The probability of a recession taking place over the next 12 months is now low ranging as high as 20%. If it reaccelerates, not an impossibility, you can take that up to 100%.
And here’s the scary part. Bear markets front-run recessions by 6-12 months, i.e. now.
We’ll get a better read on the inflation numbers over the coming months. If inflation turns hot again, the Fed will be forced to raise rates to once unimagined levels.
So, it’s time to start asking the question of what the next recession will look like. Are we in for another 2008-2009 meltdown, when friends and relatives lost homes, jobs, and their entire net worth? Or can we look forward to a mild pullback that only economists and data junkies like myself will notice?
I’ll paraphrase one of my favorite Russian authors, Fyodor Dostoevsky, who in Anna Karenina might have said, “All economic expansions are all alike, while recessions are all miserable in their own way.”
Let’s look at some major pillars of the economy. A hallmark of the 2008 recession was the near collapse of the financial system, where the ATMs were probably within a week of shutting down nationally. The government had to step in with the TARP, and mandatory 5% equity ownership in the country’s 20 largest banks.
Back then, banks were leveraged 40:1 in the case of Morgan Stanley (MS) and Goldman Sachs (GS), while Lehman Brothers and Bear Stearns were leveraged 100:1. In that case the most heavily borrowed companies only needed markets to move 1% against them to wipe out their entire capital. That is exactly what happened. (MS) and (GS) came within a hair’s breadth of going the same way.
Thanks to the Dodd Frank financial regulation bill, banks cannot leverage themselves more than 10:1. They have spent a decade rebuilding balance sheets and reserves. They are now among the healthiest in the world, having become low-margin, very low-risk utilities. It is now European and Chinese banks that are going down the tubes.
How about real estate, another major cause of angst in the last recession? The market couldn’t be any more different today. There is a structural shortage of housing, especially at entry level affordable prices. While liar loans and house flipping are starting to make a comeback, they are nowhere near as prevalent as a decade ago. And the mis-rating of mortgage-backed securities from single “C” to triple “A” is now a distant memory. (I still can’t believe no one ever went to jail for that!).
And interest rates? We went into the last recession with a 6% overnight rate and a 7% 30-year fixed rate mortgage. Here we are once again.
The auto industry has been in a mild recession for the past two years, with annual production stalling at 15 million units, versus a 2009 low of 9 million units. In any, case the challenges to the industry are now more structural than cyclical, with new buyers decamping en masse to electric vehicles made on the west coast.
Of far greater concern are industries that are already in recession now. Energy has been flagging since oil prices peaked 18 months ago, despite massive tax subsidies. It is suffering from a structural oversupply and falling demand.
Retailers have been in a Great Depression for five years, squeezed on one side by Amazon and the other by China. A decade into store closings and the US is STILL over-stored. However, many of these shares are already so close to zero that the marginal impact on the major indexes will be small.
Financials and legacy banks are also facing a double squeeze from Fintech innovation and collapsing interest rates. All of those expensive national networks with branches on every street corner will be gone later in the 2020s.
And no matter how bad the coming recession gets technology, now 30% of the S&P 500, will keep powering on. Combined revenues of the “Magnificent Seven” in Q1 are at records. That leaves a mighty big cushion for any slowdown. That’s a lot more than the “eyeballs” and market shares they possessed a decade ago.
So, netting all this out, how bad will the next recession be? Not bad at all. I’m looking at a couple of quarters' small negative numbers, like two back-to-back -0.1%’s. Then we’ll see a recovery and probably another decade of decent US growth.
The stock market, however, is another kettle of fish. While the economy may slow from a 2.2% annual rate to -0.1% or -0.2%, the major indexes could fall much more than that, say 30% to 40%.
Earnings multiples are still at a 19X high compared to a 9X low in 2009. Shares would have to drop 53% just to match the last low. Equity weightings in portfolios are low. Money is pouring out of stock funds into bond ones.
Corporations buying back their own shares have been the principal prop from the market for the past three years. Some large companies, like Kohls (KSS), have retired as much as 50% of their outstanding equity in ten years.
https://www.madhedgefundtrader.com/wp-content/uploads/2019/08/What-the-Next-Recession-Will-Look-Like.jpg400400Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2023-07-21 09:04:122023-07-21 15:33:10What the Next Recession Will Look Like
It's becoming increasingly obvious to me that there is a single great trade shaping up.
S&P 500 (SPY) gains this year have been delivered by just seven stocks, which by now you all know well.
What happens next? The other 493 start to rise.
It just so happens that these troubled 493 stocks are close to their 2023 lows, with many of these the cheapest stocks in the market.
What kind of stocks are these?
Domestic industrial, commodity, and energy stocks have already discounted a deep recession. If the recession arrives, they are fairly priced. If we get only a modest recession, they should rise by 30%-50% reasonably quickly.
In fact, we have already seen recessions play out in broad swaths of the economy, including residential and commercial real estate, and you guessed it, industrials, commodities, and energy.
It gets better.
These sectors are usually the top performers when the stock market shifts from bear to bull. And guess what happened last week? The stock market rose 20% off its October low, officially moving from bear to bull market.
In fact, this bear lasted a depressing 248 days, making it the longest since 1948, or 75 years. This means that we now have the best entry point for domestic recovery stocks in 75 years.
You can see that individual stocks are starting to sense that the all-clear signal has sounded. Last week, they edged out small, tentative gains as if to see if the coast was clear. I also started sending out my first LEAPS for this cycle, those for Freeport McMoRan (FCX) and US Steel (X).
As a pioneer and very early investor in technology, you have not seen many recommendations from me to buy US Steel. I normally don’t look at industries that are besieged by foreign competition, undercut by cheap imports, bedeviled by union problems, are major polluters, and whose principal product has declined in output by 32% since 1970, from 140 million tons a year to only 94.7 million tons.
Yet, here it is.
It gets better still.
The collapse of the Volatility Index ($VIX) from $31 to $13 in three months has suddenly made trading front month call spreads tricky. However, it has made two-year LEAPS (Long Term Equity Anticipation Securities) the bargain of the century.
Two years LEAPS in sectors just coming off multiyear bottoms just as the Fed is about to reverse a harsh interest rate policy and igniting an economic revival sounds like the trade of the year, if not the decade, to me.
The sun, moon, and stars have aligned.
Now, here comes the turbocharger, the gasoline on the fire, the force multiplier.
I was playing around with our database last week in preparation for the launch of our Mad Hedge AI Service and drew some astonishing conclusions (see chart below).
Mad Hedge has been using AI now for 11 years, longer than almost anyone in the market. The longer the AI runs and the more data it accumulates, the smarter it gets. This is manifested in rapidly improving trading performance, which this year went ballistic. It is unbelievable to see this, but the numbers don’t lie.
Read it and weep.
So far in June, we are up +0.37%. My 2023 year-to-date performance is still at an eye-popping +62.12%. The S&P 500 (SPY) is up only a miniscule +12.63% so far in 2023. My trailing one-year return reached +101.03% versus +10.08% for the S&P 500.
That brings my 15-year total return to +659.31%. My average annualized return has blasted up to +48.83%, another new high, some 2.64 times the S&P 500 over the same period.
Some 42 of my 46 trades this year have been profitable. 23 of my last 24 consecutive trade alerts have been profitable.
I executed no trades last week. Concierge members received a LEAPS trade on US Steel (X), which regular subscribers should receive shortly. My longs in Tesla (TSLA) and Freeport McMoRan are now at max profit, which I will easily run into the June 16 option expiration this week. I now have a very rare 80% cash position due to the lack of high-return, low-risk short-term trades.
Tesla Model Y Became World’s Top Selling Car, in Q1, the first EV to do so. Some 267,200 Ys were shifted, edging out Toyota’s Corolla by 10,800 units, which led the field for decades. Elon Musk’s price-cutting volume play is working to the competition’s chagrin. The Model Y is on track to top one million sales this year. Buy (TSLA) on dips.
Tesla Drops Model 3 Price to $33,000, net of $7,500 federal EV tax credit. That helped it become the world’s top-selling car. Late to the market EV makers are getting killed, hemorrhaging cash. That took the shares up to a new 2023 high of $231. Keep buying (TSLA) on dips.
General Motors Adopts Tesla’s Charging System, essentially giving a near monopoly to Elon Musk. (GM) is joining Ford’s (F) capitulation from two weeks ago. This should grow into a $20 billion-a-year profit item for Tesla. All my outrageous forecasts are coming true. Buy (TSLA) on dips.
US to Send Another $2 Billion Worth of Advanced Missiles to Ukraine. The package includes advanced Raytheon (RTX) Himars and Lockheed (LMT) Patriot 3 missiles. Buy both (RTX) and (LMT) on dips as both missiles now have order backlogs extending for years.
Weekly Jobless Claims Jump to 261,000, an increase of 28,000, as the deflationary effects of high-interest rates take hold. Europe Enters a Recession, with a -0.1% GDP print in Q1. Sharp rises in Euro interest rates get the blame.
Volatility Index Hits 3 ½ Year Low, at $14.26. Complacency with the S&P 500 is running rampant, which always ends in tears. The level implies a maximum up-and-down range of only 8.2% for 30 days.
Airline Profits to Double in 2023, as service sharply deteriorates with revenge travel accelerating. Looks for this summer to be a perfect travel storm. Low fuel costs are another plus.
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 is 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, June 12 at 8:00 AM EST, the Consumer Inflation Expectations are out.
On Tuesday, June 13 at 8:30 PM, Core Inflation Numbers are released. The Fed begins a two-day Open Market Committee Meeting.
On Wednesday, June 14 at 5:30 AM, the US Producer Price Index is published. At 11:00 AM, the Fed interest rate decision is announced. The press conference follows at 11:30 AM.
On Thursday, June 15 at 8:30 AM, the Weekly Jobless Claims are announced. US Retail Sales are also out.
On Friday, June 16 at 7:00 AM, the University of Michigan Consumer Sentiment Index is published. At 2:00 PM, the Baker Hughes Rig Count is printed.
As for me, the call from Washington DC was unmistakable, and I knew what was coming next.
“How would you like to serve your country?” I’ve heard it all before.
I answered, “Of course, I would.”
I was told that for first the first time ever, foreign pilots had access to Russian military aircraft, provided they had enough money. The Russian Air Force was so broke, they couldn’t afford the fuel to allow their pilots to maintain minimum flight hours. They needed foreign pilots to pay for the fuel.
You see, in 1992, everything in the just-collapsed Soviet Union was for sale. All they needed was someone to masquerade as a wealthy hedge fund manager looking for adventure.
No problem there.
And can you fly a MiG-29?
“Probably.”
A month later, I was wearing the uniform of a major in the Russian Air Force, my hair cut military short, sitting in the backseat of a black Volga limo, sweating bullets.
“Don’t speak,” said my driver.
The guard shifted his Kalashnikov and ordered us to stop, looked at my fake ID card, and waved us on. We were at Russia’s Zhukovky Airbase 100 miles north of Moscow, home of the country’s best interceptor fighter, the storied Fulcrum, or MiG-29.
I ended up spending a week at the top-secret base. That included daily turns in the centrifuge to make sure I was up to the G-forces demand by supersonic flight. Afternoons saw me in ejection training. There in my trainer, I had to shout “eject, eject, eject,” pull the right-hand lever under my seat, and then get blasted ten feet in the air, only to settle back down to earth.
As a known big spender, I was a pretty popular guy on the base, and I was invited to a party every night. Let me tell you that vodka is a really big deal in Russia, and I was not allowed to leave until I had finished my own bottle, straight. My memory of what happened after 8:00 PM every night is pretty foggy.
After being taught to fear Americans for their entire lives the Russians were fascinated to actually meet one in person.
In 1993, Russia was realigning itself with the West, and everyone was putting on their best face going forward. I had been warned about this ahead of time and judiciously downed a shot glass of cooking oil every evening to ward off the worst effects of alcohol poisoning. It worked.
Preflight involved getting laced into my green super-tight gravity suit, a three-hour project. Two women tied the necessary 300 knots, joking and laughing all the while. They wished me a good flight.
Next, I met my co-pilot, Captain A. Pavlov, Russia’s top test pilot. He quizzed me about my flight experience. I listed off the names: Laos, Cambodia, Thailand, Israel, Croatia, Serbia, Bosnia, Kuwait, Iraq, and Saudi Arabia. It was clear he still needed convincing.
Then I was strapped into the cockpit.
Oops!
All the instruments were in the Cyrillic alphabet….and were metric! They hadn’t told me about this, but I would deal with it.
We took off and went straight up, gaining 50,000 feet in two minutes. Yes, fellow pilots, that is a climb rate of an astounding 25,000 feet a minute. They call them interceptors for a reason. It was a humid day, and when we hit 50,000 feet the air suddenly turned to snowflakes swirling around the cockpit.
Then we went through a series of violent spins, loops, and other evasive maneuvers (see my logbook entry below). Some of them seemed aeronautically impossible. I watched the Mach Meter carefully; it was frequently dancing up to the “10” level. Anything over ten is invariably fatal, as it ruptures your internal organs. For a few seconds, I thought Pavlov was trying to kill me.
Then Pavlov said, “I guess you are a real pilot, and he handed the stick over to me. I put the fighter into a steep dive, gaining the maximum handbook speed of March 2.5, or 2.5 times the speed of sound, or 1,918 miles per hour in seconds. Let me tell you, there is nothing like diving a fighter from 90,000 feet to the earth at 1,918 miles per hour.
Then we found a wide river and buzzed that at 500 feet just under the speed of sound. Fly over any structure over the speed of sound and the resulting shock wave shatters concrete.
I noticed the fuel gages were running near empty and realized that the Russians had only given me enough fuel to fly an hour. That’s so I wouldn’t hijack the plane and fly it to Finland. Still, Pavlov trusted me enough to let me land the plane; no small thing in a $30 million aircraft. I made a perfect three-point landing and taxied back to base.
I couldn’t help but notice that there was a MiG-25 Foxbat parked in the adjoining hanger and asked if it was available. They said “yes”, but only if I had $10,000 in cash on hand, thinking this was an impossibility. I said, “No problem” and whipped out my American Express gold card.
Their eyes practically popped out of their heads, as this amounted to a lifetime of earnings for the average Russian. They took a picture of the card, called in the number, and in five minutes I was good to go.
Thank you American Express!
They asked when I wanted to fly, and as I was still in my gravity suite I said, “How about right now?” The fuel truck duly backed up and in 20 minutes I was ready for takeoff. Pavlov, once again, my co-pilot. This time, he let me do the takeoff AND the landing.
The first thing I noticed was the missile trigger at the end of the stick. Then I asked the question that had been puzzling aeronautics analysts for years. “If the ceiling of the MiG-25 was 90,000 feet and the U-2 was at 100,000 feet how did the Russians make up the last 10,000 feet?
“It’s simple,” said Pavlov. Put on full power, stall out at 90,000 feet, then fire your rockets at the apex of the parabola to make up the distance. There was only one problem with this. If your stall forced you to eject, the survival rate was only 50%. That is because when the plane in free fall hits the atmosphere at 50,000 feet it’s like hitting a wall of concrete. I told him to go ahead, and he repeated the maneuver for my benefit.
It was worth the risk to get up to 90,000 feet. There you can clearly see the curvature of the earth, the sky above is black, you can see stars in the middle of the day, and your forward vision is about 400 miles. We were the highest men in the world at that moment. Again, I made another perfect three-point landing, thanks to flying all those Mustangs and Spitfires over the decades.
After my big flights, I was taken to a museum on the base and shown the wreckage of the U-2 spy plane flown by Francis Gary Powers shot down over Russia in 1960. After suffering a direct hit from a missile there wasn’t much left of the U-2. However, I did notice a nameplate that said, “Lockheed Aircraft Company, Los Angeles, California.”
I asked “Is it alright if I take this home? My mother worked at this factory during WWII building bombers.” My hosts looked horrified. “No, no, no, no. This is one of Russia’s greatest national treasures,” and they hustled me out of the building as fast as they could.
It's a good thing that I struck while the iron was hot as foreigners are no longer allowed to fly any Russian jets. Perhaps that’s why I have suddenly become very popular in Washington DC once again.
My MiG 25 in Russia
Russian Test Pilot A. Pavlov
Good Luck and Good Trading,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
https://www.madhedgefundtrader.com/wp-content/uploads/2023/06/john-thomas-mourning.jpg177171Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2023-06-12 09:02:052023-06-12 16:22:00The Market Outlook for the Week Ahead, or The Bull Market is Back!
Below please find subscribers’ Q&A for the June 7 Mad Hedge Fund Trader Global Strategy Webinar, broadcast from Lake Tahoe, NV.
Q: Do you ever trade the CBOE Volatility Index ($VIX)?
A: No, I used to, but I got hit a few times. That’s because 95% of the year is spent seeing the ($VIX) go down, and then the other 5% basically doubles overnight. It’s a short play only. With a long ($VIX), the time decay is enormous, and it’s just not worth owning. The only way to make money in ($VIX) is to buy it right before a giant VIX spike. And the floor traders in Chicago have a huge inside advantage in that market. So, I finally gave up and decided there's better things to do.
Q: Buy the price dip for Tesla (TSLA)?
A: I’d have to look at the charts, but if it gets back down to $200, I would start hoovering it up again. The fundamentals are really arriving for Tesla big time, as is the long-term bull case.
Q: With the debt crisis over, how low will the iShares 20 Plus Year Treasury Bond ETF (TLT) go in the short term?
A: Well, we know they have to issue a trillion dollars of 90-day T-bills in the next few weeks. The debt ceiling crisis stopped Treasury bill issuance for several months and now they have a lot of catch-up to do. So, best case scenario, the (TLT) drops to $95, then you load the boat for the rest of your life in (TLT) LEAPS, like a $95-$100 2024 LEAPS. And that should double about every year.
Q: Are you concerned about commodities given the weakness in the Chinese economy?
A: Yes, it’s definitely slowing the commodities recovery, but is also giving you a fantastic opportunity to get into things like Freeport McMoRan (FCX) at a cheaper price, where it was just a couple of weeks ago. All of the commodities look like they’re bottoming now, it’s time to buy them.
Q: It seems like you really love the Russell 2000 (RUT).
A: I hate the Russell. You only want to own big money stocks because that's where the big money goes first. Big money doesn’t go into the Russell, and as long as there's any doubt of a recession coming, they’ll perform poorly.
Q: Coinbase (COIN) is getting sued by the SEC, should I buy on the dip?
A: No, the whole crypto infrastructure is getting sued out of existence and disappearing. They went after Binance also. It seems like the SEC just doesn’t like crypto very much. That kind of shrinks the whole industry back down to hot wallets, where you slowly have direct control of your bitcoin on the network and you don't use any outside brokers to buy and sell it because there may not be any left shortly.
Q: Should we still hold the Apple (AAPL) bull call spread?
A: Yes, I think we have enough room on our call spread in the next 7 trading days to take max profit. However, if you have any doubts, no one ever gets fired for taking a profit.
Q: Is the ProShares Ultra Technology ETF (ROM) a buy at this time?
A: No, if anything, ROM is a sell. It almost had a near-double move. So no, wait for a 20% or 30% correction this summer in ROM and then go in. It has actually led most tech because it's a 2X long ETF. Sometimes I just want to shoot myself. You buy before stocks double, not afterwards.
Q: What will trigger a correction this summer?
A: The risk of a further rise in interest rates, which we may get. Other than that, the market is running out of negatives.
Q: What is the risk of US currency not being the world reserve?
A: Zero. I have been asked this question every day for the last 50 years and so far, I have been right. What would you rather keep your savings in Chinese Yuan, Russian rubles, or Euros? I would say none of those. And US currency will remain the reserve currency for this century, easily, until a digital US dollar comes out.
Q: Do you want to buy the cellphone companies?
A: No, not really. They weren’t very interesting before—it's a low margin, highly competitive cutthroat business—and now you have one of the world's largest companies, Amazon (AMZN), potentially offering phones for free? I think I'll pass on that one.
Q: Do you have any interest in pairs trading?
A: No, they blow up too often.
Q: Did you say you sent out a one-year LEAPS on Freeport McMoRan (FCX), the $35-$38?
A: Yes, if you didn’t get it, email customer support.
Q: Are investing in 90-day Treasury bills until the next one or two Fed meetings are over a good idea?
A: Yes, that is a good idea. Cash has a high-value night now. Remember, a dollar at a market top is worth $10 at a market bottom, and we now have a rare opportunity to get paid 5.2% or 5.3% while we wait. That hasn’t happened in almost 20 years.
Q: Will the new Apple VR headset be a boon to the stock price?
A: Yes, adding 10% to your earnings is always good, but it won’t happen immediately. You need a few thousand third-party app developers to come through with services before the earnings really get going. That's what happened with iTunes when the iPhone came out. Growth was slow when Apple only allowed its in-house apps to be sold—when they opened to the public, the business went up 100 times. That's maybe what will happen with the virtual headset.
Q: PayPal (PYPL) has dropped a lot, should I buy it here?
A: No, cutthroat competition in the sector is destroying the share price. There are too many other better things to buy.
Q: Why do so many professional analysts say the market will go down this year, but it goes up every day?
A: Professional analysts are just that—they're analysts, not traders. And often these days, to save money, your professional analyst is 26 years old, so they don’t have much market experience. I like to think that 50 years of trading experience backed with algorithms helps.
Q: Do you think oil could hit $100 a barrel next year?
A: Yes, definitely. Especially if we get a decent economic recovery and Saudi Arabia doesn’t immediately bring back 3 million barrels a day that they’ve cut.
Q: Should I chase NVIDIA (NVDA) here?
A: No, better to own cash here than Nvidia. Buy Nvidia on the next dip, or another Nvidia wannabe company, which will almost certainly arrive shortly.
Q: When will we get peace in Ukraine?
A: Within a year, I would say. Russia has literally run out of ammunition, and Ukraine is getting more. Ukraine is also getting F16s, our older fighter planes, and many other advanced weapons and parts—those are a big help. They can beat anything the Russians throw up.
Q: Is Global X Copper Miners ETF (COPX) a good copper play?
A: Yes it is, but you don’t get the leverage that you do with an FCX LEAP. I don’t know how far the top will go, but that would be a great trade one to two years out.
Q: Can you explain why there is a short squeeze in copper?
A: There are 200 pounds of copper needed for each EV, and EV production is exploding both here and in China. Tesla is expected to make 2 million EVs this year, especially with the $33,000 price point. China manufactures this many EVs as well. Four million EVS and 200 pounds of copper per EV equals the entire annual production of copper right now. At some point, people will notice that and they’ll take copper as much as they took lithium up last year.
Q: What do you mean when you say LEAPS one or two years?
A: It really depends on your risk. When you buy a two-year LEAPS, you usually get the extra year for free or almost nothing, and if you get a rapid increase in the underlying share price, the two-year LEAP will go up almost as much as the one year. So for most people who don’t want to watch the market every day, the two-year LEAPS is probably a better choice.
Q: Why did you buy only one LEAPS contracts?
A: All of my LEAPS recommendations are only for one contract. It is up to you to decide what your risk tolerance and experience level is, whether you buy 1, 100, or 1,000 contracts, so I leave the size up to you because it can vary tremendously depending on the person. Also, one contract makes the math really easy for people to understand.
Q: At what point do you sell your LEAPS?
A: Well, if you get a rapid 500% profit, which happened with many of the LEAPS that we did in October as well as the ones we did in March, I would take it. However, the goal on these is to go for the 10 baggers, or the 100% return in a year, and you usually need to hold it for the full year to get that. But, if the stock takes off like a rocket, I would take the profit. How many times in your life do you get a 500% profit in a month or two? I would say none. So, when you get that with these LEAPS recommendations, take it and run like a madman, move to a different country, and change your name.
Q: With the ($VIX) this low and many great companies for the second half down, would you buy single LEAPS instead of spreads?
A: I would; the problem with the call spread strategy is that it’s not the best thing to do at big market bottoms, down 20%, 30%, and 40%. The better thing to do is the LEAPS, but the LEAPS is a one- or two-year position, and I have to be sending out trade alerts every day. At market bottoms, you definitely want to get the most market leverage possible on the upside, and LEAPS does that for you in spades. They essentially turn your stock into a synthetic futures contract with a 10x leverage.
Q: When do we expect China (FXI) to take over Taiwan?
A: Never, because if they invade Taiwan, China loses its food supply from the US, which cannot be replaced anywhere. They also lose their international trade, so they won’t have the profits with which to buy food elsewhere. I’ve been in China when millions died during a famine and let me tell you, there is NO substitute for food. Not all the money in the world can buy it when it just plain isn’t available. But China will keep threatening and bluffing as they have done for 74 years.
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
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
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