Followers of the Mad Hedge Fund Trader alert service have the good fortune to own a deep in-the-money options position that expires on Friday, June 16, and I just want to explain to the newbies how to best maximize their profits.
This involves the Tesla (TSLA) June 2023 $120-$130 in-the-money vertical bull call debit spread. Provided that we don’t have another 80-point move down in Tesla in ten trading days, this position should expire at its maximum profit point.
So far, so good.
Your profit can be calculated as follows:
Profit: $10.00 expiration value - $8.80 cost = $1.20 net profit
(12 contracts X 100 contracts per option X $1.20 profit per option)
= $1,440 or 13.63% in 25 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, June 19 and the margin freed up.
Some firms charge you a modest $10 or $15 fee for performing this service.
If you don’t see the cash show up in your account on Monday, get on the blower immediately and find it.
Although the expiration process is now supposed to be fully automated, occasionally machines do make mistakes. Better to sort out any confusion before losses ensue.
If you want to wimp out and close the position before the expiration, it may be expensive to do so. You can probably unload them pennies below their maximum expiration value.
Keep in mind that the liquidity in the options market understandably disappears, and the spreads substantially widen, when a security has only hours, or minutes until expiration on Friday. 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 quarter 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 Trader2023-06-02 10:02:202023-06-02 17:09:18How to Handle the Friday May 16 Options Expiration
I have always believed that markets will always do whatever they have to do to screw the most people and it is doing that right now with a vengeance.
Some $750 billion has poured into cash and equivalents since January 1. Margin debt is now at the Dotcom bust low of 1.4% of the S&P 500 not seen since 2002. Equity Allocations are at a 15 Year Low, with massive amounts of cash in 90-day T-bills now yielding 5.25%.
The broader market is expensive looking at 19 times 2023 earnings. But take out the top five performing FANGS and we are down to a very reasonable 15 times for the remaining 495 stocks.
I told you this would happen, that the bear market ended on October 15 and that big tech would lead any recovery. I reiterated this view in depth with my 2023 All Asset Class Review on January 4 (click here for the link).
In the meantime, a lot of investors had angry conversations with investment advisors this week as to why they didn’t own NVIDIA (NVDA). They heard it was too expensive, that it had already moved too much (triple since October 15), the government was going default on its debt, and that we were headed into recession.
Suffice it to say that if they lived here with me in Silicon Valley, they wouldn’t take this view. The world is going NVIDIA crazy on a huge earnings beat, taking the shares up 30%. Q1 revenues came in at $7.2 billion versus an expected $6.5 billion. Demand from AI and data centers is surging.
(NVDA) has been a core Mad Hedge holding since it went public a decade ago. It is now up 175-fold and has at least another seven bagger ahead of it. (NVDA) has matched the 175-fold gain we caught with our 2010 recommendation for Tesla. The (NVDA) January 2025 LEAPS I recommended on September 29 at 50 cents is now worth $6.25 and expires worth $10, up 20-fold!
It all vindicates my own long-term vision, unique in the investing community, that in the coming decade, technology profits will more than replace the Fed liquidity we feasted on during the 2010s.
The Internet has created about $10 trillion in value since inception. AI will create a lot more than that. That’s what will take the Dow from 33,000 to 240,000.
In the meantime, new home building is incredibly going from strength to strength and is one of the few domestic sides of the economy that is prospering mightily. New Home Sales hit a 13-Month High, up 4.1% in April. If you had told me five years ago that while 30-year fixed mortgage rates were at a two-decade high of 7.0%, demand for new homes was so strong that builders were running out of inventory, I would have told you that you were out of your mind.
Yet, here we are.
This is because half of the builders that went bust in the 2008 subprime housing crash never came back, creating a structural shortage of homes that will take 20 years to return to balance.
Baby boomers now aged 61 to 78 rushed to buy homes in their late 20s during the prosperity of the 1960s and 1970s. Only 10% paid cash for their homes, many of whom worked on Wall Street, like me.
Some 75 million Millennials are now buying homes in their mid 30’s and are therefore much wealthier than previous generations. Working in tech like my kids, some 35% are paying all cash and are immune to the interest rate cycle. That means they can afford much nicer homes than we boomers could.
Those who do borrow plan to refi quickly in a year or two when mortgages are back below 5.0%. Then the residential real estate will absolutely catch on fire. Buy (TOL), (LEN), (KBH), and (PHM) on dips.
Oh, and buy boatloads of bonds (TLT) too.
There is another angle to the story that is fascinating. High housing prices are turning Yankees into Confederates and Hawaiians into cowboys.
An onslaught of my friends have recently retired from New York for the green hills of North Carolina. The problem is that if I moved there, they’d be burning crosses on my front lawn in the first week.
Natives Hawaiians have fled their green hills for the Nevada deserts because they can’t afford to live there anymore, moving from an $800,000 median homes price to $400,000. When I was in Las Vegas a few weeks ago, I noticed ads for a hula contest, Hawaiian language lessons at the county library, and SPAM at Safeway. Outrigger canoes have been spotted on a disappearing Lake Mead. The chief complaint? Leis wilt a lot faster in the dry desert air.
So far in May, I have managed a modest 1.38%profit. My 2023 year-to-date performance is now at an eye-popping +63.13%.The S&P 500 (SPY) is up only a miniscule +10.53%so far in 2023. My trailing one-year return reached a 15-year high at +108.59% versus +12.02%for the S&P 500.
That brings my 15-year total return to +660.32%. My average annualized return has blasted up to +48.91%,another new high, some 2.72 times the S&P 500over the same period.
Some 41 of my 44 trades this year have been profitable. My last 22 consecutive trade alerts have been profitable.
I executed no trades last week, content to run my long in Tesla and a short in Tesla, the “short strangle” strategy. I now have a very rare 80% cash position due to the lack of high-return, low-risk trades. I ran a rare loss last week because while my long in Tesla is now at max profit, my short is approaching its near strike. That goes with my philosophy of when you’re wrong, be small. When you’re right, go big.
Ford (F) Cuts Deal with Tesla to Share National Charger Network, putting Elon Musk well on his way to becoming the largest electric utility in the world. It won’t affect the existing 4 million Tesla drivers yet. Ford only sold 62,000 EVs in 2022 and 25,000 the year before. Access will be provided through adapters, the (F) adopting the Tesla charging standard. It kind of screws (GM) left on its own. It was worth a $13 pop for (TSLA). Keep buying (TSLA) on dips.
Divergence Between the S&P 500 and the S&P Equal Weight is the greatest since December 1999. The Dotcom Bubble topped four months later. It’s a function of concentration in the top five tech stocks, my “Five Aces” strategy. Risk is rising. The flight to big tech balance sheets and AI has been huge. You heard it here first.
Marvel Technologies (MRVL) Rockets 25% on Spectacular Earnings Beat, as the AI fever spreads out into infrastructure plays like second-line chip makers. Demand for integrated circuits from data centers, carrier infrastructure, networking, and the auto industry is off the charts. The Internet has to grow 500% quickly to accommodate new AI demand right now. The gold rush is on. Buy (MRVL) on dips.
Inflation Continues to Fall, down 0.4% in April according to the Personal Consumption Expenditures Index Price Index. Food prices rose 6.9% from a year ago while energy fell 6.3%.
Fitch Puts US Debt on Credit Watch, meaning that it is due for a downgrade. It’s the first time since the 2011 Moody’s downgrade from AAA to AA+. Threats of default have real-world consequences.
Pending Home Sales Collapse, unchanged from March, but down 20% YOY on a signed contract basis. Soaring interest rates get the blame. The northeast took the big hit.
Ely Lily Price Target Raised to $500, by Bank of America on the strength of their Ozempic weight loss drug. The stock is up fivefold since Mad Hedge recommended it five years ago. Keep buying (LLY) on tips.
30-Year Fixed Rate Mortgages Jump Back to 7.0%, on the impasse in Washington and default fears. The residential real estate recovery goes back on hold.
(TLT) Approaches 2023 Low. The closer we get to a debt ceiling deal, the lower we go. When a deal is done, it unleashes a new onslaught of bond selling by the Treasury, and lower lows on bonds. In the dream scenario, we fall all the way to $95 in the (TLT) where we will be issuing recommendations for call spreads and LEAPS by the boatload.
My Ten-Year View
When we come out the other side of the recession, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. The economy decarbonizing and technology hyper-accelerating, creating enormous investment opportunities. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The new America will be far more efficient and profitable than the old.
Dow 240,000 here we come!
On Monday, May 29 is Memorial Day. All markets are closed.
On Tuesday, May 30 at 6:00 AM EST, the S&P Case Shiller National Home Price Index is printed.
On Wednesday, May 31 at 7:00 AM, the JOLTS Job Openings Report is out.
On Thursday, June 1 at 8:30 AM, the Weekly Jobless Claims are announced.
On Friday, June 2 at 2:00 PM, the May Nonfarm Payroll Report is released.
As for me, with the 36th anniversary of the 1987 crash coming up this year, when shares dove 20% in one day, I thought I’d part with a few memories.
I was in Paris visiting Morgan Stanley’s top banking clients, who then were making a major splash in Japanese equity warrants, my particular area of expertise.
When we walked into our last appointment, I casually asked how the market was doing (Paris is six hours ahead of New York). We were told the Dow Average was down a record 300 points. Stunned, I immediately asked for a private conference room so I could call the equity trading desk in New York to buy some stock.
A woman answered the phone, and when I said I wanted to buy, she burst into tears and threw the handset down on the floor. Redialing found all transatlantic lines jammed.
I never bought my stock, nor found out who picked up the phone. I grabbed a taxi to Charles de Gaulle airport and flew my twin Cessna as fast as the turbocharged engines take me back to London, breaking every known air traffic control rule.
By the time I got back, the Dow had closed down 512 points. Then I learned that George Soros asked us to bid on a $250 million blind portfolio of US stocks after the close. He said he had also solicited bids from Goldman Sachs, Merrill Lynch, JP Morgan, and Solomon Brothers, and would call us back if we won.
We bid 10% below the final closing prices for the lot. Ten minutes later he called us back and told us we won the auction. How much did the others bid? He told us that we were the only ones who bid at all!
Then you heard that great sucking sound.
Oops!
What has never been disclosed to the public is that after the close, Morgan Stanley received a margin call from the exchange for $100 million, as volatility had gone through the roof, as did every firm on Wall Street. We ordered JP Morgan to send the money from our account immediately. Then they lost the wire transfer!
After some harsh words at the top, it was found. That’s when I discovered the wonderful world of Fed wire numbers.
The next morning, the Dow continued its plunge, but after an hour managed a U-turn, and launched on a monster rally that lasted for the rest of the year. We made $75 million on that one trade from Soros.
It was the worst investment decision I have seen in the markets in 53 years, executed by its most brilliant player. Go figure. Maybe it was George’s risk control discipline kicking in?
At the end of the month, we then took a $75 million hit on our share of the British Petroleum privatization, because Prime Minister Margaret Thatcher refused to postpone the issue, believing that the banks had already made too much money.
That gave Morgan Stanley’s equity division a break-even P&L for the month of October 1987, the worst in market history. Even now, I refuse to gas up at a BP station on the very rare occasions I am driving a rental internal combustion engine from Enterprise.
My Quotron Screen on 1987 Crash Day
Good luck and good trading!
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
https://www.madhedgefundtrader.com/wp-content/uploads/2023/05/Screenshot-2023-05-31-at-3.24.25-AM.png6321086Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2023-05-30 10:02:292023-05-30 16:06:10The Market Outlook for the Week Ahead, or A Tale of Two Markets
Below please find subscribers’ Q&A for the May 24 Mad Hedge Fund Trader Global Strategy Webinar, broadcast from Silicon Valley, CA.
Q: Should I roll over my $55-$60 Freeport-McMoRan (FCX) 2024 LEAPS?
A: Yes, move it from the January 2024 expiration to January 2025—that gives you a full 18 months for the stock to recover from a recession (which it’s now discounting) and then double, which is where you make the really big money on our LEAPS.
Q: What's your year-end price prediction for Freeport-McMoRan (FCX)?
A: $50, this year’s high.
Q: If there’s a default, do members of Congress get paid?
A: No, they don’t, no money is no money, the cupboard is bare. Nothing gets paid. And the Treasury will have to choose who gets paid last because when they run out of money there's no money to pay anybody, which then leads to a default and a 50% stock market correction.
Q: Why do you buy in-the-money bull call spreads instead of selling credit spreads?
A: They’re easier to understand for beginners. It’s easier for people to understand that if you buy something and it goes up, you make money. It’s harder for people to understand that if you sell short something and it goes down, you make money. And it’s basically six of one and half a dozen of the other in terms of profit. I get that question constantly and that is always going to be the answer.
Q: What do you think about artificial intelligence; how will it affect stock prices?
A: It’ll be what takes the Dow average ($INDU) from $32,000 to $240,000 over the next 10 years. What AI does is it automatically triples the value of any company using it, even though now it may take years for the stock market to catch up. On top of that, companies will have their regular earnings growth from their traditional businesses.
Q: How far will Nvidia (NVDA) stock go up?
A: Well the consensus between fund managers is it goes up 7 times from here, to well over 1,000. It's at 300 today, so it sounds like 2,100 is the final target, assuming we don't have any more recessions. And by the way, we did recommend NVDA on a split adjusted basis around $2, so NVDA has gone up 175 times already from our initial recommendation 7 years ago when it was just a gaming play. The (NVDA) January 2025 LEAPS I recommended on September 29 at 50 cents is now worth $6.25 and expires worth $10, up 20-fold!
Q: How can companies be selling AI prediction services for traders, as no one can predict the future?
A: Well that is accurate, no one person can predict the future. However, algorithms can take patterns in the past, project them in the future, and they're often accurate as long as a black swan doesn’t happen. AI is getting so sophisticated now—not only do we have index predictions which we’ve been using now for almost 10 years to great success, but Mad Hedge is now services with single stock recommendations. They will say in 30 days (AMZN) will be at $X, and they’re right 90% of the time. This is getting very advanced very quickly, and we are at the absolute cutting edge of this (and have been for a long time), and that’s why we’re getting such spectacular results—it's me plus my algorithm.
Q: Are money market funds at risk if the US defaults?
A: If the US defaults and stays defaulted, then yes. Nothing anywhere is safe except gold bricks under the bed. If the US does default, they’ll get defaulted probably in days. And that's what happened last time, 12 years ago. So, I don't expect the world to end.
Q: What is the best strategy for a long-term retirement account?
A: If you're already retired like over 70, I would go 100% into fixed income, and spread out your fixed income exposure to 10-year treasuries which is now yielding 3.75%, to junk which is yielding 8.5%. And you might throw in a couple high dividend stocks like (CCI). Over age 70 you basically are looking for a 100% income portfolio, because you’re too old to go back to work at Taco Bell if you lose all your money. And believe me, I’ve been to Taco Bell and seen the 70-year-olds working there who did lose all their money, so you don’t want to do that. Equities are for younger kids like me, who are going to live forever.
Q: What about iShares 20 Plus Year Treasury Bond ETF (TLT)?
A: We’re watching very closely. We will do LEAPS, but I’m waiting for a capitulation selloff triggered by inaction in Washington to get there. Also, when they do reach a deal, it unleashes a bunch of bond selling by the government. The US Treasury is going to have to sell 700 billion dollars’ worth of bonds immediately, because they’re behind on their bills, how about that? They’re not paying military contractors. So yes, the initial move of a debt deal could be down for bonds—that's the move I'm waiting for.
Q: Are you buying at the money’s or out of the moneys on LEAPS?
A: At the money if you’re a conservative old fogie like me, and out of the money like 20% or 30% where you get like a 400% return for younger people so they still will live long enough to earn back all the money if they lose it.
Q: What do you think the next move on CBOE Volatility Index ($VIX) is?
A: Up, and I think we could see VIX at $30 sometime in June or July when our 10% selloff happens.
Q: Would you buy the ProShares UltraShort S&P 500 (SDS) now for protection?
A: Yes, I’d be buying some as a hedge against your long-term positions.
Q: Do you prefer one or two year LEAPS?
A: Two years is the more conservative maturity because it gives you two years to go into recession and get back out. If you think there isn’t going to be a recession and we reaccelerate from here, then you only want to do one year. With Treasuries bonds, I’m inclined to do one year because I think once the rise in prices happens it’ll happen very quickly. If you’re not happy with a 100% return in a year maybe you should consider another line of business.
Q: Is the housing market going to crash because of 7% mortgage rates?
A: No, one third of all the buyers now are cash buyers, who are spending their savings and will refinance when mortgages get back to 3% or 4%. Until then, housing prices go sideways because there is a severe shortage of housing nationwide, which is getting worse.
Q: How do I get my wife used to regenerative braking in Tesla (TSLA)?
A: Just take your foot off the acceleration pedal; as the car slows down, each of the four wheels perform as generators and recharge the battery. That means when you drive from Lake Tahoe at 7,000 ft down to the Central Valley at sea level, your power consumption is zero. You’re getting a free ride because you’re gravity powered, the wheels are recharging the battery the whole time. All you have to do is take your foot off the acceleration and the regenerative braking kicks in instantly. Teslas only use actual use brake shoes when they slowdown from five miles an hour down to zero.
Q: Which level is more likely this year in oil: $50 a barrel or $100?
A: Well, if we do get the recession or something close to it, we’ll see the $50 first, and then we’ll see the $100 on the recovery. That is what’s going to happen.
Q: When is the economic recovery going to be this year?
A: In the 4th quarter, starting in October, and the stock market will start discounting that in July or August. That is my view.
Q: What’s a better investment: stocks or real estate?
A: It depends on the person. At this level, stocks will probably deliver bigger returns than real estate. But real estate allows you 5-1 leverage. If you have an 80% mortgage, and that’s more leverage than most people can get in the stock market. The other thing about homes is that you don’t get to see the price every day in the newspaper and then panic and sell at the bottom. That's the other great thing about houses.
Q: Will this recording be available?
A: Yes we post it in about two hours on the website. You can look at all the charts and the commentary then.
Q: How would you hedge a 100% equity portfolio?
A: I would buy deep out of the money puts on the S&P 500, maybe 10% out of the money on puts—something like a 360 put on the SPY with a 2 month maturity. That gets you through the summer, gets you through any debt crisis, and certainly will reduce the volatility of your portfolio.
Q: Would you be buying Alibaba (BABA) down here?
A: No, I don’t want to get involved in China in anything—too much political risk.
To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in to www.madhedgefundtrader.com , go to MY ACCOUNT, click on GLOBAL TRADING DISPATCH or TECHNOLOGY LETTER, then WEBINARS, and all the webinars from the last 12 years are there in all their glory
Good Luck and Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
A Senior Citizen Teach Me the Computer at Taco Bell
(LAST CHANCE TO ATTEND THE THURSDAY, MAY 18, 2023 TAMPA FLORIDA STRATEGY LUNCHEON)
(LOOKING AT THE LARGE NUMBERS)
(TLT), (TBT) (BITCOIN), (MSTR), (BLOK), (HUT)
I think it’s time for me to go out on strike. I’m downing my tools, tearing up my punch card, and manning a picket line.
I get up at 5:00 AM every morning, well before the sun rises here on the west coast, looking for great low-risk high return trades. But for the last several weeks, there have been none, nada, bupkiss.
I have gotten spoiled over the last few years. The financial crisis, pandemic, recovery, and banking crisis provided me with an endless cornucopia of trading opportunities which doubled my average annualized return from 24% to a nosebleed 48.94%.
Part of the problem is that with a success rate of 90%, so much of the market is now copying my trades so that they are getting harder to execute. That wasn’t a problem when markets were booming. It is when trading volumes have shrunk dramatically, as they have done this year.
At The Economist magazine in London whenever plagiarism was discovered, they used to say that “Imitation is the sincerest former of flattery.”
There is no doubt that the economy is weakening, as the data has definitively shown over the last two weeks. It appears that after 500 basis points in interest rate rises in a year, the Fed’s harsh medicine is finally starting to work. The debt ceiling crisis, and regional banking crisis are scaring more investors further to the sidelines.
Notice how every stock market rally has become increasingly short-lived? Which all raises a heightened risk of recession.
Economies are like families. All are happy for the same reasons but are unhappy in myriad different ways.
In fact, they provide a generous helping of alphabet soup. If you look very closely, you can find some bay leaves, oregano, black pepper, and lots of V’s, W’s, U’s, and L’s.
Now, let’s play a game and see who can pick the letter that most accurately portrays the current economic outlook.
Here is a code key:
V – The very sharp collapse we saw in 2008 and again in 2020 is followed by an equally sharp recovery. I think it is safe to say we can now toss that one out the window. With technology hyper-accelerating, it is safe to write off the “V” recovery scenario.
W – The sharp recovery that began in October 2022 fails and we see a double dip back to those lows.
U – The economy stays at the bottom for a long time before it finally recovers.
L – The economy collapses and never recovers.
The question is, in which of these forecasts should we invest our hard-earned cash?
For a start, you can throw out the “L”. Every recession flushes out a lot of financial Cassandras who predict the economy will never recover. They are always wrong. Usually, they know more about marketing newsletters than economics.
I believe what we are seeing play out right now is the “W” scenario. This is the best possible scenario for traders, as it calls for a summer correction in the stock market when we can load the boat a second time. If you missed the October low you will get a second bite of the Apple (AAPL), both literally and figuratively.
If I’m wrong, we will get a “U”, a longer recovery. This cannot be dismissed lightly as the unemployment rate is clearly about to rise.
If I limited the outlook to only four possible scenarios, I’d be kidding you. The truth is far more complicated.
Each industry gets its own letter of the alphabet. Technology, some 27% of total stock market capitalization, gets no letter at all because it is thriving, thanks to the explosion of AI applications. That explains the single-minded pursuit of big tech by investors since January.
Someone asked me last week how long I would continue trading and I cited the example of Warren Buffett, who at 92 is 21 years older than me.
I have since found a better example.
Former Secretary of State under Nixon, Henry Kissinger, turns 100 this week, the only man in the world who President Biden, Vladimir Putin, and President Xi Jinping would immediately take a call from.
During the shuttle diplomacy between Israel and Egypt in 1974, I rode with the Secretary on Air Force One, then an antiquated Boeing 727, which is now in a museum in Seattle. For the rest of that story see below.
He gave me “Henry” privileges, while everyone else had to address him as “Mr. Secretary” because my knowledge of history exceeded that of anyone else then in the White House Press Corps, even those who had degrees in the subject.
It also helped that at that point I had already had six years of experience on the ground in the Middle East. It was all heady stuff for a journalist who at 22 was just starting out.
So, that sets the bar higher for me. The good news for you is that I’ll be sending out my wit, wisdom, and trade alerts for at least another 29 years.
So far in May, I have managed a modest +1.70% profit. My 2023 year-to-date performance is now at an eye-popping +63.45%. The S&P 500 (SPY) is up only a miniscule +8.15% so far in 2023. My trailing one-year return reached a 15-year high at +122.11% versus +6.70% for the S&P 500.
That brings my 15-year total return to +660.64%. My average annualized return has blasted up to +48.94%, another new high, some 2.80 times the S&P 500 over the same period.
Some 41 of my 44 trades this year have been profitable. My last 21 consecutive trade alerts have been profitable.
I initiated only one new trade last week, a long in Tesla (TSLA). That leaves me with my two remaining positions. Those include longs in Tesla and the bond market (TLT), which expires this coming Friday. I now have a very rare 80% cash position due to the lack of high-return, low-risk trades.
Treasury Secretary Yellen Warns of Economic Catastrophe, if the debt ceiling is not raised. Congress has voted 98 times to raise the debt ceiling to $31 trillion over 106 years to pay for money already spent. One-third of this was under the previous president who back then warned that he would default. It’s a grasp for power the House just doesn’t have. There really isn’t such a thing as a debt ceiling which has gained an importance far beyond its original housekeeping intention.
Boeing Lands Blockbuster 300 Plane Order, from Ireland’s Ryan Air worth $40 billion. Europe’s Top budget air carrier is loading up on the once troubled 737 MAX. Keeping buying (BA) on dips, now the world’s largest aircraft manufacturer.
CPI Hits 4.9% YOY, after the 0.40% report for April. It’s still headed in the right direction as far as the Fed is concerned and puts a September cut on the table. Eggs were the leader, up 21.4%, while fuel oil is the laggard, down 20.2%. My own 4% inflation rate forecast by yearend is starting to look conservative. Perish the thought!
The Oil Collapse is Signaling a Recession, as is weakness in all other commodities, even lithium. Texas tea has plunged 22% I three weeks to a new two year low at $62. It’s one of the worst performing asset classes of 2023. Widespread EV adoption is finally making a big dent, as are the price wars there. OPEC Plus production cuts were unable to stem the decline. Buy (USO) on dips as an economic recovery play.
Is a Bank Short Selling Ban Coming? The Feds could bar hedge funds from launching raids on small regional bank shares with the aim of taking them to zero. Such a ban was enforced for all banks in 2008.
Elon Musk Appoints New Twitter CEO, removing a major management distraction. Linda Yaccarino is the new CEO of Twitter, poached from her from online advertising at NBC. This is a positive for Tesla, as it frees up the heavy burden of turning around Twitter from Musk, allowing him to devote more time to Tesla. It also reduced the risk that Musk will sell more Tesla shares to finance said turnaround. Guess who just got the worst job in the world? Buy (TSLA) on dips.
Weekly Jobless Claims jump to 264,000, a new 18 month high, providing another recession indicator.
US Budget Deficit Shrinks to $1.5 Trillion, down from a $3 trillion peak during the previous administration. Government Bond selling will drop by a similar amount. That’s still up $130 billion from 2022. Increased tax revenues from a recovering economy is the reason. Buy (TLT) on every dip.
Google Ramps Up AI Effort, launching a new suite of AI tools at its annual developer conference. With a 93% market share in online search (GOOGL) has a lot to defend. The stock popped 4% on the news.
FANGS to Rise 50% by Yearend, says Fundstrat’s ultra-bull Tom Lee. I think he’s right, once the debt ceiling debacle gets out of the way. The contribution of AI is being vastly underestimated.
Berkshire Hathaway (BRK/B) Earnings Soar, with operating earnings up 12.6% in Q1, but Warren Buffet expects business to slow. Many companies now have to unwind big pandemic inventories with aggressive sales, crimping inflation. That’s why Berkshire owns $130 billion in cash and Treasury bills.
My Ten Year View
When we come out the other side of the recession, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. The economy decarbonizing and technology hyper-accelerating, creating enormous investment opportunities. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The new America will be far more efficient and profitable than the old.
Dow 240,000 here we come!
On Monday, May 15 at 7:30 AM EST the NY Emore State Manufacturing Index is out.
On Tuesday, May 16 at 6:00 AM, Retail Sales are announced. On Wednesday, May 17 at 11:00 AM the US Building Permits are printed. On Thursday, May 18 at 8:30 AM, the Weekly Jobless Claims are announced. We also get the Producer.
On Friday, May 19 at 2:00 PM the University of Baker Hughes Rig Count is released.
As for me, Egypt and I have a long history together. However, when I first visited there in 1974, they tried to kill me.
I was accompanying US Secretary of State Henry Kissinger on Air Force One as part of his “shuttle diplomacy” between Tel Aviv and Cairo. Every Arab terrorist organization had vowed to shoot our plane down.
When we hit the runway in Cairo, I looked out the window and saw a dozen armored personnel carriers chasing us just down the runway. All on board suddenly got that queasy, gut-churning feeling, except for Henry.
When the plane stopped, they surrounded us, then turned around, pointing their guns outward. They were there to protect us.
The sighs of relief were audible. In a lifetime of heart-rending landings, this was certainly one of the most interesting ones. Those State Department people are such wimps! Henry was nonplussed, as usual.
As a result of the talks Israel eventually handed back Sinai in return for an American guarantee of peace which has held to this day. Egyptian president Anwar Sadat was assassinated by his own bodyguard for his efforts shortly afterwards.
Israel was so opposed to the talks that when I traveled to Tel Aviv, El Al Airline security made sure my luggage got lost. So the Israeli airline gave me $25 to buy replacement clothes until my suitcase was delivered. On that budget, all I could afford were the surplus Israeli army fatigues at the Jerusalem flea market.
A week later, my clothes still had not caught up with me when I boarded the plane with Henry. That meant walking the streets of Cairo in my Israeli army uniform. It would be an understatement to say that I attracted a lot of attention.
I was besieged with offers to buy my clothes. Egypt had lost four wars against Israel in the previous 30 years, and war souvenirs were definitely in short supply.
By the time I left the country, I was stripped bare of all Israeli artifacts, down to my towels from the Tel Aviv Hilton, and boarded the British Airways flight to London wearing a cheap pair of Russian blue jeans I had taken in trade.
Levi Strauss never had a thing to worry about.
The bewitching North African country today is still a prisoner of a medieval religion that has left its people stranded in the Middle Ages. While its GDP has doubled in the last 70 years, so has its population, to 110 million, meaning there has been no improvement per capital income at all in a half century. That is a staggering number for a country that is mostly desert.
In 2019, I took my two teenaged daughters to Egypt to visit the pyramids and ride camels as part of an impromptu trip around the world. My logic then was that at the current rate of climate change, this trip might not be possible in five years.
As it turns out, it was not possible in six months when the pandemic started.
We were immediately picked up by Egyptian Intelligence right at the gate who remembered exactly who I was. It seems they never throw anything out in Egypt.
After a brief interrogation where I disclosed my innocent intentions, they released us. No, I wasn’t working for The Economist anymore. Yes, I was just a retired old man with his children. They even gave us a free ride to the Nile Hilton where I spent my first honeymoon in 1977.
Some people will believe anything! And I never did get that suitcase back.Good luck and good trading!
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
https://www.madhedgefundtrader.com/wp-content/uploads/2023/05/plane-window.jpg331441Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2023-05-15 09:02:502023-05-15 16:49:18The Market Outlook for the Week Ahead, or I’m Going on Strike!
Below please find subscribers’ Q&A for the May 10 Mad Hedge Fund Trader Global Strategy Webinar, broadcast from Incline Village, NV.
Q: Why is the market down on such great inflation data?
A: Yes, a 4.9% annualized inflation rate is a big improvement from 9.1% nine months ago. The market only cares about the debt ceiling debacle right now. I’ve been teaching people about the stock market for about 55 years, and I can tell you that all investors have one great fear, and it's not the fear of losing money—that they can handle. It’s the fear of looking stupid. And if they load the boat with stock now, and the US government defaults and the market drops 25%, they will look really stupid. This is not a black swan. It has probably been the most advertised market negative in history. We’ve known about the debt default since December when the Democrats chose not to raise the debt ceiling because they thought they could gain a political advantage by letting the Republicans fumble the issue, and they are reaping such advantages by the bucketload. So, even though everyone knows that this will be settled, it has settled 98 consecutive times in the last 106 years, and they don’t want to do anything before a deal. And by the way, this was only put into place during WWI to meter the rate of government borrowing during the war, so I would say it’s lost its purpose. However, it's hard to make any changes at all in the government these days. What that does do, is create big gaps up in the market when they are resolved, and big gaps down when they are not resolved. That’s why we’re doing nothing.
Q: Do you like regional banks here—are they a buy? And do you like the Schwab LEAPS?
A: Yes on the Charles Schwab LEAPS (SCHW), because you have two years for that to work out. With regional banks as a stock buy here, you’re really buying a lottery ticket because if they do get attacked by short sellers, you get wiped out practically overnight (as has happened 4 times.) On the other hand, if the US Treasury or the FCC makes selling bank shares or lending bank shares illegal, then you’ll have the regional banks just roar, because the sellers will be gone. There are too many better things to do than to make a high-risk trade on bank shares, especially after the debt ceiling is resolved.
Q: Is Apple (APPL) trade a long?
A: Yes, on any pullback. I think big tech leads for the next 10 years once we get out of our current quagmire. So it’s a question of how much pain you’re willing to take in the meantime. My target for Apple this year is $200.
Q: iShares 20 Plus Year Treasury Bond ETF (TLT) is up today; would it be worth selling out of the money call spreads with the same expiration date as our long position?
A: No, it is not. At $104, it’s not a great short, or otherwise, I’d do it myself. When we get up to $109, then you want to go short like with the $114 puts or $115 puts. But down here if you’re shorting say, the $109s, and we go to $109 the next day or week, then you get stopped out. Remember any shorts of bonds here is now a long-term counter-trend trade—you’re betting that your position expires in the money before a long-term trend to the upside reasserts itself. So no, that’s why I’m not doing any shorts right here. Also, we’re not low enough to buy it yet. You get down to $101 or $102, I’ll look at buying call spreads, but here in the middle is never a good place to trade.
Q: Are you still expecting a correction in May?
A: May isn’t over yet. When they say “Sell in May and go away,” they don’t tell you if it’s May 1st or May 30th, so I’m happy where I am. There’s no law that says you have to get every trade of the year. I think doing nothing is the best solution right now, especially with a 62% profit already in the bank this year.
Q: Is it too late for bank LEAPS?
A: I would say, on a two-year view, no. I’m looking for these shares to double in two years, so a bet that it’s unchanged or higher right now is a pretty good bet, I would say—especially if it gives you a 100% return in one or two years. So yes, all the big bank LEAPS are still good, and with small banks, too much is unknown right now for a highly leveraged bet in that sector.
Q: What do you mean when you say one-year LEAPS is a call spread?
A: When I say one year LEAP, I mean at the money, and then short the next strike higher, and that gives you the maximum leverage. Something like 20:1 leverage when you go that aggressive. But now is the time to be aggressive; that's when these LEAPS are all on sale.
Q: Near-term iShares 20 Plus Year Treasury Bond ETF (TLT) move?
A: Sorry to say, sideways. That's why I'm doing nothing. I’m waiting for the market to tell me what to do. If it goes down, I want to buy it, if it goes up, I want to sell it, if it goes sideways, I want to go on vacation—very simple trading strategy.
Q: What about commercial real estate?
A: I don’t want to touch it, and the Real Estate Investment Trusts (REITs) on those have been horrible. Maybe later in the year when the REITs are at bankruptcy levels, it might be worth a buy. But you have to be careful on your REITs; there are good REITs and there are bad REITs, and you don’t want to be anywhere near the commercial ones. With things like cell phone towers, assisted care living facilities—you know, dedicated LEAPS in safe areas would be a good place. And the yields, by the way, are very high, if they pay.
Q: If the US defaults, what would you buy?
A: Everything, because everything will be at a low for the year; so that’s an easy one. By the way, when we got the banking crisis in March, I adopted an everything strategy then: buy all big banks and brokers—and it turned out to be the best trade of the year. The same is going to happen with the debt default.
Q: How long will it take for the regional bank construction to play out?
A: I think the regional banks have completely separated themselves out from the big banks. You only want to own the big banks because you get big returns on those, and the risk/reward ratio is overwhelmingly in favor of big banks, unlike with small banks. Therefore, you only buy the big banks in that situation. If you feel like buying a lottery ticket on your local bank because it’s down 80%, go ahead and do so, but remember that's what it is—a lottery ticket, with a big payoff if you win.
Q: Bitcoin has recently been weak off its top. Do you expect another leg up in Bitcoin prices?
A: I do not. Bitcoin was the perfect asset to have when we had a huge oversupply of cash and a shortage of assets. Now, is the opposite: we have an oversupply of assets and a shortage of cash, and that may remain true for another 10 years or so. So, if you have Bitcoin, I’d be unloading any positions you have now and falling down on your knees, thanking goodness you were able to recover this much of your loss. The other problem is you now have a lot of the intermediaries going bankrupt or shut down by the SEC or the US Treasury. So, that is an additional risk, which you don’t have buying JP Morgan (JPM), for example, or the Australian dollar (FXA), or oil (USO), or copper (FCX). It’s just so far out there on the risk/reward basis. Only large institutions and miners are in the market now—most individuals have been scared away for life.
Q: Would you buy PayPal (PYPL) on the dip? The earnings were terrible.
A: Yes, I would. It is now discounting a recession. If you don't get a recession, you get a big recovery in PayPal.
Q: Do you think that a Ukraine-Russia war will end soon?
A: I would doubt that the Russia-Ukraine war lasts more than a year, and when it ends, it will create the biggest global economic stimulus since the Marshall Plan. Also, American companies will be at the front of the line on the reconstruction deals because we supplied a lot of the weapons and intelligence. Looking at the Marshall Plan in modern terms: $17 billion in 1947 money would be on the order of a $1 trillion today—you basically have to rebuild an entire country. And guess who’s good at building countries? We are. We have all the big engineering companies to do it. Buy Caterpillar (CAT) for sure. By the way, I’ll be spending my summer vacation working on the Ukraine War for the US Marine Corps and NATO. At least the Belgians have better food.
Q: What do you think about pharmaceuticals like Eli Lilly (LLY)?
A: We’ve been recommending them in the Mad Hedge Biotech & Health Care letter for literally years. They’re absolutely kicking butt with their weight loss drug Mounjaro—to the extent that there are shortages of supplies, a black market, and big price increases coming, so it’s all about the weight loss boom. I hate to think of what the combined overweightness of America is, but it’s got to be somewhere in the millions of tons (and I am one of the guilty parties myself.)
Q: There's talk that EVs put out a lot of sulfur that increases climate change issues. What do you think?
A: Absolutely not true, as there is no sulfur in an EV. I don't know where they would come out of an electric engine running on a lithium battery. It’s just another bit of fake news coming out of the oil industry, which is pretty much around us all day, every day. You just have to get used to that. Conventional international combustion engines do emit a lot of sulfur in the form of sulfur dioxide and the big three have been sued over this for at least 50 years.
Q: When will the debt ceiling negotiations end?
A: There are two indicators you look for in predicting the end of a debt ceiling crisis (the last one of which was 12 years ago): #1. When the government announces it can’t send out social security checks anymore because they have no more money, and #2. A big drop in the stock market that scares all the billionaires, cuts their wealth, and makes them threaten to withdraw funding from the politicians who are blocking this thing. Another big indicator is when the Department of Defense announces they have no more money to pay military salaries. Almost all military presence in the United States is in red states and is a major support for economies. And the reason is that's where land was cheapest during WWI, which was when we did a very rapid buildup in the number of military bases. So, watch for those indicators and look for a massive rally when this happens. The US government is basically a giant recycling machine. It takes money off the coast, where all the wealth and taxes are paid, and spends it inland, where all the infrastructure and military have to be paid for. The only military spending on the coasts is in Hawaii, cyber warfare in California, and shipbuilding on the east coast. Anything that interferes with the process of moving money off the coasts and inland is doomed to fail for sure. That’s my one-minute analysis on the cash flows inside the US economy.
Q: I read that the clarity of Lake Tahoe is the best ever. Is this true?
A: Yes, it is. It is an example of a major effort to save the environment that succeeded, but you had to live 70 years to see it. The biggest factor was improving gas mileage for cars. The average fuel economy for new model cars has increased from 12 miles per gallon in 1950 to 35 today. Notice that cars have gotten a lot smaller too. That cuts by two-thirds the carbon dioxide going into the atmosphere which can combine with nitrogen to make nitric acid which fell into the lake. Several big development projects were stopped in their tracks. So was a planned freeway around the lake. Some 17 golf courses are now banned from using fertilizer. Sewage is now piped out of the valley instead of into the lake. A record 70 inches of rainfall this year helped dilute the water. Finally, an ill-conceived freshwater shrimp farming industry ended when the shrimp all starved to death when the lake became too clear, eliminating their poop from the picture. There is now a campaign to clean garbage off the bottom which I help fund. We even found “Fredo’s” body from The Godfather! As a result, the lake clarity has improved from 50 feet in 1970 to 115 feet, the same as when Mark Twain first visited Lake Tahoe in 1861.
To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in to www.madhedgefundtrader.com , go to MY ACCOUNT, click on GLOBAL TRADING DISPATCH, then WEBINARS, and all the webinars from the last 12 years are there in all their glory.
Good Luck and Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
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