I called one of my long-time northern Nevada clients the other day to find out why he hadn’t renewed his subscription.
He told me he was quitting the stock market for good and going into the marijuana business. There were no values to be had in stocks anymore and fortunes were to be made growing pot on an industrial scale.
Then what I learned was astonishing.
In the last year, marijuana cultivation in Nevada has soared from 1,000 to 5,000 acres. The number of licensed growers has rocketed from 11 to 220. The industry now injects $50 million a year into the Reno economy. You can’t go anywhere in town without running into a pot shop.
A big impetus was the passage of the 2018 US farm bill which largely decriminalized marijuana at the federal level. States have been legalizing weed for a decade. Local banks are now allowed to accept the proceeds of marijuana sales without getting hit with money laundering charges.
And here’s the real shocker. Pot growers can now get federal crop insurance for growing weed, eliminating much of the risk for farmers! Industry associations expect marijuana to become a $25 billion a year industry by 2023. It’s all proof that if you live long enough, you see everything.
Marijuana is actually quite hard to grow. Not only do fields have to be weeded every day, requiring a large labor input, marijuana is unusually sensitive to literally hundreds of plant viruses. One virus can wipe out an entire crop in three days.
The opioid epidemic has become a major factor in the explosive growth of the pot industry. Thanks to crackdowns at the federal and state level, it is almost impossible to get Vicodin any longer. In Nevada you are tracked like a dope dealer, requiring monthly urine tests to prove you’re actually using and not selling it.
However, the pain is still there. As the baby boomer generation ages (boomers are now 58-74), arthritis is becoming rampant, as are other painful maladies. Since marijuana research has been a career killer for scientists for 100 years, very little is known about the potential benefits. Today, it is being applied to migraine headaches, aching joints, and chemotherapy (it’s a great appetite builder).
When the state of Colorado legalized pot a decade ago, every family in the United States with a child afflicted by certain types of juvenile epilepsy moved there. It was the only cure.
Early during the marijuana boom, I met with the CEO of Tilray (TLRY), the largest publicly listed marijuana company, to see if there was a real trade there.
There wasn’t.
All I heard was pie in the sky predictions, rosy forecasts, and unrealistic business models. What he didn’t mention is that the listed companies still suffer from massive competition from the black market, where prices are 40% lower (it’s tax-free).
I ran a mile, deciding instead to buy more Apple (AAPL) and Tesla (TSLA). That worked. The market has heartily agreed with my analysis, taking (TLRY) down a gut-punching 98% since that meeting. Nice miss!
I talked to my own doctor to see if there was any value in the hundreds of the marijuana-based medicinal products now flooding the market. His assessment was that most products were so diluted that it was impossible to assess whether the active ingredient in marijuana, CDB or cannabidiol, was effective or not. Some contained little more than green food coloring.
We may not know the true effects of CBD for years until years of research has taken place, which is only just now getting started.
As for the public investment opportunities in marijuana, it’s another one of those industries where it’s better to use the product than buy the stock.
https://www.madhedgefundtrader.com/wp-content/uploads/2020/01/marijuana.png289681Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2022-05-18 12:04:402022-05-18 15:59:14How “High” Can Marijuana Stocks Go?
My worst-case scenario for the S&P 500 this year was a dive of 20%. We are now off by 14%. And of course, most stocks are down a lot more than that.
Which means that we are getting close to the tag ends of this move. The kind of wild, daily 1,000-point move up and down we saw last week is typical of market bottoms.
Some $7 trillion in market capitalization lost this year. That means we could be down $10 trillion from a $50 trillion December high before this is all over. That’s a heck of a lot of wealth to disappear from the economy.
So, it may make sense to start scaling into the best quality names on the bad days in small pieces, like Apple (AAPL), Alphabet (GOOGL), Microsoft (MSFT), and NVIDIA (NVDA).
Whatever pain you may have to take what follows, the twofold to threefold gain that will follow over the next five years will make it well worth it. Is a 20% loss upfront worth a long-term gain of 200%? For most people, it is.
Bonds may also be reaching the swan song for their move as well. The United States Treasury Bond Fund (TLT) at $113 has already lost a gobsmacking $42 since the November $155 high.
The markets have already done much of the Fed’s work for it, discounting 200 basis points of an anticipated 350 basis points in rate rises in this cycle. Therefore, I wouldn’t get too cutesy piling on new bond shorts here just because it worked for five months.
Yes, there is another assured 50 basis point rise in six weeks towards the end of June. Jay Powell has effectively written that in stone. We might as well twiddle our fingers and keep playing the ranges until then. We have in effect been sent to the trading leper colony.
The barbarous relic (GLD) seems to be looking better by the day. Q1 saw a massive 551 metric tonnes equivalent pour into gold ETF equivalents, an increase of 203%. Of course, we already know of the step-up in Russian and Chinese demand to defeat western sanctions.
But the yellow metal is also drawing more traditional investment demand. Gold usually does poorly during rising interest rates. This time, it's different. An inflation rate of 8.5% minus an overnight Fed rate of 1.0%, leaving a real inflation rate of negative -7.5%. That means gold has 7.5% yield advantage over cash equivalents.
Gold’s day as an inflation hedge is back!
The April Nonfarm Payroll Report came in near-perfect at 459,000, holding the headline Unemployment Rate at 3.5%. It’s proof that a recession is nowhere near the horizon. A record 2 million workers have recovered jobs during the last four months and 6.6 million over the past 12.
Warren Buffet is Buying Stocks, some $51 billion in Q1. That includes $26 billion into California energy major Chevron (CVX), followed by a big bet on Occidental Petroleum (OXY). These are clearly a bet that oil will remain high for at least five more years. That has whittled his cash position down from $147 billion to only $106 billion. Buffet likes to keep a spare $100 billion on hand so he can take over a big cap at any time. Warren clearly eats his own cooking, buying $26 billion worth of his own stock in 2021. If you can’t afford the lofty $4,773 price for the “A” shares, try the “B” shares at $322.83, which also offer listed options on NASDAQ and in which Mad Hedge Fund Trader currently has a long position.
Elon Musk Crashes His Own Stock, selling $8.4 billion worth last week. His Twitter purchase has already been fully financed, so what else is he going to buy. The move generates a massive Federal tax bill, but Texas, his new residence, is a tax-free state. It continues a long-term trend of billionaires piling fortunes in high tax states, like Jeff Bezos in Washington, and then realizing the gains in tax-free states.
Adjustable-Rate Mortgages are Booming, replacing traditional 30-year fixed-rate mortgage at a rapid pace. Interest rates are 20% lower, but if rates skyrocket to double digits or more in five years, you have a really big problem. ARMs essentially take the interest rate risk off the backs of the lenders and place it firmly on the shoulders of the borrowers.
Travel Stocks are On Fire, with all areas showing the hottest numbers in history. Average daily hotel rates are up 20% YOY, stayed room nights 52%, airfares 39%, and airline tickets sold 48%. Expect these numbers to improve going into the summer.
JOLTS Hits a Record High, with 11.55 million job openings in March, up 205,000 on the month. There are now 5.6 million more jobs than people looking for them. No sign of a recession here. It augurs for a hot Nonfarm Payroll report on Friday.
Natural Gas Soars by 9% in Europe as the continent tries to wean itself off Russian supplies. In the meantime, US producers are refusing to boost output for a commodity that may drop by half in a year, as it has done countless times in the past. If the oil majors are avoiding risk here, maybe you should too.
My Ten-Year View
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 historically cheap, oil peaking out soon, and technology hyper accelerating, there will be no reason not to. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The America coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 240,000 here we come!
With some of the greatest market volatility seen since 1987, my May month-to-date performance lost 4.27%. My 2022 year-to-date performance retreated to 25.91%. The Dow Average is down -9.3% so far in 2022. It is the greatest outperformance on an index since Mad Hedge Fund Trader started 14 years ago. My trailing one-year return maintains a sky-high 56.62%.
On the next capitulation selloff day, which might come with the April Q1 earnings reports, I’ll be adding long positions in technology, banks, and biotech. I am currently in a rare 50% cash position awaiting the next ideal entry point.
That brings my 13-year total return to 538.47%, some 2.30 times the S&P 500 (SPX) over the same period. My average annualized return has ratcheted up to 43.36%, easily the highest in the industry.
We need to keep an eye on the number of US Coronavirus cases at 81.9 million, up 500,000 in a week, and deaths topping 998,000 and have only increased by 5,000 in the past week. You can find the data here.
The coming week is a big one for jobs reports.
On Monday, May 9 at 8:00 AM EST, US Consumer Inflation Expectations are released. On Tuesday, May 10 at 7:00 AM, the NFIB Business Optimism Index is confirmed.
On Wednesday, May 11 at 8:30 AM, the Core Inflation Rate for April is printed.
On Thursday, May 12 at 8:30 AM, Weekly Jobless Claims are disclosed. Conoco Phillips (COP) reports. We also get the Producer Price Index. On Friday, May 13 at 8:30 AM, the University of Michigan Consumer Price Index for May is disclosed. At 2:00 PM, the Baker Hughes Oil Rig Count is out.
As for me, not just anybody is allowed to fly in Hawaii. You have to undergo special training and obtain a license endorsement to cope with the Aloha State’s many aviation challenges.
You have to learn how to fly around an erupting volcano, as it can swing your compass by 30 degrees. You must master the fine art of getting hit by a wave on takeoff since it will bend your wingtips forward. And you’re not allowed to harass pods of migrating humpback whales, a sight I will never forget.
Traveling interisland can be highly embarrassing when pronouncing reporting points that have 16 vowels. And better make sure your navigation is good. Once a plane ditched interisland and the crew was found months later off the coast of Australia. Many are never heard from again.
And when landing on the Navy base at Ford Island, you were told to do so lightly, as they still hadn’t found all the bombs the Japanese had dropped during their Pearl Harbor attack.
You are also informed that there is one airfield on the north shore of Molokai you can never land at unless you have the written permission from the Hawaii Department of Public Health. I asked why and was told that it was the last leper colony in the United States.
My interest piqued, the next day found me at the government agency with application in hand. I still carried my UCLA ID which described me as a DNA researcher which did the trick.
When I read my flight clearance to the controller at Honolulu International Airport, he blanched, asking if a had authorization. I answered that yes, I did, I really was headed to the dreaded Kalaupapa Airport, the Airport of no Return.
Getting into Kalaupapa is no mean feat. You have to follow the north coast of Molokai, a 3,000-foot-high series of vertical cliffs punctuated by spectacular waterfalls. Then you have to cut your engine and dive for the runway in order to land into the wind. You can only do this on clear days, as the airport has no navigational aids. The crosswind is horrific.
If you don’t have a plane, it is a 20-mile hike down a slippery trail to get into the leper colony. It wasn’t always so easy.
During the 19th century, Hawaiians were terrified of leprosy, believing it caused the horrifying loss of appendages, like fingers, toes, and noses, leaving bloody open wounds. So, King Kamehameha I exiled them to Kalaupapa, the most isolated place in the Pacific.
Sailing ships were too scared to dock. They simply threw their passengers overboard and forced them to swim for it. Once on the beach, they were beaten a clubbed for their positions. Many starved.
Leprosy was once thought to be the result of sinning or infidelity. In 1873, Dr. Gerhard Henrik Armauer Hansen of Norway was the first person to identify the germ that causes leprosy, the Mycobacterium leprae.
Thereafter, it became known as Hanson’s Disease. A multidrug treatment that arrested the disease, but never cured it, did not become available until 1981.
Leprosy doesn’t actually cause appendages to drop off as once feared. Instead, it deadens the nerves and then rats eat the fingers, toes, and noses of the sufferers when they are sleeping. It can only be contracted through eating or drinking live bacteria.
When I taxied to the modest one-hut airport, I noticed a huge sign warning “Closed by the Department of Health.” As they so rarely get visitors, the mayor came out to greet me. I shook his hand but there was nothing there. He was missing three fingers.
He looked at me, smiled, and asked, “How did you know?”
I answered, “I studied it in college.”
He then proceeded to give me a personal tour of the colony. The first thing you notice is that there are cemeteries everywhere filled with thousands of wooden crosses. Death is the town’s main industry.
There are no jobs. Everyone lives on food stamps. A boat comes once a week from Oahu to resupply the commissary. The government stopped sending new lepers to the colony in 1969 and is just waiting for the existing population to die off before they close it down.
Needless to say, it is one of the most beautiful places on the planet.
The highlight of the day was a stop at Father Damien’s church, the 19th century Belgian catholic missionary who came to care for the lepers. He stayed until the disease claimed him and was later sainted. My late friend Robin Williams made a movie about him but it was never released to the public.
The mayor invited me to stay for lunch, but I said I would pass. I had to take off from Kalaupapa before the winds shifted.
It was an experience I will never forget.
Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
https://www.madhedgefundtrader.com/wp-content/uploads/2022/05/airport-of-no-return.png588882Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2022-05-09 09:02:202022-05-09 11:21:14The Market Outlook for the Week Ahead, or Headed for the Leper Colony
That was the sage advice Nathan Rothschild, ancestor of my former London neighbor Jacob Rothschild, gave to friends about trading stocks during the Napoleonic Wars.
Of course, information moved rather slowly back in 1812, pre-internet. Rothschild relied on carrier pigeons to gain his unfair advantage.
You have me.
Somehow, you have descended into Dante’s seventh level of hell. You have to wake up every morning now, wondering if it will be Jay Powell or Vladimir Putin who is going to eviscerate your wealth, postpone your retirement, and otherwise generally ruin your day.
Every price in the market already knows we’re in a bear market except the major indexes.
The roll call of the dead looks like a WWI casualty report: (NFLX), (ZM), (DOCU), (ROKU), (VMEO). It’s like the bid offer spread has suddenly become 25%. Companies are either reporting great earnings and seeing their shares go through the roof. Or they are sorely disappointing and getting sent to perdition on a rocket ship.
The most fascinating thing to happen last week was a new low in the bond market, since you’re all short up the wazoo, courtesy of a certain newsletter. Ten-year US Treasury yields tickled 2.05%, a two-year high, then retreated to 1.92%. That means bonds have completed their $20 swan dive from their December high, a repeat of the 2021 price action.
Trading has gotten too easy, so I think bonds will stall out here for a while. I even added a small long. And please stop calling me to ask if you should sell short bonds down $20. It’s perfect 20/20 hindsight. You can’t imagine how many such calls I’ve already received.
Our old friend, the barbarous relic, returned from the dead last week too. All it needed was for bitcoin to die a horrible death for gold to recover its bid. A prospective war in the Ukraine helped take it to a one-year high.
However, I think it’s safe to say that has lost its value as an inflation hedge for good. If a move in the CPI from 2% to 7.5% can’t elicit a pulse in the yellow metal now, it never will.
The US dollar was another puzzler last week. While the fixed income markets went from discounting three rate hikes this year to six, the greenback flatlined. It was supposed to go up, as currencies with rapidly rising interest rates usually do.
Maybe the buck just forgot how to go down. Or maybe this is the beginning of the end, when sheer over-issuance destroys the value of the US dollar. Some $30 trillion in the national debt will do that to a currency.
I know you will find this difficult to believe, but there are some outstanding money-making opportunities setting up later in the year. The crappier conditions look now, the better they will become later. But you are going to have to practice some extreme patience to get to the other side.
I hope this helps.
Goldman Sachs Chops 2022 Market Forecast, taking the S&P 500 goal from $5,100 down to $4,900. A tighter interest rate picture is to blame, with the year yields topping 2.05% on Friday. Higher interest rates devalue future corporate earnings and kill the shares of non-earning companies.
Oil Hits Seven-Year High, to $94.44 a barrel, up 3.3% on the day. Putin’s strategy of talking oil prices up with Ukrainian invasion threats is working like a charm. That’s what this is all about. Texas tea accounts for 70% of Russian government revenues.
Fed to Front-Load Rate Rises, says St. Louis Fed president Bullard. The drumbeat for a more hawkish central bank continues. Bonds were knocked for two points.
Wholesale Prices Rocket 1% in January and are up a nosebleed 9.7% YOY. Inflation has clearly not peaked yet. Look for stocks to get punished once the current short-covering rally runs out of gas.
Retail Sales Soar by 3.8%, in January indicating that the economy is stronger than it appears. The rapid shift to an online economy is accelerating. Inflation is the turbocharger. When stocks overshoot on the downside load the boat.
Weekly Jobless Claims Jump, to 248,000. The weird thing is that the economic data says the opposite, that the economy is strengthening. Expect flip-flopping data and markets all year.
US GDP Jumped by 6.9% in Q4, well above estimates. Consumers are spending like drunken sailors. Eventually, the stock market will notice this, but not before we see lower lows first.
Gold Catches a Bid, off the back of the unrelenting Ukraine crisis. This may continue as a drip for months. Watch it collapse when peace is declared.
Existing Home Sales Jump 6.7%, to 6.5 million units, far better than expected. Inventory is down to yet another record low of 16.5%, an incredibly short 1.6-month supply. The Median Home Price has risen to $350,300, with the bulk of sales on the high end. Million-dollar plus homes are up 39% YOY.
Bond Yields Dive to a 1.93% Yield after failing at 2.05%. There is another nice (TLT) put spread setting up here. Let’s see if war breaks out over the weekend. The threats continue.
My Ten-Year View
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 800% to 240,000 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 240,000 here we come!
With seven options positions expiring at max profit on Friday, my February month-to-date performance rocketed to a blistering 10.37%. My 2022 year-to-date performance has exploded to an unbelievable 24.90%. The Dow Average is down -7.9% so far in 2022. It is the great outperformance on an index since Mad Hedge Fund Trader started 14 years ago.
With 30 trade alerts issued so far in 2022, there was too much going on to describe here. Check your inboxes.
That brings my 13-year total return to 537.46%, some 2.00 times the S&P 500 (SPX) over the same period. My average annualized return has ratcheted up to 44.17% for the first time. How long it will keep rising I have no idea, but as long as it is, I’m not complaining. When you’re hot, you have to be maximum aggressive. That’s me to a tee.
We need to keep an eye on the number of US Coronavirus cases at 78.5 million, down 67% from the January peak, and deaths close to 936,000, off 20% in two weeks, which you can find here.
On Monday, February 21 markets are closed for Presidents Day.
On Tuesday, February 22 at 8:30 AM, the S&P Case Shiller National Home Price Index for December is announced.
On Wednesday, February 23 at 1:30 PM, API Crude Oil Stocks are released.
On Thursday, February 24 at 8:30 AM, Weekly Jobless Claims are published. The second estimate for Q4 GDP is also disclosed.
On Friday, February 25 at 7:00 AM, Personal Income & Spending for January is printed. At 2:00 PM, the Baker Hughes Oil Rig Count is out.
As for me, in the seventies, Air America was not too choosy about who flew their airplanes at the end of the Vietnam War. If you were willing to get behind the stick and didn’t ask too many questions, you were hired.
They didn’t bother with niceties like pilot licenses, medicals, or passports. On some of their missions, the survival rate was less than 50% and there was no retirement plan. The only way to ignore the ratatatat of bullets stitching your aluminum airframe was to turn the volume up on your headphones.
Felix (no last name) taught me to fly straight and level so he could find out where we were on the map. We went out and got drunk on cheap Mekong Whiskey after every mission just to settle our nerves. I still remember the hangovers.
When I moved to London to set up Morgan Stanley’s international trading desk in the eighties, the English had other ideas about who was allowed to fly airplanes. Julie Fisher at the London School of Flying got me my basic British pilot’s license.
If my radio went out, I learned to land by flare gun and navigate by sextant. She also taught me to land at night on a grass field guided by a single red lensed flashlight. For fun, we used to fly across the channel and land at Le Touquet, taxiing over the rails for the old V-1 launching pads.
A retired Battle of Britain Spitfire pilot named Captain John Schooling taught me advanced flying techniques and aerobatics in an old 1949 RAF Chipmunk. I learned barrel rolls, loops, chandelles, whip stalls, wingovers, and Immelmann turns, everything a WWII fighter pilot needed to know.
John was a famed RAF fighter ace. Once he got shot down by a Messerschmitt 109, parachuted to safety, took a taxi back to his field, jumped into his friend’s Spit, and shot down another German. Every lesson ended with a pint of beer at the pub at the end of the runway. John paid me the ultimate compliment, calling me “a natural stick and rudder man,” no pun intended.
John believed in tirelessly practicing engine-off landings. His favorite trick was to reach down and shut off the fuel, telling me that a Messerschmitt had just shot out my engine and to land the plane. When we got within 200 feet of a good landing, he turned the fuel back on and the engine coughed back to life. We practiced this more than 200 times.
When I moved back to the US in the early nineties, it was time to go full instrument in order to get my commercial and military certifications. Emmy Michaelson nursed me through that ordeal. After 50 hours flying blindfolded in a cockpit, you get very close with someone.
Then came flight test day. Emmy gave me the grim news that I had been assigned to “One Engine Larry” the most notorious FAA examiner in Northern California. Like many military flight instructors, Larry believed that no one should be allowed to fly unless they were perfect.
We headed out to the Marin County coast in an old twin-engine Beechcraft Duchess, me under my hood. Suddenly, Larry shut the fuel off, told me my engines failed, and that I had to land the plane. I found a cow pasture aligned with the wind and made a perfect approach. Then he asked, “How did you do that?” I told him. He said, “Do it again” and I did. Then he ordered me back to base. He signed me off on my multi-engine and instrument ratings as soon as we landed. Emmy was thrilled.
I now have to keep my many licenses valid by completing three takeoffs and landings every three months. I usually take my kids and make a day of it, letting them take turns flying the plane straight and level.
On my fourth landing, I warn my girls that I’m shutting the engine off at 2,000 feet. They cry “No dad, don’t.” I do it anyway, coasting in bang on the numbers every time.
A lifetime of flight instruction teaches you not only how to fly, but how to live as well. It makes you who you are. Thus, my insistence on absolute accuracy, precision, risk management, and probability analysis. I live my life by endless checklists, both short and long term. I am the ultimate planner and I have a never-ending obsession with the weather.
It passes down to your kids as well.
Julie became one of the first female British Airways pilots, got married, and had kids. John passed on to his greater reward many years ago. I don’t think there are any surviving Battle of Britain pilots left. Emmy was an early female hire as United pilot. She married another United pilot and was eventually promoted to full captain. I know because I ran into them in an elevator at San Francisco airport ten years ago, four captain’s bars adorning her uniform.
Flying is in my blood now and I’ll keep flying for life. I can now fly anything anywhere and am the backup pilot on several WWII aircraft including the B-17, B-24, and B-25 bombers and the P-51 Mustang fighter.
Over the years, I have also contributed to the restoration of a true Battle of Britain Spitfire, and this summer I’ll be taking the controls at the Red Hill Aerodrome for the first time.
Captain John Schooling would be proud.
Stay Healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
https://www.madhedgefundtrader.com/wp-content/uploads/2022/02/john-thomas-plane.png858864Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2022-02-22 10:02:492022-02-22 12:27:00The Market Outlook for the Week Ahead, or Buying at the Sound of the Canon
Below please find subscribers’ Q&A for the February 16 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Incline Village, Nevada.
Q: Is it a mistake to try to be nimble with the ProShares UltraShort 20+ Year Treasury ETF (TBT), or is it better just to hold it through the rest of the year?
A: You should do both; have a core long position which you keep through the end of the year, and you also have a second position that you trade. A good example is how I just took profits on the short iShares 20+ Year Treasury bond ETF (TLT) even though it had a month to run because we had 91.67% of the profit in hand. So, when you get way in the money and still have a lot of time duration left, there’s no point in continuing with these put spreads to catch the last 5 or 10% in the position. The risk/reward is no good.
Q: The iShares 20+ Year Treasury bond ETF (TLT) seems washed out.
A: There is a risk of that, which is why I went long the (TLT) $127-$130 March vertical bull call spread. I think even if we get down to $130, it will take us at least a month to get down that far. There will be several short-covering rallies along the way that we can run out the clock with, and I think even my 3/$127-$130 should expire at max profit.
Q: Should we buy puts or spreads?
A: When you get the CBOE Volatility Index (VIX) over 30, it’s only because you get a very sharp collapse in stocks, and there you’re looking at very deep in the money call spreads— 10-20% in the money can still make you $1,000 or $2,000 a month. And if you get extreme selloffs with (VIX) up to $40, then you’re really looking for long-term LEAPS, one-year call spreads on your favorite stocks, like Tesla (TSLA), NVIDIA (NVDA), and Microsoft (MSFT), and so on.
Q: Is it time to enter Tesla (TSLA) now?
A: I’m waiting for one more final selloff—if we get that, we could get back into the low 800s or even the 700s in Tesla. That's the figure I’m hanging on for, and that's where you get into Tesla LEAPS because Tesla is clearly expanding beyond just the electric car business. SpaceX is now worth $100 billion dollars, and the boring company could be worth just as much if they get more contracts for building underground mass transit. There is also Solar City to consider plus some other stuff they haven’t even announced yet.
Q: What are your thoughts on Google (GOOGL)?
A: The 20 to 1 split is in the price already. But any selloff and I would go back into there with call spreads because Google is a fantastic company and a legal monopoly which I love owning.
Q: What about the ProShares Ultra Technology ETF (ROM)?
A: Yes, I’m watching very closely. It had a huge dive in January, then made back nearly half its losses. So again, I'm waiting for another dip to go back into (ROM) with lots of leverage.
Q: Do we get Volatility Index (VIX) over $30 within 2 months?
A: Yes, I think we probably will. We’re pretty close to it now; we got up to $26 this morning. So yes, I’d be a buyer of that.
Q: Is a (TLT) $128-$131 call spread for March still ok?
A: Yes, I kind of like that. I don’t think we’ll get down below $131 in four weeks, and at the very least we’ll get one rally of several points, and that’ll be your chance to get out of that position.
Q: Is it too early for (TLT) LEAPS?
A: No, it’s too late for TLT LEAPS. You should have been doing put LEAPS in November, and everybody who did that got profits of nearly 100% on that position. I don’t see a call side LEAPS in TLT for at least 5 to 10 years when interest rates get up over 6% on 10 year US Treasury bonds. We are a long way from a (TLT) call LEAP.
Q: Are we at a Bitcoin bottom?
A: Possibly, 50/50 chance we go back and retest the lows. We’ll just have to see how Bitcoin behaves in a rising interest rates scenario because ever since Bitcoin was invented, interest rates have been falling. Rising rates are a new thing for Bitcoin and no one knows what that will look like.
Q: When will you update your long-term portfolio?
A: Soon; things have been kind of busy issuing 30 trade alerts a month.
Q: How high will the ProShares UltraShort 20+ Year Treasury bond fund (TBT) go?
A: Looking for $26 from current levels, so yes, much higher to go. And we have a double in three months on (TBT) at the $28 level.
Q: If one believes in the war in Ukraine happening soon, what companies or sectors do you invest in for the short term?
A: None; if we actually do get a war, everything gets absolutely slaughtered, and then you’re looking for the buy. And that will be buys in tech especially. I don’t think there’s going to be a war in Ukraine, but the only things that go up in a Ukraine war scenario are energy stocks (USO), oil companies, and so on.
Q: Do you like China EV stocks?
A: No, I don’t. I visited BYD Motors 15 years ago and they just don’t have the technology, the battery lengths are poor, and they tend to catch on fire. They have never been able to reach American quality standards on any of their cars, not only the EVs but also the conventional internal combustion engines as well..
Q: Which index will outperform in the second half, the Invesco QQQ Trust (QQQ) or iShares Russell 2000 ETF (IWM)?
A: I vote (QQQ). I think we have a technology-led bull market in the second half, and the Russel will be lagging.
Q: What’s better, copper or copper miners?
A: You always go for the miners like Freeport McMoRan (FCX)—they will outperform the physical metal by at least three or four to one, to the upside. That’s also true with gold miners and other derivative plays; the miners always outperform the metals.
Q: What is a bond vigilante?
A: That is a term we heard from the ‘70s and ‘80s when you would get enormous selling of bonds on even the slightest negative piece of economic data or inflation data. They called the bond traders the bond vigilantes because they just crushed the bond market for the slightest transgression on the inflation/economic front. And they are back, by the way, hugely punishing the market as we have seen ($20 points in two months is a lot of punishment) on even the slightest increase in inflation.
Q: Do you have a yearend price for Freeport McMoRan (FCX)?
A: Over $50—just rallied from $30 in September.
Q: Isn’t inflation wildly understated?
A: Yes, you can find individual items that are up 30 or 50%, but the inflation calculation is actually based on 105 different items, and some of them are going down in price. For example, you had an enormous increase in used car prices in December, but they actually went down last month. So, whenever you get a basket this big, eight groups of 80,000 items, you get smaller moves. As anyone will tell you who trades baskets of stocks against the individual stocks, the same mathematical effect happens in the calculation. And while it is being wildly understated now, it’ll be wildly overstated in a few months when we get back to the 3% level, which I am expecting.
Q: What is your TLT prediction after the next 3 or 4 interest rate hikes?
A: Remember, the interest rate hikes only affect the overnight rate. TLT is a 10 to 20-year basket of bonds, so they don’t trade one for one. We may reach a bottom by the end of the year in the (TLT) somewhere in the $120s, but it’s not going to 100 this year and it’s not going to zero like some people are predicting.
Q: The inflation measure is a joke.
A: Yes, it has always been a joke. Any collection of data among 330 million people is going to be inaccurate, late, and have huge lags—but you trade the data you have, not what you wish you had, and that is the real world. I've been trading economic data for 50 years and that is my conclusion.
Q: Martial Law was declared in Canada— is there anything to trade off of that news?
A: No; even a major international event only gets a stock market reaction of usually one day or two at the most. Whatever’s happening on a bridge in Canada, nobody here really cares.
Q: Are you doing a cruise?
A: Yes, I’m doing a Norwegian cruise. Just go to the lunches section on the madhedgefundtrader.com website, and you can still buy tickets. We would love to have you for lunch on the Queen Victoria, a Norwegian Fjord cruise. We’re coming up to payment time on the tickets.
Q: Will there be earnings disappointment in April?
A: Yes, the year-on-year comparisons are going to be difficult. That will be another problem for the market in the spring in addition to the Fed.
Q: What happens with the FOMC out today at 2:00?
A: It will show a heightened fear of inflation and a greater urgency to raise interest rates.
To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in to www.madhedgefundtrader.com , go to MY ACCOUNT, click on GLOBAL TRADING DISPATCH, then WEBINARS, and all the webinars from the last ten years are there in all their glory.
Good Luck and Stay Healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
You can count on a bear market hitting some time in 2038, one falling by at least 25%.
Worse, there is almost a guarantee that a financial crisis, severe bear market, and possibly another Great Depression will take place no later than 2058 that would take the major indexes down by 50% or more.
No, I have not taken to using an Ouija board, reading tea leaves, nor examine animal entrails in order to predict the future. It’s much easier than that.
I simply read the data just released from the National Center for Health Statistics, a subsidiary of the federal Centers for Disease Control and Prevention (click here for their link).
The government agency reported that the US birth rate fell to a new all-time low for the third year in a row, to 11.99 births per 1,000 women of child bearing age. A birth rate of 12.5 per 1,000 is necessary for a population to break even. The absolute number of births is the lowest since 1987. In 2017, women had 500,000 fewer babies than in 2007.
These are the lowest number since WWII when 17 million men were away in the military, a crucial part of the equation.
Babies grow up, at least most of them. In 20 years, they become consumers, earning wages, buying things, paying taxes, and generally contributing to economic growth.
In 45 years, they do so quite substantially, becoming the major drivers of the economy. When these numbers fall, recessions and bear markets occur with absolute certainty.
You have long heard me talk about the coming “Golden Age” of the 2020s. That’s when a two-decade-long demographic tailwind ensues because the number of “peak spenders’ in the economy starts to balloon to generational highs. The last time this happened during the 1980s and 1990s, stocks rose 20-fold.
Right now, we are just coming out of two decades of demographic headwind when the number of big spenders in the economy reached a low ebb. This was the cause of the Great Recession, the stock market crash and the anemic 2% annual growth since then.
The reasons for the maternity ward slowdown are many. The great recession certainly blew a hole in the family plans of many Millennials. Falling incomes always lead to lower birth rates, with many Millennial couples delaying children by five years or more. Millennial mothers are now having children later than at any time in history.
Burgeoning student debt, which just topped $1.5 trillion, is another. Many prospective mothers would rather get out from under substantial debt before they add to the population.
The rising education of women is another drag on childbearing and is a global trend. When spouses become serious wage earners, families inevitably shrink. Husbands would rather take the money and improve their lifestyles than have more kids to feed.
Women are also delaying having children to postpone the “pay gaps” that always kick in after they take maternity leave. Many are pegging income targets before they entertain starting families.
As a result of these trends, one in five children last year were born to women over the age of 35, a new high.
This is how Latin Americans moved from eight to two-child families in only one generation. The same is about to take place in Africa, where standards of living are rising rapidly, thanks to the eradication of several serious diseases.
The sharpest falls in the US have been with minorities. Since 2017, the birthrates for Hispanics has dropped by 27% from a very high level, African Americans 11%, whites 5%, and Asian 4%.
Europe has long had the same problem with plunging growth rates but only much worse. Historically, the US has made up for the shortfall with immigration, but that is now falling, thanks to the current administration policies. Restricting immigration now is a guaranty of slowing economic growth in the future. It’s just a numbers game.
So watch that growth rate. When it starts to tick up again, it’s time to buy….in about 20 years. I’ll be there to remind you with this newsletter.
As for me, I’ve been doing my part. I have five kids aged 15-36, and my life is only half over.
https://www.madhedgefundtrader.com/wp-content/uploads/2018/05/John-and-family-story-1-image-e1526596823183.jpg266400MHFTRhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMHFTR2022-02-10 12:02:482022-02-10 15:23:21They're Not Making Americans Anymore
Tesla is evolving into the world’s preeminent robotics and AI company.
It is building the largest neural network in history, which means all the Tesla’s ever made are talking to each other, some four million by the end of this year.
When the US goes all electric in a decade, the size of the power grid is going to triple (buy copper), or else brownouts and outages will become constant. Every home in the country is going to need solar roofs to meet the demand.
Demand for cars is the greatest Tesla has ever seen, far beyond their ability to produce them, and Q1 is the slow quarter for the auto industry. I just tried to buy a new Model X and the waiting list is one year. In fact, I can sell my existing 2018 Model X on eBay for more than I paid for it….new.
Elon never fails to amaze.
As for the stock, you have to get used to the idea that the world’s greatest company has annual 45% drawdowns. That’s how Tesla has always traded. It's either going to zero or infinity, depending on who you talk to.
My decade target is still $10,000 per share. We just had a $420, 35% pullback, so we may take one more run at the lows before we go to new Highs. But I have only been trading Tesla shares for 11 years. What do I know?
I’ll never forget my first tour of the Fremont factory in 2010, right after they bought it for stock from Toyota (TM) out of the General Motors (GM) bankruptcy (Toyota owned half). Tesla then occupied only a tiny corner of the gigantic 50,000 square foot space.
But you know what? There were virtually no humans on the assembly line, just a long row of red German-made robots. There was just the occasional guy shooting oil into automatic joints.
It was a vision into the future.
I knew I was on the right track when the salesman told me that the customer who just preceded me for a Tesla Model X P100D SUV was the Golden Bay Warriors star basketball player, Steph Currie.
Well, if it’s good enough for Steph, then it’s good enough for me.
So, when I received a call from Elon Musk’s office to test the company’s self-driving technology embedded in their new vehicles for readers of the Diary of a Mad Hedge Fund Trader.
I did, and prepare to have your mind blown!
I was driving at 80 MPH on CA-24, a windy eight-lane freeway that snakes its way through the East San Francisco Bay Area mountains. Suddenly the salesman reached over a flicked a lever twice on the left side of the driving column.
The car took over!
There it was, winding and turning along every curve, perfectly centered in the lane. As much as I hated to admit it, the car drove better than I ever could. It does especially well at night or in fog, a valuable asset for senior citizens whose night vision is fading fast.
All that was required was for me to touch the steering wheel every minute to prove that I was not sleeping.
The cars do especially well in rush hour driving, as it is adept at stop-and-go traffic. You can just sit there and work on your laptop, read a book, call some customers, or watch a movie on the built-in 5G WIFI HD TV.
When we returned to the garage the car really showed off. When we passed a parking space, another button was pushed, and we perfectly backed 90 degrees into a parking space, measuring and calculating all the way.
The range is 300 miles, which I can recharge at home at night from a standard 220-volt socket in my garage in seven hours. When driving to Lake Tahoe, I can stop halfway at get a full charge in 30 minutes at a Tesla supercharging station.
The new chargers operate at a blazing 400 miles per hour. That’s enough time to walk to the subway next door and get a couple of sandwiches.
The chassis can rise as high as eight inches off the ground so it can function as a true SUV.
The “ludicrous mode,” a $12,000 option, take you from 0 to 60
mph in 2.9. However, even a standard Tesla can accelerate so fast that it will make the average passenger carsick.
Here’s the buzzkill.
Tesla absolutely charges through the nose for extras.
The 22-inch wheels, the third row of seats to get you to seven passengers, the premium sound, the leather seats, and the self-driving software can easily run you $30,000-$40,000.
A $750 tow hitch will accommodate a ski or back rack on the back. There is a $1,000 delivery charge, even if you pick it up at the Fremont factory.
It’s easy to see how you can jump from an $84,990 base price to a total cost of $162,500, including taxes, for the ultra-luxury Performance model, as I did.
As for “drop dead’ curb appeal, nothing beats the Model X. When I first started driving Tesla’s I used to get applause at stoplights. It took a while to realize they were cheering the car, not me.
Even after driving one of these for 11 years, I still get notes with phone numbers from young women asking for rides. And they don’t even offer that as an option!
My original split-adjusted cost for my Tesla shares is $3.30.
It’s still true that if you buy the shares, you get the car for free.
https://www.madhedgefundtrader.com/wp-content/uploads/2018/05/John-and-Tesla-story-3-image-e1527026778415.jpg388400Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2022-02-09 10:04:002022-02-09 16:21:22Why Tesla is Taking Over the World
That is the sage piece of advice I learned from my father about what to do during stock market corrections. Pop wasn’t a professional investor, but he had been through enough bear markets to know the value of a dollar at a market bottom.
This week will go down in history of the week of the “Zuck Shock”, when “Meta,” the newly renamed Facebook (FB), ran up a $250 billion loss in market capitalization, the largest in history.
It turns out that China’s Tik Tok has been eating their lunch for quite some time now. Apple’s new IOS privacy settings cost them another $10 billion.
What was the worst trade of 2021? CEO Mark Zuckerberg buying back $33 billion worth of his own stock in the second half of 2021 at the highs.
It gets worse.
If you think (FB) is a bargain down here, off 40% from its recent peak and at a discount to S&P 500 earnings multiples, think again.
(FB) is one of the largest holdings of the hedge fund community. Horrible January performance is about to be followed by even worse February numbers. That means any rally in (FB) will be slammed by enormous selling.
It couldn’t happen to a nicer guy.
But (FB) is not going away. With 3.6 billion users, how could they? But they are not returning as the wellspring of new fortunes anytime soon either.
Of course, the other big development of the week was the breakout by ten-year US Treasury bond yields to new two-year highs at 1.93%. Some forecasts now see 1.75% in rate rises by the end of the year.
If you are not already triple short the bond market, then you haven’t been reading this letter. We’ll know more when the next inflation data comes out on Thursday, February 10. The blockbuster January Nonfarm Payroll Report suggests they will be horrible. We currently have the hottest economy in 50 years.
And the good times are only just getting started. The Fed has delayed rate rises for so long that they risk much higher highs in interest rates in the future and a possible recession. That puts a half-point rise squarely on the table in March. The mere threat of that will keep rates high and stocks low until then.
So, how low is low? The (SPY) 50-day moving average at $460 may be a top for the short term. The recent low at $420 may be the bottom. We could be stuck in this range for a while.
Quite honestly, we haven’t been punished enough for our excesses of a year ago, when SPACs, crypto, and cannabis stocks ruled supreme. Liquidity was so great that markets were creating whole new asset classes out of thin air just to absorb it.
So, until interest rates stabilize, I’ll be selling every tech rally with both hands until it eventually costs me money. You should too. The Nonfarm Payroll Report Comes in Hot, at 467,000 when many were expecting negative numbers due to omicron. The Headline Unemployment Rate rose to 4.0%. Manufacturing was up 13,000. Average hourly earnings were up a whopping 0.7% in January and 5.7% YOY. The U-6 “discouraged worker” unemployment rate fell to 7.1%. The numbers crashed to the bond market to a new multi-year low at a 1.93% yield, dragging stocks down with them. It definitely puts a Fed half-point hike on the table for March. It makes you wonder how hot employment would be without omicron.
The Bond Vigilantes are Back, as the monetary tightening goes global, but this time, with a German Accent. Ten-year bund yields hit a three-year high and two-year yields a five-year high, Britain has already raised rates twice, and the ECB’s Christine Lagarde has turned from dove to hawk. European rates rising faster than ours is knocking the stuffing out of the US dollar. JGB yields hit a six-year high.
Weekly Jobless Claims Fall to 238,000, down 23,000 on the week. Continuing claims drop 44,000 to 1.628 million. The light at the end of the tunnel for omicron?
US National Debt Tops $30 Trillion, the end result of 20 years of deficit spending. Clinton was the last president to run a surplus, when closing of the US Treasury bond market was discussed for lack of supply. $6 trillion for tax cuts for the wealthy, $6 trillion for Covid relief, and $4 trillion for the war in Iraq, it adds up. Without the pandemic, we were on schedule to hit $30 trillion by 2025. If interest rates ever go up, the US will really be in trouble.
Alphabet Announces 20:1 Share Split, which will take the price down from $3,000 to $150. The goal is to make the shares available to the masses. The earnings were great too. The company bought back $13.5 billion worth of its own stock as well. Taking profits on my call spread right here.
Facebook Crashes 25% on Huge Earnings Miss, in Q4. Total revenues came in at $32.8 billion and operating income at $15.9 billion. The newly renamed Meta says falling ad rates and volume are to blame. It couldn’t happen to a nicer guy. Apple’s new privacy settings delivered another dent.
PayPal Crashes 20% on horrific earnings. “Buy now, pay later” turned out to be “Buy now, pay never,” with a crushing 7% default rate. Supply chain problems, covid, reduced travel all conspired to kill off this company. The shares are off 60% from the summer high. This was my biggest loss of 2021.
Snapchat Snaps, soaring 60% on spectacular earnings, the first to ever show a profit. Avoid (SNAP) as it's too superheated. This is becoming a single stock picker’s market in the extreme.
Borrowers Stampede to Get the Last of the Low Interest Rate loans, with mortgage applications up 18% in a week. The 30-year fixed rate soared to 3.78%. Eventually, borrowers are going to have to switch to 5-year adjustables to afford a home purchase, taking on the interest rate risk.
My Ten-Year View
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 800% to 240,000 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 240,000 here we come!
With near-record volatility continuing, my February month-to-date performance rocketed to a blistering 4.25% in only four days. My 2022 year-to-date performance ended at 18.84%. The Dow Average is down -3.34% so far in 2022. It is the great outperformance on an index since Mad Hedge Fund Trader started 14 years ago.
With 28 trade alerts issued so far in 2022, there was too much going on to describe here. Check your inboxes.
That brings my 13-year total return to 531.40%, some 2.00 times the S&P 500 (SPX) over the same period. My average annualized return has ratcheted up to 43.68% easily the highest in the industry.
We need to keep an eye on the number of US Coronavirus cases at 76 million and rising quickly and deaths topping 902,000, which you can find here.
On Monday, February 7 at 1:00 PM EST, the total Vehicle Sales for January are out. Amgen (AMGN) reports.
On Tuesday, February 8 at 8:30 AM, the US Balance of Trade for December is released. Pfizer (PFE) reports. On Wednesday, February 9 at 7:00 AM, the Wholesale Inventories for December are printed. Disney (DIS) reports.
On Thursday, February 10 at 8:30 AM, the Weekly Jobless Claims are disclosed. The big number of the week is US Core Inflation. Twitter (TWTR) reports. On Friday, February 11 at 7:00 AM, the University of Michigan Consumer Sentiment for February is released.
At 2:00 PM, the Baker Hughes Oil Rig Count is out.
As for me, to say that I was an unusual hire for Morgan Stanley back in 1983 was an understatement, a firm known as being conservative, white-shoed, and a paragon of the establishment. They normally would not have touched me with a ten-foot pole, except that I spoke Japanese.
Of 1,000 employees, there were only three from California. The other two were drop-dead gorgeous Stanford grads, daughters of the president of the Philippines, hired to guarantee the firm’s leadership of the country’s biannual bond issue.
When the book Liar’s Poker was published, many in the company thought I wrote it under the pen name of Michael Lewis. Today, the real Michael lives a few blocks away from me and I kid him about it whenever I bump into him at Whole Foods.
At one Monday morning meeting, the call went out, “Does anyone have a connection with the Teamsters Union? I raised my hand, mentioning that my grandfather was a Teamster while working for Standard Oil of California during the Great Depression (it was said at the time that there was never a Great Depression at Standard Oil. It was true).
It turned out that I was virtually the only person at Morgan Stanley that didn’t have an Ivy League degree or an MBA.
My boss informed me, “You’re on the team.”
At the time, the US Justice Department had seized the Teamsters Pension Fund because the Mafia had been running it for years, siphoning off money at every opportunity. I made the pitch to the Justice Department, a more conservative bunch of straight arrows you never saw, all wearing dark suits and white business shirts.
It was crucial that we won the deal as Barton Biggs was just starting up the firm’s now immensely profitable asset management division, and a big mandate like the Teamsters would give us instant credibility in the investment community.
We won the deal!
Once the papers were signed, the entire Teamsters portfolio was dumped in my lap and I was ordered to fly to Las Vegas to investigate. It didn’t hurt that I was Italian. It was thought that the Teamsters might welcome me.
The airport was still a tiny, cramped affair, but offered slot machines. Steve Wynn was building The Mirage Hotel on the strip. Howard Hughes was still holed up in the penthouse of the Desert Inn. Tom Jones, Frank Sinatra, Siegfried & Roy, Wayne Newton, and Liberace had star billing.
It turned out that the Teamsters Pension Fund owned every seedy whorehouse, illegal casino, crooked bookie, and drug dealer in town. If you wanted someone to disappear, they could arrange that too.
I returned to New York and wrote up my report. I asked Barton to sign off on it and he said, “No thanks, you own this one.”
So it was with a heavy heart that I released a firmwide memo stating that employees of Morgan Stanley were no longer allowed to patronize the “Kit Kat Lounge”, the “Bunny Farm”, the “Mustang Ranch” and 200 other illicit businesses in Nevada.
I never lived down that memo.
I actually knew about some of these places a decade earlier because they were popular with the all-male staff of the Nuclear Test Site where I had once worked an hour north of town as a researcher and mathematician.
Then later in the early 2000s, I had to drive my son from Lake Tahoe to the University of Arizona and we drove right past the entrance to the Nuclear Test Site. The “Kit Kat Lounge”, the “Bunny Farm” were long gone, but the Site access had improved from a dusty, potholed dirt road to a four-lane superhighway.
That’s defense spending for you.
Even today, 40 years later, my old Morgan Stanley friends kid me if I know where to have a good time in Vegas, and I laugh.
But when I ride the subway in New York, I still get on at the front of the train, just to be extra careful. Accidents happen.
Stay Healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
https://www.madhedgefundtrader.com/wp-content/uploads/2022/02/frontier-stardust.png318864Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2022-02-07 10:02:492022-02-07 12:46:05The Market Outlook for the Week Ahead, or Cash is King
Below please find subscribers’ Q&A for the February 2 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Incline Village, Nevada.
Q: Thoughts on Palantir Technologies Inc. (PLTR)?
A: Well, we got out of this last summer at $28 because the CEO said he didn’t care what the share price does, and when you say that, the market tends to trash your stock. But Palantir is also in a whole sector of small, non-money-making, expensive stocks that have just been absolutely slaughtered. And of course, PayPal (PYPL) takes the prize for that today, down 25% and 60% from the top. So, we’re giving up on that whole sector until proven otherwise. Until then, these things will just keep getting cheaper.
Q: Given the weakness in January, do you think we still have to wait until the second half of the year for a viable bottom?
A: Definitely, maybe. If things are going to happen, they are going to happen fast; we got the January selloff, but that’s nowhere near a major selloff of 20%. And the fact is, the economy is still great so that’s why this is a correction, not a bear market. At some point, you want to buy into this, but definitely not yet; I think we take another run at the lows again sometime this month. We just have to let all the shorts come out and take their profits so they can reestablish again.
Q: Why are bank stocks struggling?
A: A lot of the interest rate rises that we’re getting now were already discounted last year—banks had a great year last year—so they were front running that move, which is finally happening. To get more moves out of banks, you’re going to have to get more interest rate rises, which we will get eventually. We still like the banks long term, we still like financials of every description, but they are taking a break, especially on the “sell everything” index days. A lot of the recent selling was index selling—banks have a heavy weighting in the index, about 15%. So, they will go down, but they will also be the ones that come back the fastest. We’re seeing that in some of the financials already, like Berkshire Hathaway (BRKB) and Morgan Stanley (MS) which are both close to all-time highs now.
Q: What about the situation with Russia and Ukraine?
A: It’s all for show. This is a situation where both the US and Russia need a war, or threat of a war, because the leaders of both countries have flagging popularity. Wars solve those problems—that’s why we have so many of them by the United States. We’ve been at war essentially for most of the last 40 years, ever since Ronald Reagan came in.
Q: I didn’t exit my big tech positions before the crash, should I just hang onto them at this point?
A: The big ones—yes. The Apples (AAPL), the Googles (GOOGL), the Amazons (AMZN) —they’re only going to drop about 20% at the most, maybe 25%, and then they’ll go to new highs, probably before the end of the year. If you’re good enough to get out and get back in again on a 20% move, go for it. But most people can’t do that unless they’re glued to their screens all day long. So, if you have stock, keep the stock; if you have options, get out of the options, because there the time decay will wipe you out before a turnaround can happen. This is not an options environment, unless you’re playing on the short side in the front month, which is what we’re doing.
Q: When you send out the trade alerts, I have a hard time getting them executed. How do you advise?
A: Move the strike price, go out in maturity, and you can get our prices at slightly higher risk. Or, just leave it and, quite often, people’s limit orders get done at the end of the day when the algorithms have to dump their positions at the close because they’re not allowed to carry overnight positions. Also, even if you get half of my trade alerts, you’re doing pretty good—we’re running at a 23% rate in 6 weeks, or 200% annualized. And remember, when I send out a trade alert, you’re not the only one trying to get in there, so you can even go onto a similar security. If I recommend Alphabet (GOOGL), consider going over to Microsoft (MSFT), because they all tend to move together as a group.
Q: I am sitting on a 16% profit in the ProShares Ultra Technology (ROM), which you recommended. Should I take the money and run, and get back in at a lower price?
A: Yes, this is just a short covering rally in a longer-term correction, and you make the money on the volume. You win games by hitting lots of signals, not hanging on to a few home runs where people usually strike out.
Q: You said inflation will be short lived, so why would there be 9 interest rates after the initial 4?
A: It’s going to take us 8 interest rates just to get us back to the long-term average interest rate. Remember the last 2% is totally artificial and only happened because there was a financial crisis 13 years ago. So, to normalize rates you really need to get overnight rates back up to about 3.0%. And that means 12 interest rate hikes. If you don’t do that, you risk inflation going from controllable to uncontrollable, and that is the death of the Fed. So, that’s why I expect a lot more interest rate rises.
Q: Will the tension between Russia and the Ukraine affect the market?
A: No, it hasn’t so far and I don’t expect it to. Although, it’s hard to imagine going through all of this and not seeing a shot fired. When that one shot gets fired, then maybe you get a down-500-point day, which it then makes back the next day.
Q: Anything to do with Alphabet (GOOGL) announcing its 20 to one split?
A: No, it’s too late. We had a trade alert out on a Google 20 call spread which we actually took profits on this morning. So, nice win for the Mad Hedge Technology Letter there. There’s nothing to do with these splits, it’s not like they’re going to un-announce it, this isn’t a risk-arbitrage situation where there’s always an antitrust risk hovering over the deal that may crash it. This is pretty much a done deal and doesn’t even happen until July 1. People think bringing the share price from $3,000 down to $150 makes it available for a lot more potential retail buyers, which it does. It also makes call spreads on the options a lot cheaper too. When we put out these alerts, we can only do one or two contracts, even tying up $10,000—divide that by 20 and all of a sudden your cheapest Google call spread cost $500 instead of $10,000.
Q: Can you speak about the liquidity on your strikes? Sometimes we’re trading against strikes that have no open interest.
A: Whenever you put in an order for one strike, even if there’s nothing outstanding on that strike, algorithms will arbitrage against that strike—where your order is—against all the other strikes on the whole options chain. So, don’t worry if you have limited open interest or no open interest on our trade alerts. They will get done, and it may get done by some algorithm or some market maker taking more of another strike, that’s how these things get done. It’s all thanks to the magic of computers.
Q: Do you have thoughts about Freeport-McMoRan (FCX)? I have some profitable LEAP positions open.
A: It’ll go higher, keep them. And I like the whole commodity space, which means iron ore (BHP), copper, steel (X), etc.
Q: Would you trade Barclays iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX) at this point?
A: No, because we’re dead in the middle of the recent range. That’s a horrible place to enter—you only enter (VXX) on extremes on the upsides and the downside.
Q: What should I do about Airbnb (ABNB) at this price? They’ve been profitable for 2-3 years, with revenues rising.
A: I think Airbnb is one of the best run companies in the world, and I expect their earnings to keep growing like crazy, especially once we get out of the pandemic. I am also a very frequent Airbnb user, having stayed in Airbnb’s in at least 10 countries, so I’m a big fan of them. The stock just got dragged down by the small tech bust but it will come back. This is a “throwing the baby out with the bathwater” situation.
Q: Are there any good LEAPS candidates now?
A: I’m not doing any LEAPS until we reach the final cataclysmic selloff of the correction. Otherwise, the time value will run against you enormously; I’d rather wait for better prices.
Q: Do you see a cataclysmic selloff?
A: Yes, I do. Maybe in a few more weeks, and maybe next week if we get a really hot 8%+ inflation rate—that would really kill the market.
Q: What will tell you if inflation is ending or slowing labor?
A: Labor is 70% of the inflation calculation. So, when these huge pay awards slow down, that's when inflation slows down. By the way, a lot of pay increases that are happening now are catch-up from the last 40 years of no pay increases for American workers in real inflation adjusted terms. So, a lot of this is catch-up—once that’s done, you can forget about inflation. Also, the long-term pressure of technology on prices is downwards, so allow that to reignite deflation, and that will be your bigger issue over the long term.
Q: What should I do about Editas Medicine Inc (EDIT) or CRSPR Therapeutics AG (CRSP)?
A: Don’t touch the sector, it’s out of favor. Let this thing die a slow death. When they come up with profitable products, that’s when the sector recovers. So far, everything they have works in labs but there are no mass-produced Crispr products, they’re trying for mass production on sickle cell anemia and a couple of other things, but still very early days in CRSPR technology.
Q: When will this recording be posted?
A: In two hours, it will be posted on the website. Go to “My Account” and you’ll find the last 13 years of recorded webinars.
Q: What do you mean by “stand aside from Foreign Exchange”?
A: The volatility in the foreign exchange market is just so low compared to equities and bonds, it’s not worth trading right now. When you can trade everything in the world—foreign exchange is at the bottom of the list. If I see a good entry point, I’ll do a trade; but do I trade Tesla (TSLA) with a volatility of 100%, or foreign exchange with a volatility of 5%? Those are the choices.
Q: Should I do any short plays in oil (USO)?
A: Generally, you don’t want to short any commodity unless you're a professional; I say that having been short beef futures when Mad Cow Disease hit in 2003 and you had three limit-up days in a row in the futures market. That happens in the commodity areas—liquidity is so poor compared to stocks and bonds that if you get caught in one of these one-way moves, you can’t get out. So that is the risk; and I’ve known people who have gone bust trading oil both long and short, so this is for professionals only. With stocks you get vastly more data and information than you do in the commodity markets where industry insiders have a much bigger advantage.
To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in to www.madhedgefundtrader.com, go to MY ACCOUNT, click on GLOBAL TRADING DISPATCH, then WEBINARS, and all the webinars from the last ten years are there in all their glory.
Good Luck and Stay Healthy!
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
It has been the worst New Year stock market opening in history.
After a two-day fake-out to the upside, stocks rolled over like the Bismarck and never looked up. NASDAQ did its best interpretation of flunking parachute school without a parachute, posting the worst month since 2008.
Markets can’t hold on to any rally longer than nanoseconds, and the last hour of the day has turned into one from hell.
What is even more confusing is that stocks are now trading like commodities, with massive one-way moves, while commodities, like oil (USO), copper( FCX), and iron ore (VALE) have resumed a steady grind up.
We had a lovefest going on here at Incline Village, Nevada for Technology and Bitcoin researcher Arthur Henry has been staying with me for the week to plot market strategy.
Once the market showed its hand, I sold short Microsoft (MSFT), which elicited torrents of complaints from readers. Then Arthur sold short Netflix (NFLX), inviting refund demands. Then I sold short Apple (AAPL), prompting accusations of high treason. Then Arthur sold short Teledoc (TDOC). There wasn’t a lot of talking, but frenetic writing and emailing instead.
Followers cried all the way to the bank.
In a mere two weeks, the price earnings multiple for the S&P 500 plunged from 22X to 20X. A lot of traders were only buying stock because they were going up. Take out the “up” and Houston we have a problem.
The entire streaming industry seems to have gone up in smoke and ex-growth practically overnight. Netflix (NFLX) delivered a gob smacking 29.5% swan dive in the wake of disappointing subscriber growth forecasts. Walt Disney (DIS), which ate the Netflix lunch, was dragged down 10% through guilt by association.
It is often said that the stock market has discounted 12 of the last six recessions. It is currently pricing in one of those non-recessions. What we are seeing is a sudden growth scare of the first order.
Despite last week’s carnage, stocks are still the most attractive asset class in the world, offering a potential 10% return in 2022. The problem is that they may make that 10% profit starting from 10% lower than here.
Despite all the red ink, big tech stocks are still on track to see a 30% earnings growth this year, and they account for a hefty 28% of the market.
Let’s look at Apple’s past declines for guidance on this meltdown.
Steve Jobs’ creation gave back 60% in the 2008 Great Recession, 34% during the 2015 growth scare, 48% during the great 2018 Christmas collapse, and 28% in the 2020 pandemic crash. So, the good news is that you won’t get killed by this selloff, you’ll just lose an arm and a leg. But they’ll grow back.
Remember, it’s always darkest just before it goes completely black. This correction is survivable, although it may not seem so at the moment.
It does vindicate my 2022 view that the first half will be about survival and that big money can be had in the second half.
So far, so good.
The Market is De-Grossing Big Time. That means cutting total market exposure and selling everything, regardless of stock or sector. The market is discounting a recession and bear market that isn’t going to happen, which occurs often. When it ends in a few weeks, interest rate sensitives, especially the banks, will bounce back hard, but tech won’t. Buy (JPM), (WFC), and (BAC) on bigger dips.
The Bond Collapse Goes Global, with German 10-year bunds going positive for the first time in three years, up 40 basis points in a month. Yes, inflation is finally hitting the Fatherland, home of post-WWI billion percent inflation. Eurozone inflation just topped 5%, well above its 2% target. British inflation hit a 30-year high. The move has lit a fire under all Euro currencies. Methinks the down move in (TLT) has more to go.
Fed to Raise Rates Eight Times, says Marathon Asset Management. That’s what will be needed to curb the current runaway inflation now at 7.0% and still rising. Personally, I think it will be 12 quarter-point increments to peak out at a 3 ¼% overnight rate. Any more and Powell might bring on a recession.
NASDAQ is Officially in Correction, down 10%, in the wake of poor performance this month. It’s the fourth one since the pandemic began two years ago. Tesla (TSLA), Amazon (AMZN), and NVIDIA (NVDA) have been leading the swan dive, all felled by rapidly rising interest rates. This could go on for months.
Weekly Jobless Claims Hit 286,000, a four-month high, as omicron sends workers fleeing home.
Goldman Sachs (GS) Gets Crushed, down 8%, on disappointing earnings. Tough market conditions are fading trading volumes while 2021 bonuses were through the roof. The move is particularly harsh in that buyers were flooding in right at support at the 200-day moving average.
China GDP (FXI) Grows 8.1% YOY but is rapidly slowing now, thanks to Omicron. China was first in and first out with the pandemic but is getting hit much harder in this round. That has prompted new mass lockdowns which will make out own supply chain problems worse for longer. In Chinese, “lockdown” means they weld your door shut, unlike here. Harsh, but it works.
Oil (USO) Hits Seven-Year High, as inventories hit a 21-year low. No new capital is entering the industry, crimping supplies as old fields play out. The threat of a Russian invasion of the Ukraine is prompting advance stockpiling. Russia is the world’s second-largest oil exporter.
Existing Homes Sales Hit a 15-Year High, at 6.12 million, the best since 2006. December fell 4.6%. Extreme inventory shortage is the issue, with only 910,000 homes for sale at the end of the year, an incredibly low 1.8-month supply. You can’t find anything on the market now, to buy or rent. The median price of a home sold in December was $358,000, a 15.8% gain YOY.
Bitcoin (BITO) Crashes, decisively breaking key support at $40,000. Non-yielding assets of every description are getting wiped. Bail on all crypto options plays asap.
My Ten-Year View
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 800% to 240,000 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 240,000 here we come!
With the pandemic-driven meltdown on Friday, my January month-to-date performance bounced back hard to 5.05%. My 2022 year-to-date performance also ended at 5.05%. The Dow Average is down -6.12% so far in 2022.
Once stocks went into free fall, I piled on the short positions as fast as I could write the trade alerts, including in Microsoft (MSFT), Apple (AAPL), and a double short in the S&P 500 (SPY). I also increased my shorts in the bond market (TLT) to a triple position. When prices became the most extreme, when the Volatility Index (VIX) hit $30, I bought both (SPY) and (TLT).
If everything goes our way, we should be up 14.26% by the February 18 options expiration.
That brings my 12-year total return to 517.61%, some 2.00 times the S&P 500 (SPX) over the same period. My 12-year average annualized return has ratcheted up to 42.82% easily the highest in the industry.
We need to keep an eye on the number of US Coronavirus cases at 71 million and rising quickly and deaths topping 866,000, which you can find here.
On Monday, January 24 at 6:45 AM, The Market Composite Flash PMI for January is out. Haliburton (HAL) reports.
On Tuesday, January 25 at 6:00 AM, the S&P Case Shiller National Home Price Index for November is released. American Express (AXP) reports.
On Wednesday, January 26 at 7:00 AM, the New Home Sales for December are published. At 11:00 AM The Federal Reserve interest rate decision is announced. Tesla (TSLA), Boeing (BA), and Freeport McMoRan (FCX) report.
On Thursday, January 27 at 8:30 AM the Weekly Jobless Claims are disclosed. We also get the first look at US Q4 GDP. Alaska Air (ALK) and US Steel (X) report.
On Friday, January 28 at 5:30 AM EST US Personal Income & Spending is printed. Caterpillar (CAT) reports. At 2:00 PM, the Baker Hughes Oil Rig Count is out.
As for me, when I drove up to visit my pharmacist in Incline Village, Nevada, I warned him in advance that I had a question he never heard before: How good is 80-year-old morphine?
He stood back and eyed me suspiciously. Then I explained in detail.
Two years ago, I led an expedition to the South Pacific Solomon Island of Guadalcanal for the US Marine Corps Historical Division (click here for the link). My mission was to recover physical remains and dog tags from the missing-in-action there from the epic 1942 battle.
Between 1942 and 1944, nearly four hundred Marines vanished in the jungles, seas, and skies of Guadalcanal. They were the victims of enemy ambushes and friendly fire, hard fighting, malaria, dysentery, and poor planning.
They were buried in field graves, in cemeteries as unknowns, if not at all left out in the open where they fell. They were classified as “missing,” as “not recovered,” as “presumed dead.”
I managed to accomplish this by hiring an army of kids who knew where the most productive battlefields were, offering a reward of $10 a dog tag, a king's ransom in one of the poorest countries in the world. I recovered about 30 rusted, barely legible oval steel tags.
They also brought me unexploded Japanese hand grenades (please don’t drop), live mortar shells, lots of US 50 caliber and Japanese 7.7 mm Arisaka ammo, and the odd human jawbone, nationality undetermined.
I also chased down a lot of rumors.
There was said to be a fully intact Japanese zero fighter in flying condition hidden in a container at the port for sale to the highest bidder. No luck there.
There was also a just discovered intact B-17 Flying Fortress bomber that crash-landed on a mountain peak with a crew of 11. But that required a four-hour mosquito-infested jungle climb and I figured it wasn’t worth the malaria.
Then, one kid said he knows the location of a Japanese hospital. He led me down a steep, crumbling coral ravine, up a canyon and into a dark cave. And there it was, a Japanese field hospital untouched since the day it was abandoned in 1943.
The skeletons of Japanese soldiers in decayed but full uniform laid in cots where they died. There was a pile of skeletons in the back of the cave. Rusted bottles of Japanese drugs were strewn about, and yellowed glass sachets of morphine were scattered everywhere. I slowly backed out, fearing a cave-in.
It was creepy.
I sent my finds to the Marine Corps at Quantico, Virginia, who traced and returned them to the families. Often the survivors were the children or even grandchildren of the MIAs. What came back were stories of pain and loss that had finally reached closure after eight decades.
Wandering about the island, I often ran into Japanese groups with the same goals as mine. My Japanese is still fluent enough to carry on a decent friendly conversation with the grandchildren of their veterans. It turned out I knew far more about their loved ones than they. After all, it was our side that wrote the history. They were very grateful.
How many MIAs were they looking for? 30,000! Every year, they found hundreds of skeletons, cremated in a ceremony, one of which I was invited to. The ashes were returned to giant bronze urns at Yasakuni Ginja in Tokyo, the final resting place of hundreds of thousands of their own.
My pharmacist friend thought the morphine I discovered had lost half of its potency. Would he take it himself? No way!
As for me, I was a lucky one. My dad made it back from Guadalcanal, although the malaria and post-traumatic stress bothered him for years. And you never wanted to get in a fight with him….ever.
I can work here and make money in the stock market all day long. But my efforts on Guadalcanal were infinitely more rewarding. I’ll be going back as soon as the pandemic ends, now that I know where to look.
Stay Healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
https://www.madhedgefundtrader.com/wp-content/uploads/2022/01/dog-tags-morphine.png428570Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2022-01-24 09:02:122022-01-24 16:51:22The Market Outlook for the Week Ahead, or Parachuting Without a Parachute
Upon analyzing my performance data for the past year, it couldn’t be clearer.
After three years of battle testing, the algorithm has earned its stripes. I started posting it at the top of every Mad Hedge newsletter and Trade Alert three years ago, and will continue to do so in the future.
Once I implemented my proprietary Mad Hedge Market Timing Index in October 2016, the average annualized performance of my Trade Alert service has soared to an eye-popping 42.62%.
As a result, new subscribers have been beating down the doors trying to get in.
Let me list the high points of having a friendly algorithm looking over your shoulder on every trade.
*Algorithms have become so dominant in the market, accounting for up to 80% of total trading volume, that you should never trade without one
*It does the work of a seasoned 100-man research department in seconds
*It runs real-time and optimizes returns with the addition of every new data point far faster than any human can. Imagine a trading strategy that upgrades itself 30 times a day!
*It is artificial intelligence-driven and self-learning.
*Don’t go to a gunfight with a knife. If you are trading against algos alone, you WILL lose!
*Algorithms provide you with a defined systematic trading discipline that will enhance your profits.
And here’s the amazing thing. My algorithm completely nailed the big rotation out of tech and into value stock last September.
My Mad Hedge Market Timing Index also correctly predicted the outcome of the 2020 presidential election.
You saw this in stocks like US Steel (X), which took off like a scalded chimp the week before the election and quickly tripled.
When my and the Market Timing Index’s views sharply diverge, I go into cash rather than bet against it.
Since then, my Trade Alert performance has been on an absolute tear. In 2022 we earned a ballistic 90.02% compared to a paltry 18% gain for the Dow Average.
Here are just a handful of some of the elements which the Mad Hedge Market Timing Index analysis in real-time, 24/7.
50 and 200-day moving averages across all markets and industries
The Volatility Index (VIX)
The junk bond (JNK)/US Treasury bond spread (TLT)
Stocks hitting 52-day highs versus 52-day lows
McClellan Volume Summation Index
20-day stock-bond performance spread
5-day put/call ratio
Stocks with rising versus falling volume
Relative Strength Indicator
12-month US GDP Trend
Case Shiller S&P 500 National Home Price Index
Of course, the Trade Alert service is not entirely algorithm drive. It is just one tool to use among many others.
Yes, 50 years of experience trading the markets is still worth quite a lot.
I plan to constantly revise and upgrade the algorithm that drives the Mad Hedge Market Timing Index continuously as new data sets become available.
Obviously, in light of the recent stock market crash, a ton of new valuable data is available for which my algo can mine.
https://www.madhedgefundtrader.com/wp-content/uploads/2021/03/average-annualized-jan2022.png498864Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2022-01-20 10:02:022022-01-20 12:32:16How the Mad Hedge Market Timing Algorithm Tripled My Performance
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There is a very high degree of risk involved in trading. Past results are not indicative of future returns. MadHedgeFundTrader.com and all individuals affiliated with this site assume no responsibilities for your trading and investment results. The indicators, strategies, columns, articles and all other features are for educational purposes only and should not be construed as investment advice. Information for futures trading observations are obtained from sources believed to be reliable, but we do not warrant its completeness or accuracy, or warrant any results from the use of the information. Your use of the trading observations is entirely at your own risk and it is your sole responsibility to evaluate the accuracy, completeness and usefulness of the information. You must assess the risk of any trade with your broker and make your own independent decisions regarding any securities mentioned herein. Affiliates of MadHedgeFundTrader.com may have a position or effect transactions in the securities described herein (or options thereon) and/or otherwise employ trading strategies that may be consistent or inconsistent with the provided strategies.
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