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How the Risk Parity Traders are Ruining Everything!

I received a call from a hedge fund manager on Friday warning me of what was about to hit the market.

So much money had poured into "risk parity” strategies that it was starting a long-term secular trend up in market volatility (VIX). It was a classic case of too many people bunching up at one end of the canoe.

Witness last week’s failure of stimulus talks on every front. Even though stocks kept going up, the Volatility Index did, too. That is never a good sign.

Investment advisors everywhere are bemoaning the shenanigans of high-frequency traders, offshore hedge funds, and congress for the recent volatility of the market that has been scaring the living daylights out of their clients.

But they have a new enemy that few outside the trading community are aware of: "Risk Parity" managers.

Risk parity is being blamed for the September explosion of volatility that took it from 22% to 36% in a matter of days.

The industry is thought to have $400 billion to $600 billion in assets under management now, with hedge funds Bridgewater and AQR in the lead.

Potentially, they could unload as much as $100 billion worth of stocks in days.

What's more, the fun and games aren't confined to just equities. Risk parity strategies have spread like a pandemic virus to bonds (TLT), foreign exchanges, commodities, and even precious metals.

Risk Parity is an esoteric new investment strategy that targets a specific volatility level, rather than a return relative to a convention benchmark such as Treasury bonds or the S&P 500 (SPY).

When volatility (VIX) is low, they add risk, hoping to beat the returns of competitors. When volatility is high, they cut back positions, hoping they miss the losses of others.

The goal is to come out on top of the money manager league tables, sucking in tons of new assets and countless riches in management fees.

You can see right now where this is going.

In rising markets, they increase buying, and in falling ones, they greatly step up selling.

I'm sure there was a day several years ago when this approach made money hand over fist.

That was probably back when only its inventor was implementing it alone in a back room using an undisclosed hedge fund with a tiny amount of capital.

The problem with risk parity and all other strategies of its ilk is that they become victims of their own success. New capital pours in, returns fall until they inevitably dive into negative numbers.

I have seen this occur time and again, from the portfolio insurance of the 1980s (think October 1987 when the Dow plunged 20% in a single day), to Japanese warrant arbitrage, to high-frequency trading and the flash crashes.

The proof is in the pudding.

An index of 17 risk parity funds tracked by JP Morgan has fallen by 8.2% since the beginning of May. More losses are to come. It sounds like the great unwind of risk parity assets has already started.

Like all investment fads that promise great, risk-free returns, this one will come and go.

In the meantime, fasten your seat belt.

Did You Say “BUY” or “SELL”

October 6, 2020/by MHFTR

October 2, 2020

Diary, Newsletter, Summary

Global Market Comments
October 2, 2020
Fiat Lux

Featured Trade:

(SEPTEMBER 30 BIWEEKLY STRATEGY WEBINAR Q&A),
(NVDA), (AMD), (JPM), (DIS), (GM), (TSLA), (NKLA),
(TLT), (NFLX), (PLTR), (VIX), (PHM), (LEN), (KBH), (FXA), (GLD)

October 2, 2020/by Mad Hedge Fund Trader

September 30 Biweekly Strategy Webinar Q&A

Diary, Newsletter, Research

Below please find subscribers’ Q&A for the September 30 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Silicon Valley, CA with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!

Q: Which is a better buy, NVIDIA (NVDA) or Advanced Micro Devices (AMD)?

A: NVIDIA is clearly the larger, stronger company in the semiconductor area, but AMD has more growth ahead of it. You’re not going to get a ten-bagger from NVIDIA from here, but you might get one from Advanced Micro Devices, especially if a global chip shortage develops once we’re out the other side of the pandemic. So, I vote for (AMD), and did a lot of research on that company last week. You can find the report at www.madhedgefundtrader.com but you have to be logged in to see it.

Q: Do you have any thoughts on the JP Morgan Chase Bank (JPM) spoofing cases, where they had to pay about a billion in fines? Is this a terrible time to invest in banks?

A: No, this is a great time to invest in banks because this is the friendly administration to banks now; the next one will be less than friendly. On the other hand, an awful lot of bad news is already in the price; buying these companies at book value or discount of book like JP Morgan, it's a once in a lifetime opportunity. All the bad behavior they’re being fined on now happened many years ago. So yes, I still like banks, but you really have to be careful to buy them on the dip, just in case they stay in a range. If you stay in a range, you’re buying them call spread, you always make money. The bigger drag on share prices will be the Fed ban on bank share buybacks but that may end after Q4.

Q: Is it time to buy Disney (DIS) after they laid off 28,000?

A: This is a company that practically every fund manager in the company wants to have in their portfolio. However, it could be at least a year before they get back to normal capacity in the theme parks, meaning customers packing in shoulder-to-shoulder. So, it could be another wait-for-a-turnaround, buy-on-the dip situation for sure. This company is so well managed that you’re always going to have to pay up to get into the Mouse House. By the way, my dad did business with Disney during the 1950s so we got Disneyland opening day tickets and I got to shake Walt Disney’s hand.

Q: How desperate is General Motors (GM) in buying the fake Tesla (TSLA) company, Nikola (NKLA), who've been exposed as giant frauds? Is GM hopeless?

A: Yes, the future is happening too fast for a giant bureaucracy like General Motors to get ahead of the curve. The fact that they’re trying to buy in outside technologies shows how weak their position is, and of course, it’s a great way to get stuck with a loser, as Tesla selling out to anyone. The Detroit companies are all stuck with these multibillion-dollar engine factories so they can’t afford to go electric even if they wanted to. So, I expect all the major Detroit car companies to go under in the next 5 years or so. Electric cars are already beating conventional internal combustion engines on a lifetime cost basis and will soon be beating them, within 3 years, on an up-front cost basis as well.

Q: Will Netflix (NFLX) pass $600 before the year's end?

A: I’m expecting a monster after-election rally to new all-time highs in the market and Netflix will be one of the leaders, so easy to tack on another hundred bucks to Netflix. That’s one of my targets for a call spread if we can get in at a lower price. And if you really want to be conservative, buy 2-year LEAPS, two-year call options spreads on Netflix, and you’ll get an easy 100% return on those.

Q: Who will win, Trump or Biden?

A: Neither. You will win. I am not a member of any political party as I would never join any club that would stoop to have me as a member. Groucho Marx told me that just before he died in the early 70s. Don’t ask me, ask the polls. Suffice it to say that the London betting polls are 60%-40% in favor of Biden, having just added another 5% for Biden after the debate. My expectation is that Biden picks up another point in the opinion polls in all the battleground states this weekend. So, Biden will be up anywhere from 6-10% in the 6 states that really count.

Q: What will the market impact be?

A: It makes no difference who wins. The mere fact that the election is out of the way is worth a 10% move up in the stock market.

Q: Should we keep the January 2022 (TLT) 140/143 bear put spread?

A: Absolutely, yes. That’ll be a chip shot and we in fact should go in the money on those number sometime next year. A huge cyclical recovery will create an enormous demand for funds and crowding out by the government will crush the bond market.

Q: Do you think it would be better to wait a week or two to lock in refis on home loans?

A: I think we are at the low in interest rates in the refi market. Even if the Fed lowers interest rates, banks aren’t going to lower their lending rates anymore because there's no money in it for them. It’s also taking anywhere from 2-4 months to close on a loan, as the backlogs are so enormous. If you can even get a loan officer to return a phone call, you’re lucky. So, I wouldn't be too fancy here trying to pick absolute bottoms; I would just refi now and whatever you get is going to be close to a century low.

Q: Why so few trade alerts?

A: Well, very simple. We only do trade alerts when we see really good sweet spots in the market. There aren’t sweet spots in the market every day; you’re lucky if you get 1 or 2 in a month. Then we tend to pour in and out of the market very quickly with a lot of alerts. There is no law that says you have to have a position every day of the year. That buys the broker’s yacht, not yours. You should only have positions when the risk reward is overwhelmingly in your favor. That is not now when our market timing index is hugging the 50 level. At 50, you actually have the worst possible entry point for new trades, long or short, so I’d rather wait for it to get away from that level before we get aggressive again. We have gone 100% invested multiple times in the last two months and made a ton of money. So, you just have to wait for your turn to get a sweet spot, and then you’ll make a very quick 10% or 15% in the market. Patience is rewarded in this business.

Q: Would you wait for the election because of the high implied volatility?

A: No, I would not wait. The game is to get in at the lowest price before the election. When the implied volatilities drop after the election, the profits you can make on these deep out of the money LEAPs drop by about half. Thank the volatility while it’s here because it’s creating great trading opportunities now, not in two months after the volatility Index (VIX) has collapsed.

Q: What about Zoom (ZM)?

A: As much as Zoom has had a 10-fold return since we recommended it a year ago, it looks like it wants to go higher. The Robinhood traders just love this stock; it’s a stay at home stock, stay at home is lasting a lot longer than anyone thought. Zoom is just coining it on that.

Q: Is the best outcome a Biden presidency and a Republican Senate?

A: No, that is the worst outcome. When you have a global pandemic going on, you don’t want gridlock in Washington. You want a very active Washington, controlled by a single party that can get things done very quickly. That is not now, which is possibly a major reason that we have the highest Covid-19 death rate in the world. It’s because Washington is doing absolutely nothing to stop the virus; the president won’t even wear a mask, so yes, you need one party to control everything so they can push stuff through. If it works, great, and if not then you kick them out of office next time and let the other guys have a try.

Q: Will property markets be up 20% by the end of the year?

A: If you live in a suburb of New York or San Francisco, then yes it will be up that much. For the whole rest of the country, the average is more like 5% gains year on year. In the burbs of these big money-making cities, prices are going absolutely nuts. My neighbor put his house up and it sold in a week for a $1 million over asking. So, the answer to that is yes, hell yes.

Q: Can you explain why the IPO market is suddenly booming now?

A: A lot of these companies like Palantir (PLTR) have been in development for 20 years, and prices are high. On valuation terms, we are at dot com bubble peaks now. That is the very best time to take your company public and get a huge premium for your stock. When the world is baying for paper assets, you print more of them.

Q: What is the best way to play real estate?

A: Buying the single home building companies like Pulte Homes (PHM), Lennar Homes (LEN), and KB Homes (KBH).

Q: What is your Tesla overview in China?

A: Tesla’s already announced that they’re doubling production of the Shanghai factory, from 250,000 units a year to 500,000. They built the last one in 18 months. It would take (GM) like 5 years to build something like that.

Q: Why has gold (GLD) lost its risk-off status?

A: It’s now a quantitative easing asset—like tech stocks, like bitcoin, and the stay at home stocks. It is being driven much more by QE-driven speculators flush with free cash than anyone looking for a flight to safety bid. When this group sells off, gold drops as well. The only risk-off asset right now is cash. That is the only “no risk” trade.

Q: What does reversal in lumber prices tell you?

A: Lumber was another one of those QE assets—it tripled. But you have this monster increase in new home building, huge demand for new homes in the suburbs, huge import duties leveled by the Trump administration on lumber coming from Canada. Also, a lot of people are getting COVID-19 in the lumber mills. So, they’re having huge problems on the production side in lumber, as a result of the pandemic.

Q: Are there any alternative ways to buy the Australian dollar besides (FXA)?

A: You go into the futures market and buy the Australian dollar futures. That is an entirely new regulatory regime so can be a huge headache. It requires you to register with the Commodities Futures Trading Commission, which is the worst of all the major regulators, but that is an alternative. If you’re an individual and not regulated instead of being a professional money manager, then it’s much easier.

Good Luck and Stay Healthy

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

Summit of Mount Rose

October 2, 2020/by Mad Hedge Fund Trader

September 17, 2020

Diary, Newsletter, Summary

Global Market Comments
September 17, 2020
Fiat Lux

Featured Trade:

(SHOPPING FOR FIRE INSURANCE IN A HURRICANE),
(VIX), (VXX), (XIV),
(THE ABCs OF THE VIX),
(VIX), (VXX), (SVXY)

September 17, 2020/by Mad Hedge Fund Trader

September 8, 2020

Diary, Newsletter, Summary

Global Market Comments
September 8, 2020
Fiat Lux

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD, or WHY CASH IS STILL TRASH),
(JPM), (AAPL), (AMZN), (V), (TLT), (SPY), (GOOGL),
(BAC), (C), (FCX), (VIX), (VXX), (TSLA), (FB)

September 8, 2020/by Mad Hedge Fund Trader

The Market Outlook for the Week Ahead, or Why Cash is Still Trash

Diary, Newsletter, Summary

This isn’t the “Big One.”

This isn’t even a Middle One.”

This is no more than a 10%-15% correction typical for long term bull markets.

Sure, we saw every technical indicator known to man scream “SELL” in the run-up to the recent market top. There were other factors at play as well.

The bulk of the buying focused on only the top six stocks, more concentrated than seen during the Dotcom Bubble Top in 2000.

There really was only one buyer. That would be my friend Masayoshi Son’s Softbank (SFTBY). He bought $4 billion worth of big tech call options in the run-up to the top with an exercise value of $30 billion. When he started to sell last Monday, the market for these options vaporized and stocks plunged.

The fact that both Apple (AAPL) and Tesla (TSLA) shares split the same day also defined a market top that I have been warning readers about for weeks.

This is all in the face of the incredible reality that 50% of all S&P 500 (SPY) stocks are down over the past two years. It really has been a stock picker’s market with a turbocharger.

And this isn’t just any old bull market. We are in fact 11 ½ years into a bull market that started in March 2009 that has another decade to run. We have completed the first 400% gain. What lies ahead of us is another stock market increase of 400%, taking us up to 120,000 in the Dow Average by 2030.

And this is a bull market that has suffered plenty of 10%-15% corrections since its inception. The one that began in Thursday is no different. The sole exception to this analysis was the COVID-19-induced 37% meltdown that began in February. That little event only lasted six weeks.

For you see, the fundamentals have not changed one iota. No, I’m not talking about earnings, valuations, or sales growth. That is so 20^th century.

No, I’m referring to the only fundamental that counts in the 21^st century: Liquidity.

And liquidity isn’t shrinking, it is in fact increasing. That includes the unprecedented expansion of quantitative easing by the Federal Reserve, massive deficit spending by the US government, and zero interest rates, which Fed governor Jay Powell has promised us will continue for another five years.

During the last Dotcom Bubble top, the FAANGs and Tesla (TSLA) did not even exist. Apple was just coming out of its flirtation with bankruptcy and Amazon (AMZN) had just barely gone public. Google (GOOGL) and Facebook (FB) were still but glimmers in their founders’ eyes.

Except now we have a new bullish fundamental to discount: a Biden win in November. Since Biden decisively pulled ahead in the polls in May, the stock market has risen almost every day. He is 4%-10% ahead in every battleground state poll.

Even if Trump were to win every red and red-leaning state accounting for 163 electoral college votes, plus all 63 votes from toss-up states (AZ, NC, IA, FL, GA, OH), he would still lose the election, where 270 votes are needed to win. Just THAT is a 1:100 event, on the scale of Harry Truman’s historic 1948 compact, and Trump is no Harry Truman.

So what of Biden wins?

You can count on the $3 trillion stimulus bill passed by the House in March to go through, which primarily allocates money to keep states and local municipalities from firing policemen, firemen, and teachers.

Next to come are another $3 trillion in infrastructure spending. And I absolutely know from past experience that markets love this kind of stuff. It enhanced liquidity even more.

As I say, cash is still trash, and it may remain so for years.

The Top is in, with a horrific two-day 1,500-point selloff in the Dow Average ($INDU) coming out of the blue on no news and signaling the end of the current rally. Whatever went up the most is now going down the most as the Robinhood traders flee in panic. This was long overdue. Margin calls are running rampant.

Volatility (VIX) soared to $38, up 70% in two days, meaning that we may be close to the end of this correction. The (SPX) is down 24 points, 6.7% from the Wednesday high. The last (VIX) peak was at $44 in June and $80 in March. Time to start buying stocks for a yearend rally? Look at the banks.

Was Apple (AAPL) really up 400%? Did Tesla gain 500%? You might be fooled if you didn’t know that these stocks just split, Apple at 4:1 and Tesla for 5:1. In fact, both stocks posted robust gains in real terms, Apple up 5% and Tesla up 10%. Tesla just hit my five-year split-adjusted target of $2,500. Every other analyst had a much lower target or were bearish. Time to run a mile as splits often herald intermediate market tops.

Apple hit a $2.3 trillion in market cap at the peak, up a staggering $300 billion in days. We are truly in La La Land here. The price-earnings multiple has soared from 9X to 40X. That 5G iPhone better deliver. Didn’t you hear that 5G was causing Coronavirus, a popular internet conspiracy theory?

The Dow Average just lost its Apple turbocharger. Some 1,000 of the 2,000 points the Dow Average gained in August were due to Apple alone. With the Dow rebalancing today, with (XOM), (PFE), and (RTX) out and (CRM), (AMGN), and (HON) in, Apple’s influence has been greatly diluted. With the (VIX) back up above $26, the worst is yet to come. The stock market is screaming for a correction.

Copper (FCX) hit a new 3-year high, with demand soaring in China. They were the first to cap Covid-19 and restore their economy. The red metal is a great call on the recovery of the global economy. Those who bought the Freeport McMoRan (FCX) LEAPS I recommended in March are sitting pretty. The shares are up 228% since then.

Tesla to sell $5 billion in stock to finance the construction of new factories in Nevada, TX, and Germany. (TSLA) fell 5% on the news. I had been advising clients to sell all week. It won’t be a conventional secondary stock offering but an effort to sell into every stock spike. More proof that Elon hates Wall Street as if we needed more. With a market cap of $450 billion, investors are finally viewing Tesla as a data company rather than a car company.

US car sales recover to 15.2 million in August on an annualized basis. That brings us almost back to pre-pandemic levels. This is the best indicator yet that the US is returning to a semi-normal economy. Of course, zero interest rates and other unprecedented incentives are a big help.

Consumer Spending popped, up 1.9% in July, which accounts for two-thirds of the US economy. Those who have money are spending like there’s no tomorrow, and with a global pandemic, maybe there won’t be. New car purchases were a big winner as buyers take advantage of 0% financing everywhere.

Weekly Jobless Claims dropped to 880,000, still terrible, but less terrible than last week. California claims have topped 8 million since the pandemic began. Continuing claims drop to 13.3 million, down from the 25 million peak in May.

US Unemployment Rate plunged to 8.4% in August, from 10.2%. The August Nonfarm Payroll report jumps by 1.37 million. It’s a much faster improvement than expected. Retail gained 248,000, Education & Health Services were up 147,000, and Leisure & Hospitality were up 174,000, Government was up 344,000. It’s all thanks to the miracle of government spending. The Dow Average is down 500 points anyway.

China to dump US Treasury bonds in response to Trump's escalating trade war, putting $200 billion in paper up for sale. They hold $1.07 trillion in total and is our largest single creditor. The (TLT) is down two points on the news, where I am running a double short position. Who is going to fund America’s massive borrowing?

When we come out the other side of this, 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 400% 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.

My Global Trading Dispatch bounced back hard with some super aggressive buying of stocks right at the Thursday and Friday market bottoms and selling short of bonds at the top.

By going full speed ahead, damn the torpedoes, I brought in the best two-day return in the 13-year history of the Mad Hedge Fund Trader, up a heroic 8.27%.

It started out as a terrible week, getting flushed out of one of my short positions in the (SPY) for a big loss as the market hit a new all-time high.

Then I got long banks (JPM), Apple (AAPL), Amazon (AMZN), Visa (V), and went triple short bonds (TLT). I still retain one short in the (SPY), which is now profitable. I would have bought Bank of America (BAC) and Citigroup (C), but the market ran away before I could write the trade alerts.

The instant crash was yet another gift. Right after I shorted bonds, the Chinese hinted that they would unload $200 million worth of their US Treasury bond holdings. The harder I work, the luckier I get.

If these positions expire at max profit in eight trading days, I will be back at new all-time highs. Notice that I am shifting my longs away from tech and toward domestic recovery plays.

You only need 50 years of practice to know when to bet the ranch.

That takes our 2020 year to date back up to 30.99%, versus -0.70% for the Dow Average. September stands at 4.44%. That takes my eleven-year average annualized performance back to 36.27%. My 11-year total return returned to 386.90%. My trailing one-year return popped back up to 51.60%.

It is a quiet week as always following the fireworks of the jobs data.

The only numbers that really count for the market are the number of US Coronavirus cases and deaths, which you can find here.

On Monday, September 7, it is Labor Day in the US, and markets are closed.

On Tuesday, September 8 at 10:00 AM EST, the Economic Optimism Index for September is released.

On Wednesday, September 9, at 8:13 AM EST, the EIA Cushing Crude Oil Stocks are out.

On Thursday, September 10 at 8:30 AM EST, the Weekly Jobless Claims are announced. US Core Producer’s Price Index for August is also out.

On Friday, September 4, at 8:30 AM EST, the US Inflation Rate for August is printed. At 2:00 PM The Bakers Hughes Rig Count is released.

As for me, I am headed back to Lake Tahoe to flee the horrific smoke in the San Francisco Bay Area drifting our way from the rampant California wildfires. If people don’t believe in global warming, they should come here where we have it in spades. We’ll even give you some.

At least we’ve been getting spectacular sunsets.

Stay healthy.

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

September 8, 2020/by Mad Hedge Fund Trader

September 4, 2020

Diary, Newsletter, Summary

Global Market Comments
September 4, 2020
Fiat Lux

Featured Trade:

(SEPTEMBER 2 BIWEEKLY STRATEGY WEBINAR Q&A),
(TSLA), (SPY), (GLD), (GDX), (JPM), (BAC), (C), (WFC), (VIX), (VXX), (TLT), (TBT), (USO), (INDU), (SDS),

September 4, 2020/by Mad Hedge Fund Trader

September 2 Biweekly Strategy Webinar Q&A

Diary, Newsletter, Summary

Below please find subscribers’ Q&A for the September 2 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Silicon Valley, CA with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!

Q: Tesla (TSLA) is down 25% today from the Monday high. What are your thoughts?

A: Yes, I've been recommending to people all last week that they dump their big leverage positions, like their one- and two-year LEAPS in Tesla and quite a few people got out at the absolute highs near $2,500 just before the new stock issue was announced. People who bought the Tesla convertible bonds ten years ago got an incredible tenfold return, plus interest!

Q: Are we at-the-money at the bear put spread in (SPY)?

A: Yes, and if we go any higher, you are going to get a stop loss in your inbox because I have good performance this year to protect. I do this automatically without thinking about it. In this kind of crazy market, you cannot run shorts indefinitely. Hope is not a strategy. And it’s easy to stop out of a loser when 90% of the time you know the next one is going to be a winner.

Q: Doesn’t gold (GLD) normally go up in falling stock markets?

A: Yes, in a normal market that’s what it does. The problem is that all asset classes have produced identical charts in the last 2.5 years, and when they all go up in unison, they all go down in unison. This time around, gold will sell off with the stock market and gold miners (GDX) will go down three times as fast. Remember gold miners are stocks first and gold plays second, so when a big stock dive hits, will see big dives in gold miners as well, as we saw in February and March.

Q: Why is JP Morgan (JPM) a good buy?

A: JP Morgan is the quality play in the banks. And once inflation starts to kick in and interest rates rise, and you get a positive yield curve and a strengthening economy—that is fantastic news for banks. They are also one of the few underperforming sectors left in the market, so in any stock market selloff banks will rise. And that’s JP Morgan (JPM), Bank of America (BAC), Citigroup (C) that will lead the charge. Avoid Wells Fargo (WFC). It’s still broken.

Q: I see iPath Series B S&P 500 VIX Short Term Futures ETN (VXX) starting to move up. Should we buy it?

A: Only on dips and only if you expect a dramatic selloff in the stock market very soon, which I do. The (VXX) trade is very high risk. The contango is huge. I tried making money on it a couple of times this year and failed both times; this really is for professional intraday traders in Chicago with an inside look at customer order flows. Retail traders rarely make money on the (VXX) trade—usually, they get killed.

Q: Will gold hold up as interest rates rise?

A: No, it won’t. Rising interest rates are death for gold and other precious metals. Your gold theory is that interest rates stay lower for longer, which the Fed has essentially already promised us.

Q: What do you think of the United States Treasury Bond Fund (TLT)?

A: I’m looking to sell shorts in big size as I did in the spring and I’m looking for five-point rallies to sell into. I missed the last one last week because it just rolled over so fast on an opening gap down that you couldn’t get any trade alerts out, and that’s happening more and more. So, if we get going up to $166-$167, that will be a decent short and then you want to be doing something like the $175-$178 vertical bear put spread in October. I don’t think bonds are going to go to 0% interest rates, I think the real range is 50-95 basis points in a 10-year treasury yield. That is your trading range.

Q: Do you think big oil (USO) will transform into a low carbon energy industry if Biden wins?

A: I’ve been telling big oil that that’s what they’re going to have to do for 20 years. They all read Mad Hedge Fund Trader. And, they always laugh, saying oil will be dominant at least until 2050. Since then, they have become the worst-performing sector of the S&P 500 on a 20-year view, and my thought is that eventually, big oil takes over and buys the entire alternative energy industry, and slowly pulls out of oil. They have the engineering talent to pull it off and they have the cash to make the acquisitions. They will have to reinvent themselves or go out of business, just like everybody else.

Q: What could trigger the stock market pullback you mention in your slides? Because the bullish Fed quantitative easing trade is hard to stop.

A: It’s like the 2000 top, there was no one thing or even a couple things, that could trigger the top. It’s just the sheer weight of prices and exhaustion of new buyers, and that is impossible to see in advance, so all you can do is watch your charts. One down out of the blue the Dow Average ($INDU) will suddenly drop 1,000 points for no reason.

Q: When you say Europe is recovering, which data indicates this?

A: Well, when you look at Q2 GDP growth in Europe, they were only down 10% while the US was down 26%. That is purely a result of Europe having a much more aggressive COVID-19 response than the United States. There is no mask debate in Europe, it’s like 100% compliance. Here you have blue states wearing masks and red states not. The result of that, of course, is that the death rate in the red states is about five times higher than it is in blue states, on a per capita basis. That is why the US has the highest infection rate in the world, the highest death rate, and is why we lost an extra 16% of GDP growth in Q2.

Q: Will you trade a short Tesla again?

A: No, I’ve been hit twice on Tesla shorts in the last six months and we are now in La La land—it’s essentially untradable. I got a lot of people out of Tesla earlier this week, and then they announced their share new $5 billion issue, which they should have done a while ago

Q: Is there any way to play the home mortgage refi boom in the stock market with the 30-year mortgages at a record low 2.88%?

A: You buy the banks. If you call your bank and ask for a refi quote, it might be a week before they get back to you, they are so busy. Banks are also getting enormous subsidies from all these various lending and stimulus type programs, so money is raining down on them right now. Banks are now the cheapest sector in the market, selling at 6x earnings. It is probably the single greatest sector in the stock market right now to buy.

Q: I’ve been holding the ProShares UltraShort 20 year Plus Treasury fund (TBT) and it is moving up and down in the short-range. Should I sell?

A: No, I think we have more room to go on the (TBT), I think we could get to $18, which is about a 0.90% yield in the US Treasury bond market.

Q: Do you have a target on Tesla?

A: Well, my downside target would be its old breakout level. So, divide by five and you get $300. That equates to $1450 in the pre-split price. So, we could have a real monster selloff, like 40%, once this market loses momentum. It’s safe to say don’t buy Tesla up here.

Q: Is the ProShares UltraShort S&P 500 ETF (SDS) offering a good entry point here?

A: It is as soon as we rollover. In these momentum-driven markets, it’s best to wait for proof of a top before you start getting fancy with short plays. You can see how I got hammered several times in the last month by being too early on my shorts; and fortunately, I was able to hedge out most of those losses. You might not be able to do so.

Q: Are you planning on keeping your Fortinet spread?

A: Yes, to expiration, which is only 11 days off, unless we get an out-of-the-blue meltdown.

Q: Do you like Ali Baba (BABA)?

A: Yes; that is essentially a play on a Biden win in the election. If he wins, our war with China will cease and all of the China plays will go ballistic as we return to international trade, which has been powering our economy for the last 70 years.

Q: What about cruise lines like Carnival (CCL)?

A: I know they’re cheap. They’re selling out their 2021 summer cruises with customers betting that there will be a corona vaccine by then, or simply not caring whether there is a pandemic or not. The dedicated cruisers are desperate to cruise. That’s one reason why these stocks are holding up, but I don’t want to touch them. I think the recovery will take much longer than people realize.

Q: When do you buy gold?

A: Wait for a bigger dip.

Q: Should I be holding gold for the long term?

A: Yes; if you don’t want to trade it, just sitting on your position is fine. I think gold eventually goes to 3,000 after hitting an initial target of 2,200.

Good Luck and Stay Healthy

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

September 4, 2020/by Mad Hedge Fund Trader

August 14, 2020

Diary, Newsletter, Summary

Global Market Comments
August 14, 2020
Fiat Lux

Featured Trade:

(AUGUST 12 BIWEEKLY STRATEGY WEBINAR Q&A),
(GLD), (TLT), (TSLA), (AAPL), (FB), (AMZN), (VXX), (VIX), (JPM), (BAC), (GDX), (NUGT), (MRNA), (BRK/B), (SLV), (FCX)

August 14, 2020/by Mad Hedge Fund Trader

August 12 Biweekly Strategy Webinar Q&A

Diary, Newsletter

Below please find subscribers’ Q&A for the August 12 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Lake Tahoe, NV with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!

Q: I just joined your service. Can you explain the logic to your current model trading portfolio?

I always try to balance long positions with short position. That greatly mitigates the risk of an out-of-the-blue crash, like we saw in February. Also, every individual position has a long and short, further reducing volatility. And you never can lose more money than you put up, so your risk is defined. That’s another classic risk control measure.

There is a further four hedge in that the portfolio is spread across all asset classes. So, I am long banks (JPM), (BAC), short US Treasury bonds (TLT), short a basket of big tech stocks (AAPL), (AMZN), (FB) and long gold (GLD). Something is always working where you can take profits. Our proprietary Mad Hedge Market Timing Index is always a big help in judging the best time to enter and exit these asset classes.

That is the short course on hedge fund risk management 101.

Q: Is it a good time to add in gold (GLD) here?

A: Yes, my long-term target for gold is $3,000/oz, possibly higher—it’s very common once you get a breakout from a 7-year bottoming process to get a big move like that. You always go back and retest that breakout level, that’s what’s happening now. I would use this dip to buy gold. You can look at (GLD) itself, the (GDX) gold miners which will give you 4:1 leverage over gold, or any of the 2x or 3x gold leveraged ETFs like (NUGT). There are lots of ways to play gold this time left from over the last bull market in gold ten years ago. So yes, bullish on gold with a temporary pullback in store. This recovery trade, which is buying banks, casinos, hotels, restaurants, weak dollar, weak buy market, weak gold—this is all temporary, this is just a trade. Those will all reverse themselves, probably by September if not sooner. So, if you missed the first round in the gold bull market, there’s certainly another chance to get back in.

Q: Do you think Biden and Harris will crash the stock market if elected?

A: No, since Biden started to run away in the polls, the stock market basically went straight up every day, and I prefer the stock market’s judgment on these things to opinion polls or talking heads. As far as Harris is concerned, she was the most middle of the road conservative pick of the 12 or so people they were looking at for vice president. Certainly, she’s a favorite with Wall Street, and isn’t it interesting they’re looking for the talents of a prosecutor in the White House? Who do you think they have in mind? So yes, that’s a net positive for the market. If anything, a new administration will bring a whole new round of Quantitative Easing and deficit spending, except it will be focused on bailing out Main Street, not Wall Street.

Q: Is the vaccine drug maker Moderna (MRNA) overbought here at 70?

A: Yes, I think to get any more appreciation you need to get an actual result on the many vaccines that are out there.

Q: Will Tesla (TSLA) pass 2,000 by year end?

A: I tend not to think so; Tesla had a once-in-a-lifetime 10-fold increase over a year. That is a very big move to digest, and while I’m saying people should keep their Tesla longs for the long term, short term you want to be selling calls against your long positions to hedge any downside and to take in some extra income.

Q: What caused ten-year US Treasury yields (TLT) to jump 14% yesterday? What will yields do from here?

A: Yields will go up and retest the 95-basis point level we saw a couple of months ago. That means we’re going to have a clear shot at adding shorts, probably for the next several weeks or months.

Q: I got the first TLT trade, but when I added the second one, I had to automatically close out my 175 short position to add the long 175 put position.

A: That is the correct way to do this. And what you end up with is a wider spread with a much larger size. So, you take all three positions we currently have, and you now have a (TLT) August $170-177.5 bear put spread in triple the original size and triple the profit, which expires in 5 trading days. It’s a trade with a very high return over a very short time frame. It’s the kind of trade that’s only available with very high volatilities in the market—at $25 in the (VIX), and you get very high accelerated time decay going into the close. So, it really was a two-week expiration play on the (TLT).

Q: Apple (AAPL) has been able to avoid any major damage in its share price in this trade war. How long can it last?

A: It can last 3 more months, until the election. It’s really quite amazing that the Chinese have not retaliated against Apple in all of these trade wars, and the reason for this is that Apple employs a million people in China, and they make a ton of money out of it. Apple has also managed their relationship with the communist government perfectly. So, that’s why they haven’t been hit. General Motors, other US companies—they could get expropriated. If the US can expropriate TikTok, what’s to stop China from expropriating General Motors, Starbucks, or even Apple for that matter?

Q: How do we know who has a real vaccine and who has a fake one? There’s so much information out there, I have a hard time filtering through what is real.

A: Wait for 100,000 people to try it out first—that’s what my plan is. That will be the safe way to do it. And if that means quarantining another couple of months to make sure you get the real deal, it’s worth the investment. Most industry safety standards, like animal trials, have been ditched by the FDA in order to get Trump a vaccine before the election. Putin is doing the same in Russia.

Q: Why is Warren Buffet buying back shares of Berkshire Hathaway (BRK/B) in record amounts? Is it because he sees no good investments?

A: He’d rather buy his own shares at parity or at a small premium than pay record PE multiples for essentially anything else in the market. Because the government rushed in so quickly to support the stock market, there never were any real deals in stocks, they never really got cheap. Yes, it sounds like down 40% in 2 months is cheap, but stocks weren’t, not even close to cheap, on a PE multiple basis. We never got close to the 9 ½X we saw in 2009. Also, if you believe in a recovery play, the ultimate recovery play is Berkshire Hathaway because they own predominantly old-line industrial cash flow stocks, which will lead any real recovery in the economy. So, at this point, Berkshire Hathaway will probably get you a higher return on a 12-month view than say Apple, Facebook or Amazon.

Q: Gold (GLD) vs Silver (SLV)? Which is better? And what about Copper (FCX)?

A: Silver always outperforms gold by at least 2 to 1 in any real economic recovery. Copper prices have risen 30% in 4 months; that is discounting a real economic recovery someday, so I would be buying copper on dips also.

Q: How do we learn more about options?

A: I suggest you go to the “How to Trade” section on our website, and that has links. Every trade alert we send out also has a link to a video that tells you exactly how to do the options part of that trade. And if you don’t want to do options, we also propose ETF and single stocks.

Q: What year end effect on the market do you see from a Biden tax plan on long term capital gains and qualified dividends at the ordinary income rate?

A: Well, if he actually proposes that, there will be a rush to sell assets by the end of the current year so people can take advantage of the very favorable capital gains tax that exist now. However, it’s not known whether that is actually the tax increase he’s proposing; it’s more likely he’ll simply return to the pre-Trump tax rates. However, I do expect him to come up with highly punitive tax rates on any real estate-related investment as a way of getting back at Trump. And that’s like loss carry forwards, steps up in the cost basis, 1031 exchanges—things specific to the real estate industry.

Q: If you think markets are going to come off, why aren’t you more aggressive buying the iPath Series B S&P 500 VIX Short Term Futures ETN (VXX)?

A: (VXX) has become such a professional market it really has become a day trading vehicle. It’s hard to get customers in and out of this thing fast enough to make them money, as most of my followers are not set up to be day traders. It’s a market where 90% of the professionals are playing from the short side, so when you get moves up, they essentially happen over 1 or 2 days, and then they spend weeks or months bleeding off. It really is a tough trade for a retail trader to do; and it is an area where the insiders in Chicago trade this thing and really do have an in-house advantage that I would rather not try to bet against.

Q: I sold the top on all precious metals positions and started buying back today. Was that the right thing to do?

A: Yes, I have a feeling it is. Start scaling in—if you’re nervous about buying gold here, buy a third of a position now, a third if it’s higher or lower, and a third if it’s higher or lower again. That’s what any pro would do.

Q: Do you see another big economic crisis in 2021?

A: I don’t think so; I think any continued weakness will be hit with massive liquidity from the Fed and more government spending. Now that they found the model to keep the economy going, they’re going to just keep at it, no matter who is in power. Roosevelt kept at it for 5 years to end the Great Depression, until he was bailed out by WWII, so hopefully we don’t have to bail our economy out the same way with WWIII.

Q: What about Bitcoin here?

A: We don’t trade Bitcoin as we think the whole thing is a giant scam. There’s also no value added by anyone. Insiders have a huge advantage, the people who are creating the bitcoin to sell. So, it’s a security with no fundamentals—thus unanalyzable.

Good Luck and Stay Healthy

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

August 14, 2020/by Mad Hedge Fund Trader

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