Global Market Comments
January 15, 2025
Fiat Lux
Featured Trades:
(FRIDAY, JANUARY 31, 2025, SALT LAKE CITY, UTAH STRATEGY LUNCHEON)
(IT’S TIME TO PULL OUT THOSE OLD INFLATION PLAYS OUT OF THE DRAWER),
(GLD), (SLV), (TIPS)
Being an old do-it-yourself carpenter, I never throw anything away.
My garage is filled with ancient tools I bought 50 years ago and used only once.
Scraps of wood, odd lengths of wiring, and old coffee cans filled with loose nuts, screws, and nails are everywhere.
You KNOW that if you throw a tool out, you’ll desperately need it the next day.
The same is true of my investment approach. Nothing new ever happens in the financial market, plays that worked in past years just get endlessly recycled.
My inventory of ancient trading strategies includes instruments that were once incredibly profitable (Japanese equity warrant arbitrage?), but haven’t made money in decades.
So I was rooting around my trading toolbox the other day when I found just the ones I needed: inflation plays.
Some of the greatest trades of my half-century-long career in the trenches have been with inflation plays.
Of course, gold during the 1970s was the no-brainer after President Nixon took the US off the gold standard. I started buying in the barbarous relic in the mid-$30s and chased it all the way up to $900.
I made similar fortunes in that other great inflation hedge, residential real estate. Some of the properties I owned then in California have risen 100 times in value, thanks to inflation.
It was with those fond memories in mind that found myself looking for similar inflation plays to execute.
Let me stop right here.
The oldies are still the goodies.
In the next surge of inflation that the new administration is about to unleash, I expect gold to rise from today’s $2,703 an ounce to at least $5,000. After that, look out above!
Silver (SLV) should do double, eventually touching $100 an ounce from today’s $30.83.
Your home will also be a fantastic inflation hedge. Anything you own today should rise in value at least tenfold over the next 20 years.
However, in updating my research, I came across a few new wrinkles that are definitely worthy of your attention.
The big one is TIPS.
TIPS are US Treasury bonds that are indexed to inflation. If inflation rises, the value of your TIPS rises.
Specifically, TIPS are tied to the Consumer Price Index as calculated by the US Department of Labor Bureau of Labor Statistics.
Let me show you how they work.
Let’s say you bought $1,000 worth of TIPS with a 1% coupon. If the CPI comes in at zero, you will receive $10 that year in interest payments.
If the CPI rises 2%, your $1,000 in principal increases to $1,020. Your 1% coupon is then calculated off of this new, higher amount and jumps to $10.20, giving you a total return of $32.10.
Now here is the really fun part.
If the CPI rises to 15%, as it did in 1979, the value of your investment rises by 16.15% to $1,161.50.
Yes, I still have my bell bottoms from those days, although the waist is rather tight.
This explains why many high-net-worth individuals always have a few TIPS parked away in their portfolios, usually stuck in a folder behind the radiator.
TIPS are issued by the U.S. Treasury at recurring auctions as part of the government’s overall funding program.
Currently, the Treasury conducts monthly TIPS auctions: three per year for five-year TIPS, six for 10-year TIPS, and three for 30-year TIPS.
You can buy TIPS directly from the US government and bypass hefty third-party management and brokerage fees.
However, the semi-annual inflation adjustments of a TIPS bond are treated as taxable income by the IRS, even though investors won’t see that money until they sell the bond or it matures.
So it may be wise to buy your TIPS via a mutual fund or ETF or to only hold them in a tax-exempt IRA, 401k, or deferred benefit plan.
TIPS also have the additional benefit in that, like municipal bonds, they are exempt from state and local taxes.
Well-heeled residents of highly taxed California, New York, and Illinois absolutely love them.
Like many government programs, TIPS was first created in 1997 for a problem that didn’t exist: inflation. That year the CPI was only 1.7%.
The highest CPI since then was 3.4% in 2000, the year of the dotcom bubble top. For most of 2016, it hung around 1.6%.
Since the first issuance of tips, the US economy has been steadily battered by something no one predicted: deflation.
Thanks to the onslaughts of hyper-accelerating technology, flat wage growth, and global competition, prices worldwide have been heading ever lower.
For more than two decades, investors in TIPS were shortchanged. They accepted lower yields in return for protection against something that never happened. It was the fire insurance without the fire.
That is, no fire until January this year, when we saw an actual spark.
The CPI for that month came in at 0.6%, which works out to 2.5% annualized, the fastest pace of price appreciation in four years.
The TIPS explanation I have given you so far is the simple one. It gets much more complicated.
Seasoned bond pros have figured out ways to game this market six ways from Sunday using an array of sophisticated algorithms.
This enables them to add “alpha” by outperforming generic TIPS returns with aggressive high-turnover trading strategies.
Bond giant PIMCO and DoubleLine Capital are some of the more ardent practitioners of this approach.
These firms employ both top-down and bottom-up strategies, which can be broken down into the following:
Top-down strategies include:
- Duration positioning
- Positioning based on views of yield curve steepening/flattening
- Assessing TIPS’ relative value versus nominal Treasuries, based on shifts in inflation expectations
- Country rotation among inflation-linked bond issuers
- Limited sector rotation among high quality non-government sectors
Bottom-up strategies include:
- Positioning to exploit seasonal consumer price inflation (CPI) patterns, which presents a recurring opportunity to capture attractive risk-adjusted incremental return
- “Inflation capture,” or managing the mix of short and long TIPS to express an active view that CPI will print higher than the market expects
- Targeted issue selection
- Relative value trading based on the implied option value of receiving at least the original principal value upon maturity (i.e., the embedded deflation put)
If all of this gives you a headache and you just want to keep your life simple, you can just buy one of the many TIPS ETFs out there.
PIMCO has the Broad US TIPS Index ETF (TIPZ).
BlackRock has the iShares TIPS Bond ETF (TIP). Barclays has the SPDR 1-10 Year TIPS ETF (TIPX).
The only way these won’t work is if deflation, instead of ending, accelerates.
Artificial intelligence is only just starting to pervade our lives, and the productivity increases and cost savings it promises are enormous.
So is the potential job and wage destruction, the largest component of the CPI calculation.
If that is the case, then the CPI could turn negative, and sharply so. In that scenario, inflation-indexed TIPS will deliver losses instead of the promised gains.
"My experience in business helps me as an investor, and my investment experience makes me a better businessman," said Oracle of Omaha, Warren Buffett.
Global Market Comments
January 14, 2025
Fiat Lux
Featured Trades:
(THE KINDLE EDITION OF THE JOHN THOMAS BIO IS OUT)
"If you can get a dividend higher than the yield on ten year debt, it's an opportunity we haven't seen in our lifetime. On a five year horizon, investing in large multinationals with high dividends will have a large payday" said Lawrence Fink, CEO of Black Rock.
Global Market Comments
January 13, 2025
Fiat Lux
Featured Trades:
(MARKET OUTLOOK FOR THE WEEK AHEAD or WHAT’S NEXT),
(SPY), (TSLA), (TLT), (GS)
This is not the rose garden we were promised.
Down three of six trading days so far in 2025, with the S&P 500 off 2.2%. Worse yet, there is an almost perfect head and shoulders topsetting up on the charts portending lower lows. Lead names like Tesla (TSLA) have taken it on the nose, down 25%.
Tax-deferred selling has definitely been the dead weight hanging on the market since January 1. High-net-worth individuals would have shot the financial advisors off if they had saddled them with big tax bills during the last weeks of 2024. After two 20% back-to-back years, many of these positions had doubles and triples in them. How long it will be anyone’s guess.
Once the selling does end, the market will go into “show me” mode, waiting for the new administration to deliver the promised action. This could be a long wait. The earliest Congress can vote on a new economy-changing bill in May. Until then, the market could be entering a tedious trading range until action is delivered.
The good news? There were many times in my life when I never thought I’d live until 2025. Also, we get two extra holidays in January, Jimmy Carter’s funeral and Martin Luther King Day on the 23rd.
So, what’s a trader to do in these suddenly benighted times? 90-day US Treasury bill looks fantastic right now with a 4.21% yield. Nothing is better than getting paid to wait. Big tech is entering a long-range trade from which it will eventually escape to the upside. A lot of the AI trade needs to be digested and earnings spun off before a major new upleg can begin.
One of the great things about a 16-day cruise from Los Angeles to Fort Lauderdale, Florida is the many fascinating people you meet. It turned out that I missed the start of the Great Los Angeles fires by a week.
I attended a wine tasting and learned that the entire event had been bought out by the preeminent aviation family of Alaska. The 93-year-old grandmother treated her extended 25-member family to a free cruise, great-grandchildren and all, at a cost of only $250,000. Apparently, aviation in Alaska pays well.
The subject of airplanes inevitably came up. They mentioned that they still had their original aircraft, a 1928 Travelaire D4D, which Grandpa bought second-hand and brought up to Alaska during WWII. They couldn’t get any of their current pilots to fly it, which they deemed too dangerous to fly.
I mentioned that I happened to be one of ten living pilots rated to fly the plane and showed them videos of me flying my kids over the Malibu coast (click here for the link).
I believe an invitation is pending.
We closed out December at +3.26%. Some 11 out of 12 months were profitable in 2024. The final number for 2024 came in at a sky-high +75.26%. I went all cash on the December 20 options expiration, expecting the current trouble that we are in. I would be thrilled if we even came close to these numbers in 2025.
I started out the New Year with 80% cash and two small hedged positions. I went long 10% (TLT) and long 10% (TSLA). These expire in four days on the January 17 option expiration, when we flip back to a 100% cash position.
Some 63 of my 70 round trips, or 90%, were profitable in 2023. Some 74 of 94 trades have been profitable so far in 2024, and several of those losses were really break-even. That is a success rate of +78.72%.
Try beating that anywhere.
My Ten-Year View – A Reassessment
When have to substantially downsize our expectations of equity returns in view of the election outcome. My new American Golden Age, or the next Roaring Twenties is now looking at a headwind. The economy will completely stop decarbonizing. Technology innovation will slow. Trade wars will exact a high price. Inflation will return. The Dow Average will rise by 600% to 240,000 or more in the coming decade. The new America will be far more efficient and profitable than the old.
My Dow 240,000 target has been pushed back to 2035.
On Monday, January 13 at 11:00 AM EST, the Consumer Inflation Expectations are released.
On Tuesday, January 14 at 8:30 AM, the Producer Price Index
is published.
On Wednesday, January 15 at 8:30 AM, the Inflation Rate is printed.
On Thursday, January 16 at 8:30 AM, the Retail Sales are announced.
On Friday, January 17 at 8:30 AM EST, Housing Starts and Building Permits are published. At 2:00 PM, the Baker Hughes Rig Count is printed.
As for me, I was recently in Los Angeles visiting old friends, and I am reminded of one of the weirdest chapters of my life.
There were not a lot of jobs in the summer of 1971, but Thomas Noguchi, the LA County Coroner, was hiring. The famed USC student jobs board had delivered! Better, yet, the job included hours at night and free housing at the coroner's department.
I got the graveyard shift, from midnight to 8:00 AM. All I had to do was buy a black suit from Robert Halls, for $25.
Noguchi was known as the “coroner to the stars” having famously done the autopsies on Marilyn Monroe and Jane Mansfield. He did not disappoint.
For three months, whenever there was a death from unnatural causes, I was there to pick up the bodies. If there was a suicide, gangland shooting, or horrific car accident, I was your man.
Charles Manson had recently been arrested and I was tasked with digging up the victims. One, cowboy stuntman Shorty Shay, had his head cut off and neatly placed in between his ankles.
The first time I ever saw a full set of women’s underclothing, a girdle, and pantyhose, was when I excavated a desert roadside grave that the coyotes had dug up. She was pretty far gone.
Once, me and another driver were sent to pick up a teenage boy who had committed suicide in Beverly Hills. The father came out and asked us to take the mattress as well. I regretted that we were not allowed to do favors on city time. He then said, “Can you take it for $200”, then an astronomical sum.
A few minutes later, I found a hearse driving down the Santa Monica Freeway on the way to the dump with a double mattress expertly tied on the roof with Boy Scout knots with a giant blood spot in the middle.
Once, I was sent to a cheap motel where a drug deal gone wrong had produced several shootings. I found $10,000 in a brown paper bag under the bed. The other driver found another ten grand and a bag of drugs and kept them. He went to jail. I didn’t.
The worst pick-up of the summer was also the most disgusting and even made the old veterans sick. A 300-pound man had died of a heart attack and was not discovered for a month. We decided to each grab an arm or leg and all tug on the count of three. One, two, three, and all four limbs came off!
Eventually, I figured out that handling dead bodies could be hazardous to your health, so I asked for rubber gloves. I was fired.
Still, I ended up with some of the best summer job stories ever.
Good Luck and Good Trading,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
“When the Dow was down 3,600 points I felt like hugging our computers. The combination of man and machine is wonderful…Computers, math and game theory are the best decision makers there are,” said Bridgewater founder Ray Dalio.
Global Market Comments
January 10, 2025
Fiat Lux
Featured Trades:
(A CHEAP HEDGE FOR THIS MARKET)
The S&P 500 is now 3.2% of its all-time high at 6,100 and is showing definientia signs of rolling over.
So financial advisors, pension fund managers, and cautious individuals have been ringing me up asking what is the best way to hedge the heady 23% gain in 2024.
You can forget about buying the Volatility Index (VIX), (VXX). The huge contango, the discount front month futures contracts have too far month ones, almost guarantees that your hedge will be enormously expensive and expire worthless before it has the chance to do any good.
No, there’s a much better way to do this.
Buy deep out-of-the-money, long-dated S&P 500 (SPY) put options. You want to go deep out-of-the-money so your insurance policy is cheap.
You also want to go long-dated, so time decay doesn’t kill you and your option position lives long enough to do some good. By long-dated, I’m thinking five months out, like the June 20, 2025 option expiration date.
All of this logic points to the (SPY) June 2025 $530 puts today priced at $8.00, which as of today are 10% out-of-the-money.
Here is the beauty of this position. A put option rises in value in falling markets. But so does option-implied volatility, creating a leveraged hockey stick effect on the value of your put position. And deep out-of-the-money options always see implied volatilities rise much faster than near-money ones.
You don’t need the market to drop the full 10% to make enough profit in this position to offset losses elsewhere in your portfolio.
A much more likely 5% market correction would cause the value of the June 2025 $530 puts to jump from $8.00 to $14.00, a gain of 75%, as long as that drop happens soon. However, add in an expected pop in implied options volatility and the profit could be as much as 100%.
So how many June 2025 $250 puts should you buy?
Let’s say you have a $100,000 portfolio. Only two put option contracts would provide enough coverage for your entire exposure ($100,000/100 shares per contract/$530 (SPY) strike price) = 1.88 contracts rounded up to two. Two contracts of the June 2025 $530 puts will cost you $1,600 (2 X 100 shares per contract X $8.00).
In other words, $1,600 buys you an insurance policy on $100,000 portfolio exposure for six months. Sounds like a deal to me.
There are endless variations of this strategy. For example, it is a good idea to long-date your longs and short-date your shorts to maximize accelerated time decay in your favor.
In such a scenario you would stay long the six-month put option described above, but sell short one-month options against it, but with a strike 15% out of the money instead of 10%. I could go on and on. That cuts the cost of this hedge by two-thirds.
There are a few qualifications with such a simple hedge. Let’s say that you read the Diary of a Mad Hedge Fund Trader and have a highly concentrated portfolio focused on technology and financial stocks.
In such case, the tracking error between the (SPY) and your portfolio will be large (after all, that is the point), and you may not get all the downside protection you want.
On the other hand, what if we really get the 10% correction? What if the black swans suddenly land in flocks? In that case, the value of your June 2025 $530 puts soar to at least $29, and more likely $32 when you add in the expected effects of rocketing implied volatilities. The value of your hedge rises to $3,200.
Yes, you don’t get complete 1:1 coverage. But it’s better than going into such a route naked, with no downside protection at all.
Let’s say you’re a cheapskate and you want your insurance policy for free. Yes, this can be done.
There is another hedging strategy that is far easier to execute. Just take a long cruise around the world. That way, corrections will come and go and you might not even know about it, unless your butler brings you an online copy of the Wall Street Journal every morning, as mine does.
This is the hedging strategy most of you have pursued for the past nine years and it has worked really well. At least you end up with a nice tan and some pleasant photos.
As for the June 2025 $530 puts, they’re most likely end up expiring worthless, but you’ll sleep better at night. Such is the price of peace.
