Global Market Comments
February 2, 2021
Fiat Lux
Featured Trade:
(MY NEWLY UPDATED LONG-TERM PORTFOLIO),
(PFE), (BMY), (AMGN), (CELG), (CRSP), (FB), (PYPL), (GOOGL), (AAPL), (AMZN), (SQ), (JPM), (BAC), (MS), (GS), (BABA), (EEM), (FXA), (FCX), (GLD), (SLV), (TLT)
I am really happy with the performance of the Mad Hedge Long Term Portfolio since the last update on July 21, 2020. In fact, not only did we nail the best sectors to go heavily overweight, we also completely dodged the bullets in the worst-performing ones.
For new subscribers, the Mad Hedge Long Term Portfolio is a “buy and forget” portfolio of stocks and ETFs. If trading is not your thing, these are the investments you can make, and then not touch until you start drawing down your retirement funds at age 72.
For some of you, that is not for another 50 years. For others, it was yesterday.
There is only one thing you need to do now and that is to rebalance. Buy or sell what you need to reweight every position to its appropriate 5% or 10% weighting. Rebalancing is one of the only free lunches out there and always adds performance over time. You should follow the rules assiduously.
Despite the seismic changes that have taken place in the global economy over the past nine months, I only need to make minor changes to the portfolio, which I have highlighted below.
To download the entire new portfolio in an excel spreadsheet, please go to www.madhedgefundtrader.com, log in, go “My Account”, then “Global Trading Dispatch”, then click on the “Long Term Portfolio” button.
Changes
I am cutting back my weighting in biotech from 25% to 20% because Celgene (CELG) was taken over by Bristol Myers (BMY) at a 110% profit compared to our original cost. We also earned a spectacular 145% gain on Crisper Therapeutics (CRSP). I’m keeping it because I believe it has more to run.
My 30% weighting in technology also gets pared back to 20% because virtually all of my names have doubled or more. These have been in a sideways correction for the past six months but are still an important part of any barbell portfolio. So, take out Facebook (FB) and PayPal (PYPL) and keep the rest.
I am increasing my weighting in banks from 10% to 20%. Interest rates are finally starting to rise, setting up a perfect storm in favor of bank earnings. Loan default rates are falling. Banks are overcapitalized, thanks to Dodd-Frank. And because of the trillions in government stimulus loans they are disbursing, they are now the most subsidized sector of the economy. So, add in Morgan Stanley (MS) and Goldman Sachs (GS), which will profit enormously from a continuing bull market in stocks.
Along the same vein, I am committing 10% of my portfolio to a short position in the United States Treasury Bond Fund (TLT) as I think bonds are about to go to hell in a handbasket. I rant on this sector on an almost daily basis, so go read Global Trading Dispatch.
I am keeping my 10% international exposure in Chinese Internet giant Alibaba (BABA) and the iShares MSCI Emerging Market ETF (EEM). The Biden administration will most likely dial back the recent vociferous anti-Chinese stance, setting these names on fire.
I am also keeping my foreign currency exposure unchanged, maintaining a double long in the Australian dollar (FXA). The Aussie has been the best performing currency against the US dollar and that should continue.
Australia will be a leveraged beneficiary of the synchronized global economic recovery, both through strong commodity prices and gold which has already started to rise, and the post-pandemic return of Chinese tourism and investment. I argue that the Aussie will eventually make it to parity with the US dollar, or 1:1.
As for precious metals, I’m baling on my 10% holding in gold (GLD), which delivered a nice 20% gain in 2020. From here, it is having trouble keeping up with other alternative assets, like Bitcoin, and there are better fish to fry.
Yes, in this liquidity-driven global bull market, a 20% return is just not enough to keep my interest. Instead, I add a 5% weighting in the higher beta and more volatile iShares Silver Trust (SLV), which has far wider industrial uses in solar panels and electric vehicles.
As for energy, I will keep my weighting at zero. Never confuse “gone down a lot” with “cheap”. I think the bankruptcies have only just started and will stretch on for a decade. Thanks to hyper-accelerating technology, the adoption of electric cars, and less movement overall in the new economy, energy is about to become free. You are looking at the next buggy whip industry.
My ten-year assumption for the US and the global economy remains the same. I’m looking at 3%-5% a year growth for the next decade.
When we come out the other side of this, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 400% or more in the coming decade. The America coming out the other side of the pandemic will be far more efficient, productive, and profitable than the old.
You won’t believe what’s coming your way!
I hope you find this useful and I’ll be sending out another update in six months so you can rebalance once again.
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
February 1, 2021
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or GAMBLERS HAVE ENTERED THE MARKET),
($INDU), (TSLA), (TLT), (BA), (JPM), (MS), (GME), (STBX), (GE), (MRNA)
At long last, the 10% correction I have been predicting is happening. No, it wasn’t caused by the usual reasons, like a bad economic data point, an earnings disappointment, or a geopolitical event.
The market delivered the worst week since October because gamblers have entered the stock market. Perish the thought!
It turns out that if a million kids buy ten shares each of a $4 stock, they can wipe out even the largest hedge funds on their short positions. It also turns out they can wipe out their brokers, with infinite capital calls triggered by massive order flows.
If Chicago’s Citadel had not stepped in with a $1 billion bailout, Robin Hood would have gone under last week. Citadel buys Robin Hood’s order flow and is their largest customer. That’s where systemic risk enters the picture.
And it’s not like there was really any systemic risk. Markets have an inordinate fear of the unknown, and no one has ever seen a bunch of kids in a chat room like Redditt wipe out major hedge funds.
Fortunately, there are only a dozen small illiquid stocks that could be subject to such ‘buyers raids”. So, the spillover to the main market is very limited, probably no more than a week or two.
And the regulations to reign in such a practice are already in place. Whenever a broker gets more business than it can handle, it will simply shut it down. Robin Hood did that on Friday when it has limited purchases in 20 stocks to a single share, including Starbucks (STBX), Moderna (MRNA), and General Electric (GE).
What all this does is set up an excellent buying opportunity for you and me, of which there have been precious few in recent months. By ramping up the Volatility Index to $38, it is almost impossible to lose money on front month call options spreads. We are the real winners of the (GME) squeeze.
Stocks would have to fall another 10%-20% on top of existing 10%-20% declines, and that is not going to happen in 13 trading days to the February 19 options expiration with $20 trillion about to hit the economy and the stock markets. That breaks down to $10 trillion in stimulus and $10 trillion worth of global quantitative easing.
My own long, hard-won experience is that a (VIX) at $38 earns you about 20% a month in profits. Options prices are so elevated that scoring winners now is like shooting fish in a barrel. So, join the party as fast as you can.
On Friday, I was taking profits on exiting positions and shipping out new trade alerts in the best quality names as fast as I could write them. Where is that easy, laid back retirement I was hoping for!
Keep at the barbell portfolio. The big tech names are finishing up a six-month sideways “time” corrections. Their earnings are catching up with valuations at a prolific rate. The domestic recovery names have just given back 10%-20% and are ripe for another leg up. All of these are good candidates for 2023 options LEAPS.
After all, if an insurrection and the sacking of the capitol can’t take the market down more than 1%, GameStop (GME) is certainly not going to take it down more than 10%.
GameStop (GME) posted record volatility, up from $4 a month ago to $483. Even the biggest hedge funds can’t stand up to a million kids buying ten shares each at market. All single name shorts in the market are getting covered by hedge funds in fear of getting “Gamestopped”, producing a 700-point Dow rally.
Several brokers banned trading in the name and the SEC is all over this like a wet blanket. Trading is halted due to an excess of sell orders. The problem is that funds are selling real stocks to cover the losses we own, like JP Morgan (JPM) and Tesla (TSLA) and short (TLT).
In the meantime, the action has moved over the American Airlines (AA), which has soared by 50%. AMC Entertainment Holdings (AMC) saw a 400% pop, but I haven’t seen anyone rushing back into theaters to watch Wonder Woman. Blame Jay Powell for flooding the financial system with mountains of cash seeking a home. There is so much money in circulation that traders are invented asset classes to put it into. This can’t last. Buy the dip.
Here are the best short squeeze targets with the greatest outstanding short interests. GameStop (GME) tops the list with an eye-popping 139% short interest, followed by Bed Bath & Beyond (BBBY) (67%) and Ligand Pharmaceutical (LGND) (64%). National Beverage (FIZZ), The Macerich Company (MAC), and Fubo TV (FUBO) bring up the rear. These are all failed companies in some form or another, which is why hedge funds had such large short positions.
New Home Sales disappointed in December, up only 1.6% to 842,000 units. This is on a signed contract basis only. Affordability is the big issue caused by high prices. Who buys a house at Christmas anyway?
Case Shiller soared by 9.5% in November, the fastest home price appreciation in history. Phoenix (13.8%), Seattle (12.7%), and San Diego (12.3) were the big movers. Blame a long-term structural housing shortage, a huge demographic push from Millennials, near-zero interest rates, and a flight from the cities to larger suburban homes. The Pandemic is keeping millions of homes off the market.
US GDP may reach pre-pandemic high by end of 2021, it the vaccine gets distributed to every corner of the nation and aggressive stimulus packages pass congress. Growth should come in at a minimum of 5% or higher this year, wiping out last year’s disaster. Keeping interest rates near zero will be a big help, as Treasury Secretary Yellen is determined to do. China and India are already there.
Share Buybacks have returned, the catnip of share prices. Q4 saw a jump to $116 billion from $102 billion in Q2, and this year, banks now have free reign to buy back their own shares. That’s still below the $182 billion seen in Q4 2019. It can only mean that share prices are rising further.
California lifts stay-at-home regulations, enabling restaurants to open after a nearly two-month shutdown. It’s the first ray of hope that the pandemic will end by summer. It will if Biden hits his 1.5 million vaccinations a day target.
Tesla posts sixth consecutive profit quarter, taking the stock down $60 in the aftermarket momentarily on a classic “buy the rumor, sell the news” move. The once cash-starved company now has an eye-popping $19.4 billion in reserves. Revenues reached a massive $10.7 billion, better than expected. Gross margins reached 19.2%. Looking for 50% annual growth for several years. Shanghai, Berlin, and Austin will make their first deliveries this year. Cash flow is at $19.4 billion, enough to build six more factories. No short sellers left here. It’s a perfect entry point for a LEAP. Buy the March 2023 $1,150-$1,200 call spread for a ten bagger.
Space X rocket carries 143 spacecraft into space. The Falcon 9 rocket set a new record with new satellites launched at once. Yes, you too can put 200kg into orbit for only $1 million. Many are from small tech startups selling various types of data. Elon Musk’s hobby, now worth $20 billion according to its government contracts, could be his next IPO. Don’t pass on this one!
When we come out the other side of pandemic, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 400% to 120,000 or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 120,000 here we come!
My Mad Hedge Global Trading Dispatch earned a blockbuster 10.21% in January, versus a Dow Average that is now down in 2021. This is my third double-digit month in a row.
I used the market selloff to take substantial profits in my short (TLT) holdings and buy new longs in Boeing (BA) and Morgan Stanley (MS). I rolled the strikes down on my JP Morgan (JPM) long by $10.
That brings my eleven-year total return to 432.76%, some 2.15 times the S&P 500 over the same period. My 11-year average annualized return now stands at a nosebleed new high of 38.85%, a new high.
My trailing one-year return exploded to 75.28%, the highest in the 13-year history of the Mad Hedge Fund Trader. We have earned 91.43% since the March 20 2020 low.
We need to keep an eye on the number of US Coronavirus cases at 26 million and deaths at 440,000, which you can find here. We are now running at a staggering 3,800 deaths a day.
The coming week will be all about the monthly jobs data.
On Monday, February 1 at 9:45 AM EST, the Markit Manufacturing PMI for January is out. Caterpillar (CAT) announces earnings.
On Tuesday, February 2 at 7:00 AM, Total Vehicle Sales for January are published. Alphabet (GOOG) and Amgen (AMGN) report.
On Wednesday, February 3 at 8:15 AM, the ADP Private Employment Report is published. QUALCOMM (QCOM) reports.
On Thursday, February 4 at 9:30 AM, Weekly Jobless Claims are printed. Gilead Sciences (GILD) reports.
On Friday, February 5 at 9:30 AM, the January Nonfarm Payroll Report is announced. At 2:00 PM, we learn the Baker-Hughes Rig Count.
As for me, I am often kept awake at night by painful arthritis and a collection of combat injuries and I usually spend this time thinking up new trade alerts.
However, the other night, I saw a war movie just before I went to bed, so of course, I thought about the war. This prompted me to remember the two happiest people I have met in my life.
My first job out of college was to go to Hiroshima Japan for the Atomic Energy Commission and interview survivors of the first atomic bomb 29 years after the event. There, I met Kazuko, a woman in her late forties who was attending college in Fresno, California in 1941 and spoke a quaint form of English from the period. Her parents saw the war and the internment coming, so they brought her back to Hiroshima to be safe.
Her entire family was gazing skyward when a sole B-29 bomber flew overhead. One second before the bomb exploded, a dog barked and Kazuko looked to the right. Her family was permanently blinded, and Kazuko suffered severe burns on the left side of her neck, face, and forearms. A white summer yukata protected the rest of her, reflecting the nuclear flash. Despite the horrible scarring, she was the most cheerful person I had ever met and even asked me how things were getting on in Fresno.
Then there was Frenchie, a man I played cards with at lunch at the Foreign Correspondents Club of Japan every day for ten years. A French Jew, he had been rounded up by the Gestapo and sent to the Bergen-Belson concentration camp late in the war. A faded serial number was still tattooed on his left forearm. Frenchie never won at cards. Usually, I did because I was working the probabilities in my mind all the time, but he never ceased to be cheerful no matter how much it cost him.
The happiest people I ever met were atomic bomb and holocaust survivors. I guess, if those things can’t kill, you nothing can, and you’ll never have a reason to be afraid again. That is immensely liberating.
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
January 25, 2021
Fiat LuxFeatured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or HERE COMES THE SUPERHEATED ECONOMY),
(SPY), ($INDU), (TLT), (TBT), (TSLA)
The US economy is in the worst condition in a century. The U6 Unemployment rate stands at 20 million today. Main streets everywhere are boarded up. Millions of businesses have gone under. Some 4,500 people a day are dying from a dreaded virus.
All of this means that you should rush out and buy and stocks, as many as possible, with both hands, and by the bucket load. It’s time to take out that home equity loan and pour it into stocks, damn the torpedoes.
For things are about to get better for the US economy, a whole lot better, better beyond anyone’s wildest imagination, and for you individually.
Speaking to CEOs, fund managers, and hedge fund strategists, it is clear that most are wildly underestimating the strength of the 2021 recovery. People haven’t really added up all the stimulus and quantitative easing that is about the hit, which could reach $20 trillion. The total market value of US stock markets is only $51 trillion.
I hate to engage in some simplistic calculations here, but if you increase the amount of capital going into the economy by nearly 50% in two years, stocks just might go up by nearly 50% in two years. It’s no more complicated than that.
In fact, economic conditions are about to improve so fast that the Federal Reserve may have to break its promise about not raising interest rates for three years and instead start nudging them up by the end of 2021.
Needless to say, this is terrible news for the bond market (TLT), where I am lining up to go from a double to a triple short.
You are already starting to see other analysts ratchet up their overcautious yearend S&P 500 target. By November, they may reach my own outsized goal of 4,800, bringing in a total gain in stocks of 35%.
All of this explains why stocks just absolutely refuse to go down, even a little bit. Each one-day decline seems to be met with a wall of buying. The memo is out: you absolutely have to get into this market, whether you are an individual, hedge fund, institution, or outright bet the ranch gambler.
Of course, if you think I’m so bullish because I made 90% on my money since the April bottom, you’d be right.
Just keep your discipline and observe the basic rules of trading: 1) Don’t buy a position that is so big that it can’t handle a normal 10% correction, 2) Don’t accumulate a position that is so big that you can’t sleep at night, 3) No calling John Thomas in the middle of the night and asking “I have a 3X position in this and their trading down in Asia, what should I do?”
If you have to ask the question, your position is too big.
Biden’s economic plan boosts growth forecasts, according to Goldman Sachs. Prospects have jumped from 6.4% to 6.6%, the highest in a half-century, on the back of a massive Covid-19 package.
Treasury Secretary Janet Yellen says “GO BIG” or go home to the Senate Finance Committee. She was there to get confirmation and push for Biden’s $1.9 trillion stimulus package. Markets are underestimating the extent of the stimulus headed our way, which could reach $10 trillion in addition to another $10 trillion in quantitative easing. Buy dips.
Index Funds are getting trashed, substantially trailing the S&P 500, as single-story stocks dominate the market. It’s become a stock pickers market in the extreme, with no more obvious example that (TSLA), up 1,000% in 9 months. Small caps, IPOs, and cyclical are getting all the action, leaving the (SPX) in the dust.
Tesla delivered its first Chinese Model Y, which will add 250,000 units to sales in 2021. It’s all part of Elon’s quest to take over the global automobile market. He plans to boost sales from 500,000 last year to 20 million in a decade. If so, the stock today still looks cheap. But is the quality the same?
Tesla Q4 registrations soar by 63%, in California, its largest market. It’s due to the runaway success of the Model Y small SUV. The stock is taking a long-overdue rest with a sideways “time” correction. It’s still true that if you buy the stock, you get the car for free.
Weekly Jobless Claims are still sky-high at 900,000. It’s a decline on the week but still horrifically high. The stock market may be starting to notice, with stocks moving sideways for two weeks.
Existing Home Sales soared to a 15-year high, up an amazing 22% YOY in December to a seasonally adjusted 6.76 million units. In the meantime, inventories hit all-time lows at only 1.9 months as they can’t build them fast enough. Sales of $1 million-plus homes are up an incredible 94%. The hottest markets were in Austin, TX, Tampa, FL, and Phoenix, AZ. New York was the worst, followed by San Francisco. The market is on fire and could continue for another decade. Pending tax breaks from the new tax bill will give homeownership another big push.
US Housing Starts jump 5.8%, to 1.7 Million units. Single-family homes are up 12% YOY, driven by the pandemic. Notice the enormous supply/demand gap which assures that home prices will keep rising for years. Rising mortgage interest rates so far have had no effect.
US Manufacturing PMI hits 14-Year high, according to Markit, their index jumping from 57.1 to 59.1. The performance would have been better if it weren’t for rampant parts shortages nationwide. It’s another argument for the long-term bull case.
When we come out the other side of pandemic, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 400% to 120,000 or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 120,000 here we come!
My Mad Hedge Global Trading Dispatch shot out of the gate with an immediate 7.25%so far in January. That is net of a 4% loss on a Tesla short which I added one day too soon. Given the great heights of the market, I have trimmed my book to just a long in Tesla and a Short in US Treasury bonds.
That brings my eleven-year total return to 430.30% double the S&P 500 over the same period. My 11-year average annualized return now stands at a nosebleed new high of 38.80%. My trailing one-year return exploded to 74.44%, the highest in the 13-year history of the Mad Hedge Fund Trader. We have earned 90% since the March low.
The coming week will be a big one for big tech earnings.
We also need to keep an eye on the number of US Coronavirus cases at 25 million and deaths at 420,000, which you can find here. We are now running at a staggering 4,500 deaths a day.
When the market starts to focus on this, we may have a problem.
On Monday, January 25 at 9:30 AM EST, we get the Chicago Fed National Activity Index for December. Phillips (PSX) and Kimberly Clark (KMB) report.
On Tuesday, January 26 at 10:00 AM, we learned the new S&P Case Shiller National Home Price Index. Microsoft (MSFT), Johnson & Johnson (JNJ), and American Express (AMEX) report.
On Wednesday, January 27 at 10:00 AM, US Durable Goods for December are published. Apple (AAPL), Facebook (FB) and Tesla (TSLA) report.
On Thursday, January 28 at 9:30 AM, the first look at US GDP for Q4 is announced. McDonald’s (MCD), American Airlines (AA), and Visa (V) report.
On Friday, January 29 at 9:30 AM, US Personal Income and Spending for December is published. Ely Lilly (LLY) and Caterpillar (CAT) report. At 2:00 PM, we learn the Baker-Hughes Rig Count.
As for me, I have never been big on the “meme” thing, but you have to love the one that has been circulating about Bernie Sanders. Suddenly, he showed up on every transit system in the country. Clearly, the country was dying for a laugh. I include several pictures below. Hopefully, I won’t end up like him someday.
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
January 22, 2021
Fiat Lux
Featured Trade:
(JANUARY 20 BIWEEKLY STRATEGY WEBINAR Q&A),
(QQQ), (IWM), (SPY), (ROM), (BRK/A), (AMZN), NVDA), (MU), (AMD), (UNG), (USO), (SLV), (GLD), ($SOX), CHIX), (BIDU), (BABA), (NFLX), (CHIX), ($INDU), (SPY), (TLT)
Below please find subscribers’ Q&A for the January 20 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Incline Village, NV.
Q: What will a significant rise in long term bond yields (TLT) do to PE ratios in general, and high tech specifically?
A: Well, the key question here is: what is “significant”. Is “significant” a move in a 10-year from 120 to 150, which may be only months off? I don’t think that will have any impact whatsoever on the stock market. I think to really give us a good scare on interest rates, you need to get the 10-year up to 3.0%, and that might be two years off. We’re also going to be testing some new ground here: how high can bond interest rates go while the Fed keeps overnight rates at 25 basis points? They can go up more, but not enough to hurt the stock market. So, I think we essentially have a free run on stocks for two more years.
Q: What about the Shiller price earnings ratio?
A: Currently, it’s 34.5X and you want to completely ignore anything from Shiller on stock prices. He’s been bearish on stocks for 6 years now and ignoring him is the best thing you can do for your portfolio. If you had listed to him, you would have missed the last 15,000 Dow ($INDU) points. Someday, he’ll be right, but it may be when the market goes from 50,000 to 40,000, so again, I haven't found the Shiller price earnings ratio to be useful. It’s one of those academic things that looks great on paper but is terrible in practice.
Q: Do you see any opportunity in China financials with the change of administration, like the (CHIX)?
A: I always avoid financials in China because everyone knows they have massive, defaulted loans on their books that the government refuses to force them to recognize like we do here. So, it’s one of those things where they look good on paper, but you dig deeper and find out why they’re really so cheap. Better to go with the big online companies like Baidu (BIDU) and Alibaba (BABA).
Q: Is it too late to enter copper?
A: No, the high in the last cycle for Freeport McMoRan (FCX) was $50 dollars and I think we’re only in the mid $ ’20s now, so you could get another double. Remember, these commodity stocks have discounted recovery that hasn’t even started yet. Once you do get an actual recovery, you could get another enormous move and that's what could take the Dow to 120,000.
Q: Do you see the FANGs coming back to life with the earnings results?
A: I think it'll take more than just Netflix to do that. By the way, Netflix (NFLX) is starting to look like the Tesla of the media industry, so I’d get into Netflix on the next dip. You could get a surprise, out-of-nowhere double out of that anytime. But yes, FANGs will come to life. They've been in a correction for five months now, and we’ll see—it may be the end of the pandemic that causes these stocks to really take off. So that's why I'm running the barbell portfolio and buying the FANGs on weakness.
Q: Are you recommending LEAPS on gold (GLD) and silver (SLV)?
A: Absolutely yes, go out two years with your maturity, you might buy 120% out of the money. That's where you get your leverage on the LEAPS. Something like a (GLD) January 2023 $210-$220 in-the-money vertical bull call spread and generate a 500% profit by expiration.
Q: Do you foresee a cool off for semiconductors ($SOX) even though there's been recent news of shortages?
A: No, not really. There are so many people trying to get into these it’s incredible. And again, we may get a time correction where we sideline at the top and then break out again to the upside. This is classic in liquidity-driven markets, which is what we have in spades right now. Thanks to 5G, the number of chips in your everyday devices is about to increase tenfold, and it takes at least two years to build a new chip factory. So, keep buying (NVDA), (MU), and (AMD) on dips.
Q: Where are the best LEAPS prospects (Long Term Equity Participation Securities)?
A: That would have to be in technology—that's where the earnings growth is. If you go 20% out of the money on just about any big tech LEAPs two years out, to 2023 those will be worth 500% more at expiration.
Q: What about SPACs (Special Purpose Acquisition Company) now, as we’re getting up to five new SPACs a day?
A: My belief is that a SPAC is a vehicle that allows a manager to take out a 20% a year management fee instead of only 1%. And it's another aspect of the current mania we’re in that a lot of these SPACs are doubling on the first day—especially the electric vehicle-related SPACs. Also, a lot of these SPACs will never invest in anything, but just take the money and give it back to you in two years with no return when they can't find any good investments…. If you’re lucky. There's not a lot of bargains to be found out there by anyone, including SPAC managers.
Q: Does natural gas (UNG) fall into the same “avoid energy” narrative as oil?
A: Absolutely, yes. The only benefit of natural gas is it produces 50% less carbon dioxide than oil. However, you can't get gas without also getting oil (USO), as the two come out of the pipe at the same time; so I would avoid natural gas also. Gas and oil are also about to lose a large chunk, if not all, of their tax incentives, like the oil depletion allowance, which has basically allowed the entire oil industry to operate tax-free since the 1930s.
Q: What about hydrogen cars?
A: I don't really believe in the technology myself, and when you burn hydrogen, that also produces CO2. The problem with hydrogen is that it’s not a scalable technology. It’s like gasoline—you have to build stations all over the US to fuel the cars. Of course, it produces far less carbon than gas or natural gas, but it is hard to compete against electric power, which is scalable and there's already a massive electric grid in place.
Q: If you inherited $4 million today, would you cost average into (QQQ), (IWM), or (SPY)?
A: I would go into the ProShares Ultra Technology ETF (ROM), which is double the (QQQ); and if you really want to be conservative, put half your money into (QQQ) or (ROM), and then half into Berkshire Hathaway (BRK/A), which is basically a call option on the industrial and recovery economy. I know plenty of smart people who are doing exactly that.
Q: Is it weird to see oil, as well as green energy stocks, moving up?
A: No, that's actually how it works. The higher oil and gas prices go, the more economical it is to switch over to green energy. So, they always move in sync with each other.
Q: I heard rumors that Amazon (AMZN) is likely to raise Prime’s annual fee by $10-20 a year in 2021. Will that be a catalyst for the stock to go higher?
A: Yes. For every $10 dollars per person in Prime revenue, Amazon makes $2 billion more in net profit. I would say that's a very strong argument for the stock going up and maybe what breaks it out of its current 6-month range. By the way, Amazon is wildly undervalued, and my long-term target is $5,000.
Q: Do you think that the spike in Apple (AAPL) MacBook purchases means that computers will overtake iPhones as the revenue driver for Apple in 2021, or is the phone business too big?
A: The phone business is too big, and 5G will cause iPhone sales to grow exponentially. Remember, the iPhones themselves are getting better. I just bought the 12G Pro, and the performance over the old phone is incredible. So yeah, iPhones get bigger and better, while laptops only grow to the extent that people need an actual laptop to work on in a fixed office. Is that a supercomputer in your pocket, or are you just glad to see me?
Q: Share buybacks dried up because of revenue headwinds; do you think they will come back in a massive wave, giving more life to equities?
A: Absolutely, yes. Banks, which have been banned from buybacks for the past year, are about to go back into the share buyback business. Netflix has also announced that they will go buy their shares for the first time in 10 years, and of course, Apple is still plodding away with about $100 or $200 million a year in share buybacks, so all of that accelerates. The only ones you won't see doing buybacks are airlines and Boeing (BA) because they have such a mountain of debt to crawl out from before they can get back into aggressive buybacks.
Q: Interest rates are at historic lows; the smartest thing we can do is act big.
A: That’s absolutely right; you want to go big now when we’re all suffering so we can go small later and run a balanced budget or even pay down national debt if the economy grows strong enough. The last person to do that was Bill Clinton, who paid down national debt in small quantities in ‘98 and ‘99.
Q: What do you think about General Motors (GM)?
A: They really seem to be making a big effort to get into electric cars. They said they're going to bring out 25 new electric car models by 2025, and the problem is that GM is your classic “hour late, dollar short” company; always behind the curve because they have this immense bureaucracy which operates as if it is stuck in a barrel of molasses. I don’t see them ever competing against Tesla (TSLA) because the whole business model there seems like it’s stuck in molasses, whereas Tesla is moving forward with new technology at warp speed. I think when Tesla brings out the solid-state battery, which could be in two years, they essentially wipe out the entire global car industry, and everybody will have to either make Tesla cars under license from Tesla—which they said they are happy to do—or go out of business. Having said that, you could get another double in (GM) before everyone figures out what the game is.
Q: Will you update the long-term portfolio?
A: Yes, I promise to update it next week, as long as you promise me that there won’t be another insurrection next week. It’s strictly a time issue. After last year being the most exhausting year in history, this year is proving to be even more exhausting!
Q: Do you see a February pullback?
A: Either a small pullback or a time correction sideways.
Q: Do you think the Zoom (ZM) selloff will continue, or is it done now that the pandemic is hopefully ending?
A: It’s natural for a tech stock to give up one third after a 10X move. It might sell off a little bit more, but like it or not, Zoom is here to stay; it’s now a permanent part of our lives. They’re trying to grow their business as fast as they can, they’re hiring like crazy, so they’re going to be a big factor in our lives. The stock will eventually reflect that.
Good Luck and Stay Healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
January 18, 2021
Fiat LuxFeatured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or WHAT WOULD KILL THIS MARKET?)
($INDU), (TLT), (TBT), (GLD), (GOLD), (WPM), (TESLA)
With the Dow Average now up 13,300 points, or 73.89%, since April, I’m getting besieged by questions from readers as to what could make the market go down. This is, after all, the sharpest move up in stocks in history.
With $20 trillion about to hit the US economy, $10 trillion in stimulus, $10 trillion in quantitative easing, and overnight interest rates remaining at zero for three years, there’s not much.
Still, even the most Teflon of bull markets eventually go down. Let’s explore the reasons why. I’m not intending to give you sleepless nights. But the best traders always believe that anything can happen to markets all the time.
1) The Pandemic Ends – If Covid-19 can take the market up 13,300 points in nine months, its disappearance may take it down. That’s because the all-clear on the disease may prompt investors to pull money out of stocks and put it in the real economy.
A lot of people are buying stocks because there is nothing else to do and you can execute trades in the safety of your own home without going outside. Still, this effect may be muted as there are at least 2 million fewer businesses today than before the pandemic.
2) Interest Rates Rise – The Fed has promised not to raise overnight rates for three years, or until the inflation rates top 2% for at least a year (it’s now 0.4%). That seems to give the most aggressive investors a green light for the foreseeable future.
However, the Fed has no control over long term rates, which are set by the bond market. Since January 1, the yield on the ten-year US Treasury bond has soared from 0.90% to an eye-popping $1.20%, and 1.50% is certainly within reach during the first half.
The markets could easily handle that. But if the ten-year yield jumps to 3.0%, which it could do in two years, stocks could suffer, especially if we are at much higher levels by then.
3) Stocks Go Down – A lot of new traders are buying stocks simply because they are going up, independent of the thought process. What if stocks go down? Scads of you are now promising to buy on the next 10% pullback. I guarantee you that when we ARE down 10%, the only thing on your mind will be selling. That’s the way it always works. Loss of upside momentum could easily turn into vicious downside momentum.
4) The Pandemic Gets a Lot Worse – The Teflon market (which was invented during the Manhattan Project to prevent the corrosion of the insides of steel pipes by uranium or plutonium) has matched rising share prices with increasing Corona deaths tic for tic since March. We are now at 4,000 deaths a day and many hospitals now have fleets of freezer trucks parked outside because they can’t bury the bodies fast enough.
Government health officials tell us the pandemic is peaking right now. What if they are wrong? What if in the coming months, deaths top 10,000 a day? That would definitely be worth a 10% correction, if not a 20% one.
Summary
It all sets up a continuing run for stocks that could last at least two years and take the Dow as high at 45,000, or up 50% from here.
Which leads me to a different subject.
What if I am wrong?
I know that many of you have invested in two-year call options (LEAPS, or long term equity participation securities) at the March-May bottom and are sitting on the biggest profits in your life. Lots of these are several thousand percent in the money and have turned into 10X leveraged long equity positions, essentially synthetic futures. As a result, you now have no downside protection whatsoever.
If you bought the 2022 $120-$130 call spread at $20, it is now worth $765, a gain of 38.25X, or 3,825%. You have essentially just won the lottery.
This is what you need to do right now: roll up your strikes.
I shall explain.
Let’s say that when Tesla was at $80 on a split-adjusted basis, I begged many of you to buy the 2022 $120-$130 call spread. Tesla shares then rose by a mind-boggling 1,006%.
Here’s what you do. Sell your 2022 $120-$130 call spread immediately. Lock in the profit. Then buy a 2023 $900-$950 call spread. If Tesla falls, it will be at a much slower rate than your existing position.
Long-dated out-of-the-money options fall at a much slower rate than stocks because they have immense time value. They demonstrate a downside “hockey stick” effect. Very roughly speaking and without doing any math, a 50% drop in the stock will deliver only a 25% drop in the options. However, if Tesla shares rise, you will still participate in the upside and get 95% of the gain.
It’s a classic “heads I win, tails you lose” set up.
This is what professional traders do automatically, without thinking about it as if it were second nature.
I just thought you’d like to know.
About Last Week
A second insurrection is in play for January 20 according to the FBI, with armed demonstrations planned in the capitols of all 50 states. Don’t plan on traveling that day. Public access to the capitol building has ceased for the foreseeable future. Washington is now an armed camp, with 25,000 National Guard called in. The FBI is attempting to arrest the ring leaders as fast as possible. Market will keep seeing this as a buying opportunity, the fires under the market are burning so hot.
The US budget deficit soared to $573 billion in Q4, up 61% YOY. For the full calendar year, the deficit reached a mind-boggling $3.3 trillion, triple the previous year. Almost all the increase went to spending on pandemic related benefits. It’s another nail in the coffin for the bond market. Keep selling the (TLT), even on small rallies. This could be the trade of the century.
The US has 3 million fewer jobs than when Trump took office four years ago. It’s the worst performance since Herbert Hoover took office in 1928. That’s exactly what I predicted back in 2016. Up to March 2020, we also had a zero return in the stock market under Trump, which only started to improve when Biden took the lead in the primaries in May. In the meantime, the National Debt soared from $20 trillion to $28 trillion and it is still soaring. Over 100% of US growth during the Trump administration has been borrowed from the future on credit. It’s not a way to run a country.
The semiconductor shortage is slowing the auto industry, with Toyota, Ford, and Fiat cutting back production. It’s a global problem. Modern cars use more than 100 chips each and are becoming more apps than hardware. I’ve been predicting this for a year, and the problem will continue as it takes billions of dollars and years to ramp up new production. Buy the daylights out of (NVDA), (AMD), and (MU).
Technology is 2% of US employment but 27% of market capitalization and 38% of profits, says my old friend Jeffrey Gundlach of Double Line. Bitcoin is a bubble, inflation will be 3% by June, and bonds (TLT) are beyond terrible. Stocks are expensive but could run for a long time.
Weekly Jobless Claims delivered a horrific print, up 181,000 to 965,000, the worst since the spring. Covid-19 is clearly the reason. Stocks could care less and pushed on to new all-time highs, up eight days in a row. It really is a “Look Through” market.
No rate hike until 2% inflation for a year, said Fed Governor Clarida. It could be a long wait as indicated by the recent 0.4% report.
US air travel is down 61% in November YOY, and that includes the big Thanksgiving travel bump. A trend up will start later this year, but airlines will still emerge from the pandemic with tons of debt. Avoid.
Netflix is launching a movie a day, for all of 2021. It’s disrupting legacy Hollywood at Internet speed, which Covid-19 has brought to a screeching halt. The stock has seen a sideways correction since tech peaked in sideways. Buy at the bottom end of the recent range.
When we come out the other side of pandemic, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 400% to 120,000 or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 120,000 here we come!
My Mad Hedge Global Trading Dispatch shot out of the gate with an immediate 6.25% profit for the first ten trading days of the year. That is net of a 4% loss on a Tesla short which I added one day too soon. I went pedal to the metal immediately, again going 100% invested with a 50% long/50% short market-neutral portfolio.
That brings my eleven-year total return to 428.80% double the S&P 500 over the same period. My 11-year average annualized return now stands at a nosebleed new high of 38.63%, a new high. My trailing one-year return exploded to 72.34%, the highest in the 13-year history of the Mad Hedge Fund Trader. We have earned 90% since the March low.
I did bail on my precious metals positions on (GOLD), (NEM), and (WPM) for small profits. The metals hate rising interest rates and competition from Bitcoin. They have effectively gone into a long bond, short Bitcoin position and I am not interested in either.
The coming week will be a slow one on the data front with Q4 earnings reports coming out daily.
We also need to keep an eye on the number of US Coronavirus cases at 24 million and deaths at 400,000, which you can find here. We are now running at a staggering 4,000 deaths a day.
When the market starts to focus on this, we may have a problem.
On Monday, January 18 at 11:00 AM EST, the US Markets will be closed for Martin Luther King Day.
On Tuesday, January 19 at 4:30 PM, Bank of America (BAC), Goldman Sachs (GS), and Netflix (NFLX) report.
On Wednesday, January 20 at 10:00 AM, we get the NAHB Housing Market Index. Morgan Stanley (MS) and Proctor and Gamble (PG) report.
On Thursday, January 21 at 8:30 AM, December Housing Starts are printed. Intel (INTC) and Union Pacific (UNP) report.
On Friday, January 22 at 10:00 AM, Existing Home Sales for December are out. Schlumberger (SLB) reports. At 2:00 PM, we learn the Baker-Hughes Rig Count.
As for me, I’m still waiting for orders on where to report for my Pfizer Covid-19 vaccination. In the meantime, since I will still be locked up for months to come, I have been viewing precious old pictures and videos from my past travel extravaganzas.
In 2019, I took my girls around the world via New Zealand, Sydney, Brisbane, Melbourne, Perth, Manila, New Delhi, Dubai, Cairo, Athens, Venice, Budapest, Brussels, Zermatt, and then back to San Francisco. We don’t do anything small in my family. Click here for the link to my favorite video of us arriving in Venice.
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
