter?

A: No, this market is chomping at the bit and go up and won’t do any more than a 5% correction. We’ve already tested this pullback twice. We could stay in this 5% range for a few more weeks or months, but no longer. If we make it to August before we take off to the upside, that would be a miracle. It seems to want to break out right now and if you look at the tech stocks charts you can see what I'm talking about.

Q: Why do day orders with spreads not good ‘til canceled (GTC)?

A: Actually, you can do good ‘til canceled on these spreads, it just depends on how your platform is set up. Good ‘til canceled won't hurt you—only if we get a sudden reversal on a stop out which has only happened four times this year.

Q: Disney (DIS) seems to be struggling to get back over $180; am I still safe with my January 2023 $250 LEAPS?

A: Yes, out to 2023 we’ll have two summers until those expire, so those look pretty good—that's a pretty aggressive trade, and I’m betting you’re looking at a 500% profit on those LEAPS. And by the way, I always urge people to go out long on these LEAPS, because the second year is almost free when you check the pricing. So, take the gift and that will also greatly reduce your risk. We could have a whole recession and recovery, and still have those LEAPS make it to $250 in Disney.

Q: Should I add to Freeport McMoRan (FCX)?

A: (FCX) I would not add—in fact, I would have a stop loss if we closed below $40 on (FCX) if you’re a short-term trader. There is a slowdown in the Chinese economy going on as well as a clampdown on commodity speculation. This has affected the whole base metal space, including steel and palladium. If you have the long-term LEAPS, keep them, because I think (FCX) doubles from here. The whole “green revolution story” is still good.

Q: Do you think the United States Treasury Bond Fund (TLT) is going up?

A: No, I think the (TLT) has been going down. I've been buying puts spreads like crazy, and I have a huge chunk of my own retirement fund in long-dated (TLT) LEAPS, so I am praying it will go down. We’ll talk about that when we get to the bond section.

Q: Prospects for U.S. Steel (X)?

A: It’s tied in with the whole rest of the base commodity complex—I think it is due for a rest after a terrific run, which is why I have such tight stop losses on Freeport McMoRan (FCX).

Q: Do you buy the “transitory” explanation for the hot inflation read two weeks ago that the Fed is handing out, or do you think inflation is bad and here to stay?

A: I go with the transitory argument because you’re getting a lot of one-time-only price rises off of the bottom a year ago when the economy completely shut down. Once those price rises work through the system, the inflation rate should go from 4.2% back down to 2% or so. So, I don't see inflation as a risk, which is why I think the stock markets can reach my 30% up target this year. You may get another hot month as the year-on-year comparisons are enormous. But betting on inflation is betting on the reversal of a 40-year trend, which usually doesn’t work out so well.

Q: On your spread trade alerts can we buy less than 25 contracts?

A: You can buy one contract. In fact, I recommend people start with one contract and test out where the real market is. Put a bid for one contract in the middle of the market, and if it doesn’t get done, raise your bid 5 cents, and eventually, your order gets done. Then you can add more if you want to. I always recommend this even for people who buy thousands of contracts, that they test the market with one contract order just to make sure the market is actually there.

Q: Can you recommend a LEAPS for Amazon (AMZN)?

A: The Amazon LEAPS spread is the January 2022 $3150-3300 vertical call debit spread going out 8 months.

Q: When you short the (TLT), how do you do it?

A: I do vertical bear put debit spreads. I buy a near-money put and sell short and an out-of-the-money put so I can reduce the cost, and therefore triple my size. This strategy triples the leverage on the most likely part of the stock move to take place, which is the at the money. For example, a great one to buy here would be a January 2021 (TLT) $135/140 vertical bear put debit spread where you’re buying the $140 and selling short the $135. The potential 8-month profit on this is around 100%. You’ll make far more money on that kind of trade than you ever would just buying puts outright. Some 80% of the time the single option trades expire worthless. You don’t want to become one of those worthless people.

Q: What’s your best idea for avoiding a U.S. Dollar drop?

A: Buy the Invesco Currency Shares Euro Trust (FXE) or buy the Invesco Currency Shares Australian Dollar Trust Trust (FXA), the Australian Dollar to hedge some of your US Dollar risk. The Australian dollar is basically a call option on a global economic recovery.

Q: I’m a new subscriber, but I don’t get all the recommendations that you mention.

A: Please email customer support at support@madhedgefundtrader.com , tell them you’re not getting trade alerts, and she'll set you up. We have to get you into a different app in order for you to get all those alerts.

Q: How about the ProShares UltraShort 20 Year Treasury ETF (TBT)—is that a bet on declining (TLT)?

A: Absolutely yes, that is a great bet and we’re at a great entry point right now on the (TBT) so that is something I would start scaling into today.

Q: Do you still like Palantir (PLTR)?

A: Yes, but the reason I haven't been pushing it is because the CEO says he could care less about the stock market, and when the CEO says that it tends to be a drag on the stock. Palantir has an easy double or triple on it on a three-year view though. However, small tech has been out of favor since February as it is overpriced.

Q: How far down can the (TLT) go in the next 30 days?

A: It could go down to $135 and maybe $132 on an extreme move, especially if we get another hot CPI read on June 10. However, if you hear the word “taper” from a Fed official, then you’re looking at high $120’s in days.

Q: With the TLT going up, why have you not sent out an alert to double up on put spreads?

A: I tend to be a bit of a perfectionist since I’m a scientist and an engineer, so I’m hanging on for an absolute top to prove itself and start on the way down. On the shorts, I like selling them on the way down, and buying my longs on the way up, because there are always surprises, there’s always the unknown, and heaven forbid, I might actually be wrong sometimes! So, I’m still waiting on this one. And we do already have one position that is fairly close to the money now, the June 2021 $141-144 vertical bear put debit spread, so I don't want to double up on that until we have a reversal in the intermediate term trend.

Q: I see GameStop (GME) is spiking again now up to $230—should I get in for a short-term profit?

A: No. With these meme stocks, the trading is totally random. If anything, I would be selling short, but I would do it in a limited risk way by buying a put spread. However, the implied volatility in the options on these meme stocks are so high that it's almost impossible to make any money on options; you’re paying enormous amounts of money up front, so that's my opinion on GameStop and on AMC Entertainment Holdings (AMC), the other big meme stock.

Q: Will business travel come back after the world is vaccinated?

A: Absolutely. Companies don't want to send people on the road, but customers will demand it. All you need is one competitor to land an order because they visited the customer instead of doing a Zoom (ZM) meeting, and all of a sudden business travel will come roaring back. So that's why I was dabbling in Delta Airlines (DAL) and that's why I like American Express (AXP), where 8% of transactions are for first class airline tickets.

Q: As the work-from-home economy stops and workers go back to the office, do you see a 10% correction in the housing market?

A: Actually, in the housing market with real houses, I don't see prices dropping for years, because 30% of the people who went home to work are staying there for good—that the trend out of the cities into the hinterlands is a long-term trend that will continue for decades, now that Zoom has freed us of the obligations to commute and be near big cities. And of course, I’m a classic example of that; I've been working either in my basement in San Francisco or at Lake Tahoe for the last 14 years. Housing stocks on the other hand like Lennar (LEN), Toll Brothers (TOL) and KB Home (KBH) have had a tremendous run and are basically out of homes. Could they have a 10% correction at any time? Absolutely, yes.

Q: Should I avoid buying dips in last year's work-from-home stocks?

A: Yes I would. DocuSign (DOCO) and Zoom (ZM) are the two best ones because they were both up 12X from their lows, and I tend not to chase things that are up 12X unless they are a Tesla (TSLA) or an Nvidia (NVDA) or something like that. In the end, Tesla went up 295 times.

Q: Are you looking at the carbon credits market?

A: No, but I probably should. That market shut down last year. It’s alive again, and it looks like it's growing like crazy.

Q: What’s the ideal volatility for individual options? What do you use to compare?

A: Always look at the implied volatility of the option compared to the realized volatility of the underlying stock; and when the difference gets too big, you get ideal conditions for putting on call and put spreads, which take advantage of this. These are almost volatility neutral because you’re long on one batch of volatility and short on the other.

Q: Is it too late to get involved in the ProShares Ultra Technology ETF (ROM), the 2X long ETF in a spread?

A: The November 2021 $121-125 vertical bull call spread, the farthest expiration you can get for the (ROM), was kind of aggressive—I would go closer to the money. We’re right around mid $80s right now, so maybe do a January 2022 $95-100, and even that will get you something like a 400% gain by November.

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

Good Luck and Stay Healthy.

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

Summit of Mount Rose at 10,778 feet with Lake Tahoe on the Right

May 24, 2021

Diary, Newsletter, Summary

Global Market Comments
May 24, 2021
Fiat Lux

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD, or IT'S ALL ABOUT THE NUMBERS),
(TLT), (SPY), (FCX), (QQQ), (VIX), (UUP), (AMAT), (CRM), (GOOG), (AMZN), (AAPL), (FB)

The Market Outlook for the Week Ahead, or It’s All About the Numbers

Diary, Newsletter

I know that not all of you are mathematicians, nor blessed with math degrees from UCLA, as I am. However, the future of your retirement funds relies on a few simple numbers. So, I will try to be gentle.

S&P tech stocks are trading at a 27 price earnings multiple. The S&P 500 Index, as a whole, trades at a 21 multiple. S&P value stocks, financials, and old-line recovery stocks like industrials and materials are trading at a 17 multiple.

Historically, companies with double the earnings power of the index trade at a 5-point premium to the main market. As long as this disparity exists, tech stocks will go down and value with go up.

However, we are getting close to a reversal. Allowing for market noise, I don’t see tech dropping more than 10% from here over the coming months. Then we will see the mother of all Q4 rallies taking it to new highs.

That explains why investors have been nibbling on tech lately, especially the best ones like NVIDIA (NVDA), Applied Materials (AMAT), and Salesforce (CRM). You also want to pick up big cap money machines like Alphabet (GOOG), Amazon (AMZN), Apple (AAPL), and Facebook (FB). Their LEAPS are begging for attention.

That means the downside from here is limited. Sorry Cassandras, no crashes here.

I am more convinced of this outcome than ever, given the substantial number of crashes and disasters, markets have weathered this year. These are truly Teflon markets. Last week, Bitcoin collapsed an amazing 55% in six weeks, wiping $1 trillion off the value of that market.

The fear had been that a crypto crash of this size would ignite a system contagion that would take everything down. A few years ago, it would have. But with massive Fed liquidity and unprecedented deficit spending, all we got was down 600 points one day and 600 up the next.

No crash here.

We’ve also had smaller crashes in sectors that were the most egregiously overpriced in February, like SPACS, meme stocks, and shares trading at 100 times sales with no earnings. Again, no harm no foul. It was a comeuppance that was well earned.

The big tell that I am right came screaming loud and clear last week from the US dollar, which hit a new 2021 low. A cheaper greenback means cheaper US stocks for foreign investors, which means they buy more of them. A weak buck also means that interest rates will stay lower for longer, which is great news for stocks, especially tech.

So, take it easy for the next few months. Keep positions small and rejoin the human race.

It seems odd going out into civilization and seeing live people walking around without masks. All the batteries on my watches are dead, as they have not been used for nearly two years, so they are getting replaced. I walked into my closet, and it was like adventuring into an archeological dig, with dozens of Turnbull & Asser shirts untouched by human hands. I’ve been living in Marine Corps sweats since 2019.

Bitcoin Crashes, down 33% on the day at the lows to $30,000, and off a heart-palpitating 55% from the April high. You wanted volatility, you got volatility! The problem for the rest of us is whether this will cause a real systemic financial crisis, with the Dow already down 560 at today’s low. Was Elon Musk the shoeshine boy giving tips at the market top?

Chip Shortage causes $110 Billion in US Car Industry Sales, in 2021 and will take years to address. Supply chains will need to be rebuilt. My neighbor just had to wait 11 months to take delivery of his Ford F-150.

China’s Industrial Production Slows, from 14.1% in March to only 9.8% in April. That gives us a hint to our own future, as the Middle Kingdom emerged from the pandemic a year before we did. Retail sales also disappointed. After rocketing in 2020, the Chinese economy started slowing at the beginning of this year. The dead cat bounce in the economy is over. If this continues, it's bad news for copper prices of which the Middle Kingdom is the largest producer. If (FCX) closes under $40, stop out of all short-term longs immediately.

Housing Starts Dive, as builders run out of materials at reasonable prices. It gave the Dow Average a punch in the nose worth $220. Single family homes took the big hit, down 13.4% to 1.08 million. Permits are still up 70% YOY from when Covid completely shut the industry down. This is the most inflationary sector of the economy right now but barely registers in the CPI numbers. Prices must go even higher for frustrated buyers which are accelerating their rate of increase. Builders are including contingency clauses that allow price rises after the sale, a first. The South has dominated in starts where the population is moving and took the biggest hit. Buy (LEN), (KBH), and (PHM) on dips.

Existing Home Sales Drop 2.7%, in April to 5.85 million units. Inventories are down 20% YOY to only an unimaginable two-month supply. There’s nothing for sale. With the strongest YOY price gains in history, there is nothing for sale. It’s all about high prices, high prices, high prices. Homes over $1 million are up an incredible 214% YOY. The 70-year migration from North to South continues, costing democrats 5 seats in the House. Millennials are entering their peak home-buying years and that $150,000 four-bedroom home in Savannah, GA doesn’t look so bad.

Bitcoin is the Most Crowded State in the World, according to a survey of investment managers. That may explain the 35% plunge in cryptocurrency since April. Is this the end of the Ponzi scheme? Technology and ESG stocks are the second and third most over-owned, which may explain their recent flaccid performance.

Why is the Gold Hedge Working this Time? The Barbarous relic is finally giving investors the insurance and the downside hedge they need, after failing to do so during the last correction in February. That’s because interest rates were spiking in the winter but aren’t now. Interest rates are the enemy of all no-yielding assets, like precious metals.

Fed Hints of Early Rate Rise, trashing both stocks and bonds. The big one could be here, a complete collapse of the US Treasury bond market. I’m already running the biggest (TLT) shorts ever. We should fall from the current $135 to $120 by yearend. Sell all (TLT) rallies.

Lumber Futures Collapse by 40%. There goes your inflation. Now if only Biden will end the Trump-era import duty on Canadian lumber. It gives a big boost to the “transitory” camp, arguing that this is just a one or two-month spike spawned by the cover recovery. Soaring lumber prices had been a key factor igniting new home prices.

Applied Materials Knocks the Cover off the Ball, reporting blowout earnings. The semiconductors equipment maker has been the best performing chip-related stock of 2021, up 72%. (AMAT) sees a structural chip shortage lasting for years. DRAMs are speeding up, while NAN is slowing down. Customers are placing orders years in advance for the first time ever. A new $7.5 billion stock buyback plan and 9% dividend increase were announced. Buy (AMAT) on the dips.

My Ten-Year View

My Mad Hedge Global Trading Dispatch profit reached 7.48% gain so far in May on the heels of a spectacular 15.67% profit in April. That leaves me 50% invested and 50% cash. We actually have a shot at reaching a double-digit performance for the seventh month in a row.

My 2021 year-to-date performance soared to 67.24%. The Dow Average is up 11.79% so far in 2021.

We got another major meltdown last week followed by an immediate recovery. I used the dip to reinitiate new positions in the (TLT), Goldman Sachs (GS), and Berkshire Hathaway (BRKB) to replace ones that expired on the Friday options expiration.

That brings my 11-year total return to 489.79%, some 2.00 times the S&P 500 (SPX) over the same period. My 11-year average annualized return now stands at an unbelievable 42.90%, easily the highest in the industry.

My trailing one-year return exploded to positively eye-popping 124.92%. I truly have to pinch myself when I see numbers like this. I bet many of you are making the biggest money of your long lives.

We need to keep an eye on the number of US Coronavirus cases at 33.1 million and deaths topping 590,000, which you can find here. Some 33.1 million Americans have contracted Covid-19.

The coming week will be a weak one on the data front.

On Monday, May 24, at 8:30 AM, the Chicago Fed National Activity Index is released.

On Tuesday, May 25, at 10:00 AM, the S&P Case Shiller National Home Price Index for March is announced.

On Wednesday, May 26 at 8:30 PM, MBA Mortgage Applications are revealed.

On Thursday, May 27 at 8:30 AM, the Weekly Jobless Claims are Published. We also get a second estimate for the red hot Q2 GDP.

On Friday, May 28 at 8:30 AM, the even hotter Personal Spending for April is disclosed. At 2:00 PM, we learn the Baker-Hughes Rig Count.

As for me, as this pandemic winds down, I am reminded of a previous one in which I played a role in ending.

After a 30-year effort, the World Health organization was on the verge of wiping out smallpox, a scourge that had been ravaging the human race since its beginning. I have seen Egyptian mummies at the Museum of Cairo that showed the scarring that is the telltale evidence of smallpox, which is fatal in 50% of cases.

By the early 1970s, the dread disease was almost gone but still remained in some of the most remote parts of the world. So, they offered a reward to anyone who could find live cases.

To join the American Bicentennial Mt. Everest Expedition in 1976, I took a bus to the eastern edge of Katmandu and started walking. That was the furthest roads went in those days. It was only 150 miles to basecamp and a climb of 14,000 feet.

Some 100 miles in, I was hiking through a remote village, which was a page out of the 14^th century, back when families threw buckets of sewage into the street. The trail was lined with mud brick two-story homes with wood shingle roofs, with the second story overhanging the first.

As I entered the town, every child ran to their windows to wave, as visitors were so rare. Every smiling face was covered with healing but still bleeding smallpox sores. I was immune, since I received my childhood vaccination, but I kept walking.

Two months later, I returned to Katmandu and wrote to the WHO headquarters in Geneva about the location of the outbreak. A year later, I received a letter of thanks at my California address and a check for $100 telling me they had sent in a team to my valley in Nepal and vaccinated the entire population.

Some 15 years later, while on customer calls in Geneva for Morgan Stanley, I stopped by the WHO to visit a scientist I went to school with. It turned out I had become quite famous, as my smallpox cases in Nepal were the last ever discovered.

The WHO certified the world free of smallpox in 1980. The US stopped vaccinating children for smallpox in 1972, as the risks outweighed the reward.

Today, smallpox samples only exist at the CDC in Atlanta frozen in liquid nitrogen at minus 346 degrees Fahrenheit in a high-security level 5 biohazard storage facility. China and Russia probably have the same.

That’s because scientists fear that terrorists might dig up the bodies of some British sailors who were known to have died of smallpox in the 19^th century and were buried on the north coast of Greenland remaining frozen ever since. If you need a new smallpox vaccine, you have to start from somewhere.

As for me, I am now part of the 34% of Americans who remain immune to the disease. I’m glad I could play my own small part in ending it.

Stay healthy.

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

On Mt. Everest, Smallpox-Free in 1976

Bitcoin

May 17, 2021

Diary, Newsletter, Summary

- Global Market Comments
  May 17, 2021
  Fiat Lux
  
  Featured Trade:
- (MARKET OUTLOOK FOR THE WEEK AHEAD, or WHY HISTORY RHYMES),
  (TLT), (SPY), (FCX), (MSFT), (DAL), (QQQ), (VIX), (DAL), (UUP)

The Market Outlook for the Week Ahead, or Why History Rhymes

Diary, Newsletter

The 19^th century humorist and writer, Mark Twain, said, “History never repeats itself, but it rhymes.” This is certainly one of those rhyming times.

Remember back in 2011 when the Dow hit a short-term peak at $12,300 in May of 2011? The Cassandras had a heyday. The bull market was over, stocks were imminently going to crash, and the next stop for the Dow was $3,000. Gold and bonds were the only safe places.

Those who drank the Kool-Aid missed the greatest investment opportunity of the century and are now driving for Uber cars to earn their crust of bread. Those who drank the Kool-Aid twice sold their homes as well ahead of the greatest real estate boom of all time.

Not that a correction wasn’t sorely needed, we needed to scare money out of what I call the “super liquidity” investments like Bitcoin, SPACS, and tech companies selling at 100 times sales with failing business models.

We also needed to put the fear of god into newbie day traders by teaching them that stocks go down as well as up. We’ve already made good progress on this front. With many of the “meme” stocks down by half or more since February, we are already making good progress on that front.

What will power the Dow to my now very prescient looking $40,000 target by yearend? The unwind of the 40-year-old bull market in bonds has barely just begun. Ten-year US Treasury bond yields ($TNX) have only appreciated from 0.32% to 1.68%, compared to 5.6% at the last 2007 peak. That means there are still many tens of trillions of dollars to shift out of bonds (TLT) and INTO STOCKS!

Once the current correction ends, money will pour back into the recent leaders, the economic cyclicals, including financials, commodities, industrials, and commodities.

Technology will stay in the penalty box for the foreseeable future until they become under-owned and cheap again. The good news here is that tech earnings are growing at such a prolific rate that the sector is losing two price earnings multiple points a month and will return to the bargain basement in the not-too-distant future.

The long term view here is that you want to rent growth, but own tech, which still has double the growth rate of everything else.

It all makes my 2021 $40,000 Dow Average target look like a piece of cake, and my 2030 goal of $120,000 positively conservative, cautious, and circumspect.

Notice that our 2,000 point-swan dive in the Dow last week lasted only three days, and then delivered the sharpest fall in the Volatility Index (VIX) in history, from $29 to $19 in only 24 hours. The writing is still on the wall. People want to BUY.

Inflation explodes, with the Consumer Price Index posting a ballistic 4.2% YOY rate, the fastest gain since 2009. The Fed believes this is a temporary surge, the markets not so much. Bonds take it on the nose. Keep selling rallies in the (TLT). We’re making a fortune here.

Volatility Index (VIX) soars to $29, almost doubling in a week. Call me when it tops $30. That’s the usual signal for a short-term stock market bottom. I’m relaxed because I’m going into this with 80% cash and have just made a huge fortune on bond shorts.

Value and cyclicals are still the Big Play. That was the message of the stock market on Friday’s wild day which saw an 11-basis point trading range in the ten-year US treasury bond. If you think the next big move in rates is up, then Cyclicals will roar, and techs will fade.

It’s all about buying what people are underweight and selling what they are overweight. I’m looking for cyclicals that have recently corrected. Stay tuned to this station.

US Inventories see solid gains as retailers load the boat for the biggest economic recovery of all time. March was up 1.3%. One of an endless series of data points pointing to the best business conditions in a century.

The Home Buying Frenzy continues, with the median price for a single-family home soaring by 16.2% to $319,200 in Q1, according to the National Association of Realtors. Record high prices are hitting all markets. The perfect upside storm continues.

Weekly Jobless Claims come in at 473,000, a new post-Covid low. Continuing claims fall to 3,655,000. The greatest economic recovery of all time continues.

Producer Prices leap in April, up 0.6% following a 1% gain in March. It is a natural follow-on from the hot CPI. The PPI tracks changes in production costs, and supply bottlenecks and shortages tied to the pandemic recovery have caused commodity prices to soar. Temporary or continuing, that is the big debate. Watch the bond market for clues.

Stanley Druckenmiller says Bonds are Toast, and The Dollar is Worse. I couldn’t agree more with my old friend and trading counterparty. Current Fed policies are now the most extreme in history and threaten the reserve status of the US dollar. Sell all rallies in the (TLT) and the (UUP).

My Ten Year View

My Mad Hedge Global Trading Dispatch profit reached 3.83% gain so far in May on the heels of a spectacular 15.67% profit in April. That leaves me 30% invested and 70% cash.

My 2021 year-to-date performance soared to 63.59%. The Dow Average is up 13.47% so far in 2021.

During the stock market meltdown, my hedges with shorts in the S&P 500 (SPY), NASDAQ (QQQ), and the United States Treasury Bond Fund (TLT) performed spectacularly well, leaving me up on the week. I managed to limit myself to only two stop losses, in Microsoft (MSFT) and Delta Airlines (DAL).

While everyone else was running around like chickens with their heads cut off, I was as relaxed as ever. Our worst case for May is that we will be only up single digits, instead of the double-digit gains of the past six months. That is not a bad “worst case” to have.

That brings my 11-year total return to 486.14%, some 2.00 times the S&P 500 (SPX) over the same period. My 11-year average annualized return now stands at an unbelievable 42.45%, easily the highest in the industry.

My trailing one-year return exploded to positively eye-popping 127.09%. I truly have to pinch myself when I see numbers like this. I bet many of you are making the biggest money of your long lives.

We need to keep an eye on the number of US Coronavirus cases at 33 million and deaths topping 586,000, which you can find here.

The coming week will be a weak one on the data front.

On Monday, May 17, at 9:45 AM, the New York Empire State Manufacturing Index for May will be out

On Tuesday, May 18, at 10:00 AM, the Housing Starts for April are announced.

On Wednesday, May 19 at 2:00 PM, Minutes from the last Federal Reserve FOMC Meeting are published.

On Thursday, May 20 at 8:30 AM, the Weekly Jobless Claims are published.

On Friday, May 21 at 10:00 AM, Existing Homes Sales for April are announced. At 2:00 PM, we learn the Baker-Hughes Rig Count.

As for me, we had a big 4.7 earthquake at Lake Tahoe last week. The healthy live trees vibrated and swayed. But all of the brittle dead trees killed by pine beetles during the draught snapped at the base and fell over.

Those blocked all the fire roads, so every emergency and public service organization on the lake was called up and sent up into the mountains with chain saws. That included me, a member of Lake Tahoe Search and Rescue.

I hiked up to 9,000 feet with a 50-pound load and went to work. We cut these enormous 100-foot conifers into one-foot rounds and then rolled them off the road. Everyone else on the job was under 40.

After a day of heavy lifting, I hiked down the mountain and collapsed into bed. I slept for 12 hours, which is why the Monday letter was late. They say 70 is the new 40. I am the proof of that.

So can 100 be the new 60? One can only hope.

How was your weekend?

Stay healthy.

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

20 Year Chart of Ten Year US Treasury Yields

May 10, 2021

Diary, Newsletter, Summary

Global Market Comments
May 10, 2021
Fiat Lux

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE SUSHI HITS THE FAN),
(SPY), (TLT), (TBT), (V), (UNP), (DAL), (MSFT), (GS), (JPM), (FCX)

The Market Outlook for the Week Ahead, or the Sushi Hits the Fan

Diary, Newsletter

During my senior year in High School, I had the good fortune to date the daughter of Richard Knerr, the founder of Wham-O, the inventor of Hula Hoops, Silly Putty, Super Balls, Frisbee’s, and Slip & Slides (click here).

At six feet, she was the tallest girl in the school, and at 6’4” I was an obvious choice.

After the senior prom and wearing my tux, I took her to the Los Angeles opening night of the new musical Hair. In the second act, the entire cast dropped their clothes onto the stage and stood there stark naked. The audience was stunned, shocked, embarrassed, and even gob-smacked.

Those were the reactions I saw on Friday, when the April Nonfarm Payroll Report was released showing a gain of only 266,000 jobs. A million had been expected.

So, how does that work? Red hot ADP private jobs and a year low in Weekly Jobless Claims, but a horrific monthly Payroll report?

They say economic data can be “noisy”. This time it was positively cacophonous. The fact is that these data points were never created to handle times like this, the most disruptive in history.

When the data are useless, all you have to do is take a walk down Main Street. There are “Help Wanted” signs at virtually every business.

The data dissonance created a wild day in the markets on Friday. Bonds soared, causing ten-year yields to dive to 1.48%. Then they rallied all the way back up to 1.58%.

That was seen as the end of the two-month long rally in bonds, so stock took off like a rocket. Essentially everything went up, both cyclicals, banks, AND tech.

All those bond shorts you have been nursing since March? They are about to explode to the upside. The next leg down in the year-old bear market in bonds is about to begin.

And what about that 266,000-payroll report? If you didn’t get a million jobs print in April, then you’ll almost certainly get it in May. Stocks could well keep rally until then. That’s how traders are seeing it.

Just another reason to buy.

By the way, I learned one of the great untold business stories from Richard Knerr. When the Hula Hoop was first launched in 1957, sales went ballistic. Some 25 million were sold in the first four months.

The Hula Hoop was made of a plastic tube stapled together with an oak cork made in England. Since demand seemed infinite, Wham-O ordered 50 million corks. Then the republican party claimed the toy was a communist conspiracy to destroy the youth of America as the swiveling of hips was deemed obscene. This was at the tail end of the McCarthy period.

Sales of Hula Hoops collapsed.

They cancelled the order for 50 million oak corks, which were thrown overboard mid-Atlantic. They are still floating out there somewhere today. Wham-O almost went bankrupt from the experience but was eventually saved by the Frisbee.

Richard Knerr died in 2008 at the age of 82. Wham-O was taken over by Mattel in 1995. For his obituary, please click here.

April Nonfarm Payroll Report is a huge disappointment, at 266,000 when up to one million was expected. April’s hiring boom goes bust. March was revised down massively, from 916,000 to 770,000. The headline Unemployment Rate rose to 6.1%. It was one of the most confusing reports in recent memory. Bonds rocketed, interest rates crashed, and tech stocks took off like a scalded chimp. Inflation expectations have been shattered. Leisure & Hospitality kicked in at 331,000. But Professional & Business Services collapsed by 111,000. The two million businesses that went under last year aren’t hiring. Much of the return to work has been by people who already have jobs.

Weekly Jobless Claims plunged to 488,000, one of the sharpest drops on record at 100,000. Go down any Main Street today and instead of a sea of plywood, it is plastered with “Help Wanted” signs. Productivity is soaring, while average labor costs are actually falling.

ADP Private Employment Report soars, up by 742,000 in April, the biggest gain since September. It makes the coming Friday Nonfarm Payroll Report look outstanding. The jobs market is booming, but competition for the top jobs is also fierce.

Europe’s Q1 GDP falls by 0.6%. That’s better than expected, but disastrous when compared to America’s spectacular 6.4% print. Blame the bumbled slow-motion vaccine rollout. European governments wasted time negotiating on price like it was just another government program, while the US poured billions into vaccine makers, no questions asked. European vaccines, like Astra Zeneca’s, were flawed. It’s amazing that a big government continent can’t perform a big government task, even when millions of lives depend on it.

US Factory Orders gain, up 1.1% in March, providing more evidence that stimulus is working. Most economists are expecting double-digit growth in Q2. Driving up to Lake Tahoe, the number of trucks on the road has doubled in the last month.

Personal Income Explodes, up 21.1% in March, the most since 1945 according to the Bureau of Economic Analysis. What the heck happened in 1945? $1,400 stimulus checks are clearly burning holes in the pockets of consumers. Expect all numbers to hit lifetime highs in the coming months. The sun, moon, and stars are all lining up and standard of living is soaring.

Chicago PMI rockets to a 40-year high, up to 72.1 versus an expected 65. It seems everyone is already trying to buy what I am trying to buy. My bet is that the stock market is wildly underestimating the coming onslaught of economic numbers and will go to new highs once it figures out the game.

Lumber Prices are becoming a big deal, soaring 70% in two months and a staggering 340% in a year, igniting inflation fears. It’s only a tiny fraction of our tiny spending but is adding $36,000 to the cost of a new home. Someone in four homes sold today are newly built, the highest ratio ever. Punitive Trump lumber tariffs against Canada years ago shut down a lot of production and now that we need it, it isn’t there.

IBM brings out the 2-Nanometer Chip, taking semiconductor technology to the next evolutionary level. Any smaller and electrons will be too big to squeeze through the gates. The current battle is over 7 nm technology. It promises to bring much faster computing at a lower price and will act as a temporary bridge to lightening quantum computing.

When we come out the other side of pandemic, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 400% to 120,000 or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 120,000 here we come!

My Mad Hedge Global Trading Dispatch profit reached 2.38% gain during the first week of May on the heels of a spectacular 15.67% profit in April.

I took profits in my long in Goldman Sachs (GS) and my short in the United States Treasury Bond Fund (TLT). I then plowed the cash into a new June short position in the (TLT) and a new short in the S&P 500 (SPY). That gave me a heart attack on my bond shorts when bond prices soared and then an immediate rebirth when they collapsed two points in the afternoon.

That leaves me 100% invested, as I have been for the last six months.

My 2021 year-to-date performance soared to 62.14%. The Dow Average is up 14.45% so far in 2021.

That brings my 11-year total return to 484.89%, some 2.00 times the S&P 500 (SPX) over the same period. My 11-year average annualized return now stands at an unbelievable 42.45%, easily the highest in the industry.

We need to keep an eye on the number of US Coronavirus cases at 32.7 million and deaths topping 581,000, which you can find here. New cases are in free fall, with only 12 here in Washoe County Nevada out of a population of 500,000. We could approach zero by the summer.

The coming week will be weak on the data front.

On Monday, May 10, at 9:45 AM, the April ISM New York Index is out. Roblox (RBLX) and BioNTech (BNTX) report earnings.

On Tuesday, May 11, at 10:00 AM, the NFIB Small Business Optimism Index for April is released. Palantir reports results (PLTR).

On Wednesday, May 12 at 2:00 PM, the US Core Inflation Rate for April is published. Softbank (SFTBY) reports results.

On Thursday, May 13 at 8:30 AM, the Weekly Jobless Claims are published. Walt Disney (DIS), Airbnb (ABNB), and Alibaba (BABA) report results.

On Friday, May 14 at 8:30 AM, Retail Sales for April are indicated. At 2:00 PM, we learn the Baker-Hughes Rig Count.

As for me, I’ve found a new series on Amazon Prime called Yellowstone. It is definitely NOT PG-rated, nor is it for the faint of heart. But it does remind me of my own cowboy days.

When General Custer was slaugherted during his last stand in Montana at the Little Big Horn in 1876, my ancestors spotted a great buying opportunity. They used the ensuing panic to pick up 50,000 acres near the Wyoming border for ten cents an acre.

Growing up as the oldest of seven kids, my parents never missed an opportunity to farm me out with relatives. That’s how I ended up with my cousins near Broadus, Montana for the summer of 1967.

When I got off the Greyhound bus in nearby Sheridan, I went into a bar to call my uncle. The bartender asked his name and when I told him “Carlat” he gave me a strange look.

It turned out that My uncle killed someone in a gunfight in the street out front a few months earlier, which was later ruled self-defense. It was the last public gunfight seen in the state, and my uncle hadn’t been seen in town since.

I was later picked up in a beat-up Ford truck and driven for two hours down a dirt road to a log cabin. There was no electricity, just kerosene lanterns and a propane-powered refrigerator.

Welcome to the 19^th century!

I was hired on as a cowboy, lived in a bunkhouse with the rest of the ranch hands, and was paid the princely sum of a dollar an hour. I became popular by reading the other cowboys' newspapers and their mail since they were all illiterate. Every three days, we slaughtered a cow to feed everyone on the ranch. I ate steak for breakfast, lunch, and dinner.

On weekends, my cousins and I searched for Indian arrowheads on horseback, which we found by the shoebox full. Occasionally, we got lucky finding an old rusted Winchester or Colt revolver just lying out on the range, a remnant of the famous battle 90 years before. I carried my own six-shooter to help reduce the local rattlesnake population.

I really learned the meaning of work and had callouses on my hands in no time. I had to rescue cows trapped in the mud (stick a burr under their tail), round up lost ones, and saw miles of fence posts. When it came time to artificially inseminate the cows with superior semen from Scotland, it was my job to hold them still. It was all heady stuff for a 16-year-old.

The highlight of the summer was participating in the Sheridan Rodeo. With my uncle, one of the largest cattle owners in the area, I had my pick of events. So, I ended up racing a chariot made from an old oil drum, team roping (I had to pull the cow down to the ground), and riding a Brahma bull. I still have a scar on my left elbow from where a bull slashed me, the horn pigment clearly visible.

I hated to leave when I had to go home and back to school. But I did hear that the winter in Montana is pretty tough.

It was later discovered that the entire 50,000 acres was sitting on a giant coal seam 50 feet thick. You just knocked off the topsoil and backed up the truck. My cousins became millionaires. They built a modern four-bedroom house closer to town with every amenity, even a big screen TV. My cousin built a massive vintage car collection.

During the 2000s, their well water was poisoned by a neighbor’s fracking for natural gas, and water had to be hauled in by truck at great expense. In the end, my cousin was killed when the engine of the classic car he was restoring fell on top of him when the rafter above him snapped.

It all did give me a window into a lifestyle that was then fading fast. It’s an experience I’ll never forget.

Stay healthy.

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