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The Market Outlook for the Week Ahead, or Mad Hedge Clocks 46.38% Profit in Q1

How much pain to take?

That is the question plaguing traders and portfolio managers alike around the world. For the average bear market is only 9.7 months long and we are already 16 months into the present one.

Even the longest postwar bear market was only 2.5 years, or 30 months, the 2000-2002 Dotcom Bust, and we are nowhere near that level of economic hardship. Back then, companies posted losses for several quarters in a row, and many ceased to exist (Webvan, Alta Vista, Pets.com).

That means we only have a few more months of pain to take before another decade-long bull market resumes, or 8 months if the bear stretches to a full two years.

That is unless the new bull was actually born last October, which is entirely possible. Certainly, the stock market thinks so, with its refusal to drop on even the worst of news.

Inflation at 6%? Who cares.

A Fed that hates the stock market? Couldn’t give a damn.

Pathetic earnings growth? Call me when it’s over.

This indifference chalked up the deadest trading week I can remember, putting the Volatility Index (VIX) firmly back into “Do Nothing Land” under 20%.

So investors are cautiously putting cash into stocks on every dip, even minor ones, confident that they will be higher by yearend. If a black swan arrives in the meantime, or a political crisis boils out of control, tough luck if you can’t take a joke.

All of which is focusing a lot more attention on gold (GLD), which moved within 2% of a new all-time high last week. I am always looking for cross-asset class confirmations of current trends and the barbarous relic has certainly been one of those.

I have been bullish on gold since I put out LEAPS on Barrick Gold (GOLD) and silver (SLV) last October. They have since performed spectacularly well. The move into precious metals confirms the following. That the Fed tightening cycle will end imminently. Interest rates will fall, and the US dollar (UUP) will weaken. Everything else flows from there.

You are even seeing this in US Treasury Bond yields, with the ten-year plunging to 3.30%, a one-year low. The (TLT) hit $109 last week. Aren’t bonds supposed to be held back by the looming default by the US government?

I’m starting to wonder if the debt ceiling crisis is this generation’s Y2K. At worst, your toaster may show the wrong year but nothing further. Or maybe the pent-up demand for bonds and high yields is so great that it overwhelms all other considerations?

My 2023 year-to-date performance is now at an incredible +46.38%. The S&P 500 (SPY) is up only a miniscule +7.0% so far in 2023. My trailing one-year return maintains a sky-high +103.2% versus +7.0% for the S&P 500.

That brings my 15-year total return to +643.57%, some 2.71 times the S&P 500 (SPY) over the same period. My average annualized return has blasted up to +48.26%, another new high.

I executed no trades during the holiday-shortened week, content to run my ten profitable positions into the April 21 options expiration. If a strategy ain’t broke, don’t fix it. If I see something I like, I’ll take profits on an existing position and replace it with a new one.

Nonfarm Payroll Report Holds Up, at 236,000 in March, the lowest since December 2020. It shows that high interest rates still have not impacted the jobs market. February was revised up to 326,000. The headline Unemployment Rate dropped back to a 50-year low at 3.5%. Average Hourly Earnings dropped to 4.2% YOY, a two-year low, showing that inflation is in retreat. Leisure & Hospitality led at 74,000 followed by Government at 47,000.

Weekly Jobless Claims Drop, to 228,000, down 18,000 as recession fears rise. High interest rates are finally taking their toll, with a banking crisis thrown in for good measure.

Open Jobs Tighten, The June JOLTS survey of job openings fell to 10.698 million, down from 11.3 million last month and well below expectations of 11 million. Is this the calm before the storm when job openings disappear? This report is highly negative for the US dollar.

Tesla (TSLA) Posts Record EV Deliveries, Deliveries grew 36% from a year ago, below the 50% growth Elon Musk promised for the year on the last earnings call, but Musk has a habit of overpromising. The expansion is still a healthy sign that consumers are spending. Any pullback in Tesla is a gift for shareholders.

Oil (USO) Production Cut Sends Price Soaring, with OPEC+ including Russia has pledged a total of 3.66-million-barrel oil output cut which is nearly 3.7% of global demand. The jump in oil price will only accelerate global inflation and force the Fed into a tougher predicament. The Saudi – US cooperation is at its lowest ebb.

Walmart’s (WMT) Automation Effort Goes Into Overdrive, Walmart said it expects around 65% of its stores to be serviced by automation by 2026. The company said around 55% of packages that it processes through its fulfillment centers will be moved to automated facilities and unit cost average could improve by around 20%. This is the first step to getting rid of human employees. Eventually, the government will need to deliver universal basic income (UBI).

Gold and Miners Threaten New All-Time Highs, suggesting that a collapse in interest rates is imminent. So is an economic recovery and a resurgence of monetary expansion. Russian and China continue to be major buyers to evade sanctions. Keep buying (GLD) and (GOLD) on dips.

Apple (AAPL) Cash Hoard Soars to $165 Billion, as the cash flow king of all time goes from strength to strength. This will be one of the top targets in any tech rebound, which may be imminent. But you’re have to compete with apple to buy the shares, which is a huge buyer of its own stock.

Chip Stocks are On Fire, clocking the best sector of any in Q1. Too far, too fast, say I, but I’ll be in there buying with both hands on any serious dips. This is no future without (NVDA), (MU), and (AMAT) playing a major role.
Stock Dividends Hit New All-Time Highs, at $146.8 billion, up 7% YOY. As interest rates rose, companies had to raise dividends to keep up. The economy is also far stronger those most realize, with many analysts believing we should have entered a recession a long time ago. A high dividend also gives downside protection in bear markets.

Uranium Demand is Surging with the Nuclear Renaissance. And now the US is restarting plutonium production for the first time in 20 years, a uranium derivative. The 20-year supply we bought from the old Soviet Union has run out with a scant chance of renewal. The Los Alamos Labs in New Mexico is seeking to hire 1,200 engineers to build a brand-new factory from scratch. Buy (CCJ) on dips. And buy Los Alamos real estate if you can get a security clearance.

Keep Buying 90-Day T-Bills, now pushing a 5% risk-free yield. The regional banking crisis highlights another reason. If your bank or broker goes under, your cash deposits can be tied up in bankruptcy for three years. If you own US government securities, they can be ordered and transferred out in days to another institution. You can also buy them directly from the US government free of fee. Just thought you’d like to know.

My Ten-Year View

When we come out the other side of the recession, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. The economy decarbonizing and technology hyper accelerating, creating enormous investment opportunities. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The new America will be far more efficient and profitable than the old.

Dow 240,000 here we come!

On Monday, April 10 at 7:30 AM EST, the Consumer Inflation Expectations are out.

On Tuesday, April 11 at 6:00 AM, the NFIB Business Optimism Index is announced.

On Wednesday, April 12 at 7:00 AM, the US Core Inflation Rate and Consumer Price Index are printed.

On Thursday, April 13 at 8:30 AM, the Weekly Jobless Claims are announced. The Producer Price Index is also released.

On Friday, April 14 at 8:30 AM, the US Retail Sales are released.

As for me, I covered the Persian Gulf for Morgan Stanley for ten years during the 1980s when medieval sheikdoms still living in the 14^th century were suddenly showered with untold wealth. Needless to say, the firm, which we called Morgan Stallion, had a few ideas on what they should do about it.

I was picked as the emissary to the region because I had already been visiting the Middle East for 20 years and had been doing business there for 15 years. My press visa to cover the Iran-Iraq War was still valid.

In addition, I had already developed a reputation for being wild, reckless, and up for anything to enjoy a thrill or make a buck. In addition, with all the wars, terrorist attacks, and revolutions underway, everyone but me was scared to death to go near the place.

In other words, I was perfect for the job.

Being a veteran combat pilot proved particularly useful. I used to fly down on Kuwait Airlines and I still have a nice collection of the cute little Arabic artifacts they used to hand out in first class. Once in Abu Dhabi, I rented a local plane and hopped from one sheikdom to the next drumming up business. Once, I landed on a par five fairway at a private golf course just to give a presentation to a nation’s ruler.

My last stop was always Kuwait, where I turned the plane back in and met the CIA station chief for lunch to fill him in on what I had learned. It was all considered part of the job. When Iraq invaded Kuwait in 1991, I was their first call.

Of course, flying across vast expanses of the Arabian desert is not without its risks. Whenever you fly a single-engine plane you are betting your life on an internal combustion engine, never a great idea. I always carried an extra gallon bottle of water in case of a forced landing. The survival time without water is only three days.

Whenever I refueled, I filtered the 100LL aviation gas through a chamois cloth to keep out water and sand. Still, I was pretty good at desert survival, growing up near Indio California in the Lower Colorado Desert and endlessly digging my grandfather’s pickup truck out of the sand.

Once my boss tried to ban me from a trip to the Middle East because the US Navy had bombed Libya. I assured him that something as minor as that didn’t even move the needle on the risk front, at least in my lifetime.

The problem with the Persian Gulf was that they had all the money in the world and no way to spend it. An extreme Wahabis religion was strictly adhered to, and alcohol was banned. But you could have four wives and I enjoyed some of the best fruit juice in my life.

So my clients came to rely on me for diversions. The Iran-Iraq War was taking place then. I took them up in my plane to 10,000 feet and we watched the aerial war underway 50 miles to the north. The nighttime display of rockets, machine gun fire, and explosions was spectacular.

During one such foray, the wind shifted dramatically as a sandstorm rolled in. Suddenly I was landing in a 50-knot crosswind instead of a 10-knot headwind. A quick referral to the aircraft manual confirmed that the maximum crosswind component for the plane was 27 knots.

Oops!

Then I got a bright idea. I radioed the tower and asked for permission to land on the taxiway at a 90-degree angle to the main runway. After some hesitation, they responded, “If you’re willing to try it”. They knew my only alternative was to ditch at sea with two high-ranking gentlemen who couldn’t swim.

The tower very kindly talked me down with radar vectors and at the last possible second, with the altimeter reading 20 feet, the taxiway popped into view. With such a stiff wind I was able to pancake the plane down in yards, slam it on the runway, and then immediately shut the engine down. I asked for a tow, not wanting to risk the windstorm flipping the plane over.

My passengers thanked me profusely.

When Iraq invaded Kuwait in 1991, I lost most of my friends there. They were either killed, kidnapped and held for ransom, or volunteered as translators for US forces. I never saw them again.

I didn’t return to the Middle East until 2019 when I took two teenage girls to Egypt to introduce them to that part of the world. They wore hijabs, rode camels, and opened their eyes. I even set up some meetings with an educated Arab woman.

I will probably go back someday. I still haven’t seen the ruins at Petra in Jordan, nor ridden the Hijaz Railway, which Lawrence of Arabia blew up in 1918. But I have an open invitation from the king there.

I knew his dad.

Good Luck and Good Trading
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

March 27, 2023

Diary, Newsletter, Summary

Global Market Comments
March 27, 2023
Fiat Lux

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE BANKING CRISIS IS OVER),
(SPY), (TLT), (SCHW), (NFLX), (CS), (GLD), (USO), (BRK/B), (TSLA), (BAC), (C), (JPM), (IBKR), (MS)

CLICK HERE to download today's position sheet.

The Market Outlook for the Week Ahead, or The Banking Crisis is Over

Diary, Newsletter

I think it is safe to say that the banking crisis is now in the market. You saw this in the ritual Friday selloff of bank stocks, which last week made back two-thirds of its losses by the end of the day.

Treasury Secretary Janet Yellen has made it clear that she will use her emergency authority to bail out the depositors of any US banks and leave the shareholders drifting in the wind. That’s OK as long as failures happen in ones and twos and not hundreds.

So after this coming dead, data-less week, we may launch into a serious rally next month, often the strongest of the year, back up to the top of the recent trading range. After that, it will be time to “Sell in May and go away,” and not come back until an interest rate collapse is imminent.

Personally, I have suites on the Queen Mary II and the Orient Express waiting for me. How about you?

And what happens when a crisis winds down? The need for protection ebbs as well. That means that big tech stocks with large balance sheets which had a great March will be due for a rest.

You see this in other flight-to-safety assets, like gold (GLD), which gave up some of its recent gains.

Given the failure of the Volatility Index ($VIX) to maintain a sustainable rally this year, it is clear that something important has changed in that market. That would be same-day options, which are stealing the thunder of the old ($VIX).

Instead of panicking and buying the ($VIX) at market, hedge fund algorithms are now programmed to buy individual same-day stock put options. That vastly increases the volatility of single stocks, with one day 10%-15% moves becoming normal.

When a piece of bad news erupts about the banking system, same-day put options across the entire sector rocket, regardless of whether any individual bank is having problems or not.

Needless to say, as ($VIX) opportunities fade, spectacular new trades are opening up in single stocks which Mad Hedge is happily taking advantage of. As a result, the profitability of our trading strategy has near doubled. This has produced the blowout numbers which I list below.

When panic put buying tanks a stock, we pile on call spreads, as we did two weeks ago with many bank and broker stocks. When fears of recession drive bond prices insanely high, we buy (TLT) put spreads.

Buy low, sell high, it’s my new investment strategy. I’m thinking of patenting it.

With some of the most extreme volatility of the year, Mad Hedge continued on up tear, with March up an eye-popping +12.52%.

My 2023 year-to-date performance is now at an incredible +38.28%. The S&P 500 (SPY) is up a miniscule +0.77% so far in 2023. My trailing one-year return maintains a sky-high +95.52% versus -10.23% for the S&P 500.

That brings my 15-year total return to +635.47%, some 2.8 times the S&P 500 (SPY) over the same period. My average annualized return has recovered to +48.26%, another new high.

I executed only two trades last week, content to leave alone my remaining eight positions that are profitable. I used a bond selloff to take profits with my bond short (TLT). A frenetic 25% rally prompted me to close out my long in Charles Schwab (SCHW) as we were nearing our maximum profit.

Fed Raises Interest Rates 25 basis points, to an overnight range of 4.75% to 5.00%, a 15-year high. But it left the door open to a further 25 basis points on May 3. The statement substantially weakened the prospect for future interest rate hikes, a de facto pause. Stocks loved the move, especially brokerage and technology stocks. Powell said the US banking system is sound and announced further support measures for small banks.

Yellen to Guarantee Deposits if More Banks Fail, which traders are taking to the bank as a nationwide government backstop. That explains the ballistic moves in financials yesterday. Today, Fed governor Jay Powell plays his hand.

Will the Banking Crisis End the Bear Market? I think so, as a drop in interest rates is the only possible solution. The Fed may have to guarantee all US bank deposits for a year to get there. Bank and technology stocks certainly think so, which have been on a tear this week.

Fed Window Increases By $94 Billion on the Week, and $400 billion in two weeks, in its so far successful effort to float the banking system. Some $60 billion went to foreign borrowers. It has to be viewed as a positive and the emergency need for funding is declining.

Netflix (NFLX) Soars 10%, by ending password sharing in Canada. The United States is expected to be next. The move is expected to boost paid subscriptions. I took profits on my long in (NFLX).

Oil (USO) Dives 1%, as the US energy secretary says it may take “years” to refill the Strategic Petroleum Reserve. How about never?

Existing Home Sales Soar 14.5% in February, a three-year high on a signed contract basis. The annualized rate was 4.58 million according to the National Association of Home Builders. Inventories shrink to an incredible 2.6 months or 980,000 homes. The median home prices fell 0.2% to $363,000, the first decline in 11 years. The sharp drop in interest rates last week will further turbocharge sales. Cash sales were 28% of total sales.

Gold (GLD) Tops $2,000 an Ounce, as the flight to safety bid continues. Lower interest rates sooner will also provide less yield competition for precious metals. Silver will provide the higher beta from here, as it always does.

UBS Buys Credit Suisse (CS) for $3.25 Billion, less than half of where it traded on Friday, eliminating another threat to the global financial system. It looks like there were $5 billion in hidden trading losses. Some $17 billion in lower tier bonds were written down to zero, which several US bond funds like Pimco owned. The deal includes a sweetheart $100 billion loan facility from my friends at the Swiss National Bank. The forced marriage will create one of the largest banks in Europe. Some 9,000 CS jobs will get axed.

Berkshire Hathaway Steps up Share Buybacks, totaling $1.8 billion in 2022. The three-year total is an incredible $60 billion. It explains why (BRK/B) was unchanged in an otherwise horrific year. Buffet still holds a stunning $147 billion in cash, most of which is invested in US Treasury short terms bills.

My Ten-Year View

On Monday, March 27 at 7:30 AM EST, the Dallas Fed Manufacturing Index is out.

On Tuesday, March 28 at 6:00 AM, the S&P Case Shiller National Home Price Index is announced.

On Wednesday, March 29 at 7:00 AM, the Pending Home Sales for February are printed.

On Thursday, March 30 at 8:30 AM, the Weekly Jobless Claims are announced. The final read on Q4 GDP is disclosed.

On Friday, March 31 at 8:30 AM, the Personal Income & Spending are released.

As for me, not a lot of people get a chance to board a WWII battleship these days. So when I got the chance, I jumped at it.

As part of my grand tour of the South Pacific for Continental Airlines in 1981, I stopped at the US missile test site at Kwajalein Atoll in the Marshall Islands, a mere 2,000 miles west southwest of Hawaii and just north of the equator.

Of course, TOP SECRET clearance was required and no civilians are allowed.

No problem there, as clearance from my days at the Nuclear Test Site in Nevada was still valid. Still, the FBI visited my parents in California just to be sure that I hadn’t adopted any inconvenient ideologies in the intervening years.

I met with the admiral in charge to get an update on the current strategic state of the Pacific. China was nowhere back then, so there wasn’t much to talk about in the wake of the Vietnam War.

As our meeting wound down, the admiral asked me if I had been on a German battleship. “It’s a bit before my time,” I replied. “How would you like to board the Prinz Eugen?" he responded.

The Prinz Eugen was a heavy cruiser, otherwise known as a pocket battleship built by Nazi Germany. It launched in 1938 at 16,000 tons and with eight 8-inch guns. Its sister ship was the Admiral Graf Spee, which was scuttled in the famous Battle of the River Platte in South America in 1939.

Early in the war, it helped sink the British battleship HMS Hood and damaged the HMS Prince of Wales. The Prinz Eugen spent much of the war holed up in a Norwegian fjord and later provided artillery support for the retreating German Army on the eastern front. At the end of the war, the ship was handed over to the US Navy as a war prize.

The US postwar atomic testing was just beginning so the Prinz Eugen was towed through the Panama Canal to be used as a target. Some 200 ships were assembled, including those from Germany, Japan, Britain, and even some American ships deemed no longer seaworthy like the USS Saratoga. One of the first hydrogen bombs was dropped in the middle of the fleet.

The Prinz Eugen was the only ship to remain afloat. In the Navy film of the explosion, you can see the Prinz Eugen jump 200 feet into the air and come down upright. The ship was then towed back to Kwajalein Atoll and put at anchor. A typhoon came later in 1946, capsizing and sinking it.

It was a bright at sunny day when I pulled up to the Prinz Eugen in a small boat with some Navy divers. There was no way the Navy was going to let me visit the ship alone.

The ship was upside-down, with the stern beached to the bow in 300 feet of pristine turquoise water. The propellers had recently been sent off to a war memorial in Germany. The ship’s eight cannons lay scattered on the bottom, falling out of their turrets when the ship tipped over.

The small part of the Prinz Eugen above water had already started to rust through. But once underwater it was like entering a live aquarium.
A lot of coral, seaweed, starfish, and sea urchins can accumulate in 36 years and every inch of the ship was covered. Brightly tropical fish swam in schools. A six-foot mako shark with a hungry look warily swam by.

My diver friends knew the ship well and showed me the highlights to a depth of 50 feet. The controls in the engine room were labeled in German Fraktur, the preferred prewar script. Broken dishes displayed the Nazi swastika. Anti-aircraft guns frozen in time pointed towards the bottom. No one had been allowed to remove anything from the ship since the war, and in the Navy, most men follow orders.

It was amazing what was still intact on a ship that had been blown up by a hydrogen bomb. You can’t beat “Made in Germany.” Our time on the ship was limited as the hull was still radioactive, and in any case, I was running low on oxygen.

A few years later the Navy banned all diving on the Prinz Eugen. Three divers had gotten lost in the dark, tangled in cables, and downed. I was one of the last to visit the historic ship.

I checked with my friends in the Navy and the Prinz Eugen is still there, but in deteriorating condition. When the ship started leaking oil in 2018 and staining the immaculate beaches nearby, the Navy launched a major effort to drain what was left from the 80-year-old tanks. No doubt a future typhoon will claim what is left.

So if someone asks if you know anybody who’s been on a German battleship, you can say “Yes,” you know me. And yes, my German is still pretty good these days.

Vielen dank!

Good Luck and Good Trading,

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

The Prinz Eugen in 1940

The Prinz Eugen Today

March 24, 2023

Diary, Newsletter, Summary

Global Market Comments
March 24, 2023
Fiat Lux

Featured Trade:

(MARCH 22 BIWEEKLY STRATEGY WEBINAR Q&A),
(IBB), (INTC), (AMD), (XLU), (NVDA), (TSLA), (FRC), (QQQ), (SPY), (TLT), (UNG), (USO), (VLO), (DINO), (SUN), (FCX), (JPM), (RIVN), (DVN), (LNG), (KMI), (DAL)

CLICK HERE to download today's position sheet.

March 22 Biweekly Strategy Webinar Q&A

Diary, Newsletter

Below please find subscribers’ Q&A for the March 22 Mad Hedge Fund Trader Global Strategy Webinar, broadcast from Silicon Valley, CA.

Q: I have big losses in biotech (IBB) but am a long-term believer—do you think it will recover?

A: Yes, I do. But we are still looking at the post-COVID hangover, where Biotechs rocketed for about a year. We’re simply coming off that overbought situation. In the meantime, the industry continues to generate groundbreaking discoveries at the fastest rate in history. When those translate into profit-making products, the stocks will perform, and many of them already have.

Q: Advanced Micro Devices (AMD) appears to be overbought, what are your thoughts?

A: Yes absolutely, the whole chip sector is overbought, because guess what, they benefit from falling interest rates and an economic recovery. That group will absolutely lead going into the future, and it’s hard to get into—these things just go up in a straight line. Look at Nvidia (NVDA), it has more than doubled since the October low and you barely get pullbacks. It’s looking like Nvidia is going to take over the world; we’d love to get into it but it seems like it will only be a high-risk/high-reward stock. They are now having the tailwind with Chat GPT—which everyone has to own now or go out of business—and buy Nvidia chips to make it work.

Q: Would you recommend banks and brokerages here?

A; Yes, because of the banking crisis, they’ll be the best performers as we come out of it. The end of the interest rate rising cycle is now in sight, and we are about to enter the golden age of banking. Institutions are buying stocks for that now. And your next entry point will be Friday because the pattern has been to sell off everything on Fridays in expectation of a new bank going under on the weekend. If nothing happens, then you have a big rally on Monday morning. So that you can probably play.

Q: Are there recordings of this webinar?

A: Yes, to find all past recordings, just go to www.madhedgefundtrader.com and log in.

Q: When does Intel (INTC) become a buy, if ever?

A: It’s probably a “BUY” right here. You never want to buy a tech company run by a salesman, and that’s what happened with Intel. As soon as you had a salesman guaranteeing he’d turn the company around, the stock dropped by half. So down here, it’s looking more likely that they’ll fire the head of Intel, get an engineer back in charge, and the stock should double. But clearly, it’s the only value left in the semiconductor area.

Q: Would you double up on the United States Natural Gas Fund (UNG)?

A: Yes, and I'd be doing 2-year (UNG) LEAPS. There’s no way you have an economic recovery over the next two years that will get us a double, triple, or quadruple in the price of natural gas, and (UNG) will catch that move less 35% for the contango (the 1-year differential between front month and one-year futures contracts).

Q: What’s your favorite tech stock to buy on the dip?

A: It has to be Tesla (TSLA). And I’m in the middle of writing a massive opus on the Tesla Investors Day, which included far more news and content than people realize. That's because you have journalists covering investors' day, not engineers. So I’ll get to the engineers’ and scientists view, which is much more interesting.

Q: Buy bitcoin after the financial contagion?

A: No, bitcoin is what you bought at the market top because there was nothing else to buy because everything else was so expensive. Now everything else is cheap when you can buy Apple (AAPL) at $160, Nvidia at $272 (NVDA), or Tesla (TSLA) at $200. Those are far better choices than a purely speculative asset class which you may never see again once you send in your money. That has been the experience of a lot of people.

Q: Should I sell short the Utility ETF (XLU) if investors head into growth stocks?

A: No, utilities are very heavy borrowers with big capital requirements, and also will benefit heavily from falling interest rates. Basically, everything goes up on an economic recovery. So, your short ideas were great a year ago, not so much now. Now we’re looking for long plays, and just a few hedges, like in bonds, to control risk.

Q: What's the net entry point for Freeport McMoRan (FCX)?

A: I would say here, and my target for this year for Freeport is at the very least hitting $50 again; someday we hit $100, once we get another ramp-up for EV production and the demand for copper sores accordingly.

Q: I hear China has a battery that will go 600 miles and is coming soon.

A: Tesla has a battery that will go 1,000 miles now, but it can only be recharged once. It turns out that the military is very interested in using these, converting Humvees to EVs; then you could parachute them charged batteries which you just pop in. That eliminates having to move these giant bladders of gasoline which easily explode. So yes, the 1,000-mile battery has actually been around for 10 years but can’t be mass-produced. That is the issue.

Q: How will Tesla deal with hydrogen?

A: It will ignore it. Hydrogen will never go mainstream—it can’t compete with an existing electric power grid. But there are fleet or utility applications that make sense; so other than a small, limited fleet confined to a local area, I don't see hydrogen ever catching up. And Saudi Arabia can easily convert their entire oil supply into hydrogen to create a “green” carbon-free fuel. Remember, the cost of electric power cars is dropping dramatically—at about 20% a year—so hydrogen has to keep up with that too which they’re not.

Q: Please explain a bank LEAPS.

A: You buy a call option, you sell short a call option higher up, and you do it with a maturity of one year longer, or more. That’s what makes it a LEAPS. If you want more details, just go to www.madhedgefundtrader.com, and search LEAPS and a full explanation of how to execute these will come up.

Q: What do you think of Rivian (RIVN)?

A: It’s a long-term play—they got knocked down by half on their latest $1.2 billion capital raise, which everybody knew was coming, but still seemed to surprise some traders. It’s a long-term hold, not a short term trade. That said, it’s tempting to do LEAPS on Rivian right here going out two years. The stock is down 95% from the highs.

Q: What level LEAPS do you do on JP Morgan (JPM)?

A: I sent that out to everybody last week—that would be to buy the $130 call option and sell short the $135 call option for January of 2024. That way the stock only has to go up 4% for you to make a 100% return on that investment. That’s why we love LEAPS.

Q: I had First Republic Bank (FRC) at $30, took a bath, and got rid of it. Should I have held on?

A: Yes. There's nothing wrong with First Republic's business, and that’s what's new in all of this current round of bank failures—the assets are fine. Usually when a bank goes under it’s because they extended too many dubious loans that defaulted. First Republic not only has a great loan book, but a great asset base in high-net-worth individuals. This is not a bank you would normally expect to go under. Which is why private banks are pouring money into it to save it. I’d be a buyer at the $10 level if we get down that far again. And I actually bought a little bit of First Republic myself on Monday, the meltdown day at $15, with the theory that it will get bailed out and the stock goes up ten times.

Q: Would you do vertical credit spreads on the SPDR S&P 500 ETF Fund (SPY) or Invesco QQQ ETF (QQQ) with the $2 spread?

A: No, the big money is made on single stocks, which have double or triple the volatility of indexes, and you know which single stocks to buy right now—the ones that just had a big selloff. You want more volatility at market bottoms, not less; and I would recommend doing all the financial and call spreads and LEAPS right here. They will have higher volatility and deliver much better risk/reward ratios. That is basic trading 101: you short indexes on the way down, you buy single stocks on the way up. That's what every hedge fund worth its salt does.

Q: Do you have an opinion on Zero Days to Expiration causing greater volatility?

A: Absolutely, it is—especially on Fridays. And I'm not doing these because they are basically lottery tickets. But, if it's a coin toss on whether you make money or not, and you write off the bad ones and make a nice profit on the good ones, that could be a profitable trade. I actually have several followers experimenting with that type of strategy, so I'll let you know if they make any money on it.

Q: What do you think about oil in this environment?

A: It’s discounting a recession which is never going to happen; so oil and oil plays are probably a good trade here, especially with front-month calls. I would be going for Valero Energy (VLO) and the refiners like Sinclair (DINO) and Sunoco (SUN), rather than the big producers because they have already had big moves which they have held onto mostly. Expect oil to go up—I’d be buying the commodity here (USO) and I’d be buying the United States Natural Gas Fund (UNG).

Q: What's the maximum downside in the next 30 days?

A: Well I showed you on that S&P 500 (SPY) chart at the beginning—$350 is the worst-case scenario with a deep recession, and that assumes the banking crisis doesn’t go away and gets worse. I think the banking crisis is done and getting better so we won’t test the downside, but the unanticipated can happen, so you have to be ready for anything. The non-recessionary low looks to be $375.

Q: What if you can’t do spreads in an IRA, like for iShares 20 Plus Year Treasury Bond ETF (TLT)?

A: Just buy the (TLT) outright, or buy it on 2:1 margin. (TLT) is probably a great buy around 100 or 101. ProShares has the 2X long Ultra Treasury ETF (UBT), but the fees are high, the spreads are wide, and the tracking error is large, as is standard for these kinds of instruments.

Q: When taking a position in LEAPS, how do you decide the position size per holding?

A: I send out all the LEAPS assuming one contract, then you can adjust your size according to your own experience level and risk tolerance. Keep in mind that if I’m wrong on everything, the value of all LEAPS goes to zero, so it may not be for you. On the other hand, if I am right on my one-year and two-year views, all these LEAPS will deliver a 100-120% return. You decide.

Q: Are you expecting a seasonal rally in oil?

A: Yes I am, and we’re coming off very low levels. Buy the United States Oil ETF (USO) and buy the United States Natural Gas Fund (UNG).

Q: Is a recession still on the table with all the banking crises?

A: No, if anything, it brings the end of any possibility of a recession because it’s bringing interest rate cuts sooner than expected, which brings a recovery that’s sooner than expected. And that’s why you’re getting interest-rate-sensitive stocks holding here and starting to rally.

Q: My retirement account won’t let me buy (UNG)—Are there any other good companies I can buy?

A: Yes, Devon Energy (DVN) is big in the gas area. So are Cheniere Energy (LNG) and Kinder Morgan (KMI).

Q: If the market is oversupplied with oil, why is gasoline so expensive?

A: Endless middlemen add-ons. This is one of the greatest continuing rip-offs in human history—gasoline prices always take the elevator up and the escalator down, it’s always that way. And that's how oil companies make money—by squeezing consumers. I’ve been tracking it for 50 years and that’s my conclusion. The State of California has done a lot of research on this and learned that only half of their higher prices are from taxes to pay for roads and the other half comes from a myriad of markups. Also, a lot of businessmen just don’t want to be in the gasoline retailing business and will only enter when the returns are very high. Plus, oil companies are trying to milk companies for all their worth right now because the industry may disappear in 10 years. Go electric, that’s my solution. I haven’t bought gasoline for 13 years, except for my kids. I only buy cars for my kids at junkyards and fix them up. If they want to do better they can go out and earn it.

Q: Do we need to worry about China supporting Russia in the war against Ukraine?

A: Not really, because all we have to do to cut off Chinese supplies for Russia is to cut off trade with China, and their economy will completely collapse. China knows this, so they may do some token support for Russia like send them sweatshirts or something like that. If they start a large arms supply, which they could, then the political costs and the trade costs would be more than it’s worth. And at the end of the day, China has no principles, it really is only interested in itself and its own people and will do business with anybody.

Q: What do you think about the recovery in solar?

A: What’s been going on in solar is very interesting because for the last 20 years, solar has moved one to one with oil. So, you would expect that from collapsing oil prices and more price competition from oil, solar would collapse too. Instead, solar has had tremendous moves up and is close to highs for the year. The difference has to be the Biden alternative energy subsidies, which are floating the entire industry and accelerating the entire conversion of the United States to an all-electric economy. So they've had great runs. I wouldn’t get involved here, but it’s nice to contemplate what this means for the long-term future of the country.

Q: Should I buy the airline stocks here?

A: Yes, I’d go for Delta (DAL). Again, it’s one of the sectors that’s discounting a recession that’s not going to happen. They’re going to have the biggest airline boom ever this summer as the reopening trade continues on for another year, and a lot of pent-up travel demand hits the market.

Q: Do you like platinum?

A: I do—not because of EVs but because of hydrogen. You need platinum for hydrogen fuel cells to work. That’s a brand new demand, and there’s supposed to be a shortage of half a million ounces of platinum this year.

To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in to www.madhedgefundtrader.com, go to MY ACCOUNT, click on GLOBAL TRADING DISPATCH or TECHNOLOGY LETTER, then WEBINARS, and all the webinars from the last 12 years are there in all their glory.

Good Luck and Stay Healthy,

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

March 17, 2023

Diary, Newsletter, Summary

Global Market Comments
March 17, 2023
Fiat Lux

Featured Trade:

(OIL ISN’T WHAT IT USED TO BE), (USO), (DIG), (DUG)
(A DIFFERENT VIEW OF THE US)

CLICK HERE to download today's position sheet.

Oil Isn't What It Used to Be

Diary, Newsletter

Virtually every analyst has been puzzled by the endless weakness in oil prices (USO), (DIG), (DUG), which have been in a downward spiral for more than a year. Since Russia first invaded Ukraine, the price of Texas tea has collapsed from $132 to $66 a barrel.

In fact, oil ain’t what it used to be.

The first chart below shows the number of barrels of oil needed to generate a unit of GDP, which has been steadily declining for 40 years. The second reveals the percentage of hourly earnings required to buy a gallon of gasoline in the US, which has been mostly flat for three decades, although it has recently started to spike upwards.

The bottom line is that conservation, the rollout of more fuel-efficient vehicles and hybrids, and the growth of alternatives, are all having their desired effect. Notice how small all the new cars on the road are these days, many of which get 40 mpg with conventional gasoline engines.

As for my own household, it has gone all electric. Some 15% or all the new cars sold in the US are EVs, which don’t use oil at all, except for a tiny amount of grease on the wheels and suspension

Developed countries are getting six times more GDP growth per unit of oil than in the past, while emerging economies are getting a fourfold improvement.

The world is gradually weaning itself off of the oil economy. But the operative word here is “gradually”, and it will probably take another two decades before we can bid farewell to Texas tea, at least for transportation purposes.

But the Mileage is Great!

January 27, 2023

Diary, Newsletter, Summary

Global Market Comments
January 27, 2023
Fiat Lux

Featured Trade:

(JANUARY 25 BIWEEKLY STRATEGY WEBINAR Q&A),
(RIVN), ($VIX), (SPX), (UUP), (NVDA), (TLT), (LLY), (AAPL), (RTX), (LMT), (USO), (OXY), (TSLA), (UNG), (MSFT)

CLICK HERE to download today's position sheet.

January 25 Biweekly Strategy Webinar Q&A

Diary, Newsletter

Below please find subscribers’ Q&A for the January 25 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Silicon Valley in California.

Q: What do you think about LEAPS on Rivian (RIVN)?

A: Yes, I would do those, but a smaller position with closer strike prices. Go to the maximum maturity 2 years out and be conservative—bet on only a 50% rise in the stock. I’m sure it’ll double, but with the LEAPS you’ll have tremendous upside leverage, like 10 to 1, so don’t get greedy. Go for the 500% profit in 2 years rather than the 1,000%, because it is still a startup, and we need economic recovery for startups to get traction. If anything, Tesla (TSLA) will drag this stock back up as it dragged it down. They all move together.

Q: What’s the number of contracts on your $100,000 model portfolio?

A: Our model portfolio basically assumes we have 10 positions of $10,000 each totaling $100,000 in value. You can then change the number of contracts to suit your own private portfolio—take on as much or as little risk as you want. If you’re new. I recommend trading on paper first to make sure you can make money before you use the real thing.

Q: I’m new to this service. What’s the difference between the long-term portfolio and the short-term portfolio?

A: A long term portfolio is a buy-and-forget portfolio, with maybe a 5- or 10-year view. We only change it and make adjustments twice a year so we can average back into the new positions and take profits on the old ones. The main part of this service is usually front-month, and that’s where we take advantage of anomalies in the options market and market timing to make profits 95% of the time. And a big part of the short-term portfolio is cash; we often go 100% cash when there are no trades to be had. It’s actually more valuable knowing when not to trade than when to trade. If you have any more questions, just email customer support at support@madhedgefundtrader.com and we’ll address them individually.

Q: Is it time for a CBOE Volatility Index ($VIX) trade?

A: I hate trading ($VIX). I only do it from the short side; when you get down to these low levels it can flatline for several months, and the time decay eats you to death. I only do it from the short side, and then only the 5% of the time that we’re peaking in ($VIX). The big money is made on the short side, that’s how virtually the entire options trading industry trades this.

Q: Would you be loading up with LEAPS in February?

A: No, it’s the worst time to do LEAPS. You do LEAPS at long-term market bottoms like we had in October, and then we issued 12 different LEAPS. If you get a smaller pullback, there may be LEAPS opportunities, but only in sectors that are near all-time lows, like gold or silver. It depends on the industry and where we are in the market, but basically, you’re looking to do LEAPS at lows for the year because the leverage is so enormous, and so are the potential profits.

Q: Is the increasing good performance a result of your artificial intelligence? Learning from past mistakes?

A: Partly yes, and partly my own intelligence is improving. Believe it or not, when you go from year 54 to 55 in experience in the markets, you understand a lot more about the markets. Sometimes you just get lucky being on the right side of black swan events. Of course, knowing when the market is especially sensitive and prone to black swans is also a handy skill to have.

Q: Is it too late to get into Freeport McMoRan (FCX)?

A: Yes, I wouldn’t touch (FCX) until we get at least a $10 selloff, which we may get in February, so I think the long term target for (FCX) is $100. The stock has nearly doubled since the LEAPS went out in October from $25 a share to almost $50, so that train has left the station. Better off to wait for the next train or find another stock, there are a lot of them.

Q: Where do you park cash in the holding pattern?

A: Very professional hedge fund managers buy 90-day T-bills, because if you keep your cash in your brokerage account—their cash account—and they go bankrupt, it’ll take you 3 years to get your money back in a bankruptcy proceeding. If you own 90-day T-bills and your broker goes bankrupt, they’re required by law to just hand over the T-bills to you immediately. You take delivery of the T-bills, you park them at another brokerage house, and you keep them there. There is no loss of the use of funds.

Q: What about Long term US dollar (UUP)?

A: We go down for 10 years. Falling interest rates are poison for a currency; our rates are probably going to be falling for the next several years.

Q: Thoughts on Tesla (TSLA)?

A: Short term way overbought, we almost got up 60% from the low in weeks, but that’s Tesla, that’s just how it trades. It is the best performing major stock in the market this year. I wouldn’t be looking to go back into it until we drop back, give up half of that gain, get back down to about $135—then it would be a good options trade and a good LEAPS.

Q: Would you be taking profits in Nvidia (NVDA)?

A: I would take like half here and look to buy it back on the next dip because I think Nvidia’s got higher highs ahead of it.

Q: I can’t get a password for the website.

A: Please contact customer support on the homepage and they will set you up immediately. If not, you can call them at (347) 480-1034.

Q: Would you be selling long term positions?

A: No I would not, because if you sell a long term position they’re very hard to get back into; and I’m expecting $4,800 in the (SPX) by the end of the year. Everything goes up by the end of the year, even things you hate. So no, selling is what you did a year ago, now you’re basically looking for chances to get back in.

Q: Would you hold Tesla (TSLA) over this earnings report?

A: No, I sold my position yesterday, at 70% of its maximum potential profit. I don't need substantial selloff; I’m just going to go right back in again.

Q: Have you heard anything about Tesla silicon roof tiles tending to catch fire?

A: No I have not, but if your house got struck by lightning or if someone fired a bullet at it, that might do the trick. Otherwise, you need a huge input of energy to get silicon to catch on fire as it’s a pretty stable element. And if it was already happening on a large scale, you know the media would be absolutely all over it—the media loves to hate Tesla and loves to hate Elon Musk. That certainly would draw attention if it were happening; what's more likely is that fake news is spreading rumors that are not true. That's been a constant problem with Tesla from the very beginning.

Q: Would you open the occidental spread here today?

A: I would, but I would use strike prices $5 lower. I'd be doing the February $50-$55 vertical bull call spread to give yourself some extra protection, given that the general market itself is so high.

Q: Should I be shorting Apple (APPL) here?

A: No, but the smart thing to do is to sell the $160 calls because I don’t think we’ll get up to $160. You could take any extra premium income, and if you don’t get hit this month, keep doing it every month until you are hit, and then you can take in quite a lot of premium income by the time we get to new highs in Apple, possibly as much as $10 or $15. So, that would be a smart thing to do with Apple.

Q: What's your favorite in biotech and big pharma?

A: Eli Lilly (LLY), which just doesn't seem to let anybody in.

Q: If China were to shut down again, would it hurt the stock market?

A: Yes, but not much. The much bigger falls would be in Chinese stocks (which have already doubled since October) not ours.

Q: Thoughts on biotech?

A: Biotech is the new safety trade that will continue. Also, they’re having their secular ramp-up in technology and new drugs so that is also a good long-term bull call on biotech.

Q: What’s the dip in iShares 20+ Year Treasury Bond ETF (TLT)?

A: $4 points at a minimum, $5 is a nice one, $6 would be fantastic if you can get it.

Q: Could we get a trade-up in oil (USO)?

A: Yes, maybe $5 or $10 a barrel. But it’s just that, a trade. Long term, oil still goes to zero. Short term, China recovery gives a move up in oil and that's why we went long (OXY).

Q: You talk about California NatGas being dead, but California gets 51% of its electricity from natural gas, up from 48% in 2018.

A: Yes, but that counts all of the natural gas that gets brought in from other states. In fact, if you look at the longer-term trend over the last 20 years, coal has gone to zero, nuclear is going to zero, hydro has remained the same at about 10%. NatGas has been falling and green sources like wind and solar, have been rising quite substantially. And now, approximately 25% of all the homes in California get solar energy, or 8.4 million homes, and it is now illegal to put gas piping into any new construction. New York is doing the same. That means it will be illegal to do new natural gas installations in a third of the country. So, I think that points to lower natural gas consumption, and in fact, the 22-year target is to take it to zero, which might be optimistic but you never know. All they need is a smallish improvement in solar technology, and that 100% from green sources is doable by 2045, not only for California but for everybody. All energy plays are a trade only, not an investment.

Q: Any thoughts on the implications for the US and Germany providing tanks to Ukraine?

A: You can throw Poland in there, which is also contributing a tank division—so a total of 58 M1 Abrams tanks are going to Ukraine. By the way, I did command a Marine Corps tank battalion for two weeks on my reserve duty, so I know them really well inside and out. They are powered by a turbine engine, have a suspension as soft as a Cadillac, a laser targeting system accurate to three miles even for beginners, and fire recycled uranium shells that can cut through anything like a knife through butter. The answer is the war gets prolonged, and eventually forces Russia into a retreat or a negotiation. Even though the M1 is an ancient 47-year-old design, its track record against the Russian T72 is pretty lopsided. In the first Gulf War, the US destroyed 5,000 T72s and the US lost one M1 tank because he parked on a horizon, which you should never do with a tank. And every driver of a T72 knows that track record. So that explains why Russian tanks have been running out of gas, sugaring their gas tanks, sabotaging their diesel engines, and doing everything they can to avoid combat because of massive fatal design flaws in the T72. We only need to provide about 50 or 60 of the M1 tanks as a symbolic gesture to basically scare the entire Russian tank force away.

Q: Why do you think Elon kept selling Tesla? Did he think it would go lower?

A: Elon thinks the stock’s going to $10,000, but he needed up-front cash to build out six remaining Tesla factories, and for that, he needed about $40 billion, which is why he sold $40 billion worth of stocks last year when it was peaking. He also is sensitive to selling at tops; it’s better to sell stock in with Tesla at an all-time high than at an all-time low, so he clearly times the market to meet his own cash flows.

Q: What about military contractors?

A: I know Raytheon (RTX) and Lockheed Martin (LMT) have a two-year backlog in orders for javelin missiles and stingers, which are now 47-year-old technology that has to be redesigned from scratch. The US just placed an order for a 600% increase in artillery shells for the 155 mm howitzer. I thought we’d never use these again, which is why US stocks for ammunition got so low. But it looks like we have more or less a long term or even permanent customer in Ukraine for everything we can produce, in old Vietnam-era style technologies. How about that? I’m telling the military to give them everything we’ve got because everything we’ve got is obsolete.

Q: When should we buy Microsoft (MSFT)?

A: On the next 10% dip. It’s the quality stock in the US.

Q: Do you place an order to close the spread at profit as soon as you have filled in the trade?

A: You can do that, but it’s kind of a waste of time. Wait until we get close to the strikes; most of the big companies we deal in, you don't get overnight 10% or 20% moves, although it does happen occasionally.

Q: Natural Gas (UNG) prices are collapsing.

A: Correct, because the winter energy crisis in Europe never showed and spring is just around the corner.

Q: On the Tesla (TSLA) LEAPS, what about the January 2025 $600-$610 vertical bull call spread

A: That is way too far out of the money now. I would write that off and go back into it but do something like a January 2025 $180-$190. It has a much higher probability of going in the money, and still an extremely high return. It would be something like 500% if you get in down at these levels.

Q: How do you see Bitcoin short term/long term?

A: I think the loss of confidence in the asset has been so damaging that it may not come back in my lifetime. It could be another Tokyo situation where it takes 30 years to recover, or only recovers when the entire sector gets taken over by the big banks. So, I don’t see any merit in the crypto trade, probably forever. Once you lose confidence in the financial markets, it’s impossible to get it back. And it turns out that every one of these mainline trading platforms was stealing from the customers. No one ever comes back from that in the financial markets.

To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in to www.madhedgefundtrader.com, go to MY ACCOUNT, click on GLOBAL TRADING DISPATCH or TECHNOLOGY LETTER, then WEBINARS, and all the webinars from the last 12 years are there in all their glory.

Good Luck and Stay Healthy,

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