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.
https://www.madhedgefundtrader.com/wp-content/uploads/2019/09/john-and-girls.png322345Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2022-02-15 09:02:012022-02-15 15:58:03How to Handle the Friday February 18 Options Expiration
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 20th 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
https://www.madhedgefundtrader.com/wp-content/uploads/2022/02/foreign-correspondent-ID.png544864Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2022-02-14 10:02:272022-02-14 15:49:04The Market Outlook for the Week Ahead, or Welcome to WWIII
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 19th 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
https://www.madhedgefundtrader.com/wp-content/uploads/2022/01/annualized-jan3122.png480864Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2022-01-31 09:02:522022-01-31 12:53:32The Market Outlook for the Week Ahead, or Death of the Fed Put
(MARKET OUTLOOK FOR THE WEEK AHEAD, or PARACHUTING WITHOUT A PARACHUTE), (AAPL), (SPY), (MSFT), (TLT), (TBT), (TDOC), (NFLX), (DIS), (VALE), (FCX), (USO), (JPM), (WFC), (BAC), (TSLA), (AMZN), (NVDA)
It has been the worst New Year stock market opening in history.
After a two-day fake-out to the upside, stocks rolled over like the Bismarck and never looked up. NASDAQ did its best interpretation of flunking parachute school without a parachute, posting the worst month since 2008.
Markets can’t hold on to any rally longer than nanoseconds, and the last hour of the day has turned into one from hell.
What is even more confusing is that stocks are now trading like commodities, with massive one-way moves, while commodities, like oil (USO), copper( FCX), and iron ore (VALE) have resumed a steady grind up.
We had a lovefest going on here at Incline Village, Nevada for Technology and Bitcoin researcher Arthur Henry has been staying with me for the week to plot market strategy.
Once the market showed its hand, I sold short Microsoft (MSFT), which elicited torrents of complaints from readers. Then Arthur sold short Netflix (NFLX), inviting refund demands. Then I sold short Apple (AAPL), prompting accusations of high treason. Then Arthur sold short Teledoc (TDOC). There wasn’t a lot of talking, but frenetic writing and emailing instead.
Followers cried all the way to the bank.
In a mere two weeks, the price earnings multiple for the S&P 500 plunged from 22X to 20X. A lot of traders were only buying stock because they were going up. Take out the “up” and Houston we have a problem.
The entire streaming industry seems to have gone up in smoke and ex-growth practically overnight. Netflix (NFLX) delivered a gob smacking 29.5% swan dive in the wake of disappointing subscriber growth forecasts. Walt Disney (DIS), which ate the Netflix lunch, was dragged down 10% through guilt by association.
It is often said that the stock market has discounted 12 of the last six recessions. It is currently pricing in one of those non-recessions. What we are seeing is a sudden growth scare of the first order.
Despite last week’s carnage, stocks are still the most attractive asset class in the world, offering a potential 10% return in 2022. The problem is that they may make that 10% profit starting from 10% lower than here.
Despite all the red ink, big tech stocks are still on track to see a 30% earnings growth this year, and they account for a hefty 28% of the market.
Let’s look at Apple’s past declines for guidance on this meltdown.
Steve Jobs’ creation gave back 60% in the 2008 Great Recession, 34% during the 2015 growth scare, 48% during the great 2018 Christmas collapse, and 28% in the 2020 pandemic crash. So, the good news is that you won’t get killed by this selloff, you’ll just lose an arm and a leg. But they’ll grow back.
Remember, it’s always darkest just before it goes completely black. This correction is survivable, although it may not seem so at the moment.
It does vindicate my 2022 view that the first half will be about survival and that big money can be had in the second half.
So far, so good.
The Market is De-Grossing Big Time. That means cutting total market exposure and selling everything, regardless of stock or sector. The market is discounting a recession and bear market that isn’t going to happen, which occurs often. When it ends in a few weeks, interest rate sensitives, especially the banks, will bounce back hard, but tech won’t. Buy (JPM), (WFC), and (BAC) on bigger dips.
The Bond Collapse Goes Global, with German 10-year bunds going positive for the first time in three years, up 40 basis points in a month. Yes, inflation is finally hitting the Fatherland, home of post-WWI billion percent inflation. Eurozone inflation just topped 5%, well above its 2% target. British inflation hit a 30-year high. The move has lit a fire under all Euro currencies. Methinks the down move in (TLT) has more to go.
Fed to Raise Rates Eight Times, says Marathon Asset Management. That’s what will be needed to curb the current runaway inflation now at 7.0% and still rising. Personally, I think it will be 12 quarter-point increments to peak out at a 3 ¼% overnight rate. Any more and Powell might bring on a recession.
NASDAQ is Officially in Correction, down 10%, in the wake of poor performance this month. It’s the fourth one since the pandemic began two years ago. Tesla (TSLA), Amazon (AMZN), and NVIDIA (NVDA) have been leading the swan dive, all felled by rapidly rising interest rates. This could go on for months.
Weekly Jobless Claims Hit 286,000, a four-month high, as omicron sends workers fleeing home.
Goldman Sachs (GS) Gets Crushed, down 8%, on disappointing earnings. Tough market conditions are fading trading volumes while 2021 bonuses were through the roof. The move is particularly harsh in that buyers were flooding in right at support at the 200-day moving average.
China GDP (FXI) Grows 8.1% YOY but is rapidly slowing now, thanks to Omicron. China was first in and first out with the pandemic but is getting hit much harder in this round. That has prompted new mass lockdowns which will make out own supply chain problems worse for longer. In Chinese, “lockdown” means they weld your door shut, unlike here. Harsh, but it works.
Oil (USO) Hits Seven-Year High, as inventories hit a 21-year low. No new capital is entering the industry, crimping supplies as old fields play out. The threat of a Russian invasion of the Ukraine is prompting advance stockpiling. Russia is the world’s second-largest oil exporter.
Existing Homes Sales Hit a 15-Year High, at 6.12 million, the best since 2006. December fell 4.6%. Extreme inventory shortage is the issue, with only 910,000 homes for sale at the end of the year, an incredibly low 1.8-month supply. You can’t find anything on the market now, to buy or rent. The median price of a home sold in December was $358,000, a 15.8% gain YOY.
Bitcoin (BITO) Crashes, decisively breaking key support at $40,000. Non-yielding assets of every description are getting wiped. Bail on all crypto options plays asap.
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 bounced back hard to 5.05%. My 2022 year-to-date performance also ended at 5.05%. The Dow Average is down -6.12% so far in 2022.
Once stocks went into free fall, I piled on the short positions as fast as I could write the trade alerts, including in Microsoft (MSFT), Apple (AAPL), and a double short in the S&P 500 (SPY). I also increased my shorts in the bond market (TLT) to a triple position. When prices became the most extreme, when the Volatility Index (VIX) hit $30, I bought both (SPY) and (TLT).
If everything goes our way, we should be up 14.26% by the February 18 options expiration.
That brings my 12-year total return to 517.61%, some 2.00 times the S&P 500 (SPX) over the same period. My 12-year average annualized return has ratcheted up to 42.82% easily the highest in the industry.
We need to keep an eye on the number of US Coronavirus cases at 71 million and rising quickly and deaths topping 866,000, which you can find here.
On Monday, January 24 at 6:45 AM, The Market Composite Flash PMI for January is out. Haliburton (HAL) reports.
On Tuesday, January 25 at 6:00 AM, the S&P Case Shiller National Home Price Index for November is released. American Express (AXP) reports.
On Wednesday, January 26 at 7:00 AM, the New Home Sales for December are published. At 11:00 AM The Federal Reserve interest rate decision is announced. Tesla (TSLA), Boeing (BA), and Freeport McMoRan (FCX) report.
On Thursday, January 27 at 8:30 AM the Weekly Jobless Claims are disclosed. We also get the first look at US Q4 GDP. Alaska Air (ALK) and US Steel (X) report.
On Friday, January 28 at 5:30 AM EST US Personal Income & Spending is printed. Caterpillar (CAT) reports. At 2:00 PM, the Baker Hughes Oil Rig Count is out.
As for me, when I drove up to visit my pharmacist in Incline Village, Nevada, I warned him in advance that I had a question he never heard before: How good is 80-year-old morphine?
He stood back and eyed me suspiciously. Then I explained in detail.
Two years ago, I led an expedition to the South Pacific Solomon Island of Guadalcanal for the US Marine Corps Historical Division (click here for the link). My mission was to recover physical remains and dog tags from the missing-in-action there from the epic 1942 battle.
Between 1942 and 1944, nearly four hundred Marines vanished in the jungles, seas, and skies of Guadalcanal. They were the victims of enemy ambushes and friendly fire, hard fighting, malaria, dysentery, and poor planning.
They were buried in field graves, in cemeteries as unknowns, if not at all left out in the open where they fell. They were classified as “missing,” as “not recovered,” as “presumed dead.”
I managed to accomplish this by hiring an army of kids who knew where the most productive battlefields were, offering a reward of $10 a dog tag, a king's ransom in one of the poorest countries in the world. I recovered about 30 rusted, barely legible oval steel tags.
They also brought me unexploded Japanese hand grenades (please don’t drop), live mortar shells, lots of US 50 caliber and Japanese 7.7 mm Arisaka ammo, and the odd human jawbone, nationality undetermined.
I also chased down a lot of rumors.
There was said to be a fully intact Japanese zero fighter in flying condition hidden in a container at the port for sale to the highest bidder. No luck there.
There was also a just discovered intact B-17 Flying Fortress bomber that crash-landed on a mountain peak with a crew of 11. But that required a four-hour mosquito-infested jungle climb and I figured it wasn’t worth the malaria.
Then, one kid said he knows the location of a Japanese hospital. He led me down a steep, crumbling coral ravine, up a canyon and into a dark cave. And there it was, a Japanese field hospital untouched since the day it was abandoned in 1943.
The skeletons of Japanese soldiers in decayed but full uniform laid in cots where they died. There was a pile of skeletons in the back of the cave. Rusted bottles of Japanese drugs were strewn about, and yellowed glass sachets of morphine were scattered everywhere. I slowly backed out, fearing a cave-in.
It was creepy.
I sent my finds to the Marine Corps at Quantico, Virginia, who traced and returned them to the families. Often the survivors were the children or even grandchildren of the MIAs. What came back were stories of pain and loss that had finally reached closure after eight decades.
Wandering about the island, I often ran into Japanese groups with the same goals as mine. My Japanese is still fluent enough to carry on a decent friendly conversation with the grandchildren of their veterans. It turned out I knew far more about their loved ones than they. After all, it was our side that wrote the history. They were very grateful.
How many MIAs were they looking for? 30,000! Every year, they found hundreds of skeletons, cremated in a ceremony, one of which I was invited to. The ashes were returned to giant bronze urns at Yasakuni Ginja in Tokyo, the final resting place of hundreds of thousands of their own.
My pharmacist friend thought the morphine I discovered had lost half of its potency. Would he take it himself? No way!
As for me, I was a lucky one. My dad made it back from Guadalcanal, although the malaria and post-traumatic stress bothered him for years. And you never wanted to get in a fight with him….ever.
I can work here and make money in the stock market all day long. But my efforts on Guadalcanal were infinitely more rewarding. I’ll be going back as soon as the pandemic ends, now that I know where to look.
Stay Healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
https://www.madhedgefundtrader.com/wp-content/uploads/2022/01/dog-tags-morphine.png428570Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2022-01-24 09:02:122022-01-24 16:51:22The Market Outlook for the Week Ahead, or Parachuting Without a Parachute
Here I am, locked up again. Another day, another pandemic. There is nothing left for me to do but think.
When I turned negative on technology stocks at the end of November, many readers protested, accusing me of high treason, sedition, perfidy, and insisted I be hung from the nearest lamppost.
After last week’s drubbing on technology stocks, those claims are fading fast.
As a math graduate from UCLA, I can tell you it’s not about incompetence, delusion, or dementia, it’s simply all about the numbers.
Over the last five years, the S&P 500 (SPY) rose by 2X, while NASDAQ jumped by 3X, a 50% premium to the main market.
Most of this outperformance was due to multiple expansions. As interest rates fell further and further, investors were willing to pay ever more for tech stocks. As a result, 30% of tech stocks lose money and 30% trade for a nosebleed 10X sales or more.
Roll the interest rate move in reverse, and the tech premium disappears in a puff of smoke. And that has been happening with a vengeance since early December, with yields on the ten-year US Treasury bond soaring an eye-popping 58 basis points, from 1.34% to 1.82%.
Tech stocks are also coming off a pandemic tailwind of hurricane force. Now that every home in the country is equipped with four home offices and the hardware and software to support them, the turbocharger is failing.
Apple (AAPL) is a perfect example. From 2015 to 2019, Steve Jobs creation grew earnings by an average of 4% a year. Then the perfect storm hit, and earnings grew by an astonishing 60% in 2021. That delivered a gobsmacking 58% gain in the share price since March.
Tech momentum is now dead. In two-thirds of the tech market, a Dotcom bust has already played out, with non-earning pandemic darlings like Peloton (PTON) and Zoom (ZM) falling by 60%-70%.
It is not, however, the end of the world (usually, the world doesn’t end). If you are a long-term investor, big (earning) tech won’t fall enough to make it worth selling out and buying back lower. Non-earning small tech has already fallen so much it's no longer worth selling down here.
Back to the numbers, me the mathematician.
It’s all about margins, which are still expanding, and will be up by another 40-basis point in 2022 for the S&P 500 as a whole. For big tech, it’s just a matter of time before earnings catch up with valuations and it's off to the races again. It will take longer for small tech, possibly a lot longer.
The Economy is the Strongest in Decades, according to JP Morgan CEO Jamie Diamond. I agree. That’s because banks prosper most early in an interest-raising cycle. The Fed could raise rates four times this year. Keep buying financials on dips.
Quantitative Tightening to Start in July, says Goldman Sachs. That’s when the Fed starts selling its vast holdings of US Treasury bonds, about $8.5 trillion worth. They will continue QT until the pain becomes too great. Four rate hikes in 2022 are in the bag. It’s not a stock market-friendly scenario.
This is Not the Year to Own Money-Losing Tech, says my friend Goldman’s David Kostin. For investors, the glass has gone from half full to half empty. The big ones will be OK but are still due for a pullback. NASDAQ price-earnings are still at a 20 year high at 38X. Rising interest rates were the stick that broke the camel’s back. Don’t buy the dip too soon.
What is the Cheapest Sector in the Market? Biotech and Healthcare, which are at valuation lows not seen since the 2009 and 2000 lows. It also has the best decade-long growth outlook after technology. The problem is that no one wants to buy them on the back nine of a global pandemic. They will rally hard….someday.
Inflation Hits 7.0%, with the Consumer Price Index hitting a 39-year high. Bonds ended a $3.00 rally and resumed a downtrend. Rents and used cars led the gains. I remember 1982 well. My first home mortgage had an 18% interest rate. Expect worse to come.
S&P 500 Profits Jump 22.4% in Q4, possibly taking the full-year figure up an incredible 49%. It makes stocks look like a bargain, which were up only 27% in 2021. Expect cooler numbers and a quieter stock market in 2022.
Wholesale Prices Soar 9.7% YOY, the most in 11 years. It augers for more interest rate hikes sooner, with overnight rates targeting 1.25% by yearend.
Weekly Jobless Claims Hit Two-Month High at 230,000. No doubt it is due to the omicron surge. A million cases a day is certainly going to make a dent in the workforce. Some people are afraid to get sick, while others know they can get away with it.
Auto Stocks Will Be Top Performers in 2022, says value legend Mario Gabelli. Dealers are extremely short of inventory and demanding more production. Used car prices are soaring. Average industry sales prices have soared from $40,000 to $45,000 in a year. Buy (F) on a dip. (TSLA) has topped out for now with the rest of the tech stocks.
Bitcoin Breaks $40,000, as the flight from all interest-bearing securities continues. Don’t buy the dip yet.
China Posts Record Trade Surplus in 2021 at $676 billion on global economic recovery. The US ran a massive deficit with the Middle Kingdom last year, which is clearly dollar negative. None of the trade deals negotiated by Trump were honored. Exports were up 21% YOY in December.
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 a new year at hand, it’s off to the races once again. I exploded out of the gate with a hardy 2.5% profit last week. I used fleeting rallies to sell short the S&P 500, Microsoft (MSFT), and the bond market (TLT). The Friday collapse in JP Morgan (JPM) tempted me into a long position there.
Yes, last year’s mighty 90.02% performance is a lot to top. But even the highest mountain is climbed with the first step (been there, done that).
That brings my 12-year total return to a record 515.11%, some 2.00 times the S&P 500 (SPX) over the same period. My 12-year average annualized return has ratcheted up to a record 42.62%, easily the highest in the industry.
We need to keep an eye on the number of US Coronavirus cases at 66 million and rising quickly and deaths topping 851,000, which you can find here.
On Monday, January 17 markets are closed for Martin Luther King Day.
On Tuesday, January 18 at 7:00 AM, the NAHB Housing Index for January is released.
On Wednesday, January 19 at 8:30 AM, Housing Starts for December are announced.
On Thursday, January 20 at 7:00 AM, the Existing Homes Sales for December are printed. At 8:30 AM, the Weekly Jobless Claims are disclosed.
On Friday, January 21 at 2:00 PM, the Baker Hughes Oil Rig Count is out.
As for me, during the 1980s, my late wife and I embarked on a National Geographic Expedition to the remote Greek islands, including Santorini, which in those days didn’t have an airport.
At dinner, we sat at our assigned table and I noticed that the elderly gentleman next to me spoke the same unique form of High German as I. I asked his name and he replied “Adolph.”
And what did Adolph do for a living? He was a pilot. And what kind of plane did he fly?
A Messerschmitt 262, the world’s first jet fighter.
What was his last name? Galland. Adolph Galland.
I couldn’t believe my luck. Adolph Galland was the most senior Luftwaffe general to survive WWII. He was one of Germany’s top aces and is credited with 109 kills. He only survived the war because he was shot down during the final weeks and ended up in a military hospital.
And that was the end of the cruise for the rest of the table, as Galland and I spent the rest of the week discussing the finer points of aviation history.
It was made especially interesting by the fact that I had already flown most of the allied planes that Galland went up against, including the P51 Mustang and the Spitfire.
Galland started life as a Versailles Treaty glider pilot and joined the civilian airline Lufthansa in 1932. He transferred to the Luftwaffe in 1937 to fight with Franco in the Spanish Civil War and participated in the invasion of Poland in 1939.
He flew a Messerschmitt 109 as cover for German bombers during the Battle of Britain. In 1941, he was promoted to the general in charge of Germany’s fighter force until 1945 when he was sidelined due to his opposition to Goring and Hitler.
It was a fascinating opportunity for me to learn many undisclosed historical anecdotes. Germany actually had a functioning jet fighter in 1939. But Hitler, with a WWI mindset, diverted development money to twin-engine bombers and artillery.
The army eventually produced a canon that fired a monster one-meter-wide shell but was so heavy that it needed double railroad tracks to move anywhere. The canon was virtually useless in a modern war and was a colossal waste of money. Galland believed the decision cost Germany the war.
The ME 262 was a fabulous plane. But it was too little too late. Of the 1,000 produced, 500 were destroyed on the ground and most of the rest during takeoff and landing.
A big problem with the plane was that its jet engines were made out of steel and would only last ten hours. Turkish titanium needed for longer-lived engines was embargoed by the allies.
Today, a beautiful example hangs from the ceiling of the Deutsches Museum in Munich.
Galland negotiated the handover of his jet fighter wing to the Americans from a hospital bed so they could be used in an imminent war against the Russians. The atomic bomb ended that idea.
Galland was one of the few German generals never subjected to a war crimes trial. Pilots on both sides saw themselves as modern knights of the air with their own code of conduct. Parachuting pilots were never attacked and lowering your landing gear was a respected sign of surrender.
After the war, Galland emigrated to Argentina to train Juan Peron’s Air Force. He also test flew Gloster Meteor jets for the Royal Air Force. He participated in the 1972 film, The Battle of Britain and many WWII memorials. By the time I met him, his eyesight was failing. He died in 1996 at 84 of natural causes.
I give thanks to the good luck I had in meeting him, and that I had the history behind me to understand the historical figure I was sitting next to. It isn’t everyone that gets six dinners with Germany’s top fighter ace.
A year later saw me on a top-secret mission flying from Cyprus back to the American airbase at Ramstein. I plotted my course directly over Santorini.
When I approached the volcanic island, I put my Cessna 340 into a steep descent, dove straight into the mouth of the volcano, and leveled out at 100 feet above the water, no doubt terrifying the many yachts at anchor.
Greek Military Air Control gave me hell, but it was my own private way of honoring the principlals of Adolph Galland.
Stay Healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
https://www.madhedgefundtrader.com/wp-content/uploads/2022/01/adolph-galland.png492290Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2022-01-18 09:02:482022-01-18 12:27:58The Market Outlook for the Week Ahead, or Soaring with the Eagles
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