Global Market Comments
August 19, 2024
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD or LESSONS LEARNED) plus (GLIDING INTO LITHUANIA),
(SPY), (GLD), (DHI), (TSLA), (JPM), (AAPL), (DHI), (LRCX)
Tag Archive for: (SPY)
After the worst week of the year, we get the best. If you are confused by all of this, so am I.
On the one hand, the downside was firmly rejected by the $8 trillion sitting under the market that has been trying unsuccessfully to get into the market all year. The upside was rejected as well and who knows why? Did it run too far, too fast? Did valuations get overblown? Or was it simply time to take a summer vacation?
Who knows? All three were true.
I don’t really care. I am up 2.67% in August and am 100% in cash. I’m waiting for the market to tell me what to do next. If we get another crash, I’ll buy. I’m selling the next melt-up as well. The only thing I’m really confident in is my 6,000 target for the S&P 500 by year-end which appears right on schedule.
London certainly has become the most internationally diverse city in the world. Last week my tablemates in pubs included two women from Japan who nearly fell out of their chairs when they heard me speak Japanese. A business consultant from Milan was visiting London for the first time. The head of international marketing for Industrial Light & Magic from Mill Valley, CA, filled me in on the latest developments in the digital arts.
Two Arabic-speaking ladies from Oxford University were working for a charity getting food into Gaza. One bartender was headed for Sandhurst, England’s West Point. The other was from China, and I had to explain to him what Bushmills was (it’s an Irish whiskey). Oh, and my barber was from Syria and my cleaning lady was from Barbados.
All seven of my languages were given a thorough workout. There are 56 countries in the British Commonwealth, and it seems like all of them are here at once.
This summer’s crash down, then up offered many lessons and I want to make sure you catch them all. Let every loss be a learning experience, lest you be doomed to repeat it. Of the 20 great single-day losses in the S&P 500 (SPX) since 1923, I have traded through nine. The other 11 took place in the aftermath of the 1929 crash where the market eventually dropped by 90%. But I had many friends who traded all of those. Click here for details.
For a start, it helps a lot if you see a crash coming. This market had been begging for a crash during May and June and I positioned accordingly. I went into the meltdown with nine short positions in July-August, which covered most of my losses. And I only ran positions into very short August 16 option expiration, thus greatly limiting damage incurred by the losers.
I limited losses by stopping out of out-of-the-money losers quickly in (CAT), (BRK/B), and (AMZN), right at the August 5 opening in most cases. I then became super aggressive when the Volatility Index ($VIX) hit $65, a 2-year high. I also went hyper-conservative by adding four technology positions very deep 20% in-the-money in (NVDA), (META), (TSLA), and (MSFT), which instantly became money makers.
I used the first 1,000-point rally to add a short position for a very long, thus neutralizing the portfolio at the middle of the recent range and taking in a lot of extra income.
I did ALL of this while traveling in England, Switzerland, Lithuania, Poland, Austria, and Slovakia, from assorted airport business lounges, hotels, and Airbnb’s. The travel actually helped because the New York market doesn’t open until 3:30 PM each day, giving me plenty of time to plan the day’s strategy.
Now all we have to do is figure out what the Volatility Crash ($VIX) from $65 to $14 in 9 days means, the fastest in history by a huge margin. It usually takes 170 days to make this kind of move. Could it mean that our lives are about to become boring beyond tears once again?
I doubt it.
In July we ended up a stratospheric +10.92%. So far in August, we are up by +2.67%. My 2024 year-to-date performance is at +33.61%. The S&P 500 (SPY) is up +16.14% so far in 2024. My trailing one-year return reached +52.25.
That brings my 16-year total return to +710.24. My average annualized return has recovered to +51.97%.
I spent the entire week taking profits. I cashed in on my longs in (GLD) and (DHI) and covered shorts in (TSLA), (JPM), (AAPL), and (DHI). I am now 100% in cash and boy does it feel good.
Some 63 of my 70 round trips, or 90%, were profitable in 2023. Some 49 of 66 trades have been profitable so far in 2024, and several of those losses were really break-even. That is a success rate of 74.24%.
Try beating that anywhere.
The “Soft Landing” is Back, or so says Goldman Sachs after the meteoric rise in share prices of the last ten days. The extreme concerns about the U.S. economy that have re-emerged over the past month appear overblown and investors shouldn’t get too defensive. The recent spike of market volatility had more to do with positioning than a real scare about economic growth and that investors should “keep the faith” that the U.S. avoids a recession, while also avoiding a revival in inflation.
Now it’s Volatility That’s Crashing, down a record 49 points from $65 to $16 in 9 trading days, suggesting that investors may be returning to strategies that bank on low stock volatility despite a near-meltdown in equities early this month. The ($VIX) long-term median level is $17.6. Similar reversions in the so-called fear gauge have, on average, taken 170 sessions to play out.
Consumer Price Index is a Snore, at 0.2% MOM and 2.9% YOY, below the long-term average. Ebbing inflation aligns with anecdotes from businesses that consumers are pushing back against high prices, through bargain hunting, cutting back on purchases, and trading down to lower-priced substitutes. Stock was a snore as well.
Consumer Sentiment Drops, to an eight-month low according to the University of Michigan. It was revised higher to 66.4 in July 2024 from a preliminary reading of 66.
The Yen Carry Trade is Back, with hedge funds piling back into positions they baled on only two weeks ago. It’s just a matter of math, now that the Bank of Japan has given up on raising interest rates anytime soon. What this means is more leverage, risk, and volatility for global financial markets. I love it!
New Home Construction Dives, in July to the lowest level since the aftermath of the pandemic as builders respond to weak demand that’s keeping inventory levels high. Total housing starts decreased 6.8% to a 1.2 million annualized rate last month, dragged down the biggest decline in single-family units since April 2020
Global EV Sales Jump 21% YOY, in July thanks to a large rise in China. In the European Union MG Motor, owned by China's SAIC Motor Corp, expects to be hit hardest by provisional imposed on EVs imported from China. Europe is not going to give away its core industry, especially Germany’s. EVs - whether fully electric (BEV) or plug-in hybrids (PHEV) - sold worldwide were at 1.35 million in July, of which 0.88 million were in China, where they were up 31% year-on-year.
Refi’s Rocket 35% in a Week, the result of falling inflation and a monster rally in the bond market. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($766,550 or less) fell slightly to 6.54% from 6.55%. The refinance share of mortgage activity increased to 48.6% of total applications from 41.7% in the previous week
US Producer Price Index Fades, coming in at a weak 0.1%, and giving the interest rate cut crown a high five. Stocks took off like a scalded chimp. Treasury yields fell on Tuesday as wholesale inflation measures came in softer than expected. The yield on the ten-year US Treasury was lower by about 4 basis points at 3.867%.
Foreign Investors Pull Record Amount from China, $15 billion in Q2. Chinese firms invest a record $71 billion overseas at the same time. It’s why the Chinese yuan has been so weak. The glory days are never coming back. Avoid (FXI).
Weekly Jobless Claims totaled 227,000, a decrease of 7,000 from the previous week and lower than the estimate for 235,000.
My Ten-Year View
When we come out the other side of the recession, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. The economy decarbonizing and technology hyper accelerating, creating enormous investment opportunities. The Dow Average will rise by 600% to 240,000 or more in the coming decade. The new America will be far more efficient and profitable than the old.
Dow 240,000 here we come!
On Monday, August 19 the Meeting of Central Bankers at Jackson Hole begins. Traders will peruse the tea leaves looking for clues about future interest rates policy. All the major countries of the world have already started cutting rates except the US.
On Tuesday, August 20 nothing of note is released.
On Wednesday, August 21 at 8:30 PM EST, the Minutes from the last FOMC meeting are released.
On Thursday, August 22 at 8:30 AM, the Weekly Jobless Claims are announced.
On Friday, August 16 at 8:30 AM, Federal Reserve Chairman Jay Powell speaks. Also, New Home Sales are disclosed. At 2:00 PM the Baker Hughes Rig Count is printed.
As for me, when a Concierge member invited me to spend a week in Lithuania, I jumped at the chance. I had never been to this miniscule country of 3 million, formerly a part of the Soviet Union. The last time I spent any appreciable amount of time in Eastern Europe was in 1968, at the height of the Cold War.
My friend grew up in the old USSR. He remembers as a child having to go to school in the snow wearing worn-out shoes repaired with duct tape because there weren’t any in the stores.
I remember the old Soviet Union and it was grim beyond belief. Standards of living were sacrificed for military spending in the extreme. I remember I swapped my Levi’s for a worn-out pair plus $50 because they were unobtainable.
My friend cashed in on the collapse of the Soviet Union and the mass privatizations that followed. As a trader in Gazprom shares, he made millions. Now he lives a life of leisure, taking occasional potshots at the market with my assistance. He has been with me since 2011.
Knowing I was an avid pilot he treated me to a day at the local glider club. Introduced as a Top Gun instructor who had flown everything from RAF Spitfires to F-18s, and whose grandfather had worked for Orville Wright, the club pilots were somewhat in awe. I was asked to sign logbooks, which is a great honor among pilots.
I donned my parachute with ease, and everyone relaxed. A tow plane took us up to 2,500 feet, we pulled the release from the cable and suddenly were floating over the endless green forests of Eastern Europe.
I took the stick and performed some light aerobatics, careful not to scare the daylights out of my co-pilot. The thing that really impresses you about gliders is the complete silence. No earplugs inside your headphones here, just the whooshing of the wind. We headed for the nearest clouds in search of uplifting thermals.
I was informed that birds knew more about thermals than any of us, and sure enough, we found a flock and followed them right in. We immediately picked up a few hundred feet, our electronic altimeter whining all the way.
Flying with the birds on a perfect day, how cool is that?
We could have stayed up for hours but I had a lunch appointment. So we yanked on the speed brakes and plummeted down towards the field. At 50 feet, wind shear hit us from the side and we fell like a ton of bricks, bouncing hard. My left elbow smashed against the side of the cockpit inflicting a big gash.
The glider club rushed the aircraft expecting the worst, but I gave them a thumbs up. Any landing you walk away from is a good landing. I later learned that the previous day another pilot broke both legs executing the same maneuver.
When the Soviet Union broke up in 1991, we thought it would take 100 years to integrate the former republics with the West. Although Lithuania is still one of the cheapest countries in Europe, the improvement in the standard of living has been enormous. Old Towns in Europe are usually prime real estate with the most expensive accommodation. Here it’s so cheap that you see a lot of young families with kids in strollers on the sidewalks and in the parks.
They have adopted our vices too, with elaborate tattoos commonplace and teenagers vaping on every street corner.
In the capital city of Vilnius, I developed a work schedule that was tolerable. I spent my mornings walking the Old Town, visiting palaces, castles, baroque churches, museums, and art galleries. Then when the New York Stock Exchange opened up at 4:30 PM I was at my computer banging out my trade alerts as fast as I could write them. The market closed at 11:00 PM. Thank goodness the bars were still open.
Of course, the language is a challenge. Usually, I can understand half of what is going on in Europe. But Lithuanian is a direct descendant of Sanskrit so I couldn’t understand a single word. Everyone under 40 speaks English so I was thankfully able to do my grocery shopping with some assistance.
Every year, I like to return to all my favorite countries, plus add one or two new ones. Where will next year’s new countries be? I’m already scheduled to visit Nicaragua, Columbia, Panama, Costa Rica, and Curacao before yearend. Estonia, Argentina, Latvia, Brazil, Tahiti, who knows?
Ask me in 2025.
To watch a short video of my Lithuanian glider flight, please click here.
Good Luck and Good Trading
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
August 16, 2024
Fiat Lux
Featured Trade:
( AUGUST 15 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPY), (CMG), (SBUX), (TLT), (CCI),
(FCX), (SLRN), (DAL), (TSLA), (LRCX)
Below please find subscribers’ Q&A for the August 15 Mad Hedge Fund Trader Global Strategy Webinar, broadcast from London, England
Q: Do you think we’ll still have another significant test of the lows for the year, or was that it last week? Stocks are rebounding huge this week.
A: They never really went down very much. The average drawdown IN THE S&P 500 (SPY) in any given year is 15%. We only got a 10% drawdown this month because there is still $8 trillion dollars in cash sitting under the market, which never got into stocks. All of this year it's been waiting for a pullback, so I was kind of surprised we even got 10%. I was forecasting maybe 6%. So could we get a new low? You never discount the possibility, but we really have to have another shocking data point to get down to a 15% correction. That is exactly what triggered this sell-off with the Nonfarm Payroll we got in early July. So give me another rotten Nonfarm Payroll report, and we could be back at last week's lows. Which is why I'm 100% cash. I want to have tons of dry powder, if and when that happens.
Q: We've seen a big increase in refi’s for homes in the last week. Is this going to be positive for the economy?
A: Absolutely yes, and that's why we're not going to have a recession. You get housing back into the economy which has been dead meat for almost 3 years now, and suddenly one quarter to one-third of the economy recovers. So that's what takes us into probably 3% economic growth for another year in 2025.
Q: What do you think of the Chipotle CEO (CMG) moving to take over Starbucks (SBUX)?
A: I think it's a very positive move. Starbucks was dead in the water. Their stores are old and dirty and products need refreshing. So if anyone needs a fresh view it's Starbucks, and the guy from Chipotle has a spectacular track record. Chipotle is probably one of the more successful fast-food companies out there. I usually don't ever play fast food—the margins are too low, but I certainly like to watch the fireworks when they happen.
Q: Should I be shorting airline stocks here like Delta Airlines (DAL), now that a recession risk is on the table?
A: Absolutely not. If anything, airlines are a buy here. They've had a major sell-off over the last 3 months for many different reasons, not the least of which was the software crash that they had a month ago. This is not shorting territory. That was 3 months ago for the airlines. Just because it's gone down a lot doesn't mean you now sell, it's the opposite. You should be buying airlines. I usually avoid airlines because they never have any idea if they're going to make money or not, so it's a very high-risk industry, and the margins are shrinking. Let me tell you, the airlines in Europe are absolutely packed. The fares are rock bottom and the service is terrible. Anybody who thinks the consolidation of the airline industry brought you great service has got to be out of their mind.
Q: Do you have any rules on when you stop loss?
A: The answer is very simple. If I do call spreads, whenever we break the nearest strike price, I'm out of there. That’s where the leverage works exponentially against you. Usually, you get a 1 or 2% loss when that happens, and you want to roll it into another trade as fast as you can and make the money back. Sometimes you have to do three trades to make up one loss because when you issue stop losses, everybody else is trying to get out of there at the same time. It's not a happy situation to be in, so we try to keep them to a minimum—but that is the rule of thumb. Keep your discipline. Hoping that it can recover your costs is the worst possible investment strategy out there. Hoping is not a winning strategy.
Q: Why don't you wait for the bottom?
A: Because nobody knows where the bottoms are. All you can do is scale. When you think things are oversold, when you think things are cheap, then you start buying things one at a time unless you get these giant meltdown days like we got on August 5th. So that's what I probably will be doing, is scaling in on the weak days on stocks that have the best fundamentals. That’s the only way to manage a portfolio.
Q: Is it a good time to buy REITs for income?
A: Absolutely. REITs are looking at major drops in interest rates coming. That will greatly reduce their overheads as they refi, and of course, the recovering economy is good for filling buildings. So I've been a very strong advocate of REITs the entire year, and they really have only started to pay off big time in the last month, and Crown Castle Inc (CCI) is my favorite REIT out there.
Q: I own Freeport McMoRan (FCX). Do you think China’s problems will make FCX a sell?
A: Not a sell, but a wait. China (FXI) is delaying any recovery in a bull market. If we get another move in (FCX) down to the thirties I would double up, because eventually American demand offsets Chinese weakness, and we’ll be back in a bull market on the metals. It's American demand that is delivering the long-term bull case for copper, not the return of Chinese construction demand, which led to the last bull market. So we really are changing horses as the main driver of the demand for copper. It still takes 200 pounds of copper to make an EV whose sales are growing globally.
Q: Is it time to buy (TLT) now?
A: No, the time to buy (TLT) was at the beginning of the year, seven months ago, three months ago, a month ago. Now we've just had a really big $12 point rally, and really almost $18 points off the bottom. I would wait for at least a 5-point drop-in (TLT) before we dive back into that. If you noticed, I haven't been doing any (TLT) trades lately because the move has been so extended. And in fact, if they only cut a quarter of a point in September, then you could get a selloff in (TLT), and that'll be your entry point there. You have to ditch your buy high, sell low mentality, which most people have.
Q: What bond should I buy for a 6 to 10-year investment?
A: I’d buy junk bonds. Junk bonds have always been misnamed, or I would buy some of the high-yield plays like the BB loans (SLRN). With junk bonds, the actual default rate even in a recession, only gets to about 2%. So it certainly is worth having. I still think they're yielding 6 or 7% now, so that's where I would put my money. Or you can buy REITs which also have similarly high yields, like the (CCI), which is around 5% now. Risks in both these sectors are about to decline dramatically.
Q: Will there be an inflation spike next year?
A: No. Technology is accelerating so fast it's wiping out the prices of everything that's highly deflationary, and that pretty much has been the trend over the last 40 years. So don't expect that to change. The post-COVID inflationary spike was a one-time-only event, which then ended two years ago. We've gone from a 9% down to a 2.8% inflation rate; unless we get another COVID-induced inflation spike, there's no reason for inflation to return. Deflation is going to be the next game.
Q: What do you think of the UK economy now that you're in London?
A: Awful! Brexit was the worst thing that happened to England—that's why it was financed by the Russians. Brexit will have the effect of dropping both the economic growth rate and standards of living by half over the next 20 years. Expect England to beg their way back into Europe sometime in the future, although I may not live long enough to see it. There are no English people in London anymore. It's all foreigners. No one can afford it.
Q: Should I leap on Tesla (TSLA) where the current price is?
A: No. We’re waiting for the nuclear winter in EVs to end—no sign of it yet. And unfortunately, Elon Musk is scaring away buyers, especially in blue states, by palling around with Donald Trump, a well-known climate change denier. What's in that relationship? I have no idea. One of the first things Trump did was to dump subsidies for electric cars last time he was president. It's hard to tell who’s gone crazier, Trump or Musk.
Q: I have an empty portfolio, when should we expect your options trade to start coming in again?
A: As soon as I see a great sell-off or a great individual situation like we got a couple days ago with the Mad Hedge Technology Letter in Lam Research (LRCX). That's what we look for all day, every day of the year. There's no point in trading for the sake of trading, that only makes your broker rich, not you. There's no law that says you have to have a trade every day, and actually having cash isn't so bad these days. They're still paying 5% for 90-day T Bills. If you don’t know what T Bills are, look up 90-day T bills on my website.
To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in to www.madhedgefundtrader.com , go to MY ACCOUNT, click on GLOBAL TRADING DISPATCH, then WEBINARS, and all the webinars from the last 12 years are there in all their glory.
Good Luck and Good Trading
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
May 27, 2024
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE TOP IS IN and (THE PASSING OF A GREAT MAN)
(NVDA), ($INDU), (SPY), (TLT), (GLD), (SLV), (SREIT)
In the end, it proved to be a one-stock market.
As I expected, once the NVIDIA earnings were out it proved to be not only the top for (NVDA), but also for every other stock and asset class.
It was “risk off” with a vengeance.
The Dow ($INDU) and S&P 500 (SPY) suffered their worst day in a year. Bonds (TLT) took it on the nose. Gold (GLD) and silver (SLV) gave up their recent 5% and 10% gains, the worst action in eight months. Even the real estate data was awful, even though it lags by a month.
It gets worse.
Look at the chart for the Dow Average below and you’ll see that a very clear double top is in place. And now we have commercial real estate REIT’s (SREIT) suspending redemptions and gating investors lest they trigger a run on the bank and force distress liquidations.
I’m not turning bearish. But all this means we have some tough rows to hoe before we reach substantial new highs again. I’m still sticking to my 2024 year-end target of $6,000 for the (SPY). But it might be a good summer to take a long Alaskan cruise, climb a high mountain like the Matterhorn, or catch the latest shows in London’s West End (Kiss Me Kate, Les Misérables, or Moulin Rouge?).
I’m doing all three.
Don’t get me wrong. All this travel does not mean that I have become lazy, indolent, or a skiver. I actually get more work done when I am on the road as I don’t have so many local distractions, like unplugging the toilet (I have two daughters), trapping rats under the house, or getting someone to weed the garden.
In the Galapagos Islands I actually achieved ten hours a day of work because, dead on the equator, you have to meter your sun exposure carefully. Notice that my trade alerts went up in volume and were all good and my original content increased. I actually had the time to write what I really wanted to write.
With Elon Musk’s global Starlink Internet service promising 200 mb/sec and actually delivering 50, the world is my oyster.
And how about those NVIDIA earnings!
They were Blockbuster for sure, and for good measure they announced a 10:1 stock split, Taking the shares over $1,000 for the first time. Talk about a one: two punch for the shorts!
Revenues came in at an astounding $26.04 billion vs. $24.65 billion expected. CEO Jenson Huang called it a new Industrial Revelation. It sounds a lot like my New American Golden Age and Pax Americana. I reiterate by yearend $1,400 target. It’s as if Microsoft (MSFT), Intel (INTC), Dell (DELL), and Netscape all combined into a single company in 1995.
If by some miracle we do get a 20% correction like we had in April, double the position I know you all already have. Oh, and Mad Hedge hit a new all-time high, up 18.01% YTD and 695% since inception.
What’s more important here is not how spectacular a bet on (NVDA) a decade ago at $15 a share a decade ago was, back when it was considered a lowly video game stock. The implications for the global economy are immense. In means the massive $200 billion in capital spending for this year is too low. It also means the future is happening faster than anyone realizes, even me.
You know those popup 15-second advertising videos that have suddenly started appearing on your phone? They eat up immense processing power and drain your battery at an epic rate (more power demands). But they can be entertaining. Think of them as a metaphor for the entire economy.
Let me assure you that I’m called “Mad” for a reason. When (NVDA) suffered its last correction, I doubled up my own personal LEAPS position. That was when the bears were arguing for a selloff in (NVDA) prompted by an air pocket in orders headed into the Blackwell superchip release.
It turns out there’s no air pocket. Customers are buying the old (NVDA) chips as fast as they can at premium prices.
Dow 120,000 here we come!
So far in May, we are up +3.38%. My 2024 year-to-date performance is at +18.01%. The S&P 500 (SPY) is up +10.90% so far in 2024. My trailing one-year return reached +33.25%.
That brings my 16-year total return to +694.62%. My average annualized return has recovered to +51.79.
As the market reaches higher and higher, I continue to pare back risk in my portfolio. I took profits on my long in (SLV) right at a multiyear high and just before a 10% plunge. That left me 90% in cash and with a single short in (AAPL) going into the worst selloff in a year.
The harder I work, the luckier I get.
Some 63 of my 70 round trips were profitable in 2023. Some 27 of 37 trades have been profitable so far in 2024.
Copper Slide Continues, down 7% in three days, as the extent of Chinese speculation becomes clear. The route has spread to gold, silver, iron ore, and platinum. Once the Chinese enter a market, the volatility always goes up. Speculators have fled a collapsing Chinese real estate market into commodities of every sort. Buy the big dip. They’ll be back.
S&P Global Flash PMI Jumps, 50.9 for services and 54.8 for manufacturing, a one-year high. Stocks and bonds took it on the nose, taking ten-year US Treasury yields up to 4.49%. Commodities were already taking a bath thanks to speculative Chinese dumping. Inflation wasn’t gone, it was just taking a nap.
Existing Home Sales Fall, down for the second month in a row at -1.9% to 4.14 million rates in April. The Median selling price rose to $407,600, a new record. The residential real estate boom is back! The nascent recovery in demand from a 13-year low in October is being hindered by limited inventory that’s keeping asking prices elevated
New Home Sales Tank in April, down 4.4%, and 7.7% in March.
The median price of a new home was $433,500, 4% higher than it was in April 2023. Builders say they cannot lower prices due to high costs for land, labor, and materials. The big production builders have been buying down mortgage rates to help boost sales, but they are able to do that because of their size.
Weekly Jobless Claims Fall, down 215,000, down 8,000, the steepest decline since September. Federal Reserve officials are looking for further weakening in demand as they try to tame inflation without triggering a surge in unemployment.
30-Year Fixed Rate Mortgage Drops Below 7.0%. The housing market taking a step back in April after a strong performance in the first quarter.
To Monetize or Not? Most of us are still using AI for free. Providers are now facing a dilemma, “Growth at or cost”, or “Take the money and run” for systems that are, with the new $40,000 Blackwell chips, still incredibly expensive to build. Microsoft’s GPT 4.0, Goggle’s AI Overview, and Gemini AI are essentially beta tests that are still free (the black George Washington’s, etc). But Amazon is looking to start charging for the AI elements of its Alexa service. Your biggest monthly bill may soon be for AI.
Thousands of Young Traders are Getting Wiped Out, following the trading advice of London-based IM Academy. The guru, Chris Terry, calls itself the “Yale of forex, the Harvard of trading,” despite his own criminal conviction for theft. Since 2014 IM Academy has grown to 500,000 members taking in $1 billion in revenues. Terry had no formal education and until the late nineties worked as a construction worker in New York. IM is now under investigation by the FTC. Be careful who you listen to, as most investment newsletters out there are fakes.
US to Drop One Million Barrels of Gasoline on the Market, ahead of the annual July 4 price spike. The fuel will come from closing down the Northeast Emergency Fuel Reserve. With the decarbonization of America, who needs it? It takes 2 gallons of oil to produce 1 gallon of gasoline. Hey, what’s the point of being a politician if you can’t engage in pre-election ploys? Another dig at the oil companies.
My Ten-Year View
When we come out the other side of the recession, we will be perfectly poised to launch into my new American Golden Age or the next Roaring Twenties. The economy decarbonizing and technology hyper accelerating, creating enormous investment opportunities. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The new America will be far more efficient and profitable than the old.
Dow 240,000 here we come!
On Monday, May 27 is Memorial Day. As the senior officer, I will be leading the annual parade in Incline Village, this time wearing my Ukrainian Army major’s hat.
On Tuesday, May 28 at 1:30 PM EST, the Dallas Fed Manufacturing Index is released.
On Wednesday, May 29 at 11:00 PM EST, the Fed Beige Book is published
On Thursday, May 30 at 8:30 AM EST, the Weekly Jobless Claims are announced. We also get the second read of the US Q1 GDP Growth Rate.
On Friday, May 31 at 8:30 AM the Core PCE Price Index is announced, an important inflation read.
At 2:00 PM the Baker Hughes Rig Count is printed.
As for me, It was with a heavy heart that I boarded a plane for Los Angeles to attend a funeral for Bob, the former scoutmaster of Boy Scout Troop 108.
The event brought a convocation of ex-scouts from up and down the West Coast and said much about our age.
Bob, 85, called me two weeks ago to tell me his CAT scan had just revealed advanced metastatic lung cancer. I said, “Congratulations Bob, you just made your life span.”
It was our last conversation.
He spent only a week in bed and then was gone. As a samurai warrior might have said, it was a good death. Some thought it was the smoking he quit 20 years ago.
Others speculated that it was his close work with uranium during WWII. I chalked it up to a half-century of breathing the air in Los Angeles.
Bob originally hailed from Bloomfield, New Jersey. After WWII, every East Coast college was jammed with returning vets on the GI bill. So he enrolled in a small, well-regarded engineering school in New Mexico in a remote place called Alamogordo.
His first job after graduation was testing V2 rockets newly captured from the Germans at the White Sands Missile Test Range. He graduated to design ignition systems for atomic bombs. A boom in defense spending during the fifties swept him up to the Greater Los Angeles area.
Scouts I last saw at age 13 or 14 were now 60, while the surviving dads were well into their 80’s. Everyone was in great shape, those endless miles lugging heavy packs over High Sierra passes obviously yielding lifetime benefits.
Hybrid cars lined both sides of the street. A tag-along guest called out for a cigarette and a hush came over a crowd numbering over 100.
Apparently, some things stuck. It was a real cycle of life weekend. While the elders spoke about blood pressure and golf handicaps, the next generation of scouts played in the backyard or picked lemons off a ripening tree.
Bob was the guy who taught me how to ski, cast for rainbow trout in mountain lakes, transmit Morse code, and survive in the wilderness. He used to scrawl schematic diagrams for simple radios and binary computers on a piece of paper, usually built around a single tube or transistor.
I would run off to Radio Shack to buy WWII surplus parts for pennies on the pound and spend long nights attempting to decode impossibly fast Navy ship-to-ship transmissions. He was also the man who pinned an Eagle Scout badge on my uniform in front of beaming parents when I turned 15.
While in the neighborhood, I thought I would drive by the house in which I grew up, once a modest 1,800 square-foot ranch-style home to a happy family of nine. I was horrified to find that it had been torn down, and the majestic maple tree that I planted 40 years ago had been removed.
In its place was a giant, 6,000 square foot marble and granite monstrosity under construction for a wealthy family from China.
Profits from the enormous China-America trade have been pouring into my hometown from the Middle Kingdom for the last decade, and mine was one of the last houses to go.
When I was class president of the high school here, there were 3,000 white kids and one Chinese. Today those numbers are reversed. Such is the price of globalization.
I guess you really can’t go home again.
At the request of the family, I assisted in the liquidation of his investment portfolio. Bob had been an avid reader of the Diary of a Mad Hedge Fund Trader since its inception, and he had attended my Los Angeles lunches.
It seems he listened well. There was Apple (AAPL) in all its glory at a cost of $21. I laughed to myself. The master had become the student and the student had become the master.
Like I said, it was a real circle of life weekend.
Scoutmaster Bob
1965 Scout John Thomas
The Mad Hedge Fund Trader at Age 11 in 1963
Good Luck and Good Trading,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
May 20, 2024
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or DOW 40,000 AND HANGING WITH THE AMAZON HEADHUNTERS)
(TLT), (JNK), (WES), (ET), (GLD), (SLV), (MSFT),
(NVDA), (AAPL), (SPY), (FXI), (COPX), (FCX)
When I entered the stock market in 1982 when the Dow was at 600 and you told me the Average would reach 40,000 in 42 years, I would have thought you delusional, out of your mind, and stark raving mad.
Yet, here it is 2024 and here we are, with the index up an eye-popping 66.6 times. The good news is that we are now only one triple away from reaching my long-term target of 120,000. Never underestimate the power of compounding, which my friend Warren Buffet describes as a snowball.
You can’t help but be impressed with the performance of precious metals over the last two weeks, up 6.50% for (GLD) and a ballistic 20% for (SLV). Metals producers are unable to rush supplies to the market fast enough to cover their shorts in the futures market, creating a massive short squeeze.
Long may it continue.
The moves validate my own forecasts for the barbarous relic to hit $3,000 and the white metal to reach $50 sometime in 2025.
One cannot underestimate the power of the weakening economic data over the last fortnight. As a result, we have gone from “Higher for longer” to “Lower sooner”, with huge consequences for all asset classes.
That brings to the fore investment in fixed-income securities. There are two ways to make money on a fixed income. Coupon interest rates are still at historically high levels. And as rates fall, fixed-income prices rise, opening the door to capital gains, which could reach 10%-20% in the coming year.
The fixed-income market, at $100 trillion is double the size of the stock market. And there are many more bond listings than stock ones. So the number of possible investments is almost endless. I shall give you a brief overview of some of the more interesting subsectors.
US Government bonds – are the gold standard with a guaranteed return. But you pay for the extra security with lower rates; the current ten-year US Treasury bond yield is 4.42%, much lower than the present 90-day T-bill of 5.25%. The easiest way to buy these is through the (TLT). The 30-year government bond should be avoided as the extra 0.14% in yield doesn’t adequately compensate you for the extra 20 years of risk
Junk Bonds – Also known as “high yield” bonds have always been misnamed. The default rates never remotely approached the levels that justified their high yields, not even during the financial crisis, as my old friend former junk bond king Michael Milliken has amply proven. The (JNK) is currently yielding 6.59% and has the potential for larger capital gains than government bonds.
Master Limited Partnerships – These are partnerships granted generous tax benefits with the goal of producing oil. They issue annual Form K-1’s to include with your tax return. Dividends are deferred until the MLP’s investment reaches the end of its useful lives, which can be decades. MLP’s used to be a huge industry with dozens of listed companies.
When the price of oil went to negative numbers during the pandemic, most of them got wiped out. Because of this rocky past, there are a handful of large, well-capitalized MLP’s that with extremely high yields. One is Western Midstream Partners (WES) with a 9.20% yield. Energy Transfer Partners (ET) pay a 7.96% yield.
These yields will remain safe as long as oil prices are stable or rising, as I expect in a long-term global economic recovery. Take oil back to zero again in another pandemic and these returns will get turned on their head.
With the normalizing of interest rates, it's time to normalize investment strategies as well. That means bringing back the old 60/40 strategy where one half of the portfolio ensures the other, with a modern twist. You can put 60% of your assets in stocks, with half on technology and half on domestic cyclicals.
The other 40% should be allocated to some mix of the above fixed-income investments guaranteeing annual high returns. In not a bad strategy for mature investors, especially if they would rather be on a golf course instead of spending all day in front of a screen picking bottoms and tops for stocks, like Millennials.
So far in May, we are up +3.01%. My 2024 year-to-date performance is at +17.62%. The S&P 500 (SPY) is up +10.90% so far in 2024. My trailing one-year return reached +32.80% versus +29.02% for the S&P 500.
That brings my 16-year total return to +694.56%. My average annualized return has recovered to +51.77%.
As the market reaches higher and higher, I continue to pare back risk in my portfolio. I let my (GLD) and (SLV) positions expire at max profit. I did the same with my (MSFT) short. I sold my (NVDA) and (TLT) shorts for a nice profit. That leaves me with just two positions, a long in (SLV), which has gone ballistic, and a short in (AAPL).
Some 63 of my 70 round trips were profitable in 2023. Some 27 of 37 trades have been profitable so far in 2024.
The Bull Market has Five More Years to Run, with S&P 500 (SPY) growing earnings at 10% a year for the foreseeable future. Last year brought in $222 per share, 2024 will see $250, 2025 $270, and $300 for 2026. The Great American Golden Age has only just begun. Profit margins will expand to all-time record highs. Falling rates and a weak dollar will boost exports to a recovering Europe and Japan. Inflation should hit the Fed’s 2% in 2025 as AI chatbots replace workers at a breakneck rate, cutting costs dramatically. The future is happening fast. Buy everything on dips, even bonds.
CPI Comes in Cool, in April at 0.3% versus 0.4% expected, taking stocks to new all-time highs. Inflation resumed its downward trend at the start of the second quarter in a boost to financial market expectations for a September interest rate cut. Buy em!
PPI Comes in Hot at 0.5%, and up 2.2% YOY, putting up another potential roadblock to interest rate cuts anytime soon. The PPI is a gauge of prices received at the wholesale level that came in higher than the 0.3% estimate. Higher for longer rules. The last mile, or the last 1$ drop in inflation is always the hardest and usually requires a recession. Higher for longer rules.
Retail Sales Come in Surprisingly Flat in April, setting up a Goldilocks economy for the Fed to cut rates in September. The unchanged reading in retail sales last month followed a slightly downwardly revised 0.6% increase in March, the Commerce Department's Census Bureau said on Wednesday. Retail sales were previously reported to have risen 0.7% in March.
Biden to Increase China Tariffs (FXI) to 100%, on key sectors including electric vehicles, batteries, solar cells, steel, and aluminum. Biden has previously announced the steel and aluminum tariffs, which will increase to 25% on some products that have a 7.5% rate or no tariffs now. The EV rate aims to protect the US from a potential flood of Chinese autos that could upend the politically sensitive auto sector. The total tariff on Chinese electric vehicles will rise to 102.5% from 27.5. Biden’s union support is clear for all to see.
Copper Hits Record Highs, as hedge funds, trend followers, bearish shorts, and Chinese speculators pile in. New York prices hit $5 a pound, while London reached $11,000 per metric tonne. The price action is similar to other commodities with disrupted supplies like Cocoa and Nickel. The runaway market will continue. Buy (FCX) and (COPX) on dips.
As the Dow Tops 40,000, investors are pouring money into both bonds and stocks, according to the Bank of America. Equity funds saw $11.9 billion in inflows, while bond funds drew in $11.7 billion. Within fixed income, Treasury inflation-protected securities (TIPS) saw outflows of $700 million, the most in nine weeks. Keep buying those dips.
Weekly Jobless Claims Drop 10,000, to 222,000, after seasonal factors caused a significant increase in New York claims in the prior week. The four-week moving average, which helps smooth short-term fluctuations in weekly claims figures, increased to 217,750, the highest level since November.
Solar Storm Hits Starlink, taking out several hundred satellites and degrading service, says Elon Musk. Starlink, the satellite arm of Elon Musk's SpaceX, is suffering as the Earth is battered by the biggest geomagnetic storm due to solar activity in two decades. Starlink owns around 60% of the roughly 7,500 satellites orbiting Earth and is a dominant player in satellite internet. The U.S. National Oceanic and Atmospheric Administration has said the storm is the biggest since October 2003 and is likely to persist over the weekend, posing risks to navigation systems, power grids, and satellite navigation.
My Ten-Year View
When we come out the other side of the recession, we will be perfectly poised to launch into my new American Golden Age or the next Roaring Twenties. The economy decarbonizing and technology hyper accelerating, creating enormous investment opportunities. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The new America will be far more efficient and profitable than the old.
Dow 240,000 here we come!
On Monday, May 20, nothing of note takes place.
On Tuesday, May 21 at 1:30 PM EST, API Crude Oil Stocks are released.
On Wednesday, May 22 at 2:00 PM, the Existing Homes Sales are published
On Thursday, May 23 at 7:00 AM, we get New Home Sales. And at 8:30 AM, the Weekly Jobless Claims are announced.
On Friday, May 24 at 8:30 AM, the Durable Goods Report is announced. At 2:00 PM, the Baker Hughes Rig Count is printed.
As for me, when I crossed the Continental Divide at 13,300 in the Andes Mountains of Ecuador last week, the vast expanse of the Amazon Basin lay before me. Clouds danced in and out of the treetops, waterfalls plunged down precipitous slopes, and the jungle spread out for 2,000 miles east. I was somewhat buzzed by the altitude but still enjoyed every minute.
My destination was the Termos Papallacta spa on the slopes of an ancient volcano which offered steaming hot sulfuric waters and a brisk massage for $50. Colorful exotic flowers abounded. This is where the wealthy of Quito come to salve arthritis and aches and pains in magical waters.
How do you get wealthy in Ecuador? Bananas, tourism, real estate speculation, and flower exports to the US. Given my experience with Japanese onsens, I had no problem with their ultra-hot waters.
This is the land of the Jivaro Clan, the world’s last known headhunters. Their final victim was a National Geographic Society explorer in 1961. Recently, his grandson traveled to Ecuador to retrieve the head and return it to the US for a respectful burial, all to great fanfare in the local press. The Jivaro still shrinks heads, but only of animals which they sell to tourists just to keep the practice alive.
Ecuador is the great test bed for monetary experts around the world. In 1999, they suffered a financial crisis where the value of their currency, the Sucre, collapsed to 25,000 to the dollar. The central bank responded by changing the national currency to the US dollar and only permitting conversion from the old currency at $2 per person.
The move had several unintended consequences. The savings of everyone in the country were wiped out overnight. But it also eliminated their debt. Those with relatives sending back remittances from the US suddenly became wealthy and bought up all the real estate they could. In the end, it created an economic boom that continues to today.
Today, Ecuador is one of the friendliest, and cheapest countries in South America. It elected Daniel Noboa as president in 2023, the scion of a banana fortune, who has been hugely popular. The government cracked down on the drug gangs, arresting everyone with a suspect tattoo. Today the police and army are everywhere, and the streets are safe. There are armed checkpoints at key intersections. The ownership of firearms and even long knives has been banned.
The country has no seasons, sitting right on the Equator, and is temperate all year long. Even at 13,300 feet, there is no snow. I had no problem with the food, but then I had a cast iron stomach battle-tested in 135 countries. Not even the locals drink the tap water, which is only used for washing. It has to be all bottled water all the time or you die and you often see people lugging around one-gallon bottles.
Retiring Americans have noticed and some 20,000 now live in the country on their Social Security checks at one-third the cost of home. They concentrate on cultural hot spots, like the ancient city of Cuenca, where the local hospitals speak English, are experts in gerontology, and accept Medicare. You can buy a nice home in a mountain urban area for $250,000 and beachfront digs for $500,000. The Marriot Hotel in Quito cost me $160 a night and a steak dinner was $19 and to die for.
You can’t go to Quito without visiting the Equator for which the country was named, a tourist mecca where everyone gets pictures straddling the northern and southern hemispheres. The country has two summer solstices a year, one in the spring and one in the fall, as the sun transits from north to south, then south to north.
I passed on the shrunken head, which I thought grotesque, and got the T-shirt instead. Besides, US Customs might have questions (Do you have any shrunken heads to declare?). I think I’ll be returning to Ecuador soon.
Descending into the Amazon
Jivaro Indian
Shopping for Breakfast
A Slow Day at the Flower Market
A Smoothie for Lunch
Standing on the Equator, One Foot in Each Hemisphere
Good Luck and Good Trading,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
April 25, 2024
Fiat Lux
Featured Trade:
(RISK CONTROL FOR DUMMIES) or (THE HEADS I WIN, TAILS YOU LOSE STRATEGY),
(SPY), (FCX), (NVDA), (TLT)
Whenever I change my positions, the market makes a major move, suffers a “black swan” or reaches a key level, I stress test my portfolio by inflicting various scenarios upon it and analyzing the outcome.
This is common practice and second nature for most hedge fund managers.
In fact, the larger ones will use top-of-the-line mainframes powered by $100 million worth of in-house custom programs to produce a real-time snapshot of their positions in hundreds of imaginable scenarios at all times. This is the sort of thing Ray Dalio used to do.
If you want to invest with these guys feel free to do so.
They require a $10-$25 million initial slug of capital, a one-year lock-up, charge a fixed management fee of 2%, and a performance bonus of 20% or more.
You have to show minimum liquid assets of $2 million and sign 100 pages of disclosure documents.
If you have ever sued a previous manager, forget it.
And, oh yes, the best-performing funds have a ten-year waiting list to get in, as with my friend David Tepper. Unless you are a major pension fund like the State of California, they don’t want to hear from you.
Individual investors are not so sophisticated and it clearly shows in their performance, which usually mirrors the indexes with less of a large haircut.
So, I am going to let you in on my own, vastly simplified, dumbed down, the seat of the pants, down-and-dirty style of scenario analysis and stress testing that replicates 95% of the results of my vastly more expensive competitors.
There is no management fee, performance bonus, disclosure document, lock up, or upfront cash requirement. There’s just my token $3,500 a year subscription and that’s it.
To make this even easier for you, you can perform your own analysis in the Excel spreadsheet I post every day in the paid-up members section of Global Trading Dispatch.
You can just download it and play around with it whenever you want, constructing your own best-case and worst-case scenarios. To make this easy, please log into your Mad Hedge Fund Trader, click on “MY ACCOUNT”, then click on Global Trading Dispatch, then Current Positions, and download the Excel spreadsheet for April 25, 2024.
There you will find my current trading portfolio showing:
Current Capital at Risk
Risk On
(NVDA) 5/$710-$720 call spread 10.00%
(TLT) 5/$82-$85 call spread 10.00%
(FCX) 5/$42-$45 call spread 10.00%
Risk Off
(NVDA) 5/$960-$970 put spread -10%
Total Net Position 30.00%
Total Aggregate Position 40.00%
Since this is a “for dummies” explanation, I’ll keep this as simple as possible.
No offense, we all started out as dummies, even me.
I’ll the returns in three possible scenarios: (1) The (SPY) is unchanged at $505 by the May 17 expiration of my front month option positions, which is 15 trading days away, (2) The S&P 500 rises 5.0% to $530 by then, and (3) The S&P 500 falls 5.0% to $480.
Scenario 1 – No Change
The value of the portfolio rises from a 5.07% profit to a 13.00% Profit. My existing longs in (FCX), (TLT), and (NVDA) expire at their maximum profits. So does my one short in (NVDA).
Scenario 2 – S&P 500 rises to $530
You can easily forget about the long positions in (FCX), (TLT), and (NVDA) as they will expire well in the money. If they go up fast enough, I might even take an early profit and roll into a June or July position. Our short in (NVDA) might take some heat. But in the current environment of going into the summer doldrums, there is no way (NVDA) shoots up to a new all-time high, right where our strike prices were set at on purpose. The net of all this is that our portfolio should expire at a maximum profit for the year at up 13.00%.
Scenario 3 – S&P 500 falls to $480
All three of my stocks fall, but not enough for my three call spreads to go out of the money. (FCX) will stay above my stop-out level at $45, (TLT) at $85, and (NVDA) at $720. Obviously, the short in (NVDA) becomes a chipshot. Again, we expire at a maximum profit for the year at up 13.00%.
Up we make money, down we make money, sideways we make money, I like it! This is why I run long/short baskets of options spreads whenever the market allows me. It’s a “Heads I win, tails you lose strategy”.
If the market goes up, I’m looking for stocks to sell. If the market goes down, I'm looking for securities to buy. Boy low, sell high, I’m thinking of patenting the idea.
This is the type of extremely asymmetric risk/reward ratio hedge funds are always attempting to engineer to achieve outsized returns. It is also the one you want after the stock market has risen by 25% a year since the 2020 pandemic.
All that’s really happened is that the world has gone from slightly good to better this year. I can rejigger this balance anytime I want. If I think that a change in the economy or the Fed’s interest rate policy is in the works.
Keep in mind that these are only estimates, not guarantees, nor are they set in stone. Future levels of securities, like index ETF’s are easy to estimate. For other positions, it is more of an educated guess. This analysis is only as good as its assumptions. As we used to do in the computer world, garbage in equals garbage out.
Professionals who may want to take this out a few iterations can make further assumptions about market volatility, options implied volatility or the future course of interest rates. Keep the number of positions small to keep your workload under control. I never have more than ten. Imagine being at Goldman Sachs and doing this for several thousand positions a day across all asset classes.
Once you get the hang of this, you can start projecting the effect on your portfolio of all kinds of outlying events. What if a major world leader is assassinated? Piece of cake. How about another 9/11? No problem. Oil at $150 a barrel? That’s a gimme. What if there is an Israeli attack on Iranian nuclear facilities? That might take you all of two minutes to figure out. The Federal Reserve launches a surprise interest rate rise? I think you already know the answer.
The bottom line here is that the harder I work, the luckier I get.
