Global Market Comments
September 1, 2022
Fiat Lux
Featured Trade:
(LOOKING AT THE LARGE NUMBERS)
(TLT), (TBT) (BITCOIN), (MSTR), (BLOK), (HUT)
Tag Archive for: (TLT)
Global Market Comments
August 29, 2022
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or IT’S TIME FOR PAIN)
(SPY), (QQQ), (TLT), (VIX), (TSLA)
Please don’t call me anymore.
I don’t want to hear from you, not even for a second!
I’ve deleted your email from my address book, unfriended you from Facebook, and already forgotten your telephone number.
For you have committed the ultimate sin.
You have asked me if the market is going to crash in September one too many times. This is for a market that over the last 100 years has gone up 80% of the time.
I wouldn’t mind if it were just you. But hundreds of you? Really?
Hardly an hour goes by without me getting an email, text message, or phone call telling me that you just heard from another guru saying that we are going into another Great Depression, 1929-style stock market crash, and financial Armageddon.
Enough already!
These permabear gurus have been the bane of my life for the last 54 years, even 60 years if you count the time I traded stocks in my dad’s brokerage account when I was a paper boy.
First, there was Joe Granville (RIP), the first Dr. Doom, who in 1982 predicted that the Dow Average would crater from 600 to 300. Instead, it went up 20 times to 12,000. Joe never did change his mind.
Next came one-hit wonder Elaine Gazarelli at Lehman Brothers who accurately predicted the 1987 crash, which delivered a one-day 20% haircut for the Dow. She kept on endlessly predicting crashes after that which never showed up. In the end, the Dow went up 18 times. At least Elaine’s Lehman Brothers stock went to zero.
Then we got another Dr. Doom, Dr. Nouriel Roubini, who turned bearish going into the 2008-2009 Great Recession when the Dow took a 54% hickey. Did the eminent doctor ever turn bullish? Not that I’ve heard, and the Dow went up 6X from that bottom.
So, here we are today. Fed governor Jay Powell has just suggested that he may keep interest rates higher for longer and that we may be in for some pain. That took the Dow down 1,000, with high-growth technology stocks leading the charge to the downside.
And what do I get, but an email from a subscriber saying he just heard from another guru saying that Powell’s comments confirm that we are not headed for a Roaring Twenties but a whimpering twenties, and that the Dow is plunging to 3,000.
Give me a break!
I have a somewhat different read on Powell’s comments.
Not only will they bring a PEAK in interest rates much sooner, but they also move forward the first CUT in interest rates in three years as well. That is what long term investors and hedge funds are looking for, not the last move in the current trend, but the first move in the next trend.
That’s what all the long-term money is doing, which accounts for 90% of market ownership.
That’s what the smart money is doing.
The Volatility Index (VIX) rocketed to $26 on Friday. Call me when it gets to $30. Then I might get interested.
In the meantime, the dumb money is selling.
It helps a lot that the principal drivers of Powell’s high interest rate are rolling over fast. Residential real estate is in the process of becoming a major drag on the economy. Used car have gone from an extreme shortage to a glut in two months. I never did sell that 1968 Chevy Corvair. The online jobs market has suddenly gone from bid to offered.
I am praying that Powell’s comments bring us a 4,000 Dow point selloff and a double bottom at (SPY) $362. For that will set up another 20%-30% worth of money-making opportunities by yearend.
If that happens, I am going to book the Owner’s Suite on the Queen Mary II for a Transatlantic cruise, the Orient Express, and a week at the Cipriani Hotel in Venice.
But wait!
I’ve already booked the owners suite on the Queen Mary II, the Orient Express, and the Cipriani Hotel, thanks to this summer’s Tesla (TSLA) trades.
How do you upgrade Q1 class?
I guess I’ll just have to get creative.
Fed Governor Powell pees on Stock Market Parade from the greatest possible height, giving an extremely hawkish speech at Jackson Hole. “Some Pain” is ahead. The market took the hint and sold off 1,000 points in a heartbeat ending at the lows, with technology taking the greatest hit. That puts a 75-basis point rate hike back on the table for September together with a major market correction. Have a nice flight back to DC Jay. That leaves me quite happy with my one put spread in the (SPY) and 90% cash.
Inflation is in Free Fall. It’s not just gasoline, but every product that uses energy. That has rapidly cut the prices of airline tickets, rental cars, butter, and even chicken breasts. Used cars have gone from a shortage to a glut in months. New job offers are fading rapidly. I’m looking for a 4% inflation rate by year-end….and a soaring stock market.
California Bans Internal Combustion Engine Sales by 2035. It’s a symbolic gesture because the market will move beyond them well before 13 years. Both (GM) and Ford (F) said they’re going all EV. I went all-EV in 2010 and saved a bundle.
QT Accelerates Next Thursday to $95 billion a month and you may wonder why stock markets aren’t crashing. QT will come to 1% of the outstanding $9 trillion Fed balance sheet per month and continue at that rate for the indefinite future. At that rate, the Fed balance sheet won’t be unwound until 2032. Many more factors will arrive to move stocks up or down before then. In order words, the Fed is trying to take $9 trillion out of the system with no one noticing. They may succeed.
Biden Cancels $10,000 in Student Debt per Borrower, and $20,000 for Pell Grants. Some 9 million borrowers will have their loans wiped clean. It is a positive for the economy and minimally inflationary as a lot of these college graduates went into low-paying jobs like teaching or government service. Biden is delivering for the people who voted for him. What a shocker! Too bad I already paid my loan in full. How much did a four-year education cost me? $3,000! It’s my most rapidly appreciating asset.
Pending Home Sales Dive 1% in July on a signed contract basis and are down 19.9% YOY. Only the west saw an increase. Some eight of nine months have shown declines. Homes are sitting on the market longer and sellers are pulling back. Anyone who sells now loses their 2.75% mortgage and won’t get it back.
US Vehicle Prices Hit Record High, despite soaring interest rates. The average transaction price rose to $46,259, up 11.5% YOY. Inventory shortages continue to limit sales, with August expected to reach 980,000 units, down 2.6% YOY. It makes big-ticket EVs even more competitive.
Toll Brothers Orders Plunge 60% in Q2, as demand for luxury homes vaporize. It expects to be down 15% for the full year. It could take 18 months for these dire numbers to be in the general economy. Tol (TOL) dominates in the “move up market” where prices average $1 million or more and is especially dependent on home mortgages.
New Home Sales Crash 12.6%, in July, the worst number since the Great Recession 2008 level. The housing recession is here for sure, but how bad will it get when we have a shortage of 10 million homes?
OPEC+ Maneuvers for Supply Cut to halt the dramatic 35% price decline. The futures market is discounting much greater declines, which the Saudis describe as “broken.” You are on the other side of this trade.
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 prices and inflation now rapidly declining, 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 market volatility (VIX) now dying, my August month-to-date performance appreciated to +4.87%.
My 2022 year-to-date performance ballooned to +59.70%, a new high. The Dow Average is down -12.8% 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 +73.75%.
That brings my 14-year total return to +572.26%, some 2.56 times the S&P 500 (SPX) over the same period and a new all-time high. My average annualized return has ratcheted up to +44.83%, easily the highest in the industry.
We need to keep an eye on the number of US Coronavirus cases at 94 million, up 300,000 in a week and deaths topping 1,043,000 and have only increased by 2,000 in the past week. You can find the data here.
On Monday, August 29 at 8:30 AM EDT, the Dallas Fed Manufacturing Index for August is released.
On Tuesday, August 30 at 7:00 AM, the S&P Case Shiller National Home Price Index for August is out. The monthly cycle of job reports starts with JOLTS at 7:00 AM.
On Wednesday, August 31 at 7:15 AM, ADP Private Sector Employment for July is published.
On Thursday, September 1 at 8:30 AM, Weekly Jobless Claims are announced. US GDP for Q2 is released.
On Friday, September 2 at 7:00 AM, the Nonfarm Payroll Report for August is disclosed. At 2:00 the Baker Hughes Oil Rig Count is out.
As for me, back in the early 1980s, when I was starting up Morgan Stanley’s international equity trading desk, my wife Kyoko was still a driven Japanese career woman.
Taking advantage of her near-perfect English, she landed a prestige job as the head of sales at New York’s Waldorf Astoria Hotel.
Every morning, we set off on our different ways, me to Morgan Stanley’s HQ in the old General Motors Building on Avenue of the Americas and 47th street and she to the Waldorf at Park and 34th.
One day, she came home and told me there was this little old lady living in the Waldorf Towers who needed an escort to walk her dog in the evenings once a week. Back in those days, the crime rate in New York was sky high and only the brave or the reckless ventured outside after dark.
I said, “Sure, What was her name?”
Jean MacArthur.
I said, "THE Jean MacArthur?"
She answered “yes.”
Jean MacArthur was the widow of General Douglas MacArthur, the WWII legend. He fought off the Japanese in the Philippines in 1941 and retreated to Australia in a night PT Boat escape.
He then led a brilliant island-hopping campaign, turning the Japanese at Guadalcanal and New Guinea. My dad was part of that operation, as were the fathers of many of my Australian clients. That led all the way to Tokyo Bay where MacArthur accepted the Japanese in 1945 on the deck of the battleship Missouri.
The MacArthurs then moved into the Tokyo embassy where the general ran Japan as a personal fiefdom for seven years, a residence I know well. That’s when Jean, who was 18 years the general’s junior, developed a fondness for the Japanese people.
When the Korean War began in 1950, MacArthur took charge. His landing at Inchon harbor broke the back of the invasion and was one of the most brilliant tactical moves in military history. When MacArthur was recalled by President Truman in 1952, he had not been home for 13 years.
So it was with some trepidation that I was introduced by my wife to Mrs. MacArthur in the lobby of the Waldorf Astoria. On the way out, we passed a large portrait of the general who seemed to disapprovingly stare down at me taking out his wife, so I was on my best behavior.
To some extent, I had spent my entire life preparing for this job.
I had stayed at the MacArthur Suite at the Manila Hotel where they had lived before the war. I knew Australia well. And I had just spent a decade living in Japan. By chance, I had also read the brilliant biography of MacArthur by William Manchester, American Caesar, which had only just come out.
I also competed in karate at the national level in Japan for ten years, which qualified me as a bodyguard. In other words, I was the perfect after-dark escort for Midtown Manhattan in the early eighties.
She insisted I call her “Jean”; she was one of the most gregarious women I have ever run into. She was grey-haired, petite, and made you feel like you were the most important person she had ever run into.
She talked a lot about “Doug” and I learned several personal anecdotes that never made it into the history books.
“Doug” was a staunch conservative who was nominated for president by the Republican party in 1944. But he pushed policies in Japan that would have qualified him as a raging liberal.
It was the Japanese that begged MacArthur to ban the army and the navy in the new constitution for they feared a return of the military after MacArthur left. Women gained the right to vote on the insistence of the English tutor for Emperor Hirohito’s children, an American quaker woman. He was very pro-union in Japan. He also pushed through land reform that broke up the big estates and handed out land to the small farmers.
It was a vast understatement to say that I got more out of these walks than she did. While making our rounds, we ran into other celebrities who lived in the neighborhood who all knew Jean, such as Henry Kissinger, Ginger Rogers, and the UN Secretary-General.
Morgan Stanley eventually promoted me and transferred me to London to run the trading operations there, so my prolonged free history lesson came to an end.
Jean MacArthur stayed in the public eye and was a frequent commencement speaker at West Point where “Doug” had been a student and later the superintendent. Jean died in 2000 at the age of 101.
I sent a bouquet of lilies to the funeral.
Global Market Comments
August 22, 2022
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE PARTY IS OVER)
(SPY), (QQQ), (TLT), (VIX)
It’s been one heck of a party for the last two months. We’ve been wearing lampshades on our heads, dancing the Lindyhop, and drinking hopium by the barrel.
But even the best of parties must come to an end.
It's time to put the empty bottles into the recycling bin. I’ve called Uber for the guests who can no longer walk. The hangovers have already started. The cleaning lady is probably going to fire me tomorrow.
The Party is Over, at least for now, as are the big money vacations at the Hamptons, Aspen, and Lake Tahoe. This year, wildly overbought markets are perfectly coinciding with peak vacation time.
September brings bigger worries with a Fed rate rise, doubled QT, and a looming election. I’m now net short for the first time since March.
A Volatility Index (VIX) at $19, a Mad Hedge Market Timing Index at 51, and a rally worth half of this year’s losses are telling you to stay away in droves.
Cash is king right now. Just sit back and count all the money you made with me this year. The reality is that there is a honking great dilemma in the market right now. The Fed is talking hawkish, while traders are trading dovish. The Fed ALWAYS wins this kind of bust-up.
I’m looking for stocks to give up at least half their heroic (SPY) 70-point June-August gains. That would take us down to (SPY) 50-day Moving Average at $395.
After that, we might bounce between the 50-day moving average at $395 and the 200-day at $432 all the way until the November midterm elections. Thereafter, we will launch on a meteoric yearend rally that could take us all the way up to (SPY) $480.
It couldn’t go any other way because there is too much cash lying around. In fact, short term positioning is only at 10% of historical norms, and there is still at least $500 billion worth of company share buybacks still in the pipeline, especially in tech.
That’s all fine with me because at $395, the free money trades start to set up again. At (SPY) $395, the (VIX) should be back up to $30. That means you can set up call spreads, assume we will double bottom at (SPY) $362, and STILL make the maximum potential profit. Such is the magic of vertical bull call debit spreads.
In the meantime, we might be able to squeeze out $30 or $40 worth of short-term trading profits in short positions. This will be the only place to make money for the next month or two. If you’re interested, I’m currently short the (SPY), (QQQ), and (TLT).
Yes, trading is all about alternating pain and pleasure. That’s why you must be a sadomasochist to be a great trader.
It all totally works for me.
It's no surprise that the second the yield on the ten-year US Treasury yield recovered 3.00%, the stock market rally promptly died. Message: watch the ten-year US Treasury yield like an eagle.
Tesla (TSLA) Production Tops 3 million and Elon Musk is aiming for 100 million by 2030. Mine was chassis number 125 and my name is still on the Fremont factory wall. They have driven 40 million miles since 2010, pushing their autonomous learning program far down the road when compared to others. Tesla is the third largest car maker in China. It was worth a $40 pop in the stock. The shares split 3:1 on Friday, sucking in meme interest.
Oil (USO) Collapses to New Two-Month Low to $88 a barrel, down $44, or 33% from the highs. There’s another 50-cent decline in gasoline prices in the cards. Disastrous battlefield setbacks for Russia have been the real driver. Putin has resorted to clearing out the prisons to reinforce his army. He is also forcing Ukrainian POWs to fight their own countrymen. Maybe he'll let our woman’s basketball star go free?
The Fed Minutes are out from the last meeting six weeks ago. Interest rates will rise, but not as much as expected. A pivot to flat or lower interest rates may come sooner than expected. Look for 3.50% for the overnight rate sometime in 2023, up 100 basis points from here.
Why Isn’t the Fed Balance Sheet Falling? It’s still stuck at $9 trillion, despite a massive reduction on bond buybacks via QT. The dam is about to break, with $2-$3 trillion in bond buybacks disappearing in the coming months.
Money Supply Growth Has Ground to a Halt, showing zero growth so far in 2022. It is about to start shrinking dramatically, once QT doubles up to $95 billion a month in September. This could deliver our next buying opportunity for stocks, but also might give us a recession.
Housing Starts Collapse, down 9.6% YOY in July. Labor costs are still soaring while affordability has been shattered. If you’re thinking of buying stocks now, lie down and take a long nap first, a very long nap.
Existing Home Sales Dive 6%, off for the sixth consecutive month. Sales dropped to a seasonally adjusted 4.81 million units. It’s no surprise that we are now in a housing recession while the rest of the economy remains small. Homebuyers are also still contending with tight supply. There were 1.31 million homes for sale at the end of July, unchanged from July 2021. At the current sales pace, that represents a 3.3-month supply.
20 Electric Vehicles Will Get the $7,500 Tax Credit on Day One, Biden just signed the climate bill, with Tesla far and away the leader. Only cars with 70% or more of its parts coming from the US qualify. Used EVs get a $4,000 tax credit. MSRPs must be below $55,000 and individual income no more than $150,000. The credit begins in 2023. Left out in the cold are EVs made in Japan and South Korea.
Bitcoin Hits Three-Week Low, as “RISK OFF” returns. Suddenly, stocks, oil prices, and interest rates have started going the wrong way. Avoid Crypto.
Why the IRS is Not Interested in You. Treasury secretary Yellen says the priorities will be clearing the backlog of unprocessed tax returns and improving customer service, overhauling technology, and hiring workers.
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 prices now rapidly declining, 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 market volatility (VIX) now dying, my August month-to-date performance appreciated to +3.96%.
My 2022 year-to-date performance ballooned to +58.79%, a new high. The Dow Average is down -5.91% 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 +73.78%.
That brings my 14-year total return to +571.35%, some 2.56 times the S&P 500 (SPX) over the same period and a new all-time high. My average annualized return has ratcheted up to +45.11%, easily the highest in the industry.
We need to keep an eye on the number of US Coronavirus cases soon reaching 94 million, up 300,000 in a week and deaths topping 1,040,000. You can find the data here.
On Monday, August 22 at 8:30 AM, the Chicago Fed National Activity Index for July is released.
On Tuesday, August 23 at 7:00 AM, New Home Sales for July are out.
On Wednesday, August 24 at 7:00 AM, Durable Goods for July are published.
On Thursday, August 25 at 8:30 AM, Weekly Jobless Claims are announced. US GDP for Q2 is released.
On Friday, August 26 at 7:00 AM, the Personal Income and Spending are disclosed. At 2:00, the Baker Hughes Oil Rig Count is out.
As for me, I have met countless billionaires, titans of industry, and rock stars over the last half-century, and one of my favorites has always been Sir Richard Branson.
I first met Richard when I was living in London’s Little Venice neighborhood in the 1970s. He lived on a canal boat around the corner. I often jogged past him sitting alone on a bench and reading a book at Regent’s Park’s London Zoo, far from the maddening crowds.
Richard was an entrepreneur from day one, starting a magazine when he was 16. That became the Virgin magazine reviewing new records, then the Virgin record stores, and later the Virgin Megastore where he built his first fortune.
When the money really started to pour in, Richard moved to a mansion in Kensington in London’s West End. It wouldn’t be long before Richard owned his own Caribbean Island.
In 1984, Branson was stuck in the Virgin Islands because of a cancelled British Airways flight. He became so angry that he chartered a plane and started Virgin Airlines on the spot, which soon became a dominant Transatlantic carrier and my favorite today.
A British Airways CEO later admitted that they did not take Branson seriously because “He did not wear a tie.” The British flag carrier resorted to unscrupulous means to force Virgin out of business. They hired teams of people to call Virgin customers, cancel their fights, and move them over to BA.
When British Airways got caught, Branson won a massive lawsuit again BA over the issue. He turned the award over to his employees.
Richard would do anything to promote the Virgin brand. He attempted to become the first man to cross the Atlantic Ocean by balloon, making it as far as Ireland.
When he opened a hotel in Las Vegas, he jumped off the roof in a hang glider. The wind immediately shifted and blew him against the building, nearly killing him.
Richard later went on to start ventures in rail, telecommunications, package tours, and eventually space.
When I flew to Moscow in 1992 for my MiG 29 flight, I picked Virgin Atlantic, one of the few airlines flying direct from London to Moscow (I never trusted Aeroflot). Who was in the first-class seat next to me but Richard Branson. We spent hours trading aviation stories, of which I have an ample supply.
As we approached Sheremetyevo Airport, he invited me up to the cockpit and told the pilot “This is my friend Captain Thomas. Would you mind if he joined you for the landing?”
He handed me a headset so I could listen in on a rare Moscow landing. When the tower called in the field air pressure, they were off by 1,000 feet. If we were flying under instrument flight rules, we would have crashed. I pointed this out to the pilot, and he commented that this was not the first time they had had a problem landing in Moscow.
Richard once confided in me that he was terrible at math and didn’t understand the slightest thing about balance sheets and income statements. A board member once tried to explain that business was like using a net (company) to catch a fish (profit) but to no avail.
Branson had built up his entire business empire through relationships, using other people to run the numbers. He was the ultimate content and product creator.
I always thought of Richard Branson as a kindred spirit. He is just better at finding and retaining great people than I am. That is always the case with billionaires, both the boring and the adventurous, iconoclastic kind.
Stay healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Happy and newly enriched followers of the Mad Hedge Fund Trader Alert Service have a couple of good fortune to own a record ten deep in-the-money options positions that expire on Friday, February 18 at the stock market close in two days.
It is therefore time to explain to the newbies how to best maximize their profits.
These involve the:
(TSLA) 8/$500 put spread 10.00%
(TLT) 8/123-$126 put spread
Provided that we don’t have another 2,000-point move down in the market this week, these positions should expire at their maximum profit points.
So far, so good.
I’ll do the math for you on our deepest in-the-money position, the United States US Treasury Bond Fund (TLT) $123-$126 vertical bear put debit spread. Since we are a massive $7.00 in the money with only three days left until expiration I will almost certainly will run into expiration.
Your profit can be calculated as follows:
Profit: $3.00 expiration value - $2.60 cost = $0.40 net profit
(40 contracts X 100 contracts per option X $0.40 profit per option)
= $1,600 or 15.38% in 21 trading days.
Many of you have already emailed me asking what to do with these winning positions.
The answer is very simple. You take your left hand, grab your right wrist, pull it behind your neck, and pat yourself on the back for a job well done.
You don’t have to do anything.
Your broker (are they still called that?) will automatically use your long position to cover your short position, canceling out the total holdings.
The entire profit will be credited to your account on Monday morning, August 22 and the margin freed up.
Some firms charge you a modest $10 or $15 fee for performing this service.
If you don’t see the cash show up in your account on Monday, get on the blower immediately and find it.
Although the expiration process is now supposed to be fully automated, occasionally machines do make mistakes. Better to sort out any confusion before losses ensue.
If you want to wimp out and close the position before the expiration, it may be expensive to do so. You can probably unload them pennies below their maximum expiration value.
Keep in mind that the liquidity in the options market understandably disappears, and the spreads substantially widen, when a security has only hours, or minutes until expiration on Friday, August 19. So, if you plan to exit, do so well before the final expiration at the Friday market close.
This is known in the trade as the “expiration risk.”
One way or the other, I’m sure you’ll do OK, as long as I am looking over your shoulder, as I will be, always. Think of me as your trading guardian angel.
I am going to hang back and wait for good entry points before jumping back in. It’s all about keeping that “Buy low, sell high” thing going.
I’m looking to cherry-pick my new positions going into the next month-end.
Take your winnings and go out and buy yourself a well-earned dinner. Just make sure it’s take-out. I want you to stick around.
Well done, and on to the next trade.
The Options Expiration is Coming
Global Market Comments
August 15, 2022
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD,
or WHAT THE MARKET IS REALLY DISCOUNTING NOW),
(SPY), (TLT), (AAPL), (AXP), (KO), (XOM). (TBT), (SNOW), (NFLX), (ARKK), (ETHE),
(NLR), (CCR), CORN), (WEAT), (SOYB), (DBA), (UUP), (FXA), (FXC), (BA), (TSLA)
After a half-century in the markets, I have noticed that it is the investors with the correct long-term views who make the biggest money. My favorite example is my friend, Warren Buffet, who doesn’t care if an investment turns good in five minutes or five years.
Buffet’s Berkshire Hathaway (BRKB) is the largest outside investor in Apple (AAPL). And guess what his cost has been? By the time you add up the compounded dividends he has collected since he started buying the stock in 2011, it's zero. The value today? $15.5 billion.
Buffet didn’t buy Apple for its hardware, iPhone, or iTunes. He bought it for the brand, which has improved astronomically. Look at Berkshire’s portfolio and it is packed with brands, like American Express (AXP), Coca-Cola (KO), and Exxon (XOM).
When did Buffet last buy Apple? In May when it hit $130.
That’s why Warren Buffet is Warren Buffet and you are you.
While the inflation news last week has been great and it is likely to get better, I believe that investors are missing the bigger, more important long-term picture.
The fact is that markets are now discounting an earlier than expected end to the Ukraine War, much earlier.
I get constant updates on the war from the Joint Chiefs of Staff, Britain’s Defense Committee, and NATO headquarters and I can tell you that the war has taken a dramatic turn in Ukraine’s favor just in the last two weeks.
Russian casualties have topped 80,000, nearly half the standing army. They have lost 2,200 of their 2,800 operational tanks. Some 120 front line aircraft have been destroyed. This week, Ukraine attacked the principal Russian air base in Crimea, leaving the smoking ruins of seven more aircraft there.
Russia is in effect fighting a modern digitized war with 50-year-old Cold War weapons and it isn’t working. Its generals have no experience fighting wars against determined opposition. Putin would do better listening to the retired generals on CNN for military advice.
America’s High HIMARS (the M142 High Mobility Artillery Rocket System) has become the Stinger missile of this war. The Lockheed Martin (LMT) factory in Camden, Arkansas that makes these missiles is running 24/7 on doubled orders.
The sanctions against Russia have been wildly successful. The Russian economy is utterly collapsing. What oil they are selling now is at half price. Aircraft are being cannibalized for parts to keep others flying. Much of the educated middle class has fled the country. Draft dodging is rampant.
What does all this mean for you and me?
The commodity price spike the war prompted has ended and most are now in steep downtrends. Gold (GLD), where the Russians were major buyers, has been flat as a pancake. This has put our inflation numbers into freefall. Interest rate fears peaked in June and are now in the rear-view mirror.
As is always the case, markets have seen these developments and correctly ascertained their consequences far before we humans did (except for maybe me). It has been no surprise that they have been tracking the Russian defeat day by day and have been on an absolute tear since June 15.
Even small techs suffering 18-month bear markets have now begun major recoveries, with companies like Snowflake (SNOW), up 50%, Netflix (NFLX), up 39%, and Cathie Wood’s Innovation Fund (ARKK) up 57%. Even crypto has returned from the grave, with Ethereum (ETHE) up an eye-popping 105%.
But don’t go gaga over stocks just yet.
The Fed ramps up quantitative tightening in September to $95 billion a month and will deliver another interest rate hike. That's why I am running a double short in the bond market (TLT), (TBT) once again.
We also have the midterms to worry about which, with recent developments, promise to be more contentious than ever. Look for another round of tiring new election fraud claims.
That’s great because these events will give us good entry points lower down for trade alerts, not the short-term top we are looking at right now.
It helps that with ten-year US Treasury yields at 2.80%, it has an effective price earning multiple of 37, while stocks growing earnings at 10% a year boast a price earnings multiple of only 16. That sets up a massive, long stock/short bond trade which Mad Hedge will be pushing well on into 2023.
And you know what?
The smart guys I know in the hedge fund community are starting to model for the next Fed interest rate CUT. Markets will love it and discount this far in advance.
If you want to get on the train with me before it leaves the station, just keep reading this newsletter.
Yes, markets are now being driven by rate cuts and peace prospects, not rate rises and war!
Your retirement fund will love it.
I just thought you’d like to know.
CPI Dives to 8.5%, down 0.6% in July. The peak is in, and stocks rallied 500. Look for another drop in August, with gasoline prices falling daily. The 800-pound gorilla in the room has exited.
The Producer Price Index Dives 0.5%, confirming last week’s weak CPI number. And many core prices are indicating that we will get another drop when the August numbers are reported in September. It was worth another 300-point rally in the Dow Average, which is getting seriously overbought.
Consumer Inflation Expectations dive to 6.2% for the coming year and only 3.2% for three years. according to a New York Fed Survey. Expectations for food costs saw the largest decline. The CPI is out on Wednesday. No doubt a media onslaught over a coming recession has a lot to do with it.
Elon Musk Sells $6.9 billion worth of Tesla (TSLA) Stock, explaining the $100 drop in the shares last week. Ostensibly, this is to pay for Twitter if he loses his court case. Musk clearing took advantage of a 60% rise in (TSLA) to head off distress sales in the future. Musk also opened the door to share buy backs in the future. Buy (TSLA) on dips.
85,000 IRS Agents are Headed Your Way, but only if the government can hire them and only if you are a billionaire or a profitable large oil company. The rest of us will be ignored by this unpublicized portion of the Biden inflation bill.
US Dollar (UUP) Takes a Hit on CPI Report, which effectively showed that the US saw deflation in July. The greenback is pulling back the 20-year highs which gave you the cheapest European vacation in your lives. The prospect of interest rates rising at a slower pace is dollar negative. Buy (FXA) and (FXC) on dips.
Boeing (BA) Delivered its First 787 Dreamliner in a year, after long-awaited regulatory approval. The monster 30% rise in the shares off the June low predicted as much. A global aircraft shortage helps. Airbus is going to have to start earnings its money again. Keep buying (BA) on dips.
Weekly Jobless Claims Pop 12,000 to 262,000, a new high for the year. It’s not at concerning levels yet but is definitely headed in the wrong direction. Maybe it’s just a summer slowdown? Maybe not.
Shipping Container Charges are Plunging Everywhere, except in the US, which currently has the world’s strongest economy. It’s a sign that global supply chain problems are easing. But the US leads the world in demurrage, or delays, with New York the worst, followed by Long Beach.
Import Prices are Plunging, thanks to a super strong dollar, taking more pressure off of inflation. They fell 1.4% in July according to the Department of Labor. Easing supply chain problems are helping. Biden has had the run of the table for months now
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 prices now rapidly declining, 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!
My August performance climbed to +2.14%. My 2022 year-to-date performance ballooned to +56.97%, a new high. The Dow Average is down -7.0% 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 74.76%.
That brings my 14-year total return to 569.53%, some 2.56 times the S&P 500 (SPX) over the same period and a new all-time high. My average annualized return has ratcheted up to 44.96%, easily the highest in the industry.
We need to keep an eye on the number of US Coronavirus cases at 93 million, up 300,000 in a week and deaths topping 1,037,000 and have only increased by 2,000 in the past week. You can find the data here.
On Monday, August 15 at 8:30 AM EDT, the New York Empire State Manufacturing Index for August is released.
On Tuesday, August 16 at 8:30 AM, the Housing Starts for July are out.
On Wednesday, August 17 at 8:30 AM, Retail Sales for July are published. At 11:00 AM the Fed Minutes from the last meeting are printed.
On Thursday, August 18 at 8:30 AM, Weekly Jobless Claims are announced. Existing Home Sales for July are announced.
On Friday, August 19 at 2:00 the Baker Hughes Oil Rig Count is out.
As for me, while we’re all waiting for the dog days of August to end, it is time to reminisce about my old friend George Schultz who passed away last year at the age of 101.
My friend was having a hard time finding someone to attend a reception who was knowledgeable about financial markets, White House intrigue, international politics, and nuclear weapons.
I asked who was coming. She said Reagan’s Treasury Secretary George Shultz. I said I’d be there wearing my darkest suit, cleanest shirt, and would be on my best behavior, to boot.
It was a rare opportunity to grill a high-level official on a range of top-secret issues that I would have killed for during my days as a journalist for The Economist magazine. I guess arms control is not exactly a hot button issue these days.
I moved in for the kill.
I have known George Shultz for decades, back when he was the CEO of the San Francisco-based heavy engineering company, Bechtel Corp in the 1970s.
I saluted him as “Captain Schultz”, his WWII Marine Corp rank, which has been our inside joke for years. Now that I am a major, I guess I outrank him.
Since the Marine Corps didn’t know what to do with a PhD in economics from MIT, they put him in charge of an anti-aircraft unit in the South Pacific, as he was already familiar with ballistics, trajectories, and apogees.
I asked him why Reagan was so obsessed with Nicaragua, and if he really believed that if we didn’t fight them there, would we be fighting them in the streets of Los Angeles as the then-president claimed.
He replied that the socialist regime had granted the Soviets bases for listening posts that would be used to monitor US West Coast military movements in exchange for free arms supplies. Closing those bases was the true motivation for the entire Nicaragua policy.
To his credit, George was the only senior official to threaten resignation when he learned of the Iran-contra scandal.
I asked his reaction when he met Soviet premier Mikhail Gorbachev in Reykjavik in 1986 when he proposed total nuclear disarmament.
Shultz said he knew the breakthrough was coming because the KGB analyzed a Reagan speech in which he had made just such a proposal.
Reagan had in fact pursued this as a lifetime goal, wanting to return the world to the pre nuclear age he knew in the 1930s, although he never mentioned this in any election campaign. Reagan didn’t mention a lot of things.
As a result of the Reykjavik Treaty, the number of nuclear warheads in the world has dropped from 70,000 to under 10,000. The Soviets then sold their excess plutonium to the US, which has generated 20% of the total US electric power generation for two decades.
Shultz argued that nuclear weapons were not all they were cracked up to be. Despite the US being armed to the teeth, they did nothing to stop the invasions of Korea, Hungary, Vietnam, Afghanistan, and Kuwait.
Schultz told me that the world has been far closer to an accidental Armageddon than people realize.
Twice during his term as Secretary of State, he was awoken in the middle of the night by officers at the NORAD early warning system in Colorado to be told that there were 200 nuclear missiles inbound from the Soviet Union.
He was given five minutes to recommend to the president to launch a counterstrike. Four minutes later, they called back to tell him that there were no missiles, that it was just a computer glitch projecting ghost images on a screen.
When the US bombed Belgrade in 1989, Russian president Boris Yeltsin, in a drunken rage, ordered a full-scale nuclear alert, which would have triggered an immediate American counter-response. Fortunately, his generals ignored him.
I told Schultz that I doubted Iran had the depth of engineering talent needed to run a full-scale nuclear program of any substance.
He said that aid from North Korea and past contributions from the AQ Khan network in Pakistan had helped them address this shortfall.
Ever in search of the profitable trade, I asked Schultz if there was an opportunity in nuclear plays, like the Market Vectors Uranium and Nuclear Energy ETF (NLR) and Cameco Corp. (CCR), that have been severely beaten down by the Fukushima nuclear disaster.
He said there definitely was. In fact, he was personally going to lead efforts to restart the moribund US nuclear industry. The key here is to promote 5th generation technology that uses small, modular designs, and alternative low-risk fuels like thorium.
Schultz believed that the most likely nuclear war will occur between India and Pakistan. Islamic terrorists are planning another attack on Mumbai. This time, India will retaliate by invading Pakistan. The Pakistanis plan on wiping out this army by dropping an atomic bomb on their own territory, not expecting retaliation in kind.
But India will escalate and go nuclear too. Over 100 million would die from the initial exchange. But when you add in unforeseen factors, like the broader environmental effects and crop failures (CORN), (WEAT), (SOYB), (DBA), that number could rise to 1-2 billion. This could happen as early as 2023.
Schultz argued that further arms control talks with the Russians could be tough. They value these weapons more than we do because that’s all they have left.
Schultz delivered a stunner in telling me that Warren Buffet had contributed $50 million of his own money to enhance security at nuclear power plants in emerging markets.
I hadn’t heard that.
As the event ended, I returned to Secretary Shultz to grill him some more about the details of the Reykjavik conference held some 36 years ago.
He responded with incredible detail about names, numbers, and negotiating postures. I then asked him how old he was. He said he was 100.
I responded, “I want to be like you when I grow up”.
He answered that I was “a promising young man.” I took that as encouragement in the extreme.
Stay healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
We’re Getting Pretty High
Global Market Comments
August 4, 2022
Fiat Lux
Featured Trade:
(A NOTE ON ASSIGNED OPTIONS, OR OPTIONS CALLED AWAY),
(TLT), (TSLA)
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!
