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The Market Outlook for the Week Ahead, or Looking for Big Foot

On October 14, investors finally achieved the portfolios they long desired, not only individuals but institutional ones as well. They got rid of stocks and bonds that had been hobbling them all year and built their cash positions to decade highs.

What happened the next day?

Stocks and bonds went straight up for six weeks. Cash became trash.

For October 14 was the day that the stock market discounted the worst-case economic scenario for 2023, no matter how bad it may get. And it probably won’t get very bad. That’s barring a black swan-type event, like a brand-new global pandemic.

If you think your job can be frustrating, how about mine? If you run with the dumb crowd, the uninformed crowd, the loser crowd, you get your just desserts.

Fortunately, I saw these moves coming a mile off and loaded the boat. I’ve actually made more money on the parabolic move in bonds than some of the enormous moves in stocks. NVIDIA (NVDA) up 50%?

My performance in November has so far tacked on another robust +7.05%. My 2022 year-to-date performance ballooned to +82.42%, a spectacular new high. The S&P 500 (SPY) is down -16.85% 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 +94.61%.

That brings my 14-year total return to +594.98%, some 2.60 times the S&P 500 (SPX) over the same period and a new all-time high. My average annualized return has ratcheted up to +45.76%, easily the highest in the industry.

I am going into the month-end surge with a fairly aggressive 40% long, (TLT), (TSLA), 40% short (XOM), (OXY), (TSLA), (SPY), with 20% crash for a totally market-neutral position. We’ve just had a heck of a run, and prices could well stall not far from here for the short term. The post-election rally happened, as predicted in this space.

Like Big Foot, the Yeti, and the Loch Ness Monster, the Fed pivot may soon actually make an appearance. I’m talking months, not years. That’s when our August central bank flips from the most severe tightening of interest rates in history, to a neutral, or one can only pray, an easing stance. This is what the 15% rally in stocks over the last six weeks has been all about.

And here is another old-time worn market nostrum. If investors sense that something is going to happen, they discount it fast, very fast.

Of course, there will be several false starts, denied rumors, and false flags, as there always are. After all, this is my 11^th bear market. These will create sudden panic attacks, market selloffs, and Volatility Index (VIX) runs to $30 which are the license to print money for the Mad Hedge Fund Trader. Wait for the market to tell you when to trade. Ignoring it can prove expensive.

As we say here in the west, go off the reservation and you can get a lot of arrows stuck in your back.

How is this even remotely possible with the money supply only at $21.4 trillion, down 2% YOY? That’s a buzz cut from the +30% rate from a year ago.

The answer is that the money is out there, just hiding in different unrecognizable forms. Much of the $4 trillion in pandemic stimulus payments have yet to be spent. Inflation has added $2 trillion in new corporate profits through higher sales prices. Similarly, there is also another $1.5 trillion in pay increases bubbling through the system, also inspired by inflation.

You see this is booming credit card spending, much to the joy of Master Card (MA), Visa (V), and American Express (AXP) and their share price surges we have recently seen.

As I keep telling my Concierge customers on the phone, there is no playbook anymore. All the old ones have been rendered useless by the pandemic. To succeed and make windfall profits like me, you basically have to make it up as you go along.

The Fed Favors the Slowing of Rate Hikes, making a December increase of only 50 basis points a sure thing, according to minutes released on Wednesday for the prior meeting. Housing especially is taking a big hit. All interest rate plays, like bonds, rallied strongly.

Equities See Monster Inflows, some $23 billion in 35 weeks according to the Bank of America (BAC) flow of funds survey. There have been huge cash flows out of Europe looking for a stronger dollar, fleeing WWIII, and collapsing home currencies. The big chase is on. Time to go short? I am. It could be a big bull trap.

Leading Economic Indicators Dive, off 0.8% in October, double the decline expected and the weakest since the pandemic low in April 2020. There has only been one positive number in this data series in 2022. You have to go back to the financial crisis to find numbers this bad.

S&P Global Manufacturing PMI Takes a Hit in November, down to 47.6 from an estimate of 50. Services fell from 48 to 46.1. It’s another coincident recession indicator.

Existing Home Sales Plunge 5.9% in October to an annualized rate of 4.43 million units. It is the slowest sales pace in 11 years. It's not as bad as expected but is still down a horrific 28.4% YOY. Inventory fell to just 1.22 million units, only a 3.3-month supply, supporting prices in a major way. In fact, prices are still rising, up 6.6% annually to $379,100. Housing accounts for about 20% of the US economy, so here is your recession threat right here.

New Home Sales Come in Hot at 632,000, a real shocker with the 30-year fixed at 7.4%. Low-ball seller financing incentives must be a factor where they buy down rates to lower levels. Free upgrades, like those cherry wood cabinets, bonus rooms, and marble kitchen counters, also help. Prices are still up 15% YOY and inventories rose to a once unbelievable 8.9 months.

OPEC Plus Considering a 500,000 Barrels a Day Increase at their coming December meeting, which Saudi Arabia vehemently denied. The comments came out just as West Texas intermediate was barreling in on a new nine-month low. Saudi Arabia can talk all they want, but it’s tough to beat a coming recession, which every other hard asset class and commodity is now confirming.

Disney Axes Chairman, dumping Bob Chapek and bringing back Bob Iger from retirement. Losing $1.5 billion on the Disney Plus streaming service and losing its special tax status from the State of Florida has its costs. (DIS) is also not a stock to buy if we are going into recession. Avoid (DIS), despite the 10% move today. Let’s first see if Iger can cut costs.

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. With the economy decarbonizing 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, November 28 at 8:00 AM EST, the Dallas Fed Manufacturing Index for November is out.

On Tuesday, November 29 at 8:30 AM, the S&P Case Shiller National Home Price Index is released.

On Wednesday, November 30 at 8:30 AM, the ADP Private Employment Report for November is published. We also get a number on Q3 US GDP.

On Thursday, December 1 at 8:30 AM, the Weekly Jobless Claims are announced. US Personal Income and Spending for October is also out.

On Friday, December 2 at 8:30 AM, the Nonfarm Payroll Report for November is disclosed. At 2:00, the Baker Hughes Oil Rig Count is out.

As for me, by the 1980s, my mother was getting on in years. Fluent in Russian, she managed the CIA’s academic journal library from Silicon Valley, putting everything on microfilm.

That meant managing a team that translated over 1,000 monthly publications on topics as obscure as Artic plankton, deep space phenomenon, and advanced mathematics. She often called me to ascertain the value of some of her findings.

But her arthritis was getting to her, and all those trips to Washington DC were wearing her out. So I offered Mom a job. Write the Thomas family history, no matter how long it took. She worked on it for the rest of her life.

Dad’s side of the family was easy. He was traced to a small village called Monreale above the Sicilian port city of Palermo famed for its Byzantine church. Employing a local priest, she traced birth and death certificates going all the way back to an orphanage in 1820. It is likely he was a direct illegitimate descendant of Lord Nelson of Trafalgar.

Grandpa fled to the United States when his brother joined the Mafia in 1915. The most interesting thing she learned was that his first job in New York was working for Orville Wright at Wright Aero Engines (click here). That explains my family’s century-long fascination with aviation.

Grandpa became a tailer gunner on a biplane in WWI. My dad was a tail gunner on a B-17 flying out of Guadalcanal in WWII. As for me, you’ve all heard of plenty of my own flying stories, and there are many more to come.

My Mom’s side of the family was an entirely different story.

Her ancestors first arrived to found Boston, Massachusetts in 1630 during the second Pilgrim wave on a ship called the Pied Cow, steered by a Captain Ashley (click here).

I am a direct descendant of two of the Pilgrims executed for witchcraft in the Salem Witch Trials of 1692, Sarah Good and Sarah Osborne, where children’s dreams were accepted as evidence (click here). They were later acquitted.

When the Revolutionary War broke out in 1776, the original Captain John Thomas, who I am named after, served as George Washington’s quartermaster at Valley Forge responsible for supplying food to the Continental Army during the winter.

By the time Mom completed her research, she discovered 17 ancestors who fought in the War for Independence and she became the West Coast head of the Daughters of the American Revolution. It seems the government still owes us money from that event.

Fast forward to 1820 with the sailing of the whaling ship Essex from Nantucket, Massachusetts, the basis for Herman Melville’s 1851 novel Moby Dick. Our ancestor, a young sailor named Owen Coffin signed on for the two-year voyage, and his name “Coffin” appears in Moby Dick seven times.

In the South Pacific 2,000 miles west of South America, they harpooned a gigantic sperm whale. Enraged, the whale turned around and rammed the ship, sinking it. The men escaped to whaleboats. And here is where they made the fatal navigational errors that are taught in many survival courses today.

Captain Pollard could easily have just ridden the westward currents where they would have ended up in the Marquesas’ Islands in a few weeks. But these islands were known to be inhabited by cannibals, which the crew greatly feared. They also might have landed in the Pitcairn islands, where the mutineers from Captain Bligh’s HMS Bounty still lived. So the boats rowed east, exhausting the men.

At day 88, the men were starving and on the edge of death, so they drew lots to see who should live. Owen Coffin drew the black lot and was immediately shot and devoured. The next day, the men were rescued by the HMS Indian within sight of the coast of Chile, and returned to Nantucket by the USS Constellation.

Another Thomas ancestor, Lawson Thomas, was on the second whaleboat that was never seen again and presumed lost at sea. For more details about this incredible story, please click here.

When Captain Pollard died in 1870, the neighbors discovered a vast cache of stockpiled food in the attic. He had never recovered from his extended starvation.

Mom eventually traced the family to a French weaver 1,000 years ago. Our name is mentioned in England’s Domesday Book, a listing of all the land ownership in the country published in 1086 (click here). Mom died in 2018 at the age of 88, a very well-educated person.

There are many more stories to tell about my family’s storied past, and I will in future chapters. This week, being Thanksgiving, I thought it appropriate to mention our Pilgrim connection.

I have learned over the years that most Americans have history-making swashbuckling ancestors, but few bother to look.

I did.

Stay healthy,

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

Happy Thanksgiving from the Thomas Family

USS Essex

November 28, 2022/by Mad Hedge Fund Trader

November 21, 2022

Diary, Newsletter, Summary

Global Market Comments
November 21, 2022
Fiat Lux

Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or SLOWING TO STALL SPEED),
(SPY), (TLT), (SLV), (WPH), (MAT), (NVDA), (MS), (GS)

November 21, 2022/by Mad Hedge Fund Trader

The Market Outlook for the Week Ahead, or Slowing to Stall Speed

Diary, Newsletter, Research

I got a call from my daughter the other day, who is a Computer Science major at the University of California at Santa Cruz. The university was on strike and shut down, so she suddenly had a lot of free time on her hands.

The Teaching Assistants were only getting $12 an hour, which is not enough to live on in the San Francisco Bay Area by a mile. Some one-third were living in their cars, which can get chilly on the Northern California coast in winter.

Fast food workers in California will get $22 an hour from January, thanks to a bill passed in the recent election. The TAs, most of whom are working on master’s degrees and PhD’s in all kinds of advanced esoteric subjects, are simply asking to bring their pay in line with Taco Bell.

The entire UC system is on strike, affecting ten campuses, 17,000 TAs and 200,000 students. I have noticed that the most liberal universities often have the most draconian employment policies. It’s legalized slave labor. I speak from experience as a past victim, as I was once an impoverished work-study student at UCLA earning $1.00 an hour experimenting with highly radioactive chemicals.

What was my tuition for four years at the best public university in the world? Just $3,000, and I didn’t even pay that, as I was on a full scholarship, something about rocket engines I built when I was a kid. Werner Von Braun liked them. The 800 Math SAT score probably helped a tiny bit too.

UCSC is the feeder university for Silicon Valley. Graduates in Computer Science earn $150,000 a year out the door and $200,000 with a Master's degree. PhDs get offered founders’ stock in the hottest Silicon Valley startups.

I hope the TAs get their raise.

My daughter was calling me to apologize for her poor trading performance this year. I thought, “My goodness, did she just lose her entire college fund in some crypto scam?”

“How much did you lose,” I asked.

She answered that she didn’t lose anything and in fact was up 59% this year. She knew my performance was topping 78%, and that some subscribers had made up to 1,000%.

But she missed the October low because she had a midterm and was late on my (TLT) LEAPS because she was on a field trip. She promised to pay closer attention so she could earn the money to pay for her PhD.

My kids never ask me for money. If they need it, they just go into the markets and get it themselves. But then this is a family that discussed implied volatilities, chaos theory, and the merits of the Black Scholes equation over dinner every night. That’s what it’s like to have a hedge fund manager for a dad. Any extra money I have I give away to kids not as lucky as mine.

Then we talked about the most important issue of the day, how to cook the turkey this week. Brine, or no brine, with or without a T-shirt, or deep fat fry? She cautioned me to take it out of the freezer three days early to thaw. I bought my turkey a month ago because I knew prices would rise, and they have done so mightily. In case I get in over my head, I can always call the Butterball Thanksgiving Turkey Emergency Hotline at 844-877-3436.

But that’s just me.

Whenever making money gets too easy, I get nervous.

There’s a 90% chance we saw the bottom in this bear market on October 14. But how we proceed from here is the tricky part. Too much now depends on a single monthly data point, namely the Consumer Price Index, and that is a tough game to play. The next one is out on December 13.

The truth is that even with overnight interest rates at 4.75%-5.00% , the economy is holding up far better than anyone imagined possible. Some sectors, like financials, are positively booming. And while housing is weak, we really have not seen any major price falls that could threaten a financial crisis. Consumers are in good shape with savings near record levels.

There isn’t going to be a hard landing. There isn’t even going to be a soft landing. In fact, we may not have a landing at all, with the economy continuing to motor along, albeit at a slower rate just above stall speed.

Which begs me to repeat that the next new trend in interest rates will be down, and that this will be the principal driver of all your investment decisions going forward. Bonds may make the initial move up, as last week’s trade alerts suggested. But I have no doubt that equities will have a big move in 2023 as well.

Producer Price Index Fades, up only 0.2%, half of what was expected. That’s a big decline from 8.4% to 8.0% YOY. It’s another bell ringing that inflation has topped. Stocks rallied 500 on the news.

Bonds Continue on a Tear, with the (TLT) up a breathtaking eight points from the October low. It could reach $120 in 2023. Keep buying (TLT) calls, call spreads, and LEAPS on dips.

FTX Keeps Getting Worse, as it is looking like it’s a Bernie Madoff X 10, or an Enron X 20. A new CEO has been appointed by the bankruptcy court, John Ray, the former liquidator of Enron and a distant relative of mine. This will spoil investment in most digital coins and tokens for good, which are now worthless, and coins unless they are guaranteed by JP Morgan (JPM) or Goldman Sachs (GS). FTX never had a CFO, and Sam Bankman-Fried is blaming it all on his girlfriend, not exactly what creditors want to hear. In any case, Bitcoin has been replaced by Taylor Swift tickets.

A Massive Silver Shortage is Developing, with demand up 16% in 2023 to 1.21 million ounces. With EV production increasing from 1.5 million to 20 million units a year within the decade, its share of the market will rise from 5% to 75%. Solar panel demand is also rising. Buy (SLV) and (WPM) on dips. My next LEAPS will be for silver on the next dip.

NVIDIA Sales Rise, but profits dip, taking the stock up 3%. Games sales dropped a heartbreaking 50% and crypto took a big hit. The company expects $6 billion in sales in Q4 and is still operating at an incredible 53.6% gross margin. The company is creating a new line of dumbed-down products to comply with China export bans. Keep buying (NVDA) on dips. We caught a 50% move in the past month.

Retail Sales Rise 1.3% in October, causing analysts to raise Q4 GDP forecasts. Rising prices are a major factor. Where is that darn recession?

Who Has the World’s Worst Inflation? Not the US, where price gains have been relatively muted. Venezuela leads with 21,912%, followed by Zimbabwe at 2019%, Lebanon at 1071%, Argentina at 194%, Turkey at 124%. Even Russia is at 25%. Who has the lowest? Japan at 1.0%, but their currency has just collapsed by 40%.

The 60/40 Portfolio is Back, after a 15-year hiatus. JP Morgan Chase says that keeping 60% of your money in stocks and 40% in bonds should deliver a 7.2% annual return. I believe the balanced portfolio return will be much higher, as everything will go up in 2023 and fixed income is now yielding 5% or better. 2022 saw the worst 60/40 return in 100 years.

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. With the economy decarbonizing 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, November 21 at 8:00 AM, the Chicago Fed National Activity Index for October is out.

On Tuesday, November 22 at 8:30 AM, the Richard Fed Manufacturing Index is released.

On Wednesday, November 23 at 8:30 AM, Durable Goods for October is published. At 11:00 AM, the FOMC minutes from the previous meeting are out. Weekly Jobless Claims are announced. New Homes Sales for October are out.

On Thursday, November 24, Markets are closed for Thanksgiving.

On Friday, November 25, stock markets close early at 1:00 PM. At 2:00 the Baker Hughes Oil Rig Count is out.

As for me, I have dated a lot of interesting women in my lifetime, but one who really stands out is Melody Knerr, the daughter of Richard Knerr, the founder of the famed novelty toy company Wham-O (click here). I dated her during my senior year in high school.

At six feet, she was the tallest girl in the school, and at 6’4” I was an obvious choice. After the senior prom and wearing my cheap rented tux, I took her to the Los Angeles opening night of the new musical Hair.

In the second act, the entire cast dropped their clothes onto the stage and stood there stark naked. The audience was stunned, shocked, embarrassed, and even gob-smacked. Fortunately, Melody never revealed the content of the play to her parents, or I would have been lynched.

In a recurring theme of my life, while Melody liked me, her mother liked me even more. That enabled me to learn the inside story of Wham-O, one of the great untold business stories of all time.

Richard Knerr started Wham-O in a South Pasadena garage in 1948. His first product was a slingshot, hence the company name, the sound you make when firing at a target. Business grew slowly, with Knerr trying and discarding several different toys.

Then in 1957, he borrowed an idea from an Australian bamboo exercise hoop, converted it to plastic, and called it the “Hula Hoop.” It instantly became the biggest toy fad of the 20^th century, with Wham-O selling an eye-popping 25 million in just four months. By 1959, they had sold a staggering 100 million.

The Hula Hoop was an extremely simple toy to manufacture. You took a yard of cheap plastic tubing and stapled it together with an oak plug, and you were done. The markup was 1,000%. Knerr made tens of millions and bought a mansion in a Los Angeles suburb with a stuffed lion guarding his front door which he had shot in Africa.

The company made the decision to build another 50 million Hula Hoops. Then the bottom absolutely fell out of the Hula Hoop market. Midwestern ministers perceived a sexual connotation in the suggestive undulating motion to use it and decried it the work of the devil. Orders were cancelled en masse.

Whamo-O tried to stop their order for 50 million oak plugs, which were made in England, but to no avail. They had already shipped. So, to cut their losses Whamo-O ordered the entire shipment dumped overboard in the North Atlantic, where they still bob today. The company almost went bankrupt.

Knerr saved the company with another breakout toy, the Frisbee, a runaway success which is still sold today. Even Incline Village, Nevada has a Frisbee golf course. The US Army tested it as a potential flying hand grenade. That was followed by other monster hits like the Super Ball, the Slip N Slide, and the Slinky.

Richard Knerr sold his company to toy giant Mattel (MAT) for $80 million in 1994. He passed away in 2008 at the age of 82.

As for Melody, we lost touch over the years. The last I heard she was working at a dive bar in rural California. Apparently, I was the high point of her life. The last time I saw her I learned the harshest of all lessons, never go back and visit your old high school girlfriend. They never look that good again.

Stay healthy,

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

Hula Hoop Inventor Chuck Knerr

November 21, 2022/by Mad Hedge Fund Trader

November 9, 2022

Diary, Newsletter, Summary

Global Market Comments
November 9, 2022
Fiat Lux

Featured Trade:

(TESTIMONIAL),
(THE DEATH OF PASSIVE INVESTING),
(SPY), (SPX), (QQQ), (META), (UUP), (GLD), (INDU)

November 9, 2022/by Mad Hedge Fund Trader

November 7, 2022

Diary, Newsletter, Summary

Global Market Comments
November 7, 2022
Fiat Lux

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE FED GIVETH AND THE FED TAKETH AWAY)
(SPY), (TLT), (JNK), (AAPL), (MSFT), (AMZN), (GOOGL), (META)

November 7, 2022/by Mad Hedge Fund Trader

The Market Outlook for the Week Ahead, or the Fed Giveth and the Fed Taketh Away

Diary, Newsletter

Now you see it, now you don’t.

The rip-roaring rally that started in October, with which we made so much money on, vaporized in a heartbeat. Traders lulled into a false sense of security with happy talk among themselves were suddenly throwing up on their shoes.

Fed governor Powell clearly indicated that interest rates will remain higher for longer, and therefore, stock prices lower. Powell promised us pain last summer and is delivering big time. Powell’s job is NOT to defend the stock market.

Personally, I’m looking for another 75 basis points on December 14, followed by 50 basis points on February 1 and another 25 basis points on March 22. This will bring us 4.75%-5.00% range for overnight Fed funds. After that, rates will fall for years as the Fed rushes to repair the damage it inflicted on the economy. Stocks will deliver the 800% return I have been promising.

I went into the Fed meeting short and used the ensuing meltdown to take profits.

As a result, my November month-to-date performance went off to the races, already achieving a hot +2.20%.

That leaves me with a very rare 100% cash position. With midterm election results out on Wednesday and the next report on the Consumer Price Index on Thursday, that sounds like a prudent place to be.

My 2022 year-to-date performance ballooned to +77.57%, a new high. The Dow Average is down -11.85% 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 +49.51%.

That brings my 14-year total return to +590.13%, some 2.86 times the S&P 500 (SPX) over the same period and a new all-time high. My average annualized return has ratcheted up to +49.51%, easily the highest in the industry.

There is no doubt that the greatest buying opportunity of the century is setting up. Those who bought the Dotcom Crash bottom in 2003 snapped up Apple (AAPL) at 20 cents on its way to $186, split adjusted. During the 2009 Financial Crisis bottom, the savvy snapped up Microsoft (MSFT) at $11. Its top tick last year was $23.

A similar golden opportunity is setting up in the next year and will create immense wealth. Just remember that things always go down more than you think, and then rise far more than you believe possible.

However, one of the greatest questions of all time has finally been resolved. Can stock markets rise without big tech? The answer has been an overwhelming “YES.” Financial, where we have been very heavily involved, rose up to 25% while tech was falling 20%. Healthcare has been on fire as well. It all gives us a place to earn our crust of bread until the long-term trend up in tech resumes, however long that may take.

The turn will be called by the prospect of Fed interest rate CUTS sometime in 2023, and good luck calling that.

Further complicating matters near term is that this could be the greatest tax loss selling year of all time, with some stocks down up to 80% sold to offset gains elsewhere, such as in energy. But the mutual funds are already done, their tax year already ended. Whatever is left must be wound up by December 31.

Nonfarm Payroll Comes in at a Hot 261,000 in October, higher than hoped. The Headline Unemployment Rate crawled up to 3.7%, the highest since February. Average hourly earnings are up 4.7% YOY, far below the inflation rate. The U-6 “Discourage worker” rate rose from 6.7% to 6.8%. Anyone who thinks these numbers will lead to an earlier end to the Fed interest rate rises has a hole in their head.

JOLTS Beats Bigtime, with 10.7 million jobs opening, a million more than expected. No cooling of labor demand here.

ADP Rises 239,000, more than expected, nailing the coffin shut on the 75-basis point rate hike. The strong industries, like Airlines and Leisure & Hospitality, are still hiring like crazy.

Is Big Tech Dead Money? It may be for months, or even years, but Big Tech always comes back. It’s just a matter of how long it takes big double-digit earnings to return with the onset of the next robust economic recovery. Until then, expect a lot of differentiation. Apple (AAPL) will hold up best, followed by Amazon (AMZN) and Google (GOOGL). As for Meta (META), the old Facebook, it may never come back.

Tech Austerity Accelerates, with Apple (AAPL) announcing an unheard-of hiring freeze. The rest of big tech is following suit. The knees are about to be cut from under the market’s safest stock.

Fed Raises Interest Rates by 75 Basis Points but changed their language to be slightly more accommodative. Stocks rallied 500 points on the news. If this is bullish, it’s a stretch. They are still targeting a 2% inflation rate and will take into account cumulative tightening to date. Acknowledging they have already raised rates a lot is something. That is more dovish than expected.

Chicago PMI is Still Falling, from 47 estimated to 45.2 in October. Under 50 indicates a recessionary economy.

Morgan Stanley Says Rising Rates to End Soon, according to strategist Mike Wilson. The big pivot will happen sooner than later. I agree.

Twitter Hate Speech Spikes 500%, since Elon Musk took over the company, as racists and conspiracy theorists test his looser limits. The entire senior staff has been fired as they are still subject to fraud accusations from Musk. Musk thinks he can resell the company for a big premium in five years. Is this the end of democracy, or just Twitter (TWTR) whose stock no longer trades? More advertisers will bail after Musk paraded conspiracy theories in the wake of the Pelosi assassination attempt.

US Treasury to Borrow $550 Billion in Q4. It means the bond short (TLT) and (TBT) may have one more gasp to go.

Japan Spends $42 Billion to Support the Yen in October to no avail, as it threatens new lows. The yen will remain weak as long as interest rates remain near zero.

First Starship to Launch in December, the largest rock ever launched. The super heavy booster will return to earth while the capsule will land off the coast of Hawaii. Space X has a $3 billion contract from NASA to return to the moon by 2025.

US Banks Processed $1.2 Billion in Ransomware Payments this Year, triple the previous year’s level. Russia is the source of many of the attacks. And you wonder why we are supporting Ukraine?

Russian Economy Shrinks by 5% YOY in September as the sanctions take their toll. Only 45% to go. The call-up of 300,000 reservists has yet to hit the economy.

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. With the economy decarbonizing 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, November 7 at 12:00 PM, the Consumer Credit for September is released.

On Tuesday, November 8, the US Midterm elections take place with 532 House and 34 Senate seats up for grabs.

On Wednesday, November 9 the entire day will be spent analyzing election results and tracking the ties.

On Thursday, November 10 at 8:30 AM, Weekly Jobless Claims are announced. We also get the US Core Inflation Rate for October.

On Friday, November 11 at 8:30 AM the University of Michigan Consumer Sentiment for November is printed. At 2:00 PM, the Baker Hughes Oil Rig Count is out.

As for me, I was recently in Los Angeles visiting old friends, and I am reminded of one of the weirdest chapters of my life.

There were not a lot of jobs in the summer of 1971, but Thomas Noguchi, the LA County Coroner, was hiring. The famed USC student jobs board had delivered! Better yet, the job included hours at night and free housing at the coroner's department.

I got the graveyard shift, from midnight to 8:00 AM. All I had to do was buy a black suit from Robert Halls, for $25.

Noguchi was known as the “coroner to the stars” having famously done the autopsies on Marilyn Monroe and Jane Mansfield. He did not disappoint.

For three months, whenever there was a death from unnatural causes, I was there to pick up the bodies. If there was a suicide, gangland shooting, or horrific car accident, I was your man.

Charles Manson had recently been arrested and I was tasked with digging up the victims. One, cowboy stuntman Shorty Shay, had his head cut off and neatly placed in between his ankles.

The first time I ever saw a full set of women’s underclothing, a girdle, and pantyhose, was when I excavated a desert roadside grave that the coyotes had dug up. She was pretty far gone.

Once, I and another driver were sent to pick up a teenage boy who had committed suicide in Beverly Hills. The father came out and asked us to take the mattress as well. I regretted that we were not allowed to do favors on city time. He then said, “can you take it for $200”, then an astronomical sum.

A few minutes later found a hearse driving down the Santa Monica Freeway on the way to the dump with a double mattress expertly tied on the roof with Boy Scout knots with a giant blood spot in the middle.

Once, I was sent to a cheap motel where a drug deal gone wrong had produced several shootings. I found $10,000 in a brown paper bag under the bed. The other driver found another ten grand and a bag of drugs and kept them. He went to jail. I didn’t.

The worst pick-up of the summer was also the most disgusting and even made the old veterans sick. A 300-pound man had died of a heart attack and was not discovered for a month. We decided to each grab an arm or leg and all tug on the count of three. One, two, three, and all four limbs came off!

Eventually, I figured out that handling dead bodies could be hazardous to your health, so I asked for rubber gloves. I was fired.

Still, I ended up with some of the best summer job stories ever.

Stay healthy,

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

November 7, 2022/by Mad Hedge Fund Trader

November 4, 2022

Diary, Newsletter, Summary

Global Market Comments
November 4, 2022
Fiat Lux

Featured Trade:

(NOVEMBER 2 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPY), (LLY), (TSLA), (GOOG), (GOOGL), (JPM), (BAC), (C), (BRK), (V), (TQQQ), (CCJ), (BLK), (PHO), (GLD), (SLV), (UUP)

November 4, 2022/by Mad Hedge Fund Trader

November 2 Biweekly Strategy Webinar Q&A

Diary, Newsletter

Below please find subscribers’ Q&A for the November 2 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Silicon Valley in California.

Q: The country is running out of diesel fuel this month. Should I be stocking up on food?

A: No, any shortages of any fuel type are all deliberately engineered by the refiners to get higher fuel prices and will go away soon. I think there was a major effort to get energy prices up before the election. If that's the case, then look for a major decline after the election. The US has an energy glut. We are a net energy exporter. We’re supplying enormous amounts of natural gas to Europe right now, and natural gas is close to a one-year low. Shortages are not the problem, intentions are. And this is the problem with the whole energy industry, and the reason I'm not investing in it. Any moves up are short-term. And the industry's goal is to keep prices as high as possible for the next few years while demand goes to zero for their biggest selling products, like gasoline. I would be very wary about doing anything in the energy industry here, as you could get gigantic moves one way or the other with no warning.

Q Is the SPDR S&P 500 ETF (SPY) put spread, correct?

A: Yes, we had the November $400-$410 vertical bear put spread, which we just sold for a nice profit.

Q: I missed the LEAPS on J.P. Morgan (JPM) which has already doubled in value since last month, will we get another shot to buy?

A: Well you will get another shot to buy especially if another major selloff develops, but we’re not going down to the old October lows in the financial sector. I believe that a major long-term bull move has started in financials and other sectors, like healthcare. You won’t get the October lows, but you might get close to them.

Q: I’m waiting for a dip to get into Eli Lilly (LLY), but there are no dips.

A: Buy a little bit every day and you’ll get a nice average in a rising market. By the way, I just added Eli Lilly to my Mad Hedge long-term model portfolio, which you received on Thursday.

Q: Any thoughts about the conclusion of the Twitter deal and how it will affect tech and social media?

A: So far all of the indications are terrible. Advertisers have been canceling left and right, hate speech is up 500%, and Elon Musk personally responded to the Pelosi assassination attempt by trotting out a bunch of conspiracy theories for the sole purpose of raising traffic and not bringing light to the issue. All indications are bad, but I've been with Elon Musk on several startups in the last 25 years and they always look like they’re going bust in the beginning. It’s not even a public stock anymore and it shouldn’t be affecting Tesla (TSLA) prices either, which is still growing 50% a year, but it is.

Q: In terms of food commodities for 2023, where are prices headed?

A: Up. Not only do you have the war in Ukraine boosting wheat, soybean, and sunflower prices, but every year, global warming is going to take an increasing toll on the food supply. I know last summer when it hit 121 degrees in the Central Valley, huge amounts of crops were lost due to heat. They were literally cooked on the vine. We now have a tomato shortage and people can’t make pasta sauce because the tomatoes were all destroyed by the heat. That’s going to become an increasingly common issue in the future as temperatures rise as fast as they have been.

Q: Do I trade options in Alphabet (GOOG) or Alphabet (GOOGL)?

A: The one with the L is the holding company, the one without the L is the advertising company and the stock movements are really identical over the long term, so there really isn’t much differentiation there.

Q: Why can’t inflation be brought down by increasing the supply of all goods?

A: Because the companies won’t make them. The companies these days very carefully manage output to keep prices as high as possible. It’s not only the energy industry that does that but also all industries. So those in the manufacturing sector don’t have an interest in lowering their prices—they want high prices. If they see the prices fall, they will cut back supply.

Q: What do you think about growth plays?

A: As long as interest rates are rising, growth will lag and value will lead, and that has been clear as day for the last month. This is why we have an overwhelming value tilt to our model portfolio and our recent trade alerts. They’ve all been banks—JP Morgan (JPM), Bank of America (BAC), Citigroup (C), plus Berkshire Hathaway (BRK) and Visa (V) and virtually nothing in tech.

Q: I don’t know how to execute spread trades in options so how do I take advantage of your service?

A: Every trade alert we send out has a link to a video that shows you exactly how to do the trade. I have to admit, I’m not as young as I was when I made the videos, but they’re still valid.

Q: Is the US housing market about to crash?

A: There is a shortage of 10 million houses in the US, with the Millennials trying to buy them. If you sell your house now, you may not be able to buy another one without your mortgage going from 2.75% to 7.75%—that tends to dissuade a lot of potential selling. We also have this massive demographic wave of 85 million millennials trying to buy homes from 65 million gen x-ers. That creates a shortage of 20 million right there. That's why rents are going up at a tremendous rate, and that's why house prices have barely fallen despite the highest interest rates in 20 years.

Q: If we get good news from the Fed, should we invest in 3X ETFs such as the ProShares UltraPro QQQ (TQQQ)?

A: No, I never invest in 3X ETFs, because they are structured to screw the investor for the benefit of the issuer. These reset at the close every day, so do 2 Xs and not more. If you're not making enough money on the 2Xs, maybe you should consider another line of business.

Q: Do you think BlackRock Corporate High Yield Fund (HYT) will show the pain of slights because of their green positioning?

A: No I don’t, if anything green investing is going to accelerate as the entire economy goes green. And you’ll notice even the oil companies in their advertising are trying to paint themselves as green. They are really wolves in sheep’s clothing. They’ll never be green, but they’ll pretend to be green to cover up the fact that they just doubled the cost of gasoline.

Q: Where do you find the yield on Blackrock?

A: Just go to Yahoo Finance, type in (BLK), and it will show the yield right there under the product description. That’s recalculated by algorithms constantly, depending on the price.

Q: Do you like Cameco (CCJ)?

A: Yes, for the long term. Nuclear reactors have been given an extra five years of life worldwide thanks to the Russian invasion of Ukraine. Even Japan is opening theirs.

Q: Should I short the US dollar (UUP) here?

A: The answer is definitely maybe. I would look for the dollar to try to take one more run at the highs. If that fails, we could be beginning a 10-year bear market in the dollar, and bull market in the Japanese yen, Australian dollar, British pound, and euro. This could be the next big trade.

Q: What is your outlook on Real Estate Investment Trusts (REITs) now?

A: I think it looks great. REITs are now commonly yielding 10%. The worst-case scenario on interest rates has been priced in—buying a REIT is essentially the same thing as buying a treasury bond, but with twice the leverage, because they have commercial credits and not government credits. We’ll be doing a lot more work on REITS. We also have tons of research on REITS from 12 years ago, the last time interest rates spiked. I'll go in and see who’s still around, and I'll be putting out some research on it.

Q: How do you see the price development of gold (GLD)?

A: Lower—the charts are saying overwhelmingly lower. Gold has no place in a rising interest rate world. At least silver (SLV) has solar panel demand.

Q: Do you have any fear of Korea going into IT?

A: Yes, they will always occupy the low end of mass manufacturing, and you can see that in the cellphone area; Samsung actually sells more phones than Apple, but they’re cheaper phones with lower-end lagging technology, and that’s the way it’s always going to be. They make practically no money on these.

Q: When can we get some more trade alerts?

A: We are dead in the middle of my market timing index, so it says do nothing. I’m looking for either a big move down or big move up to get back into the market. This is a terrible environment to chase trades when you're trading, so I'm going to wait for the market to come to me.

Q: What about water as an investment? The Invesco Water Resources ETF (PHO)?

A: Long term I like it. There’s a chronic shortage of fresh water developing all over the world, and we, by the way, need major upgrades of a lot of water systems in the US, as we saw in Jackson, MS, and Flint, MI.

Q: Will REITs perform as well as buying rental properties over the next 10 to 20 years?

A: Yes, rental properties should do very well, as long as you’re not buying any city that has rent control. I have some rental properties in SF and dealing with rent control is a total nightmare, you’re basically waiting for your tenants to die before you raise the rent. I don’t think they have that in Nevada. But in Las Vegas, you have the other issue that is water. I think the shortage of water will start to drag on real estate prices in Las Vegas.

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

Good Luck and Stay Healthy,

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

It’s Been a Tough Market

November 4, 2022/by Mad Hedge Fund Trader

October 31, 2022

Diary, Newsletter, Summary

Global Market Comments
October 31, 2022
Fiat Lux

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD, or WAS THAT THE POST-ELECTION RALLY?)
(SPY), (TLT), (VIX), (V), (MA), (AXP)

October 31, 2022/by Mad Hedge Fund Trader

The Market Outlook for the Week Ahead, or Was that the Post-Election Rally?

Diary, Newsletter

I have been through 11 bear markets in my lifetime, and I can tell you that the most ferocious rallies always take place in bear markets. This one is no exception. Short sellers always have a limited ability to take pain.

This rally took the Dow Average up 14.4% during the month of October, the biggest such monthly gain since 1976 (hmmm, just out of college and working for The Economist magazine in Tokyo, and dodging bullets in Cambodia).

The Dow outperformed NASDAQ by 9% in October, the most in 20 years. That is a pretty rare event. During the pandemic, the was a tremendous “pull forward” of technology stocks, as only commerce was possible. Now it is time for their earnings to catch up with pandemic valuations, which may take another year.

But first, let me tell you about my performance.

With some of the greatest market volatility in market history, my October month-to-date performance ballooned to +4.87%.

That leaves me with only one short in the (SPY) and 90% cash.

My 2022 year-to-date performance ballooned to +74.55%, a new high. The Dow Average is down -9.47% 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 +77.95%.

That brings my 14-year total return to +587.88%, some 2.86 times the S&P 500 (SPX) over the same period and a new all-time high. My average annualized return has ratcheted up to +45.60%, easily the highest in the industry.

And of course, there is no better indicator of the market strength than the Mad Hedge Market Timing Index, which broke above 50 for the first time in six months, all the way to 61.

It's no surprise that investors sold what was expensive (tech) and what was bought that was cheap (banks). It’s basic investing 101. Tech is still trading at a big premium to the market and double the price earnings of banks

The prospect of an end to Fed tightening has ignited a weaker dollar, prompting a stronger stock market that generated the rocket fuel for this month’s move.

All the negatives have gone, the seasonals, earnings reports, a strong dollar, and in 8 days, the election. Don’t forget that the (SPX) has delivered an eye-popping 16.3% return for every midterm election since 1961, all 15 of them.

The put/call spread is the biggest in history, about 1:4, showing that investors are piling in, or at least covering shorts, as fast as they can. Individual stock call options are trading at the biggest premiums ever.

Suffice it to say that I expected all of this, told you about it daily, and we are both mightily prospering as a result.

Much of the selling this year hasn’t been of individual stocks but of S&P 500 Index plays to hedge existing institutional portfolios. The exception is with tax loss selling to harvest losses to offset other gains. That means indiscriminate index selling begets throwing babies out with the bathwater on an industrial scale. And here is your advantage as an individual investor.

A classic example is Visa (V) which I’m’ liking more than ever right now, which I aggressively bought on the last two market downturns. The company has ample cash flow, carries no net debt, and with high inflation, is a guaranteed double-digit sales and earnings compounder.

It clears a staggering $10 trillion worth of transactions a year. With $29.3 billion in revenues in 2022 and $16 billion in net income, it has a technology-like 55% profit margin. Visa is also an aggressive buyer of its own shares, about 3% a year. That’s because it trades at a discount to other credit card processors, like Master Car (MA) and American Express (AXP).

The only negative for Visa is that it gets 55% of its earnings from aboard, which have been shrunken by the strong dollar. That is about to reverse.

It turns out that digital finance never made a dent in Visa’s prospects, as the dreadful performance of PayPal (PYPL) and Square (SQ) shares amply demonstrate.

Remember, however, that the Fed is raising interest rates by 0.75% to a 3.75%-4.00% range on Wednesday, November 2, and may do so again in December. It has been the fastest rate rise of my long and illustrious career, and also the best telegraphed.

That may give us one more dip in the stock market that will enable us to buy in on the coming Roaring Twenties.

We’ll see.

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. With the economy decarbonizing 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 31 at 6.45 AM, the Chicago PMI for October is released.

On Tuesday, November 1 at 7:00 AM, the JOLTS job opening report for September is out.

On Wednesday, November 2 at 8:30 AM, ADP Private Employment Report for October is published. The Fed raises interest rates at 11:00 AM and follows with a press conference at 11:30.

On Thursday, November 3 at 8:30 AM, Weekly Jobless Claims are announced.

On Friday, November 4 at 8:30 AM the Nonfarm Payroll Report for October is printed. At 2:00, the Baker Hughes Oil Rig Count is out.

As for me, during the late 1980s, the demand for Japanese bonds with attached equity warrants was absolutely exploding.

Japan was Number One, the engine of technological innovation. Everyone in the world owned a Sony Walkman. They were trouncing the United States with 45% of its car market.

The most conservative estimate for the Nikkei Average for the end of 1990 was 50,000, or up 27%. The high end was at 100,000. Why not? After all, the Nikkei had just risen tenfold in ten years and the Japanese yen had tripled in value.

In 1989, my last full year at Morgan Stanley, the Japanese warrant trading desk accounted for 80% of the firm’s total equity division profits.

The deals were coming hot and heavy. Since Morgan Stanley had the largest Japanese warrant trading operation in London, a creation of my own, we were invited to join so many deals that the firm ran out of staff to attend the signings.

Since I was the head of trading, I thought it odd that the head of investment banking wanted to speak to me. It turned out that Morgan Stanley was co-managing two monster $3 billion bond deals on the same day. Could I handle the second one? Our commission for the underwritings was $10 million for each deal!

I thought, why not, better to see how the other half lived. So, I said “yes.”

The attorneys showed up minutes later. I was given a power of attorney to sign on behalf of the entire firm and commit our capital to the underwriting $3 billion five-year bond issue for the Industrial Bank of Japan. The deal was especially attractive as the bonds carried attached put options on the Nikkei which institutional investors could buy to hedge their Japanese stock portfolios.

Since the Industrial Bank of Japan thought the stock market would never see a substantial fall, they happily sold short the put options. Only the Industrial Bank of Japan could have pulled this off as it was one of the largest and highest-rated banks in Japan. I knew the CEO well.

It turned out that there was a lot more to a deal signing than I thought, as it was done in the traditional British style. We met at the lead manager’s office in the City of London in an elegant wood-paneled private dining room filled with classic 18^th century furniture.

First, there was a strong gin and tonic which you could have lit with a match. A five-course meal accompanied with a 1977 deep Pouilly Fuse white and a 1952 Bordeaux red with authority. I had my choice of elegant desserts. Sherry and a 50-year-old port followed, along with Cuban cigars, which was a problem since I had just quit smoking (my wife recently bore twins).

The British were used to these practices. Any American banker would have been left staggering, as drinking during business hours back then was illegal in New York.

Then out came the paperwork. I signed with my usual flourish and the rest of the managers followed. The Industrial Bank of Japan provided the Dom Perignon as they were about to receive $3 billion in cash the following week.

Then an unpleasant thought arose in the back of my mind. Morgan Stanley assumed the complete liability for their share of the deal. But did I just incur a massive personal liability as well?

Then I thought, naw, why pee on someone’s parade. Morgan Stanley’s been doing this for 50 years. Certainly, they knew what they were doing.

Besides, the Japanese stock market is going up forever, right? No harm, no foul. In any case, I left Morgan Stanley to start my own hedge fund a few months later.

Some seven months later, one of the greatest stock market crashes of all time began. The Nikkei fell 50% in six months and 85% in 20 years. Some 32 years later the Nikkei still hasn’t recovered its old high.

For a few years, that little voice in the back of my mind recurred. The bonds issued by the Industrial Bank of Japan fell by half in months on rocketing credit concerns. The IBJ’s naked short position in the Nikkei puts completely blew up, costing the bank $10 billion. The Bank almost went bankrupt. It was one of the worst timed deals in the history of finance. The investors were burned bigtime.

Did I ever hear about the deal I signed on again? Did process servers show up and my front door in London with a giant lawsuit? Did Scotland Yard chase me down with an arrest warrant?

Nope, nothing, nada, bupkis. I never heard a peep from anyone. It turns out you CAN lose $12 billion worth of other people’s money and face absolutely no consequences whatsoever.

Welcome to Wall Street.

Still, when the five-year maturity of the bonds passed, I breathed a sigh of relief.

My hedge fund got involved in buying Japanese equity warrants, selling short the underlying stock, thus creating massive short positions with a risk-free 40% guaranteed return. My investors loved the 1,000% profit I eventually brought in doing this.

Unlike most managers, I insisted on physical delivery of the warrant certificates, as the creditworthiness of anyone still left in the business was highly suspect. Others who took delivery used warrants to wallpaper their bathrooms (really).

They all expired worthless, I made fortunes on the short positions, and still have them by the thousands (see below).

In September 2000, the Industrial Bank of Japan, its shares down 90%, merged with the Dai-Ichi Kangyō Bank and Fuji Bank to form the Mizuho Financial Group. It was a last-ditch effort to save the Japanese financial system after ten years of recession engineered by the government.

Morgan Stanley shut down their worldwide Japanese equity warrant trading desk, losing about $20 million and laying off 200. Some staff were outright abandoned as far away as Hong Kong. Morgan Stanley was not a good firm for running large losses, as I expected.

I learned a valuable trading lesson. The greater the certainty that people have that an investment will succeed, the more likely its failure. Think of it as Chaos Theory with a turbocharger.

But we sure had a good time while the Japanese equity warrant boom lasted.

Stay Healthy,

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