Global Market Comments
October 10, 2022
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or EATING YOUR SEED CORN),
(SPY), (TLT), (PANW), BRKB), (JPM), (MS), (V),
(USO), (MU), (RIVN), (TWTR), (TSLA)
Posts
You know that 10% downside risk I talked about? In other words, you may have to eat a handful of your seed corn.
We may have to eat into some of that 10% this week. With the September Consumer Price Index out on Thursday, and the big bank earnings are out Friday, there is more than a little concern about the coming trading week.
That’s why all my remaining positions are structured to handle a 10% correction or more and still expire at their maximum profit point in nine trading days.
Even in the worst-case Armageddon scenario, which we are unlikely to get, the S&P 500 is likely to fall below 3,000, or 627.90 points or 17.25% from here.
That’s what you pay me for and that’s what you are getting.
I shot out of the gate with an impressive +3.25% gain so far in October. My 2022 year-to-date performance ballooned to +72.93%, a new high. The Dow Average is down -19.3% so far in 2022 or a gob-smacking -7,000 points. 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 +81.35%.
That brings my 14-year total return to +585.49%, some 3.03 times the S&P 500 (SPX) over the same period and a new all-time high. My average annualized return has ratcheted up to +45.62%, easily the highest in the industry.
It is the greatest outperformance on an index since Mad Hedge Fund Trader started 14 years ago.
I used last week’s extreme volatility to rearrange positions, adding longs in Morgan Stanley (MS), JP Morgan (JPM), and Visa (V). That takes me to 80% long, 20% short, and 0% cash. I wisely rolled down the strikes on my Tesla position from $230-$240 to $200-$210. I covered one short in the S&P 500 (SPY). All of my options positions expire in only nine trading days.
I know that you’re probably getting boatloads of advice the sell all your stocks now, sell your house, and head for those generous 5% short term interest rates, and 8% in junk. Even I went 100% cash….in December last year. The problem is that these other gurus are giving you advice that is only a year late with perfect 20/20 hindsight.
To bail now, you risk giving up on the 100% gains in years to come. If I’m wrong, you lose 10%, if I’m right, you get a double or more. Sounds like a pretty good bet to me.
People always want to know how I pick market bottoms, something I have been doing since the Dow Average was at a miniscule $753.
The lower the market is, the less aggressive the Fed is going to be
Every single input into the Consumer Price Index is now turning down sharply, especially rents and housing costs, meaning we can expect a blockbuster decline when the next report comes out on October 13
We now have two outsiders doing the Fed’s job for it, the British economy, which is clearly collapsing, and a strong US dollar that is rapidly shrinking the foreign revenues of our multinationals, like big tech.
Capitulation indicators, occasionally spotted here and there, are now coming in volleys, the Volatility Index at $35, the (VIX) curve inversion, the RSI below 30, the ten-year US Treasury yield hit 4.0% and then instantly backed off, the British pound plunged to $1.03, and we saw absolutely massive retail selling in September.
The froth is now out of all tech stocks.
All of this brings forward the last Fed hike in interest rates and the next bull market in stocks. If the last Fed rate hike is two months away on December 14, then the reasons to sell stocks are disappearing like the last sands in an hourglass.
In my mere half century in the market, every time the CPI starts to fall, stock market “V” bottoms and begins classic “rip your face off’ rallies as the shorts panic to cover. It happened in 1970, 1974, 1980, 1990, and 2009. It will happen again in 2022. The market will smell that inflation is done, the Fed is done, and volatility becomes a distant memory.
And I hate to be so obvious, but if you sell in May, what do you do in October? You buy with both hands. Just do it on the right day. That could get you a 10% to 20% move by yearend. The S&P 500 earnings multiple has collapsed by eight points in nine months and that is too far, too fast.
How do midterm years perform? October is the best month of the year followed by November. Of the entire 16-month presidential election cycle, the coming first quarter of 2023 is the best of the entire lot.
Nonfarm Payroll Falls Short at 263.000 in September. The headline unemployment rate matched a 2022 low at 3.5%. The long-term unemployment rate, the U-6 also matched this year’s low at 6.7%. The report keeps the Fed on its current interest raising schedule. Stocks, bonds, and gold sold off 500-points.
JOLTS Drops Sharply, from an expected 11.0 million to only 10.05 million. This is the job openings report from the Department of Labor. It’s one of the sharpest declines in history. The jobs market is finally starting to deteriorate, which is just what the Fed wanted. Factory Orders for August were unchanged.
OPEC+ Cuts Quotas by 2 million, and production by 1 million, in one of the largest reductions in history. It’s an effort to maintain oil prices at current prices in the face of falling demand from a global recession. The Arabs are not your friends. It’s also a slap in the face of the anti-oil posture, pro-climate posture of the Biden administration, which responded with a further release of 10 million barrels from the Strategic Petroleum Reserve. Energy stocks soar across the board. Don’t get caught standing when the music stops playing. Avoid (USO).
Why Did Russia Blow Up Their Own Pipeline? International analysts are puzzled by Putin’s latest hostile move. Is this a prelude to limited nuclear war in Ukraine? My view is that Putin expects to be deposed soon and wants to make it difficult for the next government to resume relations with Europe. Others argue that the true motivation is to enable Nordstream to file a $10 billion insurance claim. Good luck collecting on that one.
Advanced Micro Devices Bombs on weak PC sales and supply chain problems, taking the stock down 5% aftermarket. Profit margins were cut. The news could take the stock down to new lows, which didn’t really participate in this week’s monster rally. The rest of the tech sector sold off in sympathy.
Tesla Breaks Production Records in Q3, manufacturing 365,000 EVs and delivering 365,000, a record high. Sales prices have risen three times this year, while commodity costs have fallen dramatically, widening profit margins. This is the most volatile stock in the market, with one 52% correction so far this year, and another 23% correction in recent weeks. It’s the reason we just saw a “buy the rumor, sell the news” type correction that took us to the bottom of a three-month range.
Another factor is that now that big tech is rallying again, people are rotating out of Tesla, which held up well in Q3. Below here, long term Tesla bulls like my friend Ron Baron, Cathie Wood, and I start adding to big positions. With OPEC+ threatening a million barrel a day production cut, taking crude up 6%, oil alternative Tesla should be rising.
Elon Musk Pays Full Price for Twitter at $54.20 a share, completely caving on pending litigation. Wall Street consensus is that the company is worth $15 a share. It may be years before we learn what’s really going on here, leaving many scratching their heads, including me. Tesla (TSLA) plunged $15 on the news, killing off a nascent rally. The distraction of management time will be huge. Avoid (TWTR).
Rivian Raises 2025 Production Goal, from 20,000 to 25,000, after a better-than-expected 7,363 third quarter. Mass production is reaching the sweet spot for the next Tesla. The company is planning a $5 billion investment in non-union Georgia. Buy (RIVN) on dips, sell short puts and buy LEAPS.
Micron Technology to Invest $100 Billion in New York Plant. It’s all part of a retreat from China and paring war risk in Taiwan. Massive government subsidies from the Chips Act helped. Biden also expanded restrictions on the export of key semiconductor manufacturing equipment, America’s crown jewels. It means more expensive buy safer supplied chips for US industry. Buy (MU) on dips.
Hurricane Ian to Cost Insurers $63 Billion, and deaths, and the federal government may be on the hook for more. The storm double-dipped, cutting a wide swath across Florida and the Carolinas. Some 95% of the costs are carried by foreign insurers through the reinsurance market. There are too many billionaire mansions on the beach which are fully insured. This paves the way for major rate increases by insurance companies, which is why Warren Buffet loves the insurance business. Many thanks to the many foreign Mad Hedge subscribers who expressed sympathy over the storm losses.
My Ten-Year View
When we come out the other side of pandemic and the recession, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With oil in a sharp downtrend and technology hyper-accelerating, there will be no reason not to. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The America coming out the other side will be far more efficient and profitable than the old. Dow 240,000 here we come!
On Monday, October 10, no data of note is released.
On Tuesday, October 11 at 7:00 AM, the 6:00 AM, the NFIB Business Optimism Index for September is released.
On Wednesday, October 12 at 8:30 AM, Producer Price Index for September is published. At 11:00 AM, the FOMC minutes from the last Fed meeting is released.
On Thursday, October 13 at 8:30 AM, Weekly Jobless Claims are announced. We also get the blockbuster Consumer Price Index.
On Friday, October 14 at 8.30 AM, US Retail Sales for September is disclosed. At 2:00 the Baker Hughes Oil Rig Count is out.
As for me, with the 35th anniversary of the October 19, 1987 crash coming up, when shares dove 22.6% in one day, I thought I’d part with a few memories.
I was in Paris visiting Morgan Stanley’s top banking clients, who then were making a major splash in Japanese equity warrants, my particular area of expertise.
When we walked into our last appointment, I casually asked how the market was doing (Paris is six hours ahead of New York). We were told the Dow Average was down a record 300 points.
Stunned, I immediately asked for a private conference room so I could call the equity trading desk in New York to buy some stock.
A woman answered the phone, and when I said I wanted to buy, she burst into tears and threw the handset down on the floor. Redialing found all Transatlantic lines jammed.
I never bought my stock, nor found out who picked up the phone. I grabbed a taxi to Charles de Gaulle airport and flew my twin Cessna as fast as the turbocharged engines could take me back to London, breaking every known air traffic control rule.
By the time I got back, the Dow had closed down a staggering 512 points, taking the Dow average down to $1,738.74. Then I learned that George Soros asked us to bid on a $250 million blind portfolio of US stocks after the close. He said he had also solicited bids from Goldman Sachs, Merrill Lynch, JP Morgan, and Solomon Brothers, and would call us back if we won.
We bid 10% below the final closing prices for the lot. Ten minutes later he called us back and told us we won the auction. How much did the others bid? He told us that we were the only ones who bid at all!
Then you heard that great sucking sound. Oops!
What has never been disclosed to the public is that after the close, Morgan Stanley received a margin call from the exchange for $100 million, as volatility had gone through the roof, as did every firm on Wall Street.
We ordered JP Morgan to send the money from our account immediately. Then they lost it! After some harsh words at the top, it was found. That’s when I discovered the wonderful world of Fed wire numbers.
The next morning, the Dow continued its plunge, but after an hour managed a U-turn, and launched on a monster rally that lasted for the rest of the year. We made $75 million on that one trade from Soros.
It was the worst investment decision I have seen in the markets in 53 years, executed by its most brilliant player. Go figure. Maybe it was George’s risk control discipline kicking in?
At the end of the month, we then took a $75 million hit on our share of the British Petroleum privatization, because Prime Minister Margaret Thatcher refused to postpone the issue, believing that the banks had already made too much money.
That gave Morgan Stanley’s equity division a break-even P&L for the month of October 1987, the worst in market history. Even now, I refuse to gas up at a BP station on the very rare occasions I am driving an internal combustion engine.
Good Luck and Good Trading,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
October 3, 2022
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or BET THE RANCH TIME IS APPROACHING),
(SPY), (VIX), (UUP), (TSLA), (RIVN), (USO), (TLT), (FCX), (SPY), (NVDA), (BRKB)
September is notorious as the worst month of the year for the market. Boy, did it deliver, down a gut busting 9.7%!
As for the Mad Hedge Fund Trader, September was one of the best trading months of my 54-year career. But then I knew what was coming.
So did you.
With some of the greatest market volatility in market history, my September month-to-date performance exploded to exactly +9.72%.
I used last week’s extreme volatility and move to a Volatility Index (VIX) of $34 to add longs in Freeport McMoRan (FCX), S&P 500 (SPY), NVIDIA (NVDA), and Berkshire Hathaway (BRKB). I added shorts in the (SPY) and the (TLT). That takes me to 70% long, 20% short, and 10% cash. I am holding back my cash for any kind of rally to sell into.
My 2022 year-to-date performance ballooned to +69.68%, a new high. The Dow Average is down -23.44% 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 +80.08%.
That brings my 14-year total return to +582.24%, some 3.03 times the S&P 500 (SPX) over the same period and a new all-time high. My average annualized return has ratcheted up to +45.45%, easily the highest in the industry.
It was in May of 2020 when 34 of my clients became millionaires through buying TESLA at precisely the right time…
Well, the stars have aligned once again!!!!
In my TESLA free report, I list 10 reasons I’d tell my grandmother to mortgage her house and go all in.
Go to MADHEDGERADIO.com and download my “Tesla takes over the world” free report…that’s
madhedgeradio.com.
At the end of the month, the market was down six days in a row. That has only happened 20 times since 1950.
However, bet the ranch time is approaching. It’s time to start scaling in in a small way into your favorite long term names where the value is the greatest.
The Fed has taken away the free put that the stock market has enjoyed for the last 13 years. Now, it’s the bond market that has the free put. Hint: always own the market where the Fed is giving you free, unlimited downside protection.
People often ask what I do for a living. I always answer, “Talking people out of selling stocks at the bottom.” Here is the cycle I see repeating endlessly. They tell me they are long term investors. Then the markets take a sudden dive, like to (SPX) $3,300, a geopolitical event takes place, and the TV networks only run nonstop Armageddon gurus. They sell everything.
Then the market turns sharply, and they helplessly watch stocks soar. When they get frustrated enough, they buy, usually near a market top.
Sell low, buy high, they are perfect money destruction machines. And they wonder why they never make money in the stock market!
If any of this sounds familiar you have a problem and need to read more Mad Hedge newsletters. The people who ignore me I never hear from again. Those who follow me stick with me for decades.
Don’t make the mistake here of only looking at real GDP growth which, in recessions, is always negative. Nominal GDP is growing like a bat out of hell, 12% in 2021 and 8% in 2022. That’s 20% in two years, nothing to be sneezed at.
The problem is that all economic data has been rendered useless by the pandemic, even for legitimate and accomplished Wall Street analysts. The US economy was put through a massive restructuring practically overnight, the long-term consequences of which nobody will understand for years. Typical is the recently released Consumer Price Index, which said that real estate prices are rocketing, when in fact they are crashing.
A lot of people have asked me about the comments from my old friend, hedge fund legend Paul Tudor Jones, that the Dow Average would show a zero return for the next decade.
For Paul to be right, technological innovation would have to completely cease for the next decade. Sitting here in the middle of Silicon Valley, I can tell you that is absolutely not happening. In fact, I’m seeing the opposite. Innovation is accelerating at an exponential rate. For goodness sakes, Apple just brought out a satellite phone with its iPhone 14 pro for a $100 upgrade!
Remember, Paul got famous, and rich, from the trades he did 40 years ago with me, not because of anything he did recently. Paul has in fact been bearish for at least five years.
Still, we have a long way to go on earnings multiples. The trailing S&P 500 market multiple is now at 19. The historic low is at 15. Current earnings are $245 per (SPX) share. The 3,000 target the bears are shouting from the rooftops assumes that a severe recession takes earnings down to $200 a share ($3,000/$200 = 15X).
I don’t think earnings will get that bad. Big chunks of the economy are still growing nicely. Companies are commanding premium prices for practically everything. There is no unemployment because the jobs market is booming.
That suggests to me a final low in this market of $3,000-$3,300. That means you can buy 15%-20% deep in-the-money vertical bull call spreads RIGHT HERE and make a killing, as Mad Hedge has done all year.
Let me plant a thought in your mind.
After easing for too long, then tightening for too long, what does the Fed do next? It eases for too long….again. You definitely want to be long stocks when that happens, which will probably start some time next year.
Let me give you one more data point. The (SPY) has been down 7% or more in September only seven times since 1950. In six of the Octobers that followed, the market was up 8% or more.
Sounds like it’s time to bet the ranch to me.
Capitulation Indicators are Starting to Flash. Cash levels at mutual funds are at all-time highs. The Bank of America Investors Survey shows the high number of managers expecting a recession since the 2020 pandemic low, the last great buying opportunity. Commercial hedgers are showing the largest short positions since 2020. And of course, my old favorite, the Volatility Index (VIX) hit $34.00 on Tuesday. The risks of NOT being invested are rising.
Bank of England Moves to Support a Crashing Pound (FXB), by flipping from a seller to a buyer in the long-dated bond market, thus dropping interest rates. The move is designed to offset the new Truss government’s plan to cut taxes and boost deficit spending. The BOE also indicated that interest rate hikes are coming. The bond vigilantes are back.
Here’s the Next Financial Crisis, massive unrealized losses in the bond market. The (TLT) alone has lost 43% in 2 ½ years. Apply that to a global $150 trillion bond market and it adds up to a lot of money. Anybody who used leverage is now gone. How many investors without swimsuits will be discovered when the tide goes out?
Will the Strong Dollar (UUP) Do the Fed’s Work, forestalling a 75-basis point rate rise? It will if the buck continues to appreciate at the current rate, up a record five cents against the British pound, taking it to a record low of $1.03. Such is the deflationary impact of weak foreign currencies, which are seriously eating into US multination earnings.
Weekly Jobless Claims Hit Five-Month Low at 195,000, far below expectations. If the Fed is waiting for the job market to roll over before it quits raising interest rates, it could be a long wait.
EV Sales to Hit New All-Time High in 2022, to 13% of global new vehicle sales, up from 9% last year. The IEA expects this figure to reach 50% by 2030. That works out to 6.6 million EVs in 2021, 9.5 million in 2022, and 36 million by 2030. Buy (TSLA), the world’s largest EV seller, and (RIVN), the fastest grower in percentage terms, on dips.
EVs Take 25% of China New Vehicle Sales, and Tesla’s Shanghai factory is a major participant. Tesla just double production there. Some 403,000 EVs were sold in China in May alone. China is also ramping up its own EV production, up 183% YOY. China is much more dependent on imported oil than other large nations, most of which goes to transportation. Global EV production is expected to soar from 8 to 60 million vehicles in five years and Tesla is the overwhelming leader. Buy (TSLA) on dips again.
Oil (USO) Hits New 2022 Low at $78 a Barrel, cheaper than pre–Ukraine War prices, thanks to exploding recession fears. Is Jay Powell the most effective weapon against Russia with his most rapid interest rate rises in history?
Consumer Sentiment Hits Record Low at 59.1 according to the University of Michigan. That’s worse than the pandemic low and the 2009 Great Recession low. It could be that politics has ruined this data source making everyone permanently negative about the future. Inflation at a 40-year high isn’t helping either, nor is the prospect of nuclear war.
Case Shiller Delivers a Shocking Fall, down from 18.7% to 16.1% in June. The other shoe is falling with the sharpest drop in this data series in history. Tampa was up (31.8%), Miami (31.7%), and Dallas (24.7%). Many more declines to come.
30-Year Fixed Rate Mortgage Hits 7.08%, up from 2.75% a year ago. You can kiss those retirement dreams goodbye. It has been the sharpest rise in mortgage rates in history. Real estate has just become an all-cash market. That screeching juddering sound you hear is the existing home market shutting down.
Pending Home Sales Drop, down 2.0% in August on a signed contract basis. Sales are down for the third month in a row and are off 24% YOY. Only the west gained. Mortgage interest rates are now at 20-year highs. Buyers catching recession fears are breaking contracts and walking away from deposits.
Stock Crash Wipes Out $9 Trillion in Personal Wealth, which is the fall in equity holdings and mutual funds as of the end of June. The drop has been from $42 to $33 trillion. The bad news: it’s still going down, putting a dent in consumer spending.
My Ten-Year View
When we come out the other side of pandemic and the recession, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With oil in a sharp downtrend and technology hyper-accelerating, there will be no reason not to. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The America coming out the other side will be far more efficient and profitable than the old. Dow 240,000 here we come!
On Monday, October 3 at 8:30 AM, the ISM Manufacturing PMI for September is released.
On Tuesday, October 4 at 7:00 AM, the JOLTS Report for private job openings for September is out.
On Wednesday, October 5 at 7:00 AM, ADP Private Employment Report for September is published.
On Thursday, October 6 at 8:30 AM, Weekly Jobless Claims are announced.
On Friday, October at 8.30 AM, the Nonfarm Payroll Report for September is disclosed. At 2:00 PM, the Baker Hughes Oil Rig Count is out.
As for me, while working for The Economist magazine in London, I was invited to interview some pretty amazing people: Margaret Thatcher, Ronald Reagan, Yasir Arafat, Zhou Enlai.
But one stands out as an all time favorite.
In 1982, I was working out of the magazine’s New York Bureau off on Third Avenue and 47th Street, just seven blocks from my home on Sutton Place, when a surprise call came in from the editor in London, Andrew Knight. International calls were very expensive then, so it had to be important.
Did anyone in the company happen to have a US top secret clearance?
I answer that it just so happened that I did, a holdover from my days at the the Nuclear Test Site in Nevada. “What’s the deal,” I asked?
A person they had been pursuing for decades had just retired and finally agreed to an interview, but only with someone who had clearance. Who was it? He couldn’t say now. I was ordered to fly to Los Angeles and await further instructions.
Intrigued, I boarded the next flight to LA wondering what this was all about. What I remember about that flight is that sitting next to me in first class was the Hollywood director Oliver Stone, a Vietnam veteran who made the movie Platoon. When Stone learned I was from The Economist, he spent the entire six hours grilling me on every conspiracy theory under the sun, which I shot down one right after the other.
Once in LA, I checked into my favorite haunt, the Beverly Hills Hotel, requesting the suite that Marilyn Monroe used to live in. The call came in the middle of the night. Rent a four-wheel drive asap and head out to a remote ranch in the mountains 20 miles east of Santa Barbara. And who was I interviewing?
Kelly Johnson from Lockheed Aircraft (LMT).
Suddenly, everything became clear.
Kelly Johnson was a legend in the aviation community. He grew up on a farm in Michigan and obtained one of the first masters degrees in Aeronautical Engineering in 1933 at the University of Michigan.
He cold called Lockheed Aircraft in Los Angeles begging for a job, then on the verge of bankruptcy in the depths of the Great Depression. Lockheed hired him for $80 a month. What was one of his early projects? Assisting Amelia Earhart with customization of her Lockheed Electra for her coming around-the-world trip, from which she never returned.
Impressed with his performance, Lockheed assigned him to the company’s most secret project, the twin engine P-38 Lightning, the first American fighter to top 400 miles per hour. With counter rotating props, the plane was so advanced that it killed a quarter of the pilots who trained on it. But it allowed the US do dominate the air war in the Pacific early on.
Kelley’s next big job was the Lockheed Constellation (the “Connie” to us veterans), the plane that entered civil aviation after WWII. It was the first pressurized civilian plane that could fly over the weather and carried an astonishing 44 passengers. Howard Hughes bought 50 just off of the plans to found Trans World Airlines. Every airline eventually had to fly Connie’s or go out of business.
The Cold War was a golden age for Lockheed. Johnson created the famed “Skunkworks” at Edwards Air Force base in the Mojave Desert where America’s most secret aircraft were developed. He launched the C-130 Hercules, which I flew in Desert Storm, the F-104 Starfighter, and the high altitude U-2 spy plane.
The highlight of his career was the SR-71 Blackbird spy plane where every known technology was pushed to the limit. It could fly at Mach 3.0 at 100,000 feet. The Russians hated it because they couldn’t shoot it down. It was eventually put out of business by low earth satellites. The closest I ever got to the SR-71 was the National Air & Space Museum in Washington DC at Dulles airport where I spent an hour grilling a retired Blackbird pilot.
Johnson greeted me warmly and complimented me on my ability to find the place. I replied, “I’m an Eagle Scout.” He didn’t mind chatting as long as I accompanied him on his morning chores. No problem. We moved a herd of cattle from one field to another, milked a few cows, and fertilized the vegetables.
When I confessed to growing up on a ranch, he really opened up. It didn’t hurt that I was also an engineer and a scientist, so we spoke the same language. He proudly showed off his barn, probably the most technologically advanced one ever built. It looked like a Lockheed R&D lab with every imageable power tool. Clearly Kelley took work home on weekends.
Johnson recited one amazing story after the other. In 1943, the British had managed to construct two Whittle jet engines and asked Kelly to build the first jet fighter. The country that could build jet fighters first would win the war. It was the world’s most valuable machine.
Johnson clamped the engine down to a test bench and fired it up surrounded by fascinated engineers. The engine immediately sucked in a lab coat and blew up. Johnson got on the phone to England and said “Send the other one.”
The Royal Air Force placed their sole remaining jet engine on a plane which flew directly to Burbank airport. It arrived on a Sunday, so the scientist charged with the delivery took the day off and rode a taxi into Hollywood to sightsee.
There, the Los Angeles police arrested him for jaywalking. In the middle of WWII with no passport, no ID, a foreign accent, and no uniform, they hauled him straight off to jail.
It took two days for Lockheed to find him. Johnson eventually attached the jet engine to a P-51 Mustang, creating the P-80, and eventually the F-80 Shooting Star (Lockheed always uses astronomical names). Only four made it to England before the war ended. They were only allowed to fly over England because the Allies were afraid the Germans would shoot one down and gain the technology.
But the Germans did have one thing on their side. The Los Angeles Police Department delayed the development of America’s first jet fighter by two days.
Germany did eventually build 1,000 Messerschmitt Me 262 jet fighters, but too late. Over half were destroyed on the ground and the engines, made of steel and not the necessary titanium, only had a ten hour life.
That evening, I enjoyed a fabulous steak dinner from a freshly slaughtered steer before I made my way home. I even helped Kelly slaughter the animal, just like I used to do on our ranch in Montana. Steaks are always better when the meat is fresh and we picked the best cuts. I went back to the hotel and wrote a story for the ages.
It was never published.
One of the preconditions of the interview was to obtain prior clearance from the National Security Agency. They were horrified with what Johnson had told me. He had gotten so old he couldn’t remember what was declassified and what was still secret.
The NSC already knew me well from our previous encounters, but MI-6 showed up at The Economist office in London and seized all papers related to the interview. That certainly amused my editor.
Johnson died at age 80 in 1990. As for me, it was just another day in my unbelievable life.
Stay healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
SR-71 Blackbird
My Former Employer
Global Market Comments
July 20, 2022
Fiat Lux
Featured Trade:
(I HAVE AN OPENING FOR THE MAD HEDGE FUND TRADER CONCIERGE SERVICE),
(SOME SAGE ADVICE ON ASSET ALLOCATION),
(TESTIMONIAL)
Global Market Comments
July 19, 2022
Fiat Lux
Featured Trade:
(TESTIMONIAL),
(MY NEW ECONOMIC INDICATOR)
Global Market Comments
July 18, 2022
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or HERE COMES
THE FULL EMPLOYMENT RECESSION),
(TSLA), (SPY), (TLT), (NVDA), (MSFT), (BRKB), (FCX)
I am writing this from the balcony of my chalet high in Zermatt, Switzerland watching the sun set on the last bit of snow at the Matterhorn summit. There is a roaring Alpine River 100 feet below me as the melting of the glaciers accelerates. Mountain larks are diving and looping through the trees.
I have just had my third top-up on the schnapps and the cheese plate in front of me is to die for.
Life is good!
I have something else to celebrate as well. The performance of the Mad Hedge Fund Trader is off the charts and the best in its 14-year history. It seems the worse market conditions get, the better our numbers. We are up 3.81% so far in July, 54.66% year-to-date, and are averaging 45.01% a year. It doesn’t get any better than that.
Or maybe it does.
Where is the recession? If you work in the imploding Bitcoin universe or the suffering mortgage origination business, you are definitely in a recession. But if you work in any other industry, you are not.
Sure, things are slowing down in interest rate-related sectors, like new home construction. But that does not make a recession.
If we are in a recession, we are in a full employment one, with the headline Unemployment Rate at a near record low of 3.6%. No one has ever seen one of those before. And if no one is losing their job in this recession, who cares?
In the meantime, the Fed is slowly and unobtrusively winning its war against inflation. Soaring interest rates have caused the housing market to grind to a halt. Used car prices have rolled over and repossessions are climbing.
It may take a couple of months to see this in the official inflation numbers, but the next Fed shocker could be a hint that the pace of interest rate rises may be slowed or stopped. Stocks would go through the roof on this because the falling inflation trade will have begun.
By the time you realize that we are in a recession, it will be over, and the next decade-long bull market will have begun.
This is one of those rare times when the long-term investor is actually rewarded versus his shorter-term trading colleagues. If you bought stocks during every postwar recession over the last 80 years, stocks were ALWAYS up on a three-year view, and they always DOUBLE on a five-year view.
That doesn’t sound bad to me.
The rollover in the price of oil is a crucial part of this view. Of course, it is recession fears that are driving the price of crude down, now off 29% from its wartime $132 high. That cuts the price of gasoline, the major inflation driver this year. Falling inflation means fewer interest rate rises, making stocks more valuable.
You see, it’s all connected.
And before I sign off, I want to update you on the NATO piece I sent out on Friday.
I just spoke with the chairman of the British Chiefs of Staff Committee, their Joint Chiefs of Staff, and the one organization with the best read on Russian losses in the Ukraine War so far.
Russia has lost an incredible 2,000 tanks out of their initial 2,800 operational ones, and a further 4,000 armored vehicles. Russia has lost one-third of its army since February through deaths or injury, some 50,000 men.
Russia is now unable to defend itself from an attack from the West. Putin is assuming that we are nicer people than we actually are, which is always a fatal mistake.
I can’t tell you why I know this, only that I do. All I can say is that the Internet, advanced hardware, encryption, and artificial intelligence are amazing things.
London’s Heathrow Airport asks airlines to cap passengers at 100,000 a day, meaning many will cancel their least profitable flights. I was there yesterday, and it was a complete madhouse on the verge of a riot. You need to arrive three hours early to have any chance of making your flight. It’s all the result of three years of pent-up travel demand unleashing over a single problem. It makes America’s problems pale in comparison.
Musk Cancels Twitter Deal, saying there was no “there” there. Much of the business was bogus. Sure, it means five years of litigation, but why should the richest man in the world care. It’s good news for Tesla because it means less diversion of management time, although the news took the stock down $50. Buy (TSLA) on dips and avoid (TWTR) like Covid.
Crypto Hedge Fund Founders Go Missing, as the bankruptcy proceedings of 3AC go missing, leaving $12 billion in losses in their wake. It could be a death blow to emerging crypto infrastructure. Avoid crypto at all costs. There are too many better fish to fry, with the best quality stocks selling at big discounts.
Home Purchase Cancellations reach 15%, the highest since the pandemic began. Many deals are falling out of escrow because of failed financing at decade-high interest rates. Price cuts of 10% across the board are happening on the homes I have been watching. 30-year fixed rate mortgages at 5.75% are proving a major impediment. Homebuilders are also seeing shocking levels of cancellations.
Is There Now a Chip Glut? There is, says TechiInsight, a research firm. Extreme shortages have flipped to oversupply as a new Covid wave, and the Ukraine War cut back spending on new cell phones and PCs. The Crypto blow-up and contagion have completely eliminated high-end chip demand from new miners. That’s why the Philadelphia Semiconductor Index (SOX) is off 35% this year. Micron Technology has already cut back production of low-end chips by 20%. If a selloff ensues, buy (NVDA), (MU), and (AMD). They will lead any recovery.
The Euro Breaks Parity Against the US Dollar, a decades low, and the Swiss franc may be next. Soaring US interest rates are the reason, while recessionary Europe is still keeping theirs at negative numbers. The dollar will remain strong for another year, or as long as the US is raising and the continent is frozen.
CPI Comes in at 9.1%, much hotter than expected, forcing the Fed to maintain an aggressive rate hike posture. That’s up an eye-popping 1.3% from May. It’s not what the Biden administration wanted to hear. A big part of that was oil price rises which have already gone away. Rents were up 0.8%, the most since 1986, and pressure from labor costs is rising. It puts on the table new lows for the Dow Average, but not by much.
Bonds Invert Big Time, posting the biggest 2/10 spread in 22 years, strongly suggesting a recession. That means short term interest rates are higher than long term ones, or the 2-year paper is yielding 20 basis points more than ten-year bonds. Oil is also holding its crushing $8.00 loss. Bonds are already suffering their worst year since 1865 when it had to shoulder the enormous cost of winning the civil war.
Doctor Copper Says the Recession is Here, dropping by 39% since February. Covid caused a slowdown in demand from China, the world’s largest consumer. It looks like we may get another chance to buy Freeport McMoRan at bargain basement prices.
Weekly Jobless Claims jump to 244,000, the highest since Thanksgiving week in November. New York led, with Google and Microsoft adding to the numbers. Let the mini-recession begin!
JP Morgan (JPM) Earnings Dive 28%. CEO Jamie Diamond says that growth, spending, and jobs remain good, but Covid, inflation, rising interest rates, and the geopolitical outlook are a drag. This is an opportunity to buy the best-run bank in America at a deep discount.
Morgan Stanley (MS) takes a hit, with Q2 earnings down 11.3% YOY at $13.13 billion. Return on equity dropped from 13.8% to 10.1%. Equity and bond trading were strong while investment banking in the falling market was weak. Money continues to pour into asset management, which I helped found 40 years ago. Buy (MS) on the dip.
My Ten-Year View
When we come out the other side of pandemic and the recession, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With oil 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 will be far more efficient and profitable than the old. Dow 240,000 here we come!
With some of the greatest market volatility in market history, my July month-to-date performance exploded to +3.81%.
My 2022 year-to-date performance ballooned to 54.66%, a new high. The Dow Average is down -18.91% so far in 2022. It is the greatest outperformance on an index since Mad Hedge Fund Trader started 14 years ago. My trailing one-year return maintains a sky-high 74.56%.
That brings my 14-year total return to 567.22%, some 2.70 times the S&P 500 (SPX) over the same period and a new all-time high. My average annualized return has ratcheted up to an eye-popping 45.01%, easily the highest in the industry.
With the July options expiration having gone spectacularly in our favor, we are now 80% in cash. The remaining 20% is in a Tesla (TSLA) August $500-$900 short strangle. If you don’t know what that is, please read your trade alerts.
We need to keep an eye on the number of US Coronavirus cases at 89.6 million, up 500,000 in a week and deaths topping 1,023,000 and have only increased by 2,000 in the past week. You can find the data here.
On Monday, July 18 at 8:30 AM, NAHB Housing Market Index for July is released.
On Tuesday, July 19 at 7:00 AM, the US Housing Starts and Building Permits for June are out.
On Wednesday, July 20 at 7:00 AM, Existing Home Sales for June are published.
On Thursday, July 21 at 8:30 AM, Weekly Jobless Claims are announced.
On Friday, July 22 at 7:00 AM, the S&P Global Flash PMI for July is disclosed. At 2:00, the Baker Hughes Oil Rig Count is out.
As for me, I am constantly asked why I do what I do, what motivates me, and why I keep taking such insane risks.
I have thought about this topic quite a lot over the years while piloting planes on long flights, crossing oceans, and sitting on mountain tops.
From a very early age, I have had an immense sense of curiosity, wanted to know what was over the next hill, and what the next country and people were like.
When I was five, my parents gave me an old fashioned alarm clock. I smashed it on the floor to see how it worked and spent a month putting it back together.
When I was eight, the local public library held a contest to see who could read the most books over the summer vacation. By the time September rolled along, the number three contestant had read 5, number two had read 10, and I had finished 365. I read the entire travel section of the library.
I vowed to visit every one of those countries and I almost did. So far, I have been to 125, and they keep inventing new ones all the time.
It helped a lot that I won the lottery with my parents. Dad was a tough Marine Corps sergeant who never withdrew from a fight and endlessly tinkered with every kind of machine. He was a heavyweight boxer with hands the size of hams. Dad went to the University of Southern California on the GI Bill to study business.
When I was 15, I bought a green 1957 Volkswagen bug for $200 that consumed a quart of oil every 20 miles. I tore the engine apart trying to fix it but couldn’t put it back together. So, I brought in dad. He got about half the engine done and hit a wall.
So, we piled all the parts into a cardboard box and took them down to a local garage run by a man who had been a mechanic for the German Army during the war, was taken prisoner, and opted to stay in the US when WWII ended. Even he ended up with four leftover parts that he couldn’t quite place, but the car ran.
Mom was brilliant, earned a 4.0 average in high school and a full scholarship to USC. They met in 1949 on the fraternity steps when she was selling tickets to a dance. She eventually worked her way up to a senior level at the CIA as a Russian translator of technical journals. I was called often to explain what these were about. For years, that gave me access to one of the CIA’s primary sources. When the Cold War ended, the first place my parents went to was Moscow. Their marriage lasted 52 years.
I was very fortunate that some of the world’s greatest organizations accepted me as a member. The Boy Scouts taught me self-sufficiency and survival skills. At the karate dojo in Tokyo, I learned self-confidence, utter fearlessness, and the ability to defend myself.
The Economist magazine is where I learned how to write and perform deep economic research. That got me into the White House where I observed politics and how governments worked. The US Marine Corps taught me how to fly, leadership, and the value of courage.
Morgan Stanley instructed me on the art of making money in the stock market, the concept of risk versus reward, and how to manage a division of a Fortune 500 company.
Being such a risk taker, it was inevitable that I ended up in the stock market. A math degree from UCLA gave me an edge over all my competitors when it counted. This was back when the Black-Scholes option pricing model was a closely guarded secret and was understood by only a handful of traders.
In the early 80s, I took a tip on a technology stock from a broker at Merrill Lynch and lost my wife’s entire salary for a year on a single options trade. I’ll never make that mistake again. I spent a month sleeping on the sofa.
I figured out that if you do a lot of research and preparation, big risks are worth taking and usually pay off.
I have met a lot of enormously successful, famous, and wealthy people over the years. They are incredibly hard workers, inveterate networkers, and opportunists. But they will all agree on one thing, that luck has played a major part in their success. Being in the right place at the right time is crucial. So is recognizing opportunity when it is staring you in the face, grabbing it by both lapels, and shaking it for all it’s worth.
If I hadn’t worked my ass off in college and graduated Magna Cum Laude, I never would have gotten into Mensa Japan. If I hadn’t joined Mensa, I never would have delivered a lecture in Tokyo on the psychoactive effects of tetrahydrocannabinol (THC), which the Tokyo police department and the famous Australian journalist Murray Sayle found immensely interesting.
Without Murray, I never would have made it into the Foreign Correspondents Club of Japan and journalism. If a 50-caliber bullet had veered an inch to the right, I never would have made it out of Cambodia.
You know the rest of the story.
I am an incredibly competitive person. Maybe it’s the result of being the oldest of seven children. Maybe it’s because I spent a lifetime around highly competitive people. That also means being the funniest person in the room, something of immense value in the fonts of all humor, the Marine Corps, The Economist, and a Morgan Stanley trading floor. If you can’t laugh in the face of enormous challenges, you haven’t a chance.
I have also learned that retirement means death and has befallen many dear old friends. It is the true grim reaper. Most people slow down when they hit my age. I am speeding up. I just have to climb one more mountain, fly one more airplane, write one more story, and send out one more trade alert before time runs out.
So, you’re going to have to pry my cold dead fingers off this keyboard before I give up on the Mad Hedge Fund Trader.
I hope this helps.
Stay healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
July 13, 2022
Fiat Lux
Featured Trade:
(JULY 22 ZERMATT, SWITZERLAND STRATEGY SEMINAR),
(HOW TO HANDLE THE FRIDAY, JULY 15 OPTIONS EXPIRATION),
(TSLA), (NVDA), (MSFT), (BRKB), (TLT)
Followers of the Mad Hedge Fund Trader alert service have the good fortune to own deep in-the-money options positions that expire on Friday, October 15, and I just want to explain to the newbies how to best maximize their profits.
These involve the:
(MSFT) 7/$200-$210 call spread 10.00%
(NVDA) 7/$120-$130 call spread 10.00%
(TSLA) 7/$500-$550 call spread 10.00%
(BRKB) 7/$220-$230 call spread 10.00%
(TLT) 7/$119-$122 put spread 10.00%
Provided that we don’t have another 2,000-point move down in the market this week, these positions should expire at their maximum profit points.
So far, so good.
I’ll do the math for you on our deepest in-the-money position, the Tesla (TSLA) July 2022 $500-$550 vertical bull call spread, which I almost certainly will run into expiration. Your profit can be calculated as follows:
Profit: $50.00 expiration value - $42.00 cost = $8.00 net profit
(2 contracts X 100 contracts per option X $8.00 profit per option)
= $1,600 or 19.05% in 21 trading days.
Many of you have already emailed me asking what to do with these winning positions.
The answer is very simple. You take your left hand, grab your right wrist, pull it behind your neck, and pat yourself on the back for a job well done.
You don’t have to do anything.
Your broker (are they still called that?) will automatically use your long position to cover your short position, canceling out the total holdings.
The entire profit will be credited to your account on Monday morning, July 18 and the margin freed up.
Some firms charge you a modest $10 or $15 fee for performing this service.
If you don’t see the cash show up in your account on Monday, get on the blower immediately and find it.
Although the expiration process is now supposed to be fully automated, occasionally machines do make mistakes. Better to sort out any confusion before losses ensue.
If you want to wimp out and close the position before the expiration, it may be expensive to do so. You can probably unload them pennies below their maximum expiration value.
Keep in mind that the liquidity in the options market understandably disappears, and the spreads substantially widen when a security has only hours, or minutes until expiration on Friday July 15. So, if you plan to exit, do so well before the final expiration at the Friday market close.
This is known in the trade as the “expiration risk.”
One way or the other, I’m sure you’ll do OK, as long as I am looking over your shoulder, as I will be, always. Think of me as your trading guardian angel.
I am going to hang back and wait for good entry points before jumping back in. It’s all about keeping that “Buy low, sell high” thing going.
I’m looking to cherry-pick my new positions going into the next month end.
Take your winnings and go out and buy yourself a well-earned dinner. Just make sure it’s take-out. I want you to stick around.
Well done, and on to the next trade.
You Can’t Do Enough Research