In the run up to every options expiration, which is the third Friday of every month, there is a possibility that any short options positions you have may get assigned or called away.
If that happens, there is only one thing to do: fall down on your knees and thank your lucky stars. You have just made the maximum possible profit for your position instantly.
Most of you have short option positions, although you may not realize it. For when you buy an in-the-money vertical option spread, it contains two elements: a long option and a short option.
The short options can get “assigned,” or “called away” at any time, as it is owned by a third party, the one you initially sold the put option to when you initiated the position.
You have to be careful here because the inexperienced can blow their newfound windfall if they take the wrong action, so here’s how to handle it correctly.
Let’s say you get an email from your broker telling you that your call options have been assigned away. I’ll use the example of the Microsoft (MSFT) July 2022 $200-$210 in-the-money vertical BULL CALL spread.
For what the broker had done in effect is allow you to get out of your call spread position at the maximum profit point 7 days before the July 15 expiration date. In other words, what you bought for $8.80 is now $10.00!
All have to do is call your broker and instruct them to exercise your long position in your (MSFT) July 2022 $200 calls to close out your short position in the (MSFT) July 2022 $210 calls.
This is a perfectly hedged position, with both options having the same expiration date, and the same amount of contracts in the same stock, so there is no risk. The name, number of shares, and number of contracts are all identical, so you have no exposure at all.
Calls are a right to buy shares at a fixed price before a fixed date, and one options contract is exercisable into 100 shares.
To say it another way, you bought the (MSFT) at $200 and sold it at $210, paid $8.80 for the right to do so, so your profit is $1.20 cents, or ($1.20 X 100 shares X 12 contracts) = $1,440. Not bad for an 18-day limited risk play.
Sounds like a good trade to me.
Weird stuff like this happens in the run-up to options expirations like we have coming.
A call owner may need to buy a long (MSFT) position after the close, and exercising his long July 2022 $200 call is the only way to execute it.
Adequate shares may not be available in the market, or maybe a limit order didn’t get done by the market close.
There are thousands of algorithms out there which may arrive at some twisted logic that the puts need to be exercised.
Many require a rebalancing of hedges at the close every day which can be achieved through option exercises.
And yes, options even get exercised by accident. There are still a few humans left in this market to blow it by writing shoddy algorithms.
And here’s another possible outcome in this process.
Your broker will call you to notify you of an option called away, and then give you the wrong advice on what to do about it. They’ll tell you to take delivery of your long stock and then most additional margin to cover the risk.
Either that or you can just sell your shares on the following Monday and take on a ton of risk over the weekend. This generates a ton of commission for the brokers but impoverishes you.
There may not even be an evil motive behind the bad advice. Brokers are not investing a lot in training staff these days. It doesn’t pay. In fact, I think I’m the last one they really did train.
Avarice could have been an explanation here but I think stupidity and poor training and low wages are much more likely.
Brokers have so many legal ways to steal money that they don’t need to resort to the illegal kind.
This exercise process is now fully automated at most brokers but it never hurts to follow up with a phone call if you get an exercise notice. Mistakes do happen.
Some may also send you a link to a video of what to do about all this.
If any of you are the slightest bit worried or confused by all of this, come out of your position RIGHT NOW at a small profit! You should never be worried or confused about any position tying up YOUR money.
Professionals do these things all day long and exercises become second nature, just another cost of doing business.
If you do this long enough, eventually you get hit. I bet you don’t.
Calling All Options!
https://www.madhedgefundtrader.com/wp-content/uploads/2018/11/Call-Options.png345522Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2022-08-04 09:02:102022-08-05 00:11:15A Note on Assigned Options, or Options Called Away
I am writing this from the balcony of my corner suite at the historic Danieli Hotel overlooking the Grand Canal in Venice, Italy.
Every conceivable watercraft imaginable are passing by in large numbers; water taxis, Vaporettos, and even the traditional gondolas. Outside my window, I see two pilots are heatedly arguing over who should enter the side canal first.
This will be my last stay at the Danieli for a while as the 200-year-old hotel cobbled together for three 700-year-old palaces has been sold to the Four Seasons and will imminently close for a three-year gutting and remodeling.
Until Thursday, the market was reaching the top of a three-month range and was ripe to roll over for an August summer correction. Then the Democrats dropped a bombshell. They announced a blockbuster $739 billion stimulus package that will be voted on as early as this week. All of a sudden, the Biden agenda is back on just at one-third its original size.
The package breaks down as follows:
Commits $369 billion to Climate change
Renews a $7,500 tax credit for electric vehicles
Allows Medicare to negotiate prices
Adds a 15% Corporate alternative minimum tax
Reduces the Deficit by $300 billion
It all amounts to a massive stimulus package just as the US economy is entering the most modest of recessions. It also represents a Hail Mary for the Democrats to maintain congressional control.
It just might work.
Who is the biggest victim of the stimulus package? Big oil companies where an alternative minimum neatly sidesteps the oil depletion allowance which enabled them to dodge most taxes since it was passed in 1913.
Who is the biggest winner? Tesla (TSLA), which accounted for 80% of global EV production and benefits enormously from a $7,500 tax credit, is made available for low-income earners purchasing electric cars. It also allows tax credits for the purchase of used EVs for the first time. That is important for the economy as a whole, as both General Motors (GM) and Ford (F) plan to have more than 50% of their production in EVs by 2030.
Traders seemed to know this, taking Tesla shares up 50% from the June bottom and minting several new Mad Hedge millionaires along the way.
The market seemed to sense that something was in the works, even though the meetings were held in secret in a windowless basement room in the Capitol Building. The markets seemed to know something was coming. July posted the best market performance in two years, with the Dow Average up 7.69%.
This is a classic example of markets sensing major events we mere humans are blind to. My favorite example of this is the Battle of Midway, where the Japanese lost a disastrous four aircraft carriers and 350 planes, which ended on June 7, 1942. Even though the outcome was top secret and withheld from the public for months, a 20-year bull market ensued and didn’t end until the 1962 Cuban Missile Crisis.
You may have noticed that I have pulled back from my aggressive shorting of the bond market. That’s because the US budget deficit is seeing the largest decline in American history. Throw in the $300 billion promised by this week’s stimulus package, and the deficit will plunge by a staggering $1.5 trillion in 2022.
That will pay off 37.5% of the $4 trillion deficit run up by the Trump administration. As a result, ten-year US Treasury yields have plunged an eye-popping 90 basis points, from 3.5% to 2.6% in only six weeks. No wonder stocks have been so hot during the same time period.
The Fed Makes Its Move, and the market loved it, taking stocks up 436 points. Notice that the market is not letting anyone in. An increasing number of investors are coming over to my view that the S&P 500 is headed over to $4,800 by yearend. The bottom for this cycle is in. The overnight rate is now 2.25%-2.5%. The Fed is rapidly catching up with the curve. Powell left the door open to raising only 0.50% next time. The futures market is betting that we hit 3.3% this year.
The US is Officially in Recession, after reporting a slight 0.9% decline in Q2. That makes two back-to-back quarters following the 1.6% decline in Q1. The big question is are we already out, given the incredible demand seen in some sectors of the economy, like airlines, hotels, and resorts? It also looks like a big spending bill is about the pass congress. Weekly Jobless Claims Hit 256,000, down 5,000 from the previous week. Is the recession already over?
IMF Cuts GDP Forecast, cutting its 2022 forecast from 3.6% to 3.2%. 2023 gets a haircut from 3.6% to 2.9%. The IMF is always a deep lagging indicator. Inflation, a China slowdown, and the Ukraine War are the reasons. I think largest are about to start discounting a growth resurgence.
Russia and Ukraine Sign Grain Deal, opening up the Black Sea ports for wheat exports. It’s hard to imagine how this is going to work. Two countries at war but continuing international trade? Indeed, one Russian missile hit Odessa the next day with two others shot down. Still, it was enough to drop wheat prices.
Space X Breaks Launch Record, sending 32 reusable Falcon 9’s aloft so far in 2022. The Starlink ramp-up is responsible, Elon Musk’s effort to build a global satellite WIFI network. You can already become a Starlink beta tester in the US at competitive prices.
The S&P Case Shiller National Home Price Index Sees Another Drop, from 20.6% to 19.7% in May. The closely watched figure saw only its second drop in three years. Tampa (36.1%), Miami (34%), and Dallas (30.8%) brought in the strongest gains. These are still incredible mains, meaning high mortgage interest rates have yet to make a serious dent in prices.
Pending Home Sales Fell a Staggering 20% in June, on a signed contracts basis, says the National Association of Realtors. It’s the slowest pace since June 2011. The roll-over of the real estate market has just begun, in volume, if not in price. The hottest cities like Phoenix, Tampa, and Boise are seeing the sharpest falls.
Lumber Prices are Still in Free-Fall, with lumber sales down 25% in June. Commodities are still falling, showing that the end of inflation is near. Some 10.8% of orders have been cancelled and inventories are building. Construction costs are falling too.
Russia Seizes all Foreign Leased Aircraft and re-registers them as Russian. Some 515 leased aircraft worth $10 billion are trapped in the country and are not allowed by sanctions to get spare parts. Ireland is taking the biggest hit, with 40% owned there. Why insurance covers accidents and not theft as large commercial aircraft are so rarely stolen. And 515 at once! This will be a legal headache for the ages.
Walmart Gets Crushed, with the founding Walton family taking $11.4 billion in personal losses on the $13 or 10% drop in the stock suffered yesterday. Low-end retail is not what you want to own if you think a recession is headed our way. That’s on an expected 13% decline in EPS expected for the year. Sam Walton would be rolling over in his grave.
Microsoft Misses Slightly, but the stock jumps 5% anyway as the long term buyers come in. A strong dollar punches foreign earnings in the nose. The crucial azure cloud hosting and storage business is still growing at 40% a year. Buy (MSFT) on dips and sell short the puts.
Meta (META) Post First Loss Ever in Q2, with ever weaker forecasts as Market Zuckerberg’s money machine grinds to a halt. It will take 3-5 years for the metaverse to mature to the point where the world’s largest social media platform is making money again. The required investment is overwhelming. Avoid (META).
The Wealthiest 100 Americans Lost $622 Billion Since November when the stock market topped. But they are still richer than pre-pandemic. Who was the biggest loser? My friend Elon Musk, whose stock dropped 50% from $1,200 in the first half, costing him a neat $170,000 billion personally. But it created a spectacular buying opportunity for the stock for the rest of us.
My Ten-Year View
When we come out the other side of pandemic and the recession, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With oil peaking out soon, and technology hyper-accelerating, there will be no reason not to. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The America coming out the other side will be far more efficient and profitable than the old. Dow 240,000 here we come!
With some of the greatest market volatility in market history, my July month-to-date performance exploded to +3.98%.
My 2022 year-to-date performance ballooned to 54.83%. The Dow Average is down -11.23% so far in 2022. It is the greatest outperformance on an index since Mad Hedge Fund Trader started 14 years ago. My trailing one-year return maintains a sky-high 77.02%.
That brings my 14-year total return to 567.39%, some 2.40 times the S&P 500 (SPX) over the same period and a new all-time high. My average annualized return has ratcheted up to 44.79%, easily the highest in the industry.
We need to keep an eye on the number of US Coronavirus cases at 91 million, up 300,000 in a week and deaths topping 1,030,000 and have only increased by 2,000 in the past week. You can find the data here.
On Monday, August 1 at 7:00 AM, the ISM Manufacturing PMI for July is released. Activision Blizzard (ATVI) announces earnings.
On Tuesday, August 2 at 7:00 AM, the JOLTS Job Openings for July are out. Caterpillar (CAT) and Airbnb (ABNB) announce earnings.
On Wednesday, August 3 at 7:00 AM, ISM Manufacturing PMI for July is published. MGM Resorts (MGM) announces earnings.
On Thursday, August 4 at 8:30 AM, Weekly Jobless Claims are announced. Amgen (AMGN) and Lyft (LYFT) announce earnings. On Friday, August 5 at 8:30 AM, the Nonfarm Payroll Report for July is disclosed. Berkshire Hathaway (BRKB) announces earnings. At 2:00 the Baker Hughes Oil Rig Count is out.
As for me, I have met many interesting people over a half-century of interviews, but it is tough to beat Corporal Hiroshi Onoda of the Japanese Army, the last man to surrender in WWII.
I had heard of Onoda while working as a foreign correspondent in Tokyo. So, I convinced my boss at The Economist magazine in London that it was time to do a special report on the Philippines and interview president Ferdinand Marcos. That accomplished, I headed for Lubang island where Onoda was said to be hiding, taking a launch from the main island of Luzon.
I hiked to the top of the island in the blazing heat, consuming two full army canteens of water (plastic bottles hadn’t been invented yet). No luck. But I had a strange feeling that someone was watching me.
When the Philippines fell in 1945, Onoda’s commanding officer ordered the remaining men to fight on to the last man. Four stayed behind, continuing a 30-year war.
As a massive American military presence and growing international trade raised Philippine standards of living, the locals eventually were able to buy their own guns and kill off Onoda’s companions one by one. By 1972 he was alone, but he kept fighting.
The Japanese government knew about Onoda from the 1950s onward and made every effort to bring him back. They hired search crews, tracking dogs, and even helicopters with loudspeakers, but to no avail. Frustrated, they left a one-year supply of the main Tokyo newspaper and a stockpile of food and returned to Japan. This continued for 20 years.
Onoda read the papers with great interest, believing some parts but distrusting others. His world view became increasingly bizarre. He learned of the enormous exports of Japanese automobiles to the US, so he concluded that while still at war, the two countries were conducting trade.
But when he came to the classified ads, he found the salaries wildly out of touch with reality. Lowly secretaries were earning an incredible 50,000 yen a year, while a salesman could earn an obscene 200,000 yen.
Before the war, there was one Japanese yen to the US dollar. In the hyperinflation that followed, the yen fell to 800, and then only recovered to 360. Onoda took this as proof that all the newspapers were faked by the clueless Americans who had no idea of true Japanese salary levels.
So he kept fighting. By 1974, he had killed 17 Filipino civilians.
After I left Lubang island, a Japanese hippy named Norio Suzuki with long hair, beads, and sandals followed me, also looking for Onoda. Onoda tracked him as he had me but was so shocked by his appearance that he decided not to kill him. The hippy spent two days with Onoda explaining the modern world.
Then Suzuki finally asked the obvious question: what would it take to get Onoda to surrender? Onoda said it was very simple, a direct order from his commanding officer. Suzuki made a beeline straight for the Japanese embassy in Manila and the wheels started turning.
A nationwide search was conducted to find Onoda’s last commanding officer and a doddering 80-year-old was turned up working in an obscure bookstore. Then the government custom-tailored a prewar Imperial Japanese Army uniform and flew him down to the Philippines.
The man gave the order and Onoda handed over his samurai sword and rifle, or at least what was left of it. Rats had eaten most of the wooden parts. You can watch the surrender ceremony by clicking here on YouTube.
When Onoda returned to Japan, he was a sensation. He displayed prewar mannerisms and values like filial piety and emperor worship that had been long forgotten. Emperor Hirohito was still alive.
When I finally interviewed him, Onoda was sympathetic. I had by then been trained in Bushido at karate school and displayed the appropriate level of humility, deference, mannerisms, and reference.
I asked why he didn’t shoot me. He said that after fighting for 30 years, he only had a few shells left and wanted to save them for someone more important.
Onoda didn’t last long in the modern Japan, as he could no longer tolerate modern materialism and cold winters. He moved to Brazil to start a school to teach prewar values and survival skills where the weather was similar to that of the Philippines. Onoda died in 2014 at the age of 91. A diet of coconuts and rats had extended his life beyond that of most individuals.
Onoda wasn’t actually the last Japanese to surrender in WWII. I discovered an entire Japanese division in 1975 that had retreated from China into Laos and just blended in with the population. They were prized for their education and hard work and married well.
During the 1990s, a Japanese was discovered in Siberia. He was released locally at the end of the war, got a job, married a Russian woman, and forgot how to speak Japanese. But Onoda was the last to stop fighting.
The Onoda story reminds me of a fact about journalists very early in their careers. You can provide all the facts in the world to someone. But if they conflict with deeply held beliefs, they won’t buy them for a second. The debate over the 2020 election outcome is a perfect example. There is no cure for this disease.
Stay healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Hiro Onoda Surrenders
Budding Journalist John Thomas
https://www.madhedgefundtrader.com/wp-content/uploads/2022/08/hiro-onoda-e1659376492740.jpg394450Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2022-08-01 11:02:482022-08-01 14:18:30The Market Outlook for the Week Ahead, or A Bombshell from Washington
This will be my last week of writing from the balcony of my chalet in Zermatt. I’ll try to bag a few more peaks over the weekend, then it is a long train ride with transfers in Visp, through the 12-mile stretch of the 125-year old Simplon Tunnel, then on to Milan and my Venice Strategy Luncheon.
Swiss trains run right on time, Italian ones not so much.
Stock markets have been trapped in a tedious range for three months now, from (SPX) 3,600 to 4,200, and are dead in the middle of that range. Earnings widely forecast to be awful came in moderate. With 20% of the S&P 500 reporting, revenues were up 10.5% and profit up 5%. These are not the torrid numbers seen in years past but are positive nonetheless.
This is not what recessions are made of.
Are we about to break out to the upside, downside, or do nothing?
I know the answer but it will take some ‘splanin to get you to understand how and why. I think this has all been one long bottoming process and what follows will be exciting, if not enthralling.
Everyone is hoping for one more capitulation selloff to buy into. The problem is that if too many people wish for something, it never happens.
The primary destroyer of markets this year has been energy-driven inflation. But oil prices peaked at $132 and have been falling ever since and are now off 35%. Oil is now the same price as when the Ukraine War started.
Gasoline has fallen too, some 15% since mid-June, lagging on the downside, as it always does.
Some long-sighted investors, like me, have already read the memo and have been buying. As a result, modest earnings shortfalls have allowed multiple expansion for six weeks now. ALL of the gains since then have come from multiple expansion, meaning the outlook for companies is now improving.
The only question now is whether we get one more selloff in August giving us another chance to load the boat. We could get a short-term peak this week when big tech reports, especially if they come up short. Terms like “hiring freeze”, “slowing revenues”, and “disappointing” might become commonplace.
Another peak could come at 8:30 AM on August 10 when the July CPI Report comes out. Even a modest gain will prompt a round of profit-taking. A decline and it could be a big one, and it’s off to the races.
The end result will be a massive yearend rally that could take the S&P 500 up 20% to 4,800. Individual high-growth stocks, like Tesla (TSLA) could rise by 50% or more.
Happy days will be back again.
The biggest threat to the markets right now may be coming from Europe, where things are clearly falling apart. There is a continuing war in Ukraine that could last for years. A Russian cutoff of natural gas threatens to trigger a deep recession.
Inflation in the UK hit 9.4%, a 40-year high. Heat-induced shutdowns are becoming common. Governments are falling like ten pins, such as in the UK and Italy. Currencies everywhere are in free fall.
Not our problem you may say. But some 30% of S&P 500 earnings come from Europe, especially for technology companies, which with a greenback at a 20-year high are shrinking by the day. Disaster in Europe could cut your retirement portfolio off at the knees, so you better help throw them a rope…. again.
Tesla Earnings Were a Mixed Bag, with revenues up to $16.93 billion for the quarter, a gain of 42% YOY, making it the fastest growing large car maker in the world. Solar energy and services also grew nicely. But margin is down from 33% to 27% QOQ due to high startup costs of the Berlin and Austin factories. That’s still 2.2 times better than the 12% margins seen at Big Three automakers and why it is still a long term “BUY.” The shares popped $100, clearly taking a “glass half full” view. Elon sold 75% of his Bitcoin, taking an implied $350 million paper loss from the top. Buy (TSLA) on dips.
Bonds Hit Two-Week High, boosted by Europe’s 50 basis point rate rise, the first in 11 years. Bonds and the US Dollar are starting to lose some of their yield advantage over the Euro. Recession fears continue to light a fire under bonds, as they have done since early June, taking yields down to 2.73 today.
Weekly Jobless Claims Hit 251,000, giving another recessionary hint, the highest since November. The trend remains up.
Nordstream One is Back Online, delivering 40% of its maximum capacity of natural gas to Germany, the prewar level. It had been down ten days for maintenance. But for how long? The German and the European economies are on a knife edge, and it’s the Russians who decide which way things go. Natgas prices sold off by 4.2%, thankfully.
The Euro Could Hit 90 Cents, a 20-year low, as the Russian gas cutoff hits hard before American supplies arrive on the scene in time. Talk of a 100-basis point Fed rate hike next week is pouring flames on the fire. It will certainly make US vacationers happy, who are seeing prices drop by the day.
Ukraine Sells $12 Billion in Gold, to finance the war with Russia. No wonder the barbarous relic has been trading so poorly.
Russia is Losing the War. I just spoke with the chairman of the British Chiefs of Staff Committee, their Joint Chiefs of Staff, and the one organization with the best read on Russian losses in the Ukraine War so far.
Russia has lost an incredible 2,000 tanks out of their initial 2,800 initial operational ones, and a further 4,000 armored vehicles. Russia has lost one-third of its army since February through deaths or injury, some 50,000 men.
Russia is now unable to defend itself from an attack from the West. Putin is assuming that we are nicer people than we actually are, always a fatal mistake. I can’t tell you why I know this, only that I do. All I can say is that the Internet, advanced hardware, encryption, and artificial intelligence are amazing things.
US Gasoline Prices Hit Two-Month Low, at $4.44 a gallon, suggesting that inflation is in retreat. But notice that they are falling faster than they rose, which is always the case in a rigged market. Prices have fallen for a record 35 consecutive days in a row. Credit recession fears and the administration release of one million barrels a day from the Strategic Petroleum Reserve.
Housing Starts Come in Weak, down 2% in June at 1.55 million seasonally adjusted. Housing Permits were weak at 0.6%, the lowest in ten months. Homebuilder Sentiment saw the biggest decline since the data started where firms are dropping prices. We are starting to see single-digit price drops in almost all markets. Phoenix is seeing the sharpest falls, followed by Austin, which saw the most speculative “flipping” activity.
Existing Home Sales Dive 5.4% in May, and down 14.2% YOY, reflecting the rising tide of woes affecting the housing market. Median prices are still rising, to $416,000, up 13.4% YOY. Some 5.12 million used homes were sold in May. Inventories rose for the first time in three years to a three-month supply.
Real Estate Prices Peaked Simultaneously all Over the World, for the first time ever. The frothiest markets in New Zealand and Australia have already seen a 13% fall. Of course, global interest rates moving up in synch is the cause. Matters were made worse in the land of the kiwis by a flood of Chinese money that abruptly ended with the pandemic. New Zealand has only 5 million residents, smaller than greater San Francisco.
China US Treasury Holdings Drop to a 12-Year Low of under $1 trillion. Few know that China is the world’s largest owner of US government debt, followed by Japan. Is this a political move, or have they simply turned bearish on bonds? My experience is that the Middle Kingdom is pretty good at making calls like this. They have a lot of friends in the market.
My Ten-Year View
When we come out the other side of pandemic and the recession, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With oil peaking out soon, and technology hyper-accelerating, there will be no reason not to. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The America coming out the other side will be far more efficient and profitable than the old. Dow 240,000 here we come!
With some of the greatest market volatility in market history, my July month-to-date performance maintained a healthy +2.01%.
My 2022 year-to-date performance maintained 52.86%. The Dow Average is down -13.5% so far in 2022. It is the greatest outperformance on an index since Mad Hedge Fund Trader started 14 years ago. My trailing one-year return maintains a sky-high 73.07%.
That brings my 14-year total return to 565.42%, some 2.55 times the S&P 500 (SPX) over the same period and a new all-time high. My average annualized return has ratcheted up to 44.93%, easily the highest in the industry.
We need to keep an eye on the number of US Coronavirus cases at 90.4 million, up 300,000 in a week and deaths topping 1,027,000 and have increased by 9,000 in the past week. You can find the data here.
On Monday, July 25 at 8:30 AM, the Chicago Fed National Activity Index for June is released.
On Tuesday, July 26 at 6:00 AM, the S&P Case Shiller National Home Price Index for May is out. New Home Sales for June are also released. Microsoft (MSFT) reports earnings.
On Wednesday, July 27 at 11:00 AM, the Federal Reserve is expected to raise interest rates by 75 basis points. A closely watched press conference follows. Meta (META) reports earnings.
On Thursday, July 28 at 8:30 AM, Weekly Jobless Claims are announced. We also get the initial read of Q2 GDP growth. Apple (AAPL) and Amazon (AMZN) report earnings. On Friday, July 29 at 8:30 AM, the Personal Income & Spending are disclosed. At 2:00 the Baker Hughes Oil Rig Count are out.
As for me, it has been a lifetime desire of mine to fly a Supermarine Spitfire, the Royal Air Force fighter that won the 1940 Battle of Britain.
When I lived in London 40 years ago, there were only 15 flying examples in the world owned by the RAF and a handful of British billionaires who only flew them themselves. They were just too valuable to lend out.
By comparison, there were over 200 American P51 Mustangs, which you could buy from the government for scrap for $500 after the war ended.
Now in 2022, there are 70 flying Spitfires. A global network of warbird enthusiasts has rescued them from bogs, jungles, and scrap yards around the world and restored them to flying condition. It helped that the market value of these planes has shot up from $1 million to $5 million since 1982.
So when a Mad Hedge Concierge member Peter offered me his Spitfire for a day, I couldn’t wait to return to England.
There are very few people in the world who can fly prewar tailwheel configured airplanes. I have flown over a dozen different types. They are prone to ground loops, nose overs, scraping wing tips, and crashes. The airframes are usually made of Norwegian spruce and Irish linen and the wings can fall off at any time.
No wonder the fatality rate was so high in the old days. It helped that I went armed with my old British Aerobatics license along with a phalanx of American civilian and military licenses.
It was a cool and blustery afternoon when I showed up at Biggin Hill south of London, one of the top RAF fighter stations during WWII, and told Peter “Major John Thomas reporting for duty, sir.” He laughed and set about giving me my preflight briefing. Flying 80-year-old airplanes can be deadly. 70-year-old pilots are even more dangerous.
I was cautioned to move the stick gently as the controls are famously sensitive, thanks to the plane’s unique elliptical wing tips. No rudder was needed at all.
If the engine failed, I had the choice of parachuting out or risking a hard landing. I chose the latter, as Southern England is basically one big grass landing strip. Plus, I’ve had plenty of practice with this kind of maneuver.
For good measure, I brought along a safety pilot. They’ve moved the London control zone around a bit over the years, and I wanted to make sure you keep receiving Mad Hedge newsletter for the indefinite future. We took off, banked right, and headed for the English Channel.
While the plaque on the control panel read “DO NOT FLY OVER 350 MPH”, I dared not go faster than 250 MPH given the age considerations of both the plane and the pilot. Another plaque reading “EMERGENCY BOOST PUMP” was wired shut. The Merlin V-12 1,250 horsepower engine purred. Later versions of the plane with the 2,000 horsepower Griffin engine flew over 450 MPH.
The Spitfire could outmaneuver any plane the German Luftwaffe threw up against it. When Hitler asked my late acquaintance Luftwaffe General Adolph Galland what he needed to win the Battle of Britain, he replied, “A squadron of Spitfires.” German losses in the battle topped 2,000 planes versus 900 for the British.
But German crew losses were ten times that of the British. That meant an RAF pilot could get shot down and be in another plane in hours. That is what decided the Battle of Britain. The pilots were worth more than the planes. In the end, the British shot down two-thirds of the German Air Force, a loss from which they never recovered.
We found a clear piece of sky over the White Cliffs of Dover between two big fluffy cumulus clouds and commenced a full-on aerobatic flight test. Pilots always want to see what I can do in these old planes and this time was no different.
I executed multiple loops, barrel rolls, chandelles, lazy eights, Immelmann turns, and wingovers, careful never to exceed 1G lest, yes, the wings fall off. Spitfires can dive like crazy. We dropped from 8,000 feet to 2,000 feet in seconds.
While I was limited to one-inch moves of the stick, wartimes diaries speak of full right, full left, and steep dives to escape marauding Messerschmitt 109's and Focke Wulf 190's where pilots suffered 10G’s of force or more. The punishment those kids took was amazing.
The plane carried only two hours of fuel so after I passed my test with flying colors, it was back to Biggin Hill. Spitfires lacked IFR instruments because in 1938 they hadn’t been invented yet, so we were careful to avoid clouds. I made a perfect three-point landing on runway 27, as usual, and taxied up to the hanger where Peter greeted me.
Back at the hanger it took two men to haul me out of the plane, stinking, drenched with sweat, and elated. I felt like I had just done 15 rounds with Mike Tyson, but it was worth it.
Then it was off to the nearest pub for a well-earned pint of Guinness, as has long been the tradition of the RAF. The walls were adorned with the pictures of wartime Spitfire pilots who never made it back, some looking no older than teenagers, which they were.
That’s another bucket list item off the list. The time to get them all is running out, and I keep adding new ones, so I better get a move on.
I’ll be back next summer, for sure, because the commanding general of the RAF has invited me back to fly their sole surviving WWII Avro Lancaster four-engine bomber. It’s part of the Battle of Britain Memorial Flight, the fruit of contacts made during my NATO military duties. It is a national treasure.
It seems they’re short of pilots.
To watch a two-minute video of my epic flight, please click here.
Stay healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
A 1943 Supermarine Spitfire Mark IX
Flying Upside Down Over the White Cliffs of Dover
Mission Accomplished
Back at the Pub for a Pint
Avro Lancaster Bomber
https://www.madhedgefundtrader.com/wp-content/uploads/2022/07/JT-upside-down.png362678Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2022-07-25 14:02:362022-07-25 15:01:18The Market Outlook for the Week Ahead, or When is Breakout Time?
I am writing this from the balcony of my chalet high in Zermatt, Switzerland watching the sun set on the last bit of snow at the Matterhorn summit. There is a roaring Alpine River 100 feet below me as the melting of the glaciers accelerates. Mountain larks are diving and looping through the trees.
I have just had my third top-up on the schnapps and the cheese plate in front of me is to die for.
Life is good!
I have something else to celebrate as well. The performance of the Mad Hedge Fund Trader is off the charts and the best in its 14-year history. It seems the worse market conditions get, the better our numbers. We are up 3.81% so far in July, 54.66% year-to-date, and are averaging 45.01% a year. It doesn’t get any better than that.
Or maybe it does.
Where is the recession? If you work in the imploding Bitcoin universe or the suffering mortgage origination business, you are definitely in a recession. But if you work in any other industry, you are not.
Sure, things are slowing down in interest rate-related sectors, like new home construction. But that does not make a recession.
If we are in a recession, we are in a full employment one, with the headline Unemployment Rate at a near record low of 3.6%. No one has ever seen one of those before. And if no one is losing their job in this recession, who cares?
In the meantime, the Fed is slowly and unobtrusively winning its war against inflation. Soaring interest rates have caused the housing market to grind to a halt. Used car prices have rolled over and repossessions are climbing.
It may take a couple of months to see this in the official inflation numbers, but the next Fed shocker could be a hint that the pace of interest rate rises may be slowed or stopped. Stocks would go through the roof on this because the falling inflation trade will have begun.
By the time you realize that we are in a recession, it will be over, and the next decade-long bull market will have begun.
This is one of those rare times when the long-term investor is actually rewarded versus his shorter-term trading colleagues. If you bought stocks during every postwar recession over the last 80 years, stocks were ALWAYS up on a three-year view, and they always DOUBLE on a five-year view.
That doesn’t sound bad to me.
The rollover in the price of oil is a crucial part of this view. Of course, it is recession fears that are driving the price of crude down, now off 29% from its wartime $132 high. That cuts the price of gasoline, the major inflation driver this year. Falling inflation means fewer interest rate rises, making stocks more valuable.
You see, it’s all connected.
And before I sign off, I want to update you on the NATO piece I sent out on Friday.
I just spoke with the chairman of the British Chiefs of Staff Committee, their Joint Chiefs of Staff, and the one organization with the best read on Russian losses in the Ukraine War so far.
Russia has lost an incredible 2,000 tanks out of their initial 2,800 operational ones, and a further 4,000 armored vehicles. Russia has lost one-third of its army since February through deaths or injury, some 50,000 men.
Russia is now unable to defend itself from an attack from the West. Putin is assuming that we are nicer people than we actually are, which is always a fatal mistake.
I can’t tell you why I know this, only that I do. All I can say is that the Internet, advanced hardware, encryption, and artificial intelligence are amazing things.
London’s Heathrow Airport asks airlines to cap passengers at 100,000 a day, meaning many will cancel their least profitable flights. I was there yesterday, and it was a complete madhouse on the verge of a riot. You need to arrive three hours early to have any chance of making your flight. It’s all the result of three years of pent-up travel demand unleashing over a single problem. It makes America’s problems pale in comparison.
Musk Cancels Twitter Deal, saying there was no “there” there. Much of the business was bogus. Sure, it means five years of litigation, but why should the richest man in the world care. It’s good news for Tesla because it means less diversion of management time, although the news took the stock down $50. Buy (TSLA) on dips and avoid (TWTR) like Covid.
Crypto Hedge Fund Founders Go Missing, as the bankruptcy proceedings of 3AC go missing, leaving $12 billion in losses in their wake. It could be a death blow to emerging crypto infrastructure. Avoid crypto at all costs. There are too many better fish to fry, with the best quality stocks selling at big discounts.
Home Purchase Cancellations reach 15%, the highest since the pandemic began. Many deals are falling out of escrow because of failed financing at decade-high interest rates. Price cuts of 10% across the board are happening on the homes I have been watching. 30-year fixed rate mortgages at 5.75% are proving a major impediment. Homebuilders are also seeing shocking levels of cancellations.
Is There Now a Chip Glut? There is, says TechiInsight, a research firm. Extreme shortages have flipped to oversupply as a new Covid wave, and the Ukraine War cut back spending on new cell phones and PCs. The Crypto blow-up and contagion have completely eliminated high-end chip demand from new miners. That’s why the Philadelphia Semiconductor Index (SOX) is off 35% this year. Micron Technology has already cut back production of low-end chips by 20%. If a selloff ensues, buy (NVDA), (MU), and (AMD). They will lead any recovery.
The Euro Breaks Parity Against the US Dollar, a decades low, and the Swiss franc may be next. Soaring US interest rates are the reason, while recessionary Europe is still keeping theirs at negative numbers. The dollar will remain strong for another year, or as long as the US is raising and the continent is frozen.
CPI Comes in at 9.1%, much hotter than expected, forcing the Fed to maintain an aggressive rate hike posture. That’s up an eye-popping 1.3% from May. It’s not what the Biden administration wanted to hear. A big part of that was oil price rises which have already gone away. Rents were up 0.8%, the most since 1986, and pressure from labor costs is rising. It puts on the table new lows for the Dow Average, but not by much.
Bonds Invert Big Time, posting the biggest 2/10 spread in 22 years, strongly suggesting a recession. That means short term interest rates are higher than long term ones, or the 2-year paper is yielding 20 basis points more than ten-year bonds. Oil is also holding its crushing $8.00 loss. Bonds are already suffering their worst year since 1865 when it had to shoulder the enormous cost of winning the civil war.
Doctor Copper Says the Recession is Here, dropping by 39% since February. Covid caused a slowdown in demand from China, the world’s largest consumer. It looks like we may get another chance to buy Freeport McMoRan at bargain basement prices.
Weekly Jobless Claims jump to 244,000, the highest since Thanksgiving week in November. New York led, with Google and Microsoft adding to the numbers. Let the mini-recession begin!
JP Morgan (JPM) Earnings Dive 28%. CEO Jamie Diamond says that growth, spending, and jobs remain good, but Covid, inflation, rising interest rates, and the geopolitical outlook are a drag. This is an opportunity to buy the best-run bank in America at a deep discount.
Morgan Stanley (MS) takes a hit, with Q2 earnings down 11.3% YOY at $13.13 billion. Return on equity dropped from 13.8% to 10.1%. Equity and bond trading were strong while investment banking in the falling market was weak. Money continues to pour into asset management, which I helped found 40 years ago. Buy (MS) on the dip.
My Ten-Year View
When we come out the other side of pandemic and the recession, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With oil peaking out soon, and technology hyper-accelerating, there will be no reason not to. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The America coming out the other side will be far more efficient and profitable than the old. Dow 240,000 here we come!
With some of the greatest market volatility in market history, my July month-to-date performance exploded to +3.81%.
My 2022 year-to-date performance ballooned to 54.66%, a new high. The Dow Average is down -18.91% so far in 2022. It is the greatest outperformance on an index since Mad Hedge Fund Trader started 14 years ago. My trailing one-year return maintains a sky-high 74.56%.
That brings my 14-year total return to 567.22%, some 2.70 times the S&P 500 (SPX) over the same period and a new all-time high. My average annualized return has ratcheted up to an eye-popping 45.01%, easily the highest in the industry.
With the July options expiration having gone spectacularly in our favor, we are now 80% in cash. The remaining 20% is in a Tesla (TSLA) August $500-$900 short strangle. If you don’t know what that is, please read your trade alerts.
We need to keep an eye on the number of US Coronavirus cases at 89.6 million, up 500,000 in a week and deaths topping 1,023,000 and have only increased by 2,000 in the past week. You can find the data here.
On Monday, July 18 at 8:30 AM, NAHB Housing Market Index for July is released.
On Tuesday, July 19 at 7:00 AM, the US Housing Starts and Building Permits for June are out.
On Wednesday, July 20 at 7:00 AM, Existing Home Sales for June are published.
On Thursday, July 21 at 8:30 AM, Weekly Jobless Claims are announced. On Friday, July 22 at 7:00 AM, the S&P Global Flash PMI for July is disclosed. At 2:00, the Baker Hughes Oil Rig Count is out.
As for me, I am constantly asked why I do what I do, what motivates me, and why I keep taking such insane risks.
I have thought about this topic quite a lot over the years while piloting planes on long flights, crossing oceans, and sitting on mountain tops.
From a very early age, I have had an immense sense of curiosity, wanted to know what was over the next hill, and what the next country and people were like.
When I was five, my parents gave me an old fashioned alarm clock. I smashed it on the floor to see how it worked and spent a month putting it back together.
When I was eight, the local public library held a contest to see who could read the most books over the summer vacation. By the time September rolled along, the number three contestant had read 5, number two had read 10, and I had finished 365. I read the entire travel section of the library.
I vowed to visit every one of those countries and I almost did. So far, I have been to 125, and they keep inventing new ones all the time.
It helped a lot that I won the lottery with my parents. Dad was a tough Marine Corps sergeant who never withdrew from a fight and endlessly tinkered with every kind of machine. He was a heavyweight boxer with hands the size of hams. Dad went to the University of Southern California on the GI Bill to study business.
When I was 15, I bought a green 1957 Volkswagen bug for $200 that consumed a quart of oil every 20 miles. I tore the engine apart trying to fix it but couldn’t put it back together. So, I brought in dad. He got about half the engine done and hit a wall.
So, we piled all the parts into a cardboard box and took them down to a local garage run by a man who had been a mechanic for the German Army during the war, was taken prisoner, and opted to stay in the US when WWII ended. Even he ended up with four leftover parts that he couldn’t quite place, but the car ran.
Mom was brilliant, earned a 4.0 average in high school and a full scholarship to USC. They met in 1949 on the fraternity steps when she was selling tickets to a dance. She eventually worked her way up to a senior level at the CIA as a Russian translator of technical journals. I was called often to explain what these were about. For years, that gave me access to one of the CIA’s primary sources. When the Cold War ended, the first place my parents went to was Moscow. Their marriage lasted 52 years.
I was very fortunate that some of the world’s greatest organizations accepted me as a member. The Boy Scouts taught me self-sufficiency and survival skills. At the karate dojo in Tokyo, I learned self-confidence, utter fearlessness, and the ability to defend myself.
The Economist magazine is where I learned how to write and perform deep economic research. That got me into the White House where I observed politics and how governments worked. The US Marine Corps taught me how to fly, leadership, and the value of courage.
Morgan Stanley instructed me on the art of making money in the stock market, the concept of risk versus reward, and how to manage a division of a Fortune 500 company.
Being such a risk taker, it was inevitable that I ended up in the stock market. A math degree from UCLA gave me an edge over all my competitors when it counted. This was back when the Black-Scholes option pricing model was a closely guarded secret and was understood by only a handful of traders.
In the early 80s, I took a tip on a technology stock from a broker at Merrill Lynch and lost my wife’s entire salary for a year on a single options trade. I’ll never make that mistake again. I spent a month sleeping on the sofa.
I figured out that if you do a lot of research and preparation, big risks are worth taking and usually pay off.
I have met a lot of enormously successful, famous, and wealthy people over the years. They are incredibly hard workers, inveterate networkers, and opportunists. But they will all agree on one thing, that luck has played a major part in their success. Being in the right place at the right time is crucial. So is recognizing opportunity when it is staring you in the face, grabbing it by both lapels, and shaking it for all it’s worth.
If I hadn’t worked my ass off in college and graduated Magna Cum Laude, I never would have gotten into Mensa Japan. If I hadn’t joined Mensa, I never would have delivered a lecture in Tokyo on the psychoactive effects of tetrahydrocannabinol (THC), which the Tokyo police department and the famous Australian journalist Murray Sayle found immensely interesting.
Without Murray, I never would have made it into the Foreign Correspondents Club of Japan and journalism. If a 50-caliber bullet had veered an inch to the right, I never would have made it out of Cambodia.
You know the rest of the story.
I am an incredibly competitive person. Maybe it’s the result of being the oldest of seven children. Maybe it’s because I spent a lifetime around highly competitive people. That also means being the funniest person in the room, something of immense value in the fonts of all humor, the Marine Corps, The Economist, and a Morgan Stanley trading floor. If you can’t laugh in the face of enormous challenges, you haven’t a chance.
I have also learned that retirement means death and has befallen many dear old friends. It is the true grim reaper. Most people slow down when they hit my age. I am speeding up. I just have to climb one more mountain, fly one more airplane, write one more story, and send out one more trade alert before time runs out.
So, you’re going to have to pry my cold dead fingers off this keyboard before I give up on the Mad Hedge Fund Trader.
I hope this helps.
Stay healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
https://www.madhedgefundtrader.com/wp-content/uploads/2022/07/1yr-july1822.jpg331441Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2022-07-18 11:02:082022-07-18 14:41:56The Market Outlook for the Week Ahead, or Here Comes the Full Employment Recession
(JULY 22 ZERMATT, SWITZERLAND STRATEGY SEMINAR),
(HOW TO HANDLE THE FRIDAY, JULY 15 OPTIONS EXPIRATION),
(TSLA), (NVDA), (MSFT), (BRKB), (TLT)
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2022-07-13 10:06:362022-07-13 11:45:56July 13, 2022
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