Global Market Comments
April 11, 2023
Fiat Lux
Featured Trade:
(HOW TO HANDLE THE FRIDAY, APRIL 21 OPTIONS EXPIRATION),
(TESLA), (BAC), (C), (JPM), (IBKR), (MS), (BRK/B), (FCX), (TLT)
CLICK HERE to download today's position sheet.
Posts
Followers of the Mad Hedge Fund Trader alert service have the good fortune to own TEN deep in-the-money options positions that expire on Friday, April 21, and I just want to explain to the newbies how to best maximize their profits.
These involve:
Risk On
(TSLA) 4/$130-$140 call spread 20.00%
(BAC) 4/$20-$23 call spread 10.00%
(C) 4/$30-$35 call spread 10.00%
(JPM) 4/$105-$115 call spread 10.00%
(IBKR) 4/$60-$65 call spread 10.00%
(MS) 4/$65-$70 call spread 10.00%
(BRK/B) 4/$260-$270 call spread. 10.00%
(FCX) 4/$30-$33 call spread 10.00%
(TLT) 4/$96-$99 call spread 10.00%
Total Aggregate Position 100.00%
Provided that we don’t have another 2,000-point move up or down in the stock market in the next eight trading days, 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 April $130-$140 vertical bull call debit spread. Since we are a massive $45.00, or 32% in-the-money with only eight days left until expiration I almost certainly will run into the April 21 option expiration.
Your profit can be calculated as follows:
Profit: $10.00 expiration value - $8.80 cost = $1.20 net profit
(12 contracts X 100 contracts per option X $1.20 profit per option)
= $1,440 or 13.64%.
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 in your debit spreads, canceling out the total holdings.
The entire profit will be credited to your account on Monday morning April 24 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 phone 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. You will notice that the highest volatility stocks, like Tesla, will maintain premium all the way into expiration.
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, April 21. 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.
The Options Expiration is Coming
Global Market Comments
April 3, 2023
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or GOLDILOCKS IS BACK!)
(TSLA), (BAC), (C), (JPM), (IBKR), MS), (BRK/B), (FCX), (TLT)
CLICK HERE to download today's position sheet.
After a three-week vacation, sanity has returned.
In a mere 15 trading days, the stock market has leaped from “the end of the financial system as we know it” to “happy days are here again.”
It was a week that brought us a major recovery of domestic cyclicals, with banks and commodities leading and technology bringing up the rear. Market breadth is broadening and winners are outnumbering losers. The Volatility Index ($VIX) completed a round trip, from $19 to $31, then back down again to $19.
Trading volumes of banks have plummeted 90% from their peaks. The Russell 2000 was the top gaining index of the week, which is 25% made up of small financials.
I’ve always been a numbers guy and to me, hard data rules all. Earnings that were widely expected to be terrible because of the coming recession are coming in better than expected. The actual fact is that the US economy is growing at a 2.5% annualized rate, slightly below the long-term average of 3%.
No recession here!
Last week, we learned the harsh reality of the Silicon Bank failure in congressional hearings. Once venture capitalist Peter Theil started the rumors, the bad news spread like wildfire. That day, some $40 billion left the bank, withdrawn instantly through the bank’s convenient cell phone app. The next day, $100 billion was scheduled for withdrawal….which the bank didn’t have.
There was no pleading from Mr. Potter to leave your cash in the bank to help the broader community. The money left with the speed of light. If Janet Yellen had not stepped in to guarantee deposits, every small bank in the country would have been cleaned out of cash the following week.
It makes one worry about what other manifestations of modern technology our financial system is unable to cope with. AI maybe, the development of which Elon Musk called for a halt to ensure our own survival. Maybe that was AI at work at (SVB)?
I am happy to say that Mad Hedge clocked the best month in two years, up +20.85%. Every time I do this, people ask me how. Here are a few key points that were screaming at me on meltdown day on Monday, March 13, when I loaded the boat with bank stocks, call spreads, and LEAPS.
1) Trading volume in banks rose tenfold
2) All banks were being dumped indiscriminately, with the best dropping as fast as the worst
3) Some 90% of stocks were down on the day. It was a classic one-way day.
4) Key technical levels in the S&P 500 held at $3,750
5) The Volatility Index spiked to $31
6) The usual merchants of doom appeared on TV and predicted the end of the world so they could buy stocks cheaper
When the sun, moon, and planets align, I strike. The market doesn’t ask twice.
Most importantly, having spent seven days a week for 55 years studying the fundamentals and the market, I knew they in no way justified the magnitude of the crash we were getting. What the market was really giving us was a gift, the best quality stocks at huge discounts. Whenever the market offers you a gift, you take it.
I did with both hands.
I went into this crash with 80% cash, a great position of strength. That comes from not overtrading, chasing marginal trades, or taking on positions because there is nothing else to do, all beginner mistakes and own goals. I live by the philosophy that a dollar at a market top is worth $10 at a market bottom. That was certainly the case this time.
It also helped that I know the Treasury Secretary Janet Yellen well, as I was once one of her students at UC Berkeley. I was in regular contact with her office the weekend Silicon Valley crash happened, and I knew she would do the right thing.
She did.
Every time we get one of these events, Mad Hedge followers make about 20%. This time was no different.
March closed out at +20.85%. My 2023 year-to-date performance is now at an incredible +46.62%. The S&P 500 (SPY) is up a miniscule +7.73% so far in 2023. My trailing one-year return maintains a sky-high +104.40% versus -22.75% for the S&P 500.
That brings my 15-year total return to +643.81%, some 2.80 times the S&P 500 (SPY) over the same period. My average annualized return has recovered to +48.29%, another new high.
I executed only three trades last week, taking profits on my bond short (TLT) and rolling it into a new long bond position, and buying Freeport McMoRan (FCX).
Silicon Valley Bank Sells to First Citizens Bancshares (FCNCA), whose shares rocketed by an incredible 72% on the news. First Citizens is buying about $72 billion worth of SVB assets from the FDIC at a discount of $16.5 billion. The FDIC gave (FCNCA) an unheard-of $70 billion line of credit to do the deal. (SVB) management sold $84 million worth of stock in the two years leading up to the bankruptcy, including $3 million by the CEO, which will almost certainly get clawed back. It certainly doesn’t pass the smell test.
Q4 GDP Comes in at 2.6% and is likely to continue at the same rate in Q1. A solid Christmas selling season was a big help. Someone forgot to tell the economy it was supposed to be in a recession. That’s down from 3.2% in Q3 2022. Maybe this is why stocks won’t go down?
Commercial Real Estate is in Trouble, says JP Morgan, falling 37% last year on a total return basis. Those pressures are set to mount as commercial real estate, already dealing with higher interest rates and fewer workers showing up at offices, deals with the regional banking fallout.
Manhattan Office Vacancies Hit Record High, a victim of the work-from-home trend and fears of a coming recession. More than 16% of a total of 470 million square feet was empty in Q1. Average rents are flat at $76.96 a square foot.
Home Ownership Premium Highest Since 2006, when compared to rentals. The spread assumes a new homeowner took out a mortgage yesterday, which few have. That’s up 71% in three years compared to annual rental growth of 6.3%. The failure of home prices to drop is part of the problem, which they won’t with a 10 million unit national structural shortage.
Europe Bans Internal Combustion Engines, from 2035. An exemption was allowed for German cars that run on carbon-neutral fuels, like hydrogen. Half of the world’s oil demand is about to disappear.
A Severe Short Squeeze in Copper is Developing, leading to a massive price spike later in 2023. A Chinese economic recovery and exploding EV growth are the reasons. Copper is the only industrial metal up this year, some 6%. The rest are all down on recession fears. Is the red metal now recession-proof? Buy (FCX) on Dips.
Lithium Prices Have Dropped by Half, in the past four months, following a ballistic 1,300% price increase in the previous two years. Australia is the world’s largest producer of lithium. China and Chile follow, thanks to cheap labor, lax regulation, and lack of environmental controls.
Alibaba to Break Up into six different companies, which may independently list sometime in the future. Such a move usually brings a doubling in value for the $255 billion Chinese tech giant and (BABA) rose 15% on the news. It also makes it easier for the government in Beijing to exert control. Avoid (BABA) as China is still not out of the woods yet.
S&P Case Shiller Loses Gains in January in their National Home Price Index, dropping from a 5.6% annual gain to only 3.8%. Prices have been dropping for seven straight months. San Francisco was down 8% YOY, while Seattle gave up 5%. Miami gained 14%, Tampa 11%, and Atlanta 8%.
AI Could be a $7 Trillion Business in ten years, according to Goldman Sachs. I think it could be more. AI is touted to be the next big shift in technology after the evolution of the internet, mobile, and the cloud. It will make every company you own more valuable. Buy (NVDA) on dips.
Solar Could Have a Big Year in 2023, driven by huge government subsidies and soaring electricity costs. The real net break-even cost against keeping your existing gas or oil-fired system is four years. Can’t afford it? Get the government to give you a 30% tax credit bolstered by Biden’s Inflation Reduction Act. I’ve taken $250,000 in such tax credits over the last eight years. (ENPH) looks like a “BUY” here off of a 47% four-month correction. All the others have already run, like (FSLR), or are too diluted by other businesses, like (GE).
My Ten-Year View
When we come out the other side of the recession, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. The economy decarbonizing and technology hyper-accelerating, creating enormous investment opportunities. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The new America will be far more efficient and profitable than the old.
Dow 240,000 here we come!
On Monday, April 3 at 7:30 AM EST, the ISM Manufacturing Index is out.
On Tuesday, April 4 at 6:00 AM, the JOLTS Job Openings Report is announced.
On Wednesday, April 5 at 7:00 AM, the ADP private Employment Report for March is printed.
On Thursday, April 6 at 8:30 AM, the Weekly Jobless Claims are announced.
On Friday, April 7 at 8:30 AM the Nonfarm Payroll Report for March is released.
As for me, few Americans know that 80% of all US air strikes during the Vietnam War originated in Thailand. At their peak in 1969, there were more US troops serving in Thailand than in South Vietnam itself.
I was one of those troops.
When I reported to my handlers at the Ubon Airbase in northern Thailand for my next mission, they had nothing for me. They were waiting for the enemy to make their next move before launching a counteroffensive. They told me to take a week off.
The entertainment options in northern Thailand in those days were somewhat limited. Phuket and the pristine beaches of southern Thailand where people vacation today were then overrun by cutthroat pirates preying on boat people and would kill you for your boots.
Life was cheap in Asia in those days, especially your life. Any trip there would be a one-way ticket.
There were the fleshpots of Bangkok and Chang Mai. But I would likely contract some dreadful disease there. I wasn’t really into drugs, figuring whatever my future was, it required a brain. Besides, some people’s idea of a good time there was throwing a hand grenade into a crowded disco. So, I, ever the history buff, decided to go look for The Bridge Over the River Kwai.
Men of my generation knew the movie well, about a company of British soldiers who were the prisoners of bestial Japanese. At the end of the movie, all the key characters die as the bridge is blown up.
I wasn’t expecting much, maybe some interesting wreckage. I knew that the truth in Hollywood was just a starting point. After that, they did whatever they had to do to make a buck.
The fall of Singapore was one of the great Allied disasters at the beginning of WWII. Japanese on bicycles chased Rolls Royce armored cars and tanks the length of the Thai Peninsula. Two British battleships, the Repulse and the Prince of Wales, were sunk due to the lack of air cover with a great loss of life. When the Japanese arrived at Singapore, the defending heavy guns were useless as they pointed out to sea.
Some 130,000 men surrendered, including those captured in Malaysia. There were also 686 American POWs, the survivors of US Navy ships sunk early in the war. Most were shipped north by train to work as slave labor on the Burma Railway.
The Japanese considered the line strategically essential for their invasion of Burma. By building a 258-mile railway connecting Bangkok and Rangoon, they could skip a sea voyage of 2,000 miles in waters increasingly dominated by American submarines.
Some 12,000 Allied troops died of malaria, beriberi, cholera, dysentery, or starvation, along with 90,000 impressed Southeast Asian workers. That earned the line the fitting name: “Death Railway.”
The Burma railway was one of the greatest engineering accomplishments in human history, ranking alongside the Pyramids of Egypt. It required the construction of 600 bridges and viaducts. It crossed countless rivers and climbed steep mountain ranges. The work was all done in 100-degree temperatures with high humidity in clouds of mosquitoes. And it was all done in 18 months.
One of those captured was my good friend James Clavell, who spent the war at Changi Prison, now the location of Singapore International Airport. Every time I land there, it gives me the creeps.
Clavell wrote up his experiences in the best-selling book and movie King Rat. He followed up with the Taipan series set in 19th century Hong Kong. We lunched daily at the Foreign Correspondents Club of Japan when he researched another book, Shogun, which became a top TV series for NBC.
So I navigated the Thai railway system to find remote Kanchanaburi Province where the famous bridge was said to be located.
My initial surprise was that the bridge was still standing, not destroyed as it was in the film. It was not a bridge made of wood but concrete and steel trestles. Still, you could see the scars of allied bombing on the foundations, which tried many times to destroy the bridge from the air.
That day, the Bridge Over the River Kwai was a quiet, tranquil, peaceful place. Farmers wearing traditional conical hats made of palm leaves and bamboo strips called “ngob’s” crossed to bring topical fruits and vegetables to market. A few water buffalo loped across the narrow tracks. The river Kwai gurgled below.
Once a day, a train drove north towards remote locations near the Burmese border where a bloody rebellion by the indigenous Shan people was underway.
The wars seemed so far away.
The only memorial to the war was a decrepit turn-of-the-century English steam engine badly in need of repair. There were no tourists anywhere.
So I started walking.
After I crossed the bridge, it wasn’t long before I was deep in the jungle. The ghosts of the past were ever present, and I swear I heard voices. I walked a few hundred yards off the line and the detritus of the war was everywhere: abandoned tools, rusted-out helmets, and yes, human bones. I didn’t linger because the snakes here didn’t just bite and poison you, they swallowed you whole.
After the war, the Allies used Japanese prisoners to remove the dead for burial in a nearby cemetery, only identified by their dog tags. Most of the “coolies” or Southeast Asian workers were left where they fell.
Today, only 50 miles of the original Death Railway remain in use. The rest proved impossible to maintain, because of shoddy construction, and the encroaching jungle.
There has been talk over the years of rebuilding the Burma Railway and connecting the rest of Southeast Asia to India and Europe. But with Burma, today known as Myanmar, a pariah state, any progress is unlikely.
Maybe the Chinese will undertake it someday.
Every Christmas vacation, when my family has lots of free time, I sit the kids down to watch The Bridge Over the River Kwai. I just wanted to pass on some of my experiences, teach them a little history, and remember my old friend Cavell.
Good Luck and Good Trading,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Walking the Bridge Over the River Kwai in 1976
The Bridge Over the River Kwai Today
1976 Death Railway Steam Engine
A Thai Farmer
Global Market Comments
March 30, 2023
Fiat Lux
Featured Trade:
Trade Alert - (MS) LEAPS – BUY
(MS)
CLICK HERE to download today's position sheet.
BUY the Morgan Stanley (MS) January 2024 $90-$95 at-the-money vertical Bull Call debit spread LEAPS at $2.25 or best
Opening Trade
3-30-2023
expiration date: January 19, 2024
Number of Contracts = 1 contract
The brokerage sector has been beaten like the proverbial red-headed stepchild this year, with plunging stock market prices and volumes. However, it should be at the core of any long-term LEAPS portfolio.
The best time to pick up this position will be during a market meltdown day and the Volatility Index is over $30.
If you are looking for a lottery ticket, then here is a lottery ticket.
While the chance of winning a real lottery is something like a million to one, this one is more like 10:1 in your favor. And the payoff is 2:1. That is the probability that Morgan Stanley shares will rise by 9.2% over the next nine months.
(MS) is the class act in the global investment banking sector, and CEO James Gorman is the best CEO in the sector. I helped personally build out some of the key fund management and trading infrastructure some 40 years ago and the profits are now kicking in big time.
The regional banking crisis has pulled forward any recession and therefore the recovery. The Fed certainly raised interest rates by 25 basis point because it was already in the mail.
After that, there will be no interest rate rises for a decade. The cuts will start in June and continue rapidly after that. That’s when the economic data catch up with the reality that is happening right now, which is hugely deflationary.
(NVDA) and (TSLA) already know this, which are rising sharply.
And here is the sweet spot. Fears of a recession have knocked $17, or 17% off the recent $101 high in (MS) shares this year. To learn more about the company, please visit their website at https://www.morganstanley.com
I am therefore buying the Morgan Stanley (MS) January 2024 $90-$95 at-the-money vertical Bull Call spread LEAPS at $2.25 or best.
Don’t pay more than $3.00 or you’ll be chasing on a risk/reward basis.
Please note that these options are illiquid, and it may take some work to get in or out. Executing these trades is more an art than a science.
Let’s say the Morgan Stanley (MS) January 2024 $90-$95 at-the-money vertical Bull Call spread LEAPS are showing a bid/offer spread of $2.00-$3.00, which is typical. Enter an order for one contract at $2.30, another for $2.40, another for $2.50, and so on.
Eventually, you will enter a price that gets filled immediately. That is the real price. Then enter an order for your full position at that real price.
A lot of people ask me about the appropriate size. Remember, if this stock does NOT rise by 9.2% in nine months, the value of your investment goes to zero.
The way to play this is to buy LEAPS in ten different names. If one out of ten increases ten times, you break even. If two of ten work you double your money, and if only three of ten work you triple your money.
There is another way to cash in. Let’s say we get half of your double in the next three months, which from these low levels is entirely possible. Then you could earn half of the maximum potential profit in months. Then you can decide whether to keep the fivefold return or go for the full ten bagger. It’s a nice problem to have.
Notice that the day-to-day volatility of LEAPS prices is miniscule since the time value is so great. This means that the day-to-day moves in your P&L will be small. It also means you can buy your position over the course of a month just entering new orders every day. I know this can be tedious but getting screwed by overpaying for a position is even more tedious.
Look at the math below and you will see that a 9.2% rise in (MS) shares will generate a 122% profit with this position, such is the wonder of LEAPS. That gives you an implied leverage of 13:1 across the $90-$95 space.
Only use a limit order. DO NOT USE MARKET ORDERS UNDER ANY CIRCUMSTANCES. Just enter a limit order and work it.
This is a bet that Morgan Stanley will not fall below $95 by the January 19, 2024 options expiration in 9 months.
Here are the specific trades you need to execute this position:
Buy 1 January 2024 (MS) $90 calls at………….………$10.00
Sell short 1 January 2024 (MS) $95 calls at……...……$7.75
Net Cost:………………………….………..…………......….....$2.25
Potential Profit: $5.00 - $2.25 = $2.75
(1 X 100 X $2.75) = $275 or 122% in 9 months.
To see how to enter this trade in your online platform, please look at the order ticket below, which I pulled off of Interactive Brokers.
If you are uncertain on how to execute an options spread, please watch my training video on “How to Execute a Vertical Bull Call Debit Spread” by clicking here.
The best execution can be had by placing your bid for the entire spread in the middle market and waiting for the market to come to you. The difference between the bid and the offer on these deep in-the-money spread trades can be enormous.
Don’t execute the legs individually or you will end up losing much of your profit. Spread pricing can be very volatile on expiration months farther out.
Global Market Comments
March 27, 2023
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE BANKING CRISIS IS OVER),
(SPY), (TLT), (SCHW), (NFLX), (CS), (GLD), (USO), (BRK/B), (TSLA), (BAC), (C), (JPM), (IBKR), (MS)
CLICK HERE to download today's position sheet.
I think it is safe to say that the banking crisis is now in the market. You saw this in the ritual Friday selloff of bank stocks, which last week made back two-thirds of its losses by the end of the day.
Treasury Secretary Janet Yellen has made it clear that she will use her emergency authority to bail out the depositors of any US banks and leave the shareholders drifting in the wind. That’s OK as long as failures happen in ones and twos and not hundreds.
So after this coming dead, data-less week, we may launch into a serious rally next month, often the strongest of the year, back up to the top of the recent trading range. After that, it will be time to “Sell in May and go away,” and not come back until an interest rate collapse is imminent.
Personally, I have suites on the Queen Mary II and the Orient Express waiting for me. How about you?
And what happens when a crisis winds down? The need for protection ebbs as well. That means that big tech stocks with large balance sheets which had a great March will be due for a rest.
You see this in other flight-to-safety assets, like gold (GLD), which gave up some of its recent gains.
Given the failure of the Volatility Index ($VIX) to maintain a sustainable rally this year, it is clear that something important has changed in that market. That would be same-day options, which are stealing the thunder of the old ($VIX).
Instead of panicking and buying the ($VIX) at market, hedge fund algorithms are now programmed to buy individual same-day stock put options. That vastly increases the volatility of single stocks, with one day 10%-15% moves becoming normal.
When a piece of bad news erupts about the banking system, same-day put options across the entire sector rocket, regardless of whether any individual bank is having problems or not.
Needless to say, as ($VIX) opportunities fade, spectacular new trades are opening up in single stocks which Mad Hedge is happily taking advantage of. As a result, the profitability of our trading strategy has near doubled. This has produced the blowout numbers which I list below.
When panic put buying tanks a stock, we pile on call spreads, as we did two weeks ago with many bank and broker stocks. When fears of recession drive bond prices insanely high, we buy (TLT) put spreads.
Buy low, sell high, it’s my new investment strategy. I’m thinking of patenting it.
With some of the most extreme volatility of the year, Mad Hedge continued on up tear, with March up an eye-popping +12.52%.
My 2023 year-to-date performance is now at an incredible +38.28%. The S&P 500 (SPY) is up a miniscule +0.77% so far in 2023. My trailing one-year return maintains a sky-high +95.52% versus -10.23% for the S&P 500.
That brings my 15-year total return to +635.47%, some 2.8 times the S&P 500 (SPY) over the same period. My average annualized return has recovered to +48.26%, another new high.
I executed only two trades last week, content to leave alone my remaining eight positions that are profitable. I used a bond selloff to take profits with my bond short (TLT). A frenetic 25% rally prompted me to close out my long in Charles Schwab (SCHW) as we were nearing our maximum profit.
Fed Raises Interest Rates 25 basis points, to an overnight range of 4.75% to 5.00%, a 15-year high. But it left the door open to a further 25 basis points on May 3. The statement substantially weakened the prospect for future interest rate hikes, a de facto pause. Stocks loved the move, especially brokerage and technology stocks. Powell said the US banking system is sound and announced further support measures for small banks.
Yellen to Guarantee Deposits if More Banks Fail, which traders are taking to the bank as a nationwide government backstop. That explains the ballistic moves in financials yesterday. Today, Fed governor Jay Powell plays his hand.
Will the Banking Crisis End the Bear Market? I think so, as a drop in interest rates is the only possible solution. The Fed may have to guarantee all US bank deposits for a year to get there. Bank and technology stocks certainly think so, which have been on a tear this week.
Fed Window Increases By $94 Billion on the Week, and $400 billion in two weeks, in its so far successful effort to float the banking system. Some $60 billion went to foreign borrowers. It has to be viewed as a positive and the emergency need for funding is declining.
Netflix (NFLX) Soars 10%, by ending password sharing in Canada. The United States is expected to be next. The move is expected to boost paid subscriptions. I took profits on my long in (NFLX).
Oil (USO) Dives 1%, as the US energy secretary says it may take “years” to refill the Strategic Petroleum Reserve. How about never?
Existing Home Sales Soar 14.5% in February, a three-year high on a signed contract basis. The annualized rate was 4.58 million according to the National Association of Home Builders. Inventories shrink to an incredible 2.6 months or 980,000 homes. The median home prices fell 0.2% to $363,000, the first decline in 11 years. The sharp drop in interest rates last week will further turbocharge sales. Cash sales were 28% of total sales.
Gold (GLD) Tops $2,000 an Ounce, as the flight to safety bid continues. Lower interest rates sooner will also provide less yield competition for precious metals. Silver will provide the higher beta from here, as it always does.
UBS Buys Credit Suisse (CS) for $3.25 Billion, less than half of where it traded on Friday, eliminating another threat to the global financial system. It looks like there were $5 billion in hidden trading losses. Some $17 billion in lower tier bonds were written down to zero, which several US bond funds like Pimco owned. The deal includes a sweetheart $100 billion loan facility from my friends at the Swiss National Bank. The forced marriage will create one of the largest banks in Europe. Some 9,000 CS jobs will get axed.
Berkshire Hathaway Steps up Share Buybacks, totaling $1.8 billion in 2022. The three-year total is an incredible $60 billion. It explains why (BRK/B) was unchanged in an otherwise horrific year. Buffet still holds a stunning $147 billion in cash, most of which is invested in US Treasury short terms bills.
My Ten-Year View
When we come out the other side of the recession, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. The economy decarbonizing and technology hyper accelerating, creating enormous investment opportunities. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The new America will be far more efficient and profitable than the old.
Dow 240,000 here we come!
On Monday, March 27 at 7:30 AM EST, the Dallas Fed Manufacturing Index is out.
On Tuesday, March 28 at 6:00 AM, the S&P Case Shiller National Home Price Index is announced.
On Wednesday, March 29 at 7:00 AM, the Pending Home Sales for February are printed.
On Thursday, March 30 at 8:30 AM, the Weekly Jobless Claims are announced. The final read on Q4 GDP is disclosed.
On Friday, March 31 at 8:30 AM, the Personal Income & Spending are released.
As for me, not a lot of people get a chance to board a WWII battleship these days. So when I got the chance, I jumped at it.
As part of my grand tour of the South Pacific for Continental Airlines in 1981, I stopped at the US missile test site at Kwajalein Atoll in the Marshall Islands, a mere 2,000 miles west southwest of Hawaii and just north of the equator.
Of course, TOP SECRET clearance was required and no civilians are allowed.
No problem there, as clearance from my days at the Nuclear Test Site in Nevada was still valid. Still, the FBI visited my parents in California just to be sure that I hadn’t adopted any inconvenient ideologies in the intervening years.
I met with the admiral in charge to get an update on the current strategic state of the Pacific. China was nowhere back then, so there wasn’t much to talk about in the wake of the Vietnam War.
As our meeting wound down, the admiral asked me if I had been on a German battleship. “It’s a bit before my time,” I replied. “How would you like to board the Prinz Eugen?" he responded.
The Prinz Eugen was a heavy cruiser, otherwise known as a pocket battleship built by Nazi Germany. It launched in 1938 at 16,000 tons and with eight 8-inch guns. Its sister ship was the Admiral Graf Spee, which was scuttled in the famous Battle of the River Platte in South America in 1939.
Early in the war, it helped sink the British battleship HMS Hood and damaged the HMS Prince of Wales. The Prinz Eugen spent much of the war holed up in a Norwegian fjord and later provided artillery support for the retreating German Army on the eastern front. At the end of the war, the ship was handed over to the US Navy as a war prize.
The US postwar atomic testing was just beginning so the Prinz Eugen was towed through the Panama Canal to be used as a target. Some 200 ships were assembled, including those from Germany, Japan, Britain, and even some American ships deemed no longer seaworthy like the USS Saratoga. One of the first hydrogen bombs was dropped in the middle of the fleet.
The Prinz Eugen was the only ship to remain afloat. In the Navy film of the explosion, you can see the Prinz Eugen jump 200 feet into the air and come down upright. The ship was then towed back to Kwajalein Atoll and put at anchor. A typhoon came later in 1946, capsizing and sinking it.
It was a bright at sunny day when I pulled up to the Prinz Eugen in a small boat with some Navy divers. There was no way the Navy was going to let me visit the ship alone.
The ship was upside-down, with the stern beached to the bow in 300 feet of pristine turquoise water. The propellers had recently been sent off to a war memorial in Germany. The ship’s eight cannons lay scattered on the bottom, falling out of their turrets when the ship tipped over.
The small part of the Prinz Eugen above water had already started to rust through. But once underwater it was like entering a live aquarium.
A lot of coral, seaweed, starfish, and sea urchins can accumulate in 36 years and every inch of the ship was covered. Brightly tropical fish swam in schools. A six-foot mako shark with a hungry look warily swam by.
My diver friends knew the ship well and showed me the highlights to a depth of 50 feet. The controls in the engine room were labeled in German Fraktur, the preferred prewar script. Broken dishes displayed the Nazi swastika. Anti-aircraft guns frozen in time pointed towards the bottom. No one had been allowed to remove anything from the ship since the war, and in the Navy, most men follow orders.
It was amazing what was still intact on a ship that had been blown up by a hydrogen bomb. You can’t beat “Made in Germany.” Our time on the ship was limited as the hull was still radioactive, and in any case, I was running low on oxygen.
A few years later the Navy banned all diving on the Prinz Eugen. Three divers had gotten lost in the dark, tangled in cables, and downed. I was one of the last to visit the historic ship.
I checked with my friends in the Navy and the Prinz Eugen is still there, but in deteriorating condition. When the ship started leaking oil in 2018 and staining the immaculate beaches nearby, the Navy launched a major effort to drain what was left from the 80-year-old tanks. No doubt a future typhoon will claim what is left.
So if someone asks if you know anybody who’s been on a German battleship, you can say “Yes,” you know me. And yes, my German is still pretty good these days.
Vielen dank!
Good Luck and Good Trading,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
The Prinz Eugen in 1940
The Prinz Eugen Today
Global Market Comments
March 20, 2023
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or QE IS BACK!)
(SPY), (BITCOIN), (GLD), (SLV), (ARKK), (NVDA), (AAPL), (GOOGL), (META), (SCHW), (MS), (FRC), (TLT), (KBWH)
CLICK HERE to download today's position sheet.
Remember the endless flood of the money supply that went on for a decade, floating all boats?
It's back!
One need look no further than the Fed balance sheet, which ratcheted up a breathtaking $297 billion last week. That offsets three months worth of quantitative tightening if it even still exists.
This is further confirmed by the classic QE asset classes, which saw their best week in a year. Bitcoin jumped by 30%, gold (GLD) gained 8%, silver (SLV) popped 12%, and technology stocks went on a tear. Even bonds did well, with the (TLT) up $8.00 from the previous week’s low.
Big tech stocks like (NVDA), (AAPL), (GOOGL), and (META) are now seen as the new “safe “stocks, thanks to their gigantic balance sheets and immense cash flows. Tech funds have seen net inflows for the past four consecutive weeks, delivering the largest new investment in three years. The ARK Innovation Fund (ARKK) saw its biggest inflows since the 2021 peak.
It's the regional banking crisis that is reverting the Fed to its old habits, all prompted by the mindless management of Silicon Valley Bank. All California assets were dumped as California was about to fall into the ocean, like Charles Schwab (SCHW), Bank of America (BAC), and First Republic Bank (FRC).
That puts the Fed in a quandary, which renders its interest rate decision on Wednesday, March 22 at 2:00 PM EST, because the last thing you do in a financial crisis is raise interest rates. That’s what the Fed did in 1929, extending the Great Depression from 10 days to 10 years.
My bet is that they raise by 25 basis point one more time because it’s already in the mail. The regional banking crisis has pulled forward any recession and therefore the recovery.
After that, there will be no interest rate rises for a decade, which the Fed may hint at in its statement and the following press conference. The cuts will start in June and continue rapidly after that. That’s when the economic data catch up with the reality that is happening right now, which is hugely deflationary.
(NVDA) and (TSLA) already know this, which are rising sharply on Friday.
The action certainly caught the attention of the US Treasury, which seemed willing to jump in with guarantees at the drop of a hat. There has been a massive flight of capital from the heartland to the coasts where the top 20 “too big to fail” banks live.
It’s another example of an industry deregulating itself out of existence, which obtained looser capital requirements after heavy lobbying in 2018. At one point, JP Morgan bank, the safest of the safe, was turning down new account applications. This means that the trade of the decade is setting up for the banks. In the wake of the 2008 financial crisis, the Invesco Bank ETF (KBWB) rose 75% in a year. I expect the same to happen this time around. It has already plunged by 30% in 2023, so it has to rise by 50% just to get back to where it was in January, but with bank deposits now guaranteed and more safeguards in place.
And if you are worried about hidden unrealized losses on bank balance sheets, I list below the safest banks ranked by capital ratios NET of losses when marked to market.
14.5% Goldman Sachs (GS)
13.4% Morgan Stanley (MS)
11.5% JP Morgan Bank (JPM)
11.3% Citigroup (C)
8.7% State Street
5.9% Bank of America (BAC)
No surprise that (GS) and (MS) is at the top where the mark-to-market culture is strong. A strong dose of regulation from the SEC helps too. (BAC) takes a big hit because of the largest holdings of low-yielding mortgages which can’t be marked to market unless they are sold or defaulted.
The crisis brought the traditional recession indicators out of the closet last week. A big one is crude oil prices, which hit a 2 ½ year low at $65 a barrel. It turns out that not only banks but oil producers are hurt by high interest rates as well. Some 120 million barrels have gone into storage in the beast nine months and the market is oversupplied by 300,000 barrels a day.
Only OPEC Plus can put in a floor by cutting production, which they are loathed to do as it brings immediate spending cuts. Or the greatest oil trader in history, Joe Biden of Delaware, can cover his short in the Strategic Petroleum which he sold at $90 last year. You may have to wait for a future Republican administration for that to happen.
While markets crashed, investors have been jumping out of windows, the world appeared to be ending, and the rain continuing incessantly, Mad Hedge continued on up tear with March up +5.61%.
My 2023 year-to-date performance is now at an eye-popping +31.37%. The S&P 500 (SPY) is up +2.63% so far in 2023. My trailing one-year return maintains a sky-high +87.76% versus -15.55% for the S&P 500.
That brings my 15-year total return to +628.56%, some 2.87 times the S&P 500 (SPX) over the same period. My average annualized return has recovered to +47.76%, another new high.
At the market lows, I covered shorts in my Tesla and March NVIDIA positions. I religiously adhered to my stop loss discipline, stopping out of my April short in NVIDIA (NVDA) when the melt-up ensued, my only remaining equity short. I also established a new short in (TLT) at the market high, my first since August.
Silicon Valley Bank fails to sell, but the FDIC stepped in to guarantee all deposits. The FDIC took over Signature Bank in New York as well. If they hadn’t, there would be lines snaking out the doors of every small bank in America Monday morning. The cost is being born by steeper deposit insurance premiums for the banking industry, which will no doubt cause some grumbling. There are 100 banks that would leap to buy Silicon Valley Bank to gain a franchise in the world’s fastest growing technology center. They just need a few hours to get a handle on the bank’s loan portfolio, which only the former management really understand. Buy banks and brokers on dips (SCHW).
Is Platinum the Precious Metals Play of 2023? I am told by the insiders who know that platinum (PPLT) could be the big precious metals play of 2023. The white metal has become the principal metal used in the manufacture of catalytic converters for conventional internal combustion cars of which 15 million a year is still made in the US. There is rising demand for hydrogen fuel cells and the green hydrogen movement. The world’s second largest producer of platinum is Russia, whose supplies have been cut off. As a result, there is expected to be a 556,000-ounce shortage this year after two years of surpluses.
Say Goodbye to the 50 Basis Point Rate Hike, at the Fed meeting on March 22 in the wake of a regional banking Crisis. It’s now a quarter point….or nothing at all. In 48 hours, we have gone from “higher rates for longer” to “maybe the next rate rise is the last one.” Tech stocks are buying it after holding up incredibly well. Buy tech and big banks on dips (JPM), (BAC), (C), (SCHW).
Core Inflation Comes in Moderate, up 0.4% and 0.5% without food and energy. That is a 6.0% YOY rate, down from the 2023 high of 8.7%. Stocks extended a 300-point rally on the news. Inflation has been running at a 3.5% annual rate for the past four months, my yearend target.
Mortgage Rates Dive, off the back of a three-day, $8.00 rally in the bond market. Mortgage rates plunged by 50 basis points to 6.50% and may have more to go. Will this kick off the spring residential real estate market?
Gold (GLD) Breaks Out, crossing a key technical level and setting the options market on fire. Some gold minders saw options volume up 400%. Did the regional banking crisis put the top in interest rates, which have been weighing heavily on gold? Or maybe it’s just an old fashioned flight to safety triggered by the financial crisis. It could be presaging a global economic recovery and a coming commodity boom. (GOLD) LEAPS on the way.
Ron Baron Loaded the Boat with Charles Schwab (SCHW) Shares on Friday, as all the smart money did, including Mad Hedge. My old friend was also an early investor in Tesla (TSLA) and is now one of the largest outside shareholders. When someone offers you a dollar for 40 cents, you take it!
Swiss National Bank Steps in to Bail Out Credit Suisse, taking pressure off US market. I knew they would come in as I was a director of UBS for a year, The Swiss take care of their own. More importantly, the rolling global bank crisis has put the fear of God into the Fed, meaning that the 25 basis point hike next week may be the last for a decade. Buy “RISK ON”, especially banks.
Europe Raises Interest Rates by 50 Basis Points, catching up with the US. It’s an overreaction given the fragility of the banking system. The markets didn’t like the move. Europe has inflation at 2% higher than the US so they really had no choice
Weekly Jobless Claims Drop to 192,000, a surprising fall. The worker shortage continues unabated. It’s the biggest decline since July. If the Fed were looking for a reason to continue quantitative tightening this is it.
First Republic Bank is for Sale, the next bailout target. The mere fact that it is based in California is the problem, which many investors now apparently believe is about to break off of the North American Continent and fall into the Pacific Ocean. You never see a bank with $70 billion in cash and equivalents get in trouble. Morgan Stanley (MS) and JP Morgan are thought to be in the bidding. A group of banks deposited $30 billion into (FRC) to firewall the rest of the banking system.
My Ten-Year View
When we come out the other side of the recession, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. The economy decarbonizing and technology hyper accelerating, creating enormous investment opportunities. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The new America will be far more efficient and profitable than the old.
Dow 240,000 here we come!
On Monday, March 20, there are no data points of note.
On Tuesday, March 21 at 7:00 AM, the Existing Home Sales are announced.
On Wednesday, March 22 at 7:00 AM, the Federal Reserve Open Market Committee announces its interest rate decision. A hike of 25 basis points is in the market. The published statement and following press conference will be the most important of the year, indicating whether they recognize the seriousness of the regional banking crisis and are now leaning hawkish or dovish.
On Thursday, March 23 at 8:30 AM, the Weekly Jobless Claims are announced.
On Friday, March 17 at 8:30 AM, the Durable Goods are released.
As for me, I recall my last trip around the world in 2018. I took the trip because I feared climate change would soon make visits to the equator impossible because of intolerable temperatures and the breakdown of civilization. As it turned out, the global pandemic came six months later, making such travel out of the question for two years.
I beat Phileas Fogg by 55 days, who needed 88 days to complete his trip around the world to settle a gentleman’s bet. But then, he had to rely on elephants, sailing ships, and steam engines to complete his epic voyage, or at least, the one imagined by Jules Verne.
I actually took a much longer route, using a mix of Boeings and Airbuses to fly 80 hours over 40,000 miles on 18 flights through 12 countries in only 33 days. Incredibly, our baggage made it all the way, rather than see its contents sold on the black markets of Manila, New Delhi, or Cairo.
It was a trip around the world for the ages, made even more challenging by dragging my 13 and 15-year-old girls along with me. I have always considered my most valuable asset to be the trips I took to Europe, Africa, and Asia in 1968. The comparisons I can make today some 55 years later are nothing less than awe-inspiring. I wanted to give the same gift to them.
It began with a 12 ½ hour flight from San Francisco to Auckland, New Zealand. Straight out of the airport, I rented a left-hand drive Land Rover and drove three hours to high in the steam-covered mountains of Rarotonga where we were dinner guests of a Māori tribe. To earn my dinner of pork and vegetables cooked underground, I had to dance the haka, a Māori war dance.
The Haka
Of course, with kids in tow, a natural stop was the Hobbit Village of Hobbiton 1½ hours outside of Auckland. I figured the owners of the idyllic sheep farm were earning at least $25 million a year showing tourists the movie set.
In all, I put 1,000 miles on the car in four days, even crossing New Zealand’s highest mountain range on a dirt road. The thick forests were so primeval my daughter expected to see a dinosaur around every curve. We reached our southernmost point at Mt. Ruapehu, a volcano used as the inspiration for Mt. Doom in Peter Jackson’s Lord of the Rings.
The Real Mount Doom
The focus of the Australia leg were ten strategy lectures which I presented around the country. I was mobbed at every stop, with turnouts double what I expected. The Mad Hedge Fund Trader and the Mad Hedge Technology Letter picked up 100 new subscribers in the Land Down Under in five days.
Maybe it was something I said?
My kids’ only requirements were to feed real kangaroos and koala bears, which we duly accomplished on a freezing cold morning outside Melbourne. We also managed to squeeze in a tour of the incredible Sydney Opera House in between lectures, dashing here and there in Uber cabs.
I hosted five Mad Hedge Global Strategy Luncheons for existing customers in five days. The highlight was in Perth, where eight professional traders and I enjoyed a raucous, drunken meal. They had all done well off my advice, so I was popular, to say the least. Someone picked up the tab without me even noticing.
After that, it was a brief ten-hour flight to Manila in the Philippines, with a brief changeover in Hong Kong, where massive protest demonstrations were underway. Ever the history buff, I booked myself into General Douglas MacArthur’s suite at the historic Manila Hotel. The last time I was here, I interviewed President Ferdinand Marcos and his lovely wife Imelda. After a lunch with my enthusiastic Philippine staff and I was on my way to the airport.
I took Malaysian Airlines to New Delhi, India, which has lost two planes over the last five years and where the crew was definitely on edge. I asked why a second plane was lost somewhere over the South Indian Ocean and the universal response was that the pilot had gone insane. Security was so tight that they confiscated a bottle of Jamieson Irish Whiskey that I had just bought in duty free.
India turned out to be a dystopian nightmare. If climate change continues, this is your preview. With temperatures up to 120 degrees in 100% humidity, people were dying of heat stroke by the hundreds. Elephants had to be hosed down to keep them alive. It was so hot you couldn’t stray from the air conditioning for more than an hour. The national radio warned us to stay indoors.
In Old Delhi, the kids were besieged by child beggars pawing them for food and there were mountains of trash everywhere. In the Taj Mahal, my older daughter passed out and we had to dump our remaining drinking water on her to cool her down and bring her back to life. We spent the rest of the day sightseeing indoors at the most heavily air-conditioned shops.
If global temperatures rise by just a few more degrees, you’re going to lose a billion people in India very soon.
On the way to Abu Dhabi, we flew directly over the tanker war at the Straits of Hormuz, one of my old flight paths during my Morgan Stanley days. It was too dusty to see any action there. We got a much better view of Sinai and the Red Sea, which, I told the kids, Moses parted 5,000 years ago (they’ve seen Charlton Heston in The Ten Commandments many times).
The Red Sea
Upon landing at Cairo, Egypt’s ever-vigilant military intelligence service immediately picked me up. Apparently, I was still in their system dating back to my coverage of Henry Kissinger’s shuttle diplomacy for The Economist in 1976. That was all a long time ago. Having two kids with me meant I was not there to cause trouble, so they were very friendly. They even gave us a free ride to the downtown Nile Hilton.
After India, Cairo, and the Sahara Desert were downright pleasant, a dry and comfortable 100 degrees. We did the standard circuit, the pyramids, and the Sphynx followed by a camel ride into the desert.
If you are the least bit claustrophobic, don’t even think about crawling into the center of the Great Pyramid on your hands and knees as we did. I was sore for two days. We spent the evening on a Nile dinner cruise, looking for alligators, entertained by an unusually talented belly dancer.
The next stage involved a one-day race to Greece, where we circled the Acropolis in all its glory, and then argued with a Greek taxi driver on how to get back to the airport. We ended up taking an efficient airport train, a remnant of the 2000 Athens Olympics. If impoverished and bankrupt Athens has such great airport train, why doesn’t New York or San Francisco?
It was a quick hop across the Adriatic to Venice Italy, where we caught an always exciting speed boat from the Marco Polo to our Airbnb near St. Mark’s Square. We ran through the ancient cathedral and the Palace of the Doges, admiring the massive canvases, the medieval weaponry, and of course, the dungeon.
One of the high points of the trip was a performance of Vivaldi’s Four Seasons in the very church it was composed for. A ferocious thunderstorm hit, flooding the plaza outside and causing the lead violinist’s string to break, halting the concert (rapid humidity change I guess).
When we got home with soggy feet, the Carabinieri had cordoned off our block with police tape because a big chunk of our 400-year-old roof had fallen into the street. It taxed my Italian to the max to get into our apartment that night. The Airbnb host asked me not to mention this in my review (I didn’t).
The next day brought a circuitous trip to Budapest via Brussels. Budapest was a charm, a former capital of the Austria-Hungarian Empire and the architecture to prove it. The last time I was here 55 years ago, the Russian Army was running the place and it was grim, oppressive, and dirty.
Today, it is a thriving hot spot for Europe’s young, with bars and night clubs everywhere. Dinners dropped from $150 in Venice to $30. We topped the night with a Danube dinner cruise with a folk dancing troupe. I’m telling you, you can live there like a king for $1,000 a month.
Visiting the Golden Age in Budapest
The next morning, we drew closer to our final destination of Switzerland. A four-hour train ride brought us to my summer chalet in Zermatt and some much-needed rest. At the end of a long valley and lacking any cars, Zermatt is one of those places where you can just give the kids 50 Swiss francs and tell them to get lost. I spent mornings hiking up from the valley floor and afternoons getting caught up on the markets and my writing.
There’s nothing like recharging my batteries in the clean mountain air of the Alps. The forecast was rain every day for two weeks, but it never showed. As a result, I ended up hiking ten miles a day to the point where my legs were made of lead by the end.
The only downer was watching helicopters pick up the bodies of two climbers who fell near the top of the Matterhorn. As temperatures rise rapidly, the ice holding the mountain together is melting, leading to a rising tide of fatal accidents.
I caught my last flight home from Milan. Anything for one more great dinner in Italy, which I enjoyed in the Galleria. At the train station, I chatted with a troop of Italian Boy Scouts in blue uniforms headed for the Italian Alps. The city was packed with Chinese tour groups, and there was a one-month wait to buy tickets for Leonardo DaVinci’s The Last Supper. Another Airbnb made sure I stayed up all night listening to the city’s yellow trolleys trundle by.
Finally, an 11-hour flight brought me back to the City by the Bay. Thanks to two sleeping pills of indeterminate origin I went to sleep over England and woke up over Oregon, preparing for a landing. It seems that somewhere along the way I proposed marriage to the Arab woman sitting next to me, but I have no memory of that whatsoever. At least that’s what the head flight attendant thought.
I am now planning this summer trip. After the Queen Mary and the Orient Express should I climb the Matterhorn again? Or should I summit Mount Kilimanjaro in Africa first? No transatlantic trip should ever be wasted. And I have to get home in time to join a 50-mile hike with the Boy Scouts in New Mexico and then cart two kids off to college.
What a great problem to have.
Good Luck and Good Trading,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
