(SPY) Archives

The Market Outlook for the Week Ahead, or Farewell the Peace Dividend

Remember that great bull market of the Dotcom Boom? Most investors believe it was the result of combining a new Internet, cheap PCs, and the Mosaic Application which made it all work together.

But to Wall Street types usually blind to geopolitics, there was another important factor: The peace dividend paid out by the end of the Cold War. The end result was 30 years of less defense spending, lower taxes, and higher profits for corporate America.

The numbers are pretty compelling. Since the Soviet Union collapsed in 1991, the Dow Average has risen from $2,875 to $34,000, a gain of 12 times. That averages out to an incredible 40% a year. Individual stocks like Monster Beverage (MNST), Tractor Supply (TSCO), and Altria (MO) appreciated a thousandfold or more.

So what happens if the Cold War resumes? Do we have to pay the money back?

In part, yes.

Not that you have to have to write a check anytime soon. But you will have to pay in the form of higher taxes for more defense spending, slower economic growth, fewer corporate profits, and a more modestly appreciating stock market. And that great multiplier of growth, globalization, just suffered a dagger through its heart.

While we have just seen one of the greatest short-covering rallies of all time, $1,800 points or 5.6% in two days, don’t think you’re back on Easy Street yet. A worst-case scenario full-scale Russian invasion of the Ukraine is in the price. So, it's back to focusing on runaway inflation and the certain multiple Fed interest rate hikes to fight it once again.

And guess what? Wars are inflationary. We are already seeing surges in the price of energy, wheat, and nonferrous metals.

So, I think I’ll stick to the short side for the time being. After all, it’s worked pretty well so far in 2022. You’ll still need to maintain some discipline here, only selling rallies.

If the US acts fast, there is an opportunity here for it to create a second War in Afghanistan for Russia. It’s certainly trying. As I write this, there are already long convoys of NATO trucks that carry ammunition and antitank missiles into the Ukraine. If you remember, it was its loss of the first one that led to the demise of the Soviet Union. I think Putin has bit off more than he expected.

For those who are maintaining core long-term portfolios, which are most of you, writing, or selling short front month out-of-the-money call options against your positions is a great idea. It will reduce your risk, lower your average cost, reduce your volatility, and bring in some extra income. Option volatilities are still high, so you can earn a pretty penny with such a strategy.

And if in case we return to happy days again, you will be taken out of your positions at higher prices with bigger profits and will think you have died and gone to Heaven.

What is the other smart trade here? If you have any energy exposure whatsoever this is a generational opportunity to get rid of it. The best-case golden scenario has happened. Even if oil goes to $125 short term, your energy stocks won’t go much higher from here.

If Russia and Saudi Arabia are trying to exit the energy business, maybe you should too.

There has been a lot of speculation about Putin’s timing of his invasion of the Ukraine. The winter, oil inventory shortages, and NATO’s half-century of underinvestment in defense were all factors.

But the most important one is being completely ignored. Putin has to unload his country’s energy resources before they become worthless, which I reckon will happen in about 20 years.

That means in two decades, some 70% of Russia’s total government revenues vaporize. The invasion of the Ukraine allows Putin to get rid of more energy faster at higher prices right now.

As my old friend, Dr. Armand Hammer used to say, “Everything boils down to oil.” (click here for the link).

Without energy, Russia has little to offer the world but a few metals and a lot of unregulated hackers. You see the same motivation in Saudi Arabia’s massive investment in alternative energy in California. And yes, they really did try to buy all of Tesla three years ago (TSLA) before the shares rose fivefold.

My Ten-Year View

When we come out the other side of pandemic, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 240,000 here we come!

With near-record volatility fading fast, my February month-to-date performance rocketed to a blistering 10.51%. It turned out to be a great month to play from the short side in size. My 2022 year-to-date performance ended at 25.10%. The Dow Average is down -6.1% so far in 2022. It is the great outperformance on an index since Mad Hedge Fund Trader started 14 years ago.

I went into the Russian invasion with 90% cash, expecting trouble. I stopped out of a long in Apple (AAPL) in a day for a small loss. The next trade I added was another short in bonds, followed quickly by a new long in Tesla (TSLA) ($700 a share? Really?). Within hours the stock was up $100!

That brings my 13-year total return to 537.66%, some 2.00 times the S&P 500 (SPX) over the same period. My average annualized return has ratcheted up to 43.89%, easily the highest in the industry.

We need to keep an eye on the number of US Coronavirus cases at 79 million and rising quickly and deaths topping 950,000, which you can find here.

On Monday, February 28 at 8:00 AM EST, the president delivers the State of the Union Speech

On Tuesday, March 1 at 8:30 AM, the ISM Manufacturing Index for February is out.

On Wednesday, March 2 at 5:15 AM, the ADP Private Employment Index is released.

On Thursday, March 3 at 8:30 AM, Weekly Jobless Claims are published.

On Friday, March 4 at 8:30 AM, the February Nonfarm Payroll Report is Published. At 2:00 PM, the Baker Hughes Oil Rig Count is out.

As for me, I’m not supposed to be alive right now. In fact, the betting in my extended family is that I would never make it past 30. But here I am 40 years after my “sell by” date and I’m having the last laugh.

There were times when it was a close-run thing. Breaking my neck in a 70 mile per hour head-on collision in Sweden in 1968 didn’t exactly help my odds. Nor did watching a land mine blow up the guy in front of me in Cambodia in 1975, showering me head to toe with shrapnel and bone fragments.

After crashing three airplanes in Italy, Austria, and France, the European Union Aviation Safety Agency certainly wishes I died at a much earlier age. So, no doubt did the tourists at the top of the Eifel Tower one day in 1987, who I just missed hitting by 100 feet (yes, I was the Black Baron).

When I was in high school, the same group of four boys met every day at recess. We were all in the same Boy Scout Troop and became lifelong friends. Since I had been to over 50 countries by the age of 16, I was considered the wild man of the bunch, the risk-taker, always willing to roll the dice. The rest lived vicariously through me. But I was also the lucky one.

For a start, I was not among the 22 from my school who died in Vietnam, 11 officers and 11 draftees. Their names are all on the Vietnam Memorial Wall in Washington DC. My work for the Atomic Energy Commission at the Nuclear Test Site gave me a lifetime draft exception on national security grounds.

But I went anyway, on my own dime, to see who was telling the truth. It turned out no one was.

The other three boys in my group played it safe, pursuing conventional careers and never took any risks.

David Wilson was the first to go. He managed a hotel in Park City, Utah for a national chain. When he was hiking in the Rocky Mountains one day, a storm blew in and he went over a cliff. They didn’t find his body for a week.

Paul Blaine went on to USC and law school. In his mid-fifties, he lost a crucial case and shot himself at his desk at his Newport Bay office. I later learned he had been fighting a lifetime battle against depression. We never knew.

Robert Sandiford spent his entire career working as a computer programmer for the city of Los Angeles. By the time he retired at 65, he was managing 40 people. He pursued his dream to buy a large RV, drive it to Alaska, and play his banjo in a series of blue grass festivals.

Robert was unfamiliar with driving such a large vehicle. Around midnight, he was driving north on Interstate 5 near Modesto, CA when he passed a semi. When he pulled back into the slow lane, he clipped the front of the truck on cruise control with a driver half asleep. The truck pierced a propane tank on the RV, blowing up both vehicles. Robert, his wife Elise, and the truck driver were all burned to death.

At least, this was the speculation by the California Highway Patrol. Robert and Elise went missing for months. We thought that maybe his RV had broken down somewhere on the Alaskan Highway and family members went there to look for him. It was only after the Los Angeles County Coroner discovered some dental records that we learned the truth.

When the bones were returned, the family had them cremated and we scattered the ashes in the Pacific Ocean off Catalina Island where we used to camp as scouts.

I have been rewarded for risk taking for my entire life, so I keep at it. Similarly, I have seen others punished for risk avoidance, as happened to all my friends. The same applies to my trading as well. The price of doing nothing is far greater than doing something, and being aggressive offers the greatest reward of all.

This summer, I am scheduled to fly an 80-year-old Supermarine Spitfire fighter aircraft over the white cliffs of Dover, of Battle of Britain fame. I am spending my evenings memorizing the 1940 operations manual just to be safe, as I always do with new aircraft.

A 70-year-old flying an 80-year-old plane, what could go wrong with that?

Oh, and I am learning the banjo too.

I’ll send you the videos.

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

That’s a Heck of a Dividend

February 28, 2022/by Mad Hedge Fund Trader

February 22, 2022

Diary, Newsletter, Summary

Global Market Comments
February 22, 2022
Fiat Lux

Featured Trades:

(MARKET OUTLOOK FOR THE WEEK AHEAD, or BUYING AT THE SOUND OF THE CANON),
(SPY), (TLT), (TBT), (BRKB), (MSFT), (GOOGL),
(NFLX), (ZM), (DOCU), (ROKU), (VMEO)

February 22, 2022/by Mad Hedge Fund Trader

The Market Outlook for the Week Ahead, or Buying at the Sound of the Canon

Diary, Newsletter, Research

“Buy at the sound of the canon.”

That was the sage advice Nathan Rothschild, ancestor of my former London neighbor Jacob Rothschild, gave to friends about trading stocks during the Napoleonic Wars.

Of course, information moved rather slowly back in 1812, pre-internet. Rothschild relied on carrier pigeons to gain his unfair advantage.

You have me.

Somehow, you have descended into Dante’s seventh level of hell. You have to wake up every morning now, wondering if it will be Jay Powell or Vladimir Putin who is going to eviscerate your wealth, postpone your retirement, and otherwise generally ruin your day.

Every price in the market already knows we’re in a bear market except the major indexes.

The roll call of the dead looks like a WWI casualty report: (NFLX), (ZM), (DOCU), (ROKU), (VMEO). It’s like the bid offer spread has suddenly become 25%. Companies are either reporting great earnings and seeing their shares go through the roof. Or they are sorely disappointing and getting sent to perdition on a rocket ship.

The most fascinating thing to happen last week was a new low in the bond market, since you’re all short up the wazoo, courtesy of a certain newsletter. Ten-year US Treasury yields tickled 2.05%, a two-year high, then retreated to 1.92%. That means bonds have completed their $20 swan dive from their December high, a repeat of the 2021 price action.

Trading has gotten too easy, so I think bonds will stall out here for a while. I even added a small long. And please stop calling me to ask if you should sell short bonds down $20. It’s perfect 20/20 hindsight. You can’t imagine how many such calls I’ve already received.

Our old friend, the barbarous relic, returned from the dead last week too. All it needed was for bitcoin to die a horrible death for gold to recover its bid. A prospective war in the Ukraine helped take it to a one-year high.

However, I think it’s safe to say that has lost its value as an inflation hedge for good. If a move in the CPI from 2% to 7.5% can’t elicit a pulse in the yellow metal now, it never will.

The US dollar was another puzzler last week. While the fixed income markets went from discounting three rate hikes this year to six, the greenback flatlined. It was supposed to go up, as currencies with rapidly rising interest rates usually do.

Maybe the buck just forgot how to go down. Or maybe this is the beginning of the end, when sheer over-issuance destroys the value of the US dollar. Some $30 trillion in the national debt will do that to a currency.

I know you will find this difficult to believe, but there are some outstanding money-making opportunities setting up later in the year. The crappier conditions look now, the better they will become later. But you are going to have to practice some extreme patience to get to the other side.

I hope this helps.

Goldman Sachs Chops 2022 Market Forecast, taking the S&P 500 goal from $5,100 down to $4,900. A tighter interest rate picture is to blame, with the year yields topping 2.05% on Friday. Higher interest rates devalue future corporate earnings and kill the shares of non-earning companies.

Oil Hits Seven-Year High, to $94.44 a barrel, up 3.3% on the day. Putin’s strategy of talking oil prices up with Ukrainian invasion threats is working like a charm. That’s what this is all about. Texas tea accounts for 70% of Russian government revenues.

Fed to Front-Load Rate Rises, says St. Louis Fed president Bullard. The drumbeat for a more hawkish central bank continues. Bonds were knocked for two points.

Wholesale Prices Rocket 1% in January and are up a nosebleed 9.7% YOY. Inflation has clearly not peaked yet. Look for stocks to get punished once the current short-covering rally runs out of gas.

Retail Sales Soar by 3.8%, in January indicating that the economy is stronger than it appears. The rapid shift to an online economy is accelerating. Inflation is the turbocharger. When stocks overshoot on the downside load the boat.

Weekly Jobless Claims Jump, to 248,000. The weird thing is that the economic data says the opposite, that the economy is strengthening. Expect flip-flopping data and markets all year.

US GDP Jumped by 6.9% in Q4, well above estimates. Consumers are spending like drunken sailors. Eventually, the stock market will notice this, but not before we see lower lows first.

Gold Catches a Bid, off the back of the unrelenting Ukraine crisis. This may continue as a drip for months. Watch it collapse when peace is declared.

Existing Home Sales Jump 6.7%, to 6.5 million units, far better than expected. Inventory is down to yet another record low of 16.5%, an incredibly short 1.6-month supply. The Median Home Price has risen to $350,300, with the bulk of sales on the high end. Million-dollar plus homes are up 39% YOY.

Bond Yields Dive to a 1.93% Yield after failing at 2.05%. There is another nice (TLT) put spread setting up here. Let’s see if war breaks out over the weekend. The threats continue.

My Ten-Year View

When we come out the other side of pandemic, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 240,000 here we come!

With seven options positions expiring at max profit on Friday, my February month-to-date performance rocketed to a blistering 10.37%. My 2022 year-to-date performance has exploded to an unbelievable 24.90%. The Dow Average is down -7.9% so far in 2022. It is the great outperformance on an index since Mad Hedge Fund Trader started 14 years ago.

With 30 trade alerts issued so far in 2022, there was too much going on to describe here. Check your inboxes.

That brings my 13-year total return to 537.46%, some 2.00 times the S&P 500 (SPX) over the same period. My average annualized return has ratcheted up to 44.17% for the first time. How long it will keep rising I have no idea, but as long as it is, I’m not complaining. When you’re hot, you have to be maximum aggressive. That’s me to a tee.

We need to keep an eye on the number of US Coronavirus cases at 78.5 million, down 67% from the January peak, and deaths close to 936,000, off 20% in two weeks, which you can find here.

On Monday, February 21 markets are closed for Presidents Day.

On Tuesday, February 22 at 8:30 AM, the S&P Case Shiller National Home Price Index for December is announced.

On Wednesday, February 23 at 1:30 PM, API Crude Oil Stocks are released.

On Thursday, February 24 at 8:30 AM, Weekly Jobless Claims are published. The second estimate for Q4 GDP is also disclosed.

On Friday, February 25 at 7:00 AM, Personal Income & Spending for January is printed. At 2:00 PM, the Baker Hughes Oil Rig Count is out.

As for me, in the seventies, Air America was not too choosy about who flew their airplanes at the end of the Vietnam War. If you were willing to get behind the stick and didn’t ask too many questions, you were hired.

They didn’t bother with niceties like pilot licenses, medicals, or passports. On some of their missions, the survival rate was less than 50% and there was no retirement plan. The only way to ignore the ratatatat of bullets stitching your aluminum airframe was to turn the volume up on your headphones.

Felix (no last name) taught me to fly straight and level so he could find out where we were on the map. We went out and got drunk on cheap Mekong Whiskey after every mission just to settle our nerves. I still remember the hangovers.

When I moved to London to set up Morgan Stanley’s international trading desk in the eighties, the English had other ideas about who was allowed to fly airplanes. Julie Fisher at the London School of Flying got me my basic British pilot’s license.

If my radio went out, I learned to land by flare gun and navigate by sextant. She also taught me to land at night on a grass field guided by a single red lensed flashlight. For fun, we used to fly across the channel and land at Le Touquet, taxiing over the rails for the old V-1 launching pads.

A retired Battle of Britain Spitfire pilot named Captain John Schooling taught me advanced flying techniques and aerobatics in an old 1949 RAF Chipmunk. I learned barrel rolls, loops, chandelles, whip stalls, wingovers, and Immelmann turns, everything a WWII fighter pilot needed to know.

John was a famed RAF fighter ace. Once he got shot down by a Messerschmitt 109, parachuted to safety, took a taxi back to his field, jumped into his friend’s Spit, and shot down another German. Every lesson ended with a pint of beer at the pub at the end of the runway. John paid me the ultimate compliment, calling me “a natural stick and rudder man,” no pun intended.

John believed in tirelessly practicing engine-off landings. His favorite trick was to reach down and shut off the fuel, telling me that a Messerschmitt had just shot out my engine and to land the plane. When we got within 200 feet of a good landing, he turned the fuel back on and the engine coughed back to life. We practiced this more than 200 times.

When I moved back to the US in the early nineties, it was time to go full instrument in order to get my commercial and military certifications. Emmy Michaelson nursed me through that ordeal. After 50 hours flying blindfolded in a cockpit, you get very close with someone.

Then came flight test day. Emmy gave me the grim news that I had been assigned to “One Engine Larry” the most notorious FAA examiner in Northern California. Like many military flight instructors, Larry believed that no one should be allowed to fly unless they were perfect.

We headed out to the Marin County coast in an old twin-engine Beechcraft Duchess, me under my hood. Suddenly, Larry shut the fuel off, told me my engines failed, and that I had to land the plane. I found a cow pasture aligned with the wind and made a perfect approach. Then he asked, “How did you do that?” I told him. He said, “Do it again” and I did. Then he ordered me back to base. He signed me off on my multi-engine and instrument ratings as soon as we landed. Emmy was thrilled.

I now have to keep my many licenses valid by completing three takeoffs and landings every three months. I usually take my kids and make a day of it, letting them take turns flying the plane straight and level.

On my fourth landing, I warn my girls that I’m shutting the engine off at 2,000 feet. They cry “No dad, don’t.” I do it anyway, coasting in bang on the numbers every time.

A lifetime of flight instruction teaches you not only how to fly, but how to live as well. It makes you who you are. Thus, my insistence on absolute accuracy, precision, risk management, and probability analysis. I live my life by endless checklists, both short and long term. I am the ultimate planner and I have a never-ending obsession with the weather.

It passes down to your kids as well.

Julie became one of the first female British Airways pilots, got married, and had kids. John passed on to his greater reward many years ago. I don’t think there are any surviving Battle of Britain pilots left. Emmy was an early female hire as United pilot. She married another United pilot and was eventually promoted to full captain. I know because I ran into them in an elevator at San Francisco airport ten years ago, four captain’s bars adorning her uniform.

Flying is in my blood now and I’ll keep flying for life. I can now fly anything anywhere and am the backup pilot on several WWII aircraft including the B-17, B-24, and B-25 bombers and the P-51 Mustang fighter.

Over the years, I have also contributed to the restoration of a true Battle of Britain Spitfire, and this summer I’ll be taking the controls at the Red Hill Aerodrome for the first time.

Captain John Schooling would be proud.

Stay Healthy.

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

Captain John Schooling and His RAF 1949 Chipmunk

A Mitchell B-25 Bomber

A 1932 De Havilland Tiger Moth

Flying a P-51 Mustang

The Next Generation

February 22, 2022/by Mad Hedge Fund Trader

February 15, 2022

Diary, Newsletter, Summary

Global Market Comments
February 15, 2022
Fiat Lux

Featured Trades:

(HOW TO HANDLE THE FRIDAY, FEBRUARY 18 OPTIONS EXPIRATION),
(TLT), (SPY), (BRKB), (TSLA), (MSFT), (AMZN)

February 15, 2022/by Mad Hedge Fund Trader

How to Handle the Friday February 18 Options Expiration

Diary, Newsletter

Happy and newly enriched followers of the Mad Hedge Fund Trader Alert Service have the good fortune to own a record ten deep in-the-money options positions that expire on Friday, February 18 at the stock market close in three days.

I have to admit that I traded like a Wildman this month, pedal to the metal, and 100% invested. This will take our 2022 year-to-date performance to over 24%. I like to think that is the end result of my 53 years investment in researching trading strategies.

Sometimes overconfidence works.

It is therefore time to explain to the newbies how to best maximize their profits.

These involve the:

Risk On

World is Getting Better

(TLT) 2/$149-$152 put spread 10.00%
(TLT) 2/$147-$150 put spread 10.00%
(TLT) 3/$150-$153 put spread 10.00%
(BRKB) 2/$270-$280 call spread 10.00%
(TSLA) 2/$600-$650 call spread 10.00%

Risk Off

World is Getting Worse

(MSFT) 2/$340-$350 put spread -10.00%
(SPY) 2/$465-$475 put spread -10.00%
(SPY) 3/$470-$480 put spread -10.00%
(AMZN) 2/$3400-$3500 put spread -10.00%
(TLT) 3/$127-$130 call spread -10.00%

Total Net Position 0.00%

Total Aggregate Position 100.00%

Provided that we don’t have another 2,000-point move down in the market in the next three 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 (TSLA) February 18 $600-$650 vertical bull call spread, which 50% in the money from its lower strike price which I almost certainly will run into expiration. Your profit can be calculated as follows:

Profit: $50.00 expiration value - $43.00 cost = $7.00 net profit

(2 contacts X 100 contracts per option X $7.00 profit per option)

= $1,400 or 16.28% in 15 trading days.

Many of you have already emailed me asking what to do with these winning positions.

The answer is very simple. You take your left hand, grab your right wrist, pull it behind your neck, and pat yourself on the back for a job well done.

You don’t have to do anything.

Your broker (are they still called that?) will automatically use your long position to cover your short position, canceling out the total holdings.

The entire profit will be credited to your account on Monday morning February 21 and the margin freed up.

Some firms charge you a modest $10 or $15 fee for performing this service.

If you don’t see the cash show up in your account on Monday, get on the blower immediately and make your broker find it.

Although the expiration process is now supposed to be fully automated, occasionally machines do make mistakes. Better to sort out any confusion before losses ensue.

If you want to wimp out and close the position before the expiration, it may be expensive to do so. You can probably unload them pennies below their maximum expiration value.

Keep in mind that the liquidity in the options market understandably disappears, and the spreads substantially widen, when a security has only hours, or minutes until expiration on Friday, February 18. So, if you plan to exit, do so well before the final expiration at the Friday market close.

This is known in the trade as the “expiration risk.”

One way or the other, I’m sure you’ll do OK, as long as I am looking over your shoulder, as I will be, always. Think of me as your trading guardian angel.

I am going to hang back and wait for good entry points before jumping back in. It’s all about keeping that “Buy low, sell high” thing going.

I’m looking to cherry-pick my new positions going into the next month-end.

Take your winnings and go out and buy yourself a well-earned dinner. Just make sure it’s take-out. I want you to stick around.

Well done, and on to the next trade.

You Can’t Do Enough Research

February 15, 2022/by Mad Hedge Fund Trader

February 14, 2022

Diary, Newsletter, Summary

Global Market Comments
February 14, 2022
Fiat Lux

Featured Trades:

(MARKET OUTLOOK FOR THE WEEK AHEAD, or WELCOME TO WORLD WAR III),
(TLT), (SPY), (MSFT), (AMZN), (BKKB), (AAPL)

February 14, 2022/by Mad Hedge Fund Trader

The Market Outlook for the Week Ahead, or Welcome to WWIII

Diary, Newsletter

The market finally found something worse than inflation to rattle it: WWIII.

I’m not expecting my call-up papers from the Marine Corps anytime soon. After all, there isn’t a war that is about to happen. In any case, if the defense of the nation relies upon me as a pilot, we are in big trouble.

The market clearly thought otherwise last week, when the Dow swooned 1,200 points in two days. The Friday close was a dog’s breakfast.

It gets worse.

The collapse sets up a perfect “head and shoulders” top which the hedge fund community has been gunning for all year. That beckons eventual lows that will finally bring us into decent LEAPS territory, especially if the Volatility Index (VIX) leaps over $40.

Biden actually has a pretty good strategy going in the Ukraine. By announcing the time and date of the Russian invasion in advance, he boxes Putin into a corner, forcing him to put up or shut up.

It's really all one big chess game, with the two countries attempting to each gain maximum security advantages at minimum cost. Putin would love the Ukraine if he could get it. So did Hitler, Napoleon, and Genghis Khan before him.

Biden hopes to make the price so high it’s not worth it. After all, Hitler, Napoleon, and Genghis Khan didn’t come to good endings.

It’s really meaningless to fight this battle when modern national borders are rapidly dissolving anyway. Modern borders are increasingly being drawn by operating systems, apps, and security suites rather than lines on a map.

Of course, bonds were discounting a completely different scenario, that of peace, prosperity, and booming economies that demand more capital at higher interest rates. Fed members are now playing a game of competitive hawkishness, talking interest rates up and bond prices down.

It all sounds like a great short bond environment to me, which is why I have been running a triple short position since the beginning of the year. The best is yet to come.

So we flipped from being long everything in 2021 to short the works in 2022. That’s just the way markets work now. So, if you can’t stand the heat, get out of the kitchen.

Fed Now Pushing a Half-Point Hike, tanking the markets, and could deliver 100 basis points by July. Competitive hawkishness has broken out at the Fed. Looks like a bond short will be the trade of the year. Who knew? (You did).

Core CPI Comes in Hot at 7.5%, the highest since 1982, and hotter than expected. The news finally took bond prices to new multi-year lows and ten-year yields to 2.0%. One-third of this number is rent, which is rising at a record rate. Wages are up an eye-popping 5% YOY. Used car prices were up massively. Stocks took it on the news. It’s going to get worse before it gets better. The chances of a 50-basis point hike in March.

Real Yields Turn Positive, for the first time in a decade, at least for 30-year US treasury bonds. That is the real inflation-adjusted yield for TIPS, or Treasury Inflation-Protected Securities, which now yield 0.08%. Expect real yields to soar from here. Yes, positive returns for bonds at last!

JGB Yields Approach Five Year High, at 0.25%, so will the Bank of Japan be forced to raise rates for the first time in 21 years to come in line with the market. Quantitative Easing is also ending. Gee, do you think zero rates have worked? It's all part of an accelerating trend for more expensive global money.

Pfizer Hauls in $32 Billion From Covid, and another $22 billion for its antiviral Paxlovid. Still, the stock market is a “What have you done for me lately,” and the shares are off 20% since December.

NVIDIA Cancels ARM Purchase, ending its $66 billion attempt to buy market share. UK regulatory opposition was the issue. Buy (NVDA) on dips. The best-run company in the market has just suffered a 40% selloff.

GM to Ramp Up EV Production Sixfold This Year. Electric Escalade SUVs and trucks are the top priority. But while saying is one thing, doing is another. No mention has been made of how they will obtain the extra chips and batteries. Avoid (GM) a never-ending font of disappointment.

Weekly Jobless Claims Prints at 223,000, well above the post-pandemic low of 188,000 in December. Continuing Claims post at 1,621,000.

Foreclosures are Soaring now that the pandemic relief is over. They were up 29% in January, double YOY levels. Florida leads in this troubled category. The numbers would be higher save for enormous rises in home prices which permit cash out refis.

My Ten-Year View

When we come out the other side of pandemic, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 240,000 here we come!

With near record volatility fading fast, my February month to date performance rocketed to a blistering 8.71% in only nine days. My 2022 year-to-date performance has exploded to an unbelievable 23.30%. The Dow Average is down -4.3% so far in 2022. It is the great outperformance on an index since Mad Hedge Fund Trader started 14 years ago.

With 30 trade alerts issued so far in 2022, there was too much going on to describe here. Check your inboxes.

That brings my 13-year total return to 535.86%, some 2.00 times the S&P 500 (SPX) over the same period. My average annualized return has ratcheted up to 44.04% for the first time. How long it will keep rising I have no idea, but as long as it is, I’m not complaining. When you’re hot, you have to be maximum aggressive.

We need to keep an eye on the number of US Coronavirus cases at 78 million and rising quickly and deaths topping 919,000, which you can find here.

On Monday, February 14 at 8:00 AM EST, US Consumer Inflation Expectations are out.

On Tuesday, February 15 at 8:30 AM, the New York Empire State Manufacturing Index is printed.

On Wednesday, February 16 at 8:30 AM, US Retail Sales for January are announced.

On Thursday, February 17 at 8:30 AM, Weekly Jobless Claims are published. Housing Starts and Building Permits for January are announced.

On Friday, February 18 at 7:00 AM, Existing Home Sales for January are disclosed. At 2:00 PM, the Baker Hughes Oil Rig Count are out.

As for me, I made the most unlikely of entries into journalism 50 years ago, thanks to basketball, Mensa, and the kindness of complete strangers.

Struggling as a part-time English teacher in Tokyo for Toyota, Sony, and Meiji Shipping, I noticed one day in the Japan Times an ad for a Mensa meeting, the organization for geniuses.

I joined and, after a few meetings, was invited to give a presentation on the subject of my choice at the next meeting. Since I had just obtained a degree in Biochemistry from UCLA, I spoke on the effects of THC (tetra hydro cannabinol) on the human brain. The meeting was exceptionally well attended by detectives from the Tokyo Police Department, as THC was then highly illegal.

At the end of the meeting, famed Australian journalist Murray Sayle approached me and said he could get me into the Foreign Correspondents Club of Japan. The big attraction was access to the Club’s substantial English language library.

Except for a few well-worn Playboy magazines coming out of the local US Air Force bases, there were almost no English language publications in Japan in those days.

So I joined as a corporate member at 22, the youngest of the 2,000-man club, eating lunch daily with the foreign correspondents on the 20^th floor of the Yurakcho Denki Building in central Tokyo. It was just across the street from General Douglas MacArthur’s WWII occupation headquarters.

Many correspondents were holdovers from WWII and had fought their way to Japan on the long island-hopping campaign. Once in Tokyo, they never left, were treated like visiting royalty, paid well, and besieged by beautiful women.

At 6’4” it was only weeks before I was recruited for the club’s basketball team. We played the team from the US Embassy Marine Corps guard, which regularly kicked our butts every week. After all, they had nothing to do all day but play basketball. But they also gave us access to the Tokyo PX where you could get a bottle of Johnny Walker Red for $3.00, versus the local retail price of $100.00.

I managed to eventually get a job at Dai Nana Securities to teach English to the sales staff there. The first oil shock had just taken place and the sole buyers of shares in the world were all in the Middle East.

After two weeks of trying, I met with the president of the company, Mr. Saito, and told him his staff would never learn English. They just lacked the language gene. But if he taught me the stock business, I would sell the shares for him.

He said OK.

Thus, I ensued on a crash course on securities analysis, relying heavily on the firm’s only copies of the 1934 book, Securities Analysis by Benjamin Graham, and his 1949 tome, The Intelligent Investor. I still have a copy of the first research report I wrote on electric tool maker Makita.

It wasn’t long before I became the top salesman at Dai Nana, eventually selling up to 5% holdings in the top 200 Japanese companies to the Saudi Arabia Monetary Authority, the Kuwait Investment Authority, and the Abu Dhabi Investment Authority.

Then the stock market crashed. I lost my job. So, I started asking around the Press Club if anyone had any work. I was broke and nearly homeless.

At the time, most of the correspondents had just returned from covering the Vietnam War. In Japan, they wanted to cover politics, geisha girls, and Emperor Hirohito. Business was at the very bottom of the list. Besides, no one cared what happened in Japan anyway.

It turned out that all the members of the Press Club basketball team were business journalists. There was Mike Tharpe from the Wall Street Journal, Tracy Dalby from the New York Times, and Richard Hanson from the Associated Press, all NCAA college athletes.

Then one team member, The Economist correspondent, Doug Ramsey, asked me if I could write a story about the Japanese steel industry, which was then aggressively dumping product in the US, killing American jobs and creating a political firestorm. Using my stock market contacts, I spent a week diligently researching the subject.

The editors in London loved the story and said they’d take two a week at $75 each. Then the Financial Times heard about me and said they’d also take two a week. All of a sudden, I had a full-time job paying the princely sum of $1,200 a month!

I eventually built up a global syndicate of 40 business publications in ten countries. By 26, I was earning $100,000 a year and published several books. At my peak I accounted for about half of all business news coming out of Japan, along with stringer jobs with the British Broadcasting Corp. in London and NBC in New York.

This was all from a person whose only “C” in college was in English. Officially, I didn’t know how to write back then.

Officially, I still don’t.

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

February 14, 2022/by Mad Hedge Fund Trader

February 7, 2022

Diary, Newsletter, Summary

Global Market Comments
February 7, 2022
Fiat Lux

Featured Trades:

(MARKET OUTLOOK FOR THE WEEK AHEAD, or CASH IS KING),
(SPY), (TLT), (TBT), (MSFT), (AAPL), (TSLA), (BRKB)

February 7, 2022/by Mad Hedge Fund Trader

January 31, 2022

Diary, Newsletter, Summary

Global Market Comments
January 31, 2022
Fiat Lux

Featured Trades:

(TESTIMONIAL),
(MARKET OUTLOOK FOR THE WEEK AHEAD, or DEATH OF THE FED PUT),
(SPY), (TLT), (TBT), (MSFT), (AAPL), (TSLA), (BRKB)

January 31, 2022/by Mad Hedge Fund Trader

The Market Outlook for the Week Ahead, or Death of the Fed Put

Diary, Newsletter

That great wellspring of your personal wealth for the last 13 years, the Fed put, is no more.

No longer can you count on an endless expansion of the money supply to boost the value of your share and real estate portfolios.

In fact, since our central bank embarked on an endless effort to restore the economy during the 2008 financial crisis, the Fed balance sheet has ballooned from $400 million to $9 trillion. And it is still expanding, although at a much smaller rate.

Long time Fed watchers like myself, will tell you that the Fed is always slow, behind the curve, and is often responding to data a year late. We have an hour late and dollar short central bank.

That is certainly true with this cycle when it took 12 months for the Open Market Committee to notice that a decade-plus of zero interest rates had caused inflation to explode to 6.9%.

But just as we have to reinvent ourselves every day with a constantly evolving stock market, so does the Fed with its interest rates policy. As a result, this new interest rate cycle will be like no others.

There can be no doubt that the Fed is taking away the punch bowl. Overnight, the futures market is gone from discounting three-quarter point interest rate hikes to six. That means a rate increase at every meeting for the rest of 2022.

Quantitative easing has been thrown into the dustbin of history as well. Fed Bond buying will taper down from $120 billion in December to zero by March. The big guess now is how soon quantitative tightening will start.

In the meantime, the glass has gone from half full to half-empty for the stock market. That means selling every rally rather than buying every dip. It’s a new World.

Since the beginning of the year, I have been playing roulette. Except for that numbers one through 35 are colored black and I have only been betting black. That is the percentage of trade alerts that have been profitable so far in 2022. And you know what? I am going to keep on playing!

I’ll tell you how all this ends. Eventually, big technology prices will drop 20% and earnings will rise by 30%, producing a 50% valuation haircut. That will be enough of a bargain to draw back even the most cautious of investors. But that is still months off.

Ukraine? You’re worried about the Ukraine? Last week Biden moved the USS Harry S. Truman into the Black Sea. Other US carriers are close by. That puts a massive air counterstrike against a Russian tank invasion a phone call away.

The last time this contest played out was during the first Iraq War. Russian supplied forces lost 5,000 tanks and we lost one (he parked on a ridgeline). Putin may like chess, but he doesn’t play Russian roulette. This is all just a ploy to get oil prices high, on which Russia relies on for 70% of government revenues.

By the end of this year, the supply chain will be restored, inflation tamed, the economy will be booming, we will be at full employment, and big technology earnings will be at new records. Higher share prices are a bet I am more than willing to make, especially with 35:1 ods in my favor.

The Dow Dives Nearly $4,000 points in 14 days, in the mother of all corrections. And while the market has discounted the next four quarter-point rate hikes, it hasn’t even thought about the eight after that. Yes, overnight rates may peak at 3.25% in three years. In addition, my friends at the Fed are considering taking $3 trillion in liquidity out of the system by the end of 2023. US earnings growth will more than cover this but it may take months for markets to figure that out. That makes H1 all about preserving capital and then swinging for the fences in H2. In the meantime, make volatility your friend and not your enemy.

Don’t Buy this Dip, says Morgan Stanley. We are in for more punishment, especially in non-earning technology stocks. Too many investors missed the top and are still looking to get out. Growth is dead. But it won’t be as bad as the 2000 Dotcom bust. At a certain point, sellers will get exhausted.

The Fed Leaves Rates Unchanged but says rates will rise soon and signaled the end of quantitative easing in March. No mention was made of quantitative tightening. The economy is still very strong, but omicron is a concern. The universal feeling is that the Fed is a year late in its unfolding tightening, prompting runaway inflation. The was little market reaction as the comments were largely expected. The Volatility Index is back down to $27.

Apple Blows it Away with Q4 revenues of an eye-popping $124 billion, up 11% YOY. Some $27 billion in dividends and share buybacks was returned to shareholders. iPhone sales were up 9.2% YOY and 57% of the total. The bottom may not be in yet for this bear move but I see the shares at $250 by next year, powered by the rollout of new product lines and services. Taking profits on my short-term long right here.

Mortgage Interest Rates Hit 22-Month High, with the 30-year fixed hitting 3.56%. So far, no effect on the housing market, which is hotter than ever. But homebuilder stocks like (LEN), (KBH), and (TOL) have been getting hit hard.

S&P Case Shiller Rockets 18.8%, in November with its National Home Price Index. Phoenix 32.2%, Tampa (29%), and Miami (26.6%) were the big gainers. The real estate boom is years away from a peak.

New Home Sales Skyrocket to an eye-popping 811,000 in December, up 11.7% YOY. Median sales prices jump to $377,700, up 3% YOY. Inventories further shrink to six months. Builders can’t build them fast enough, thanks to labor and supply chain shortages. With a 50-basis point rise in mortgage rates, next month’s report may be a different story.

Oil Could Hit $100 in a Day if Russia attacks the Ukraine. Inventories are already short from lack of investment and Europe is facing a Russian engineered energy squeeze. A Chinese economic recovery, the world’s largest importer, could make matters worse. Watch (USO).

Caterpillar Announces Robust Earnings, but the stock sells off anyway. Total 2021 profits came to $505 million, up 72% from 2020. Enormous construction demand is a major boost, as well as ongoing commodity and agricultural booms. Buy (CAT) on dips as a major pro-cyclical play.

My Ten-Year View

When we come out the other side of pandemic, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 240,000 here we come!

With the pandemic-driven meltdown on Friday, my January month-to-date performance rocketed to 12.05%. My 2022 year-to-date performance ended at 12.05%. The Dow Average is down -5.2% so far in 2022.

With 26 trade alerts issued so far in January, there was too much going on to describe here.

That brings my 12-year total return to 524.61%, some 2.00 times the S&P 500 (SPX) over the same period. My 12-year average annualized return has ratcheted up to 43.19%, easily the highest in the industry.

We need to keep an eye on the number of US Coronavirus cases at 74 million and rising quickly and deaths topping 884,000, which you can find here.

On Monday, January 31 at 6:45 AM, the Chicago PMI for January is out.

On Tuesday, February 1 at 7:00 AM, the JOLTS Job Openings for December are announced.

On Wednesday, February 2 at 8:30 AM, the ADP private jobs figures for December are released.

On Thursday, February 3 at 8:30 AM the Weekly Jobless Claims are disclosed. At 7:00 AM the ISM Non-Manufacturing PMI is printed.

On Friday, February 4 at 8:30 AM the January Nonfarm Payroll Report is released. At 2:00 PM, the Baker Hughes Oil Rig Count is out.

As for me, those of you who have followed me for a long time will not be surprised to learn that I once made a living as a male model in Japan.

I took fairly conservative gigs, a TV commercial for Mazda Motors, a testimonial for Mitsubishi television sets, and print ads for Toyota. The X-rated requests I passed on to my friends at the karate school.

Then the casting call went out for the tallest, meanest-looking foreigner in Japan.

They picked me.

Koikei Potato Chips was unique among competing brands in Tokyo in that they were sprinkled with seaweed flakes. I couldn’t stand them.

The script set me in a boxing ring beating the daylights out of a small Japanese competitor. I knocked him flat. Then a Japanese girl rushed up to the ring and fed the downed man Koikei Potato Chips. Instantly, he jumped up and won the fight.

In the last scene, the Japanese man is seen sitting on top of me with two black eyes eating more potato chips. Oh, and the whole thing was set in a 19^th century format so I was wearing tights the entire time.

I took my 10,000 yen home and considered it a good day’s work.

Ten years later, I was touring Japan as a director of Morgan Stanley with some of the firm’s largest clients. We stopped for lunch at a rural restaurant with a TV on the wall. Suddenly, one of the clients asked, “Hey John, isn’t that you on the TV?”

It was my Koike Potato Chip commercial. After ten years, they were still running it. Who knew? I was never so embarrassed. When the final scene came, everyone burst into laughter. I feebly explained my need for spare cash a decade earlier, but no one paid attention.

I continued with my tour of Japan but somehow the customer reaction was just not the same.

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