Global Market Comments
January 9, 2023
Fiat Lux
Featured Trades:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE “PULL FORWARD” MARKET)
(AAPL), (TLT), (TSLA), (BRKB), (GOLD), (WPM), (QQQ), (VIX)
Posts
The market went into the new year short. After listening to dire forecasts for 2023 and January in particular, institutional investors raised cash and hedge funds sold short. That was made clear by the explosive move up in the market on Friday.
Those blinkered by a short-term view got slaughtered. Those who pursued my own long-term view expounded in my Wednesday, January 4 letter made a killing.
The December Nonfarm Payroll Report was the trigger. The headline numbers were just warm, not hot. But the average hourly earnings dropped by half, meaning workers are getting hired at lower pay levels. If we get an even modest inflation print at 8:30 AM on Thursday, January 12, you could get another gap up move in “RISK ON” markets.
The financial markets continue “pull forward movement” as they did for much of the second half of 2022.
The post-Election rally happened in October.
The Santa Claus rally took place in November.
The New Year January selloff struck in December, closing the year near a low.
What happens next?
Another dive at the lows will attack in February.
This is typical of bear markets where liquidity is thin, trading is dominated by a handful of professionals and algorithms, and individual investors are missing in action.
What is most puzzling even to me is how the Volatility Index (VIX) is remaining artificially low at $22. Is the index storing up volatility for a future run at $30 or $40?
We shall see.
My performance in January has so far tacked on an explosive +13.39%. My 2023 year-to-date performance was the same at +13.39%, a spectacular new high. The S&P 500 (SPY) is up +2.29% so far in 2023.
It is the greatest outperformance on an index since Mad Hedge Fund Trader started 15 years ago. My trailing one-year return maintains a sky-high +98.02%.
That brings my 15-year total return to +610.58%, some 2.81 times the S&P 500 (SPX) over the same period and a new all-time high. My average annualized return has ratcheted up to +46.67%, easily the highest in the industry.
I used the new year to go maximum bullish. First, I covered my short in Apple (AAPL) for a nice profit. I took my weighting in long bonds (TLT) up to 50%, which then nicely went ballistic. I also poured on new longs in Tesla (TSLA), Berkshire Hathaway (BRKB), and the metals stocks Barrick Gold (GOLD) and Wheaton Precious Metals (WPM).
That leaves me 90% long and 10% in cash, which I am holding back to add a new short in the (QQQ) at the next market top.
I have been getting a lot of questions about the chaos in the US House of Representatives. It greatly raises the risk of a default on US government debt by the summer and certainly casts a shadow over my 50% long bond position.
It also makes a government shutdown a sure thing, which is a big market negative. However, I don’t expect it to last more than a month.
The US government is basically a big recycling machine which sucks money from the coasts and spends it inland. For example, New York and California get back 75 cents of every tax dollar they send to Washington, while Wyoming and North Dakota get $1.25. They have long distances and few people. The big winners are Alaska and Hawaii, which get back $7.00 and $8.00 because of massive infrastructure and military spending.
Once red states see cash flow from the federal government dry up, opposition to a budget deal will dry up. It always does, usually after one billing cycle.
But if prices flatline and don’t fall, I’ll still make my maximum profit. I’ll just get less sleep at night.
Nonfarm Payroll Report Comes in Warm at 223,000 for November, presenting markets with a Goldilocks scenario. The Headline Unemployment Rate fell to an eye-popping 3.5%, a post-Covid low. Average hourly earnings dropped by half to 0.3% and up 4.6% YOY. No stock market crash here. If the Fed is trying to cause mass joblessness with high interest rates to kill inflation, it’s failing miserably.
Tesla to Announce Fifth Factory in Mexico, near Monterey, the Detroit of Mexico. The move is an important step in taking Tesla to an annual production of 20 million units a year, or 20% of the global car market by 2030. Construction should cost $10 billion - $20 billion. The move is a stroke of genius and is reminiscent of the old Elon Musk. By setting up in Mexico, Tesla can gain ample cheap skilled labor from the General Motors, Ford, and Hyundai factories already there. They negotiated priority customs clearance for parts coming into Mexico and finished cars headed north by rail. It is close to Texas where Tesla is already ramping up production at an Austin plant. The most likely product will be the hot-selling Model Y.
Tesla Suspends Production at Shanghai Plant in response to a rampant Covid-19 wave far worse than disclosed. The Beijing government claims only 2.5 million cases in 2022. But a leaked top-secret report says the true figure is closer to 250 million. The final capitulation selloff in Tesla is at hand. Buy calls, call spread, shares, and two-year LEAPS.
Tesla Q4 Sales Come in Short, delivering 405,278 and 1.3 million for all of 2023. The slight miss took the shares down an astounding 14%, a huge overreaction. The stock is now selling for 22 times 2023 earnings and 11 times 2025 earnings, compared to an average of 17 times earnings for the top four tech companies. That’s an eye-popping 35% discount to big tech. It’s certainly worth taking a risk going long here for a company that is still growing earnings by 40% a year.
Japan Reverses 30-Year Easy Money Policy, allowing interest rates to float up from 0.25% to 0.50%. The Japanese yen soared 4% on the move, the world's most shorted currency, which hedge funds used to fund all positions. US bonds tanked $5 in two days, as Japan is the largest buyer of US Treasury bonds (TLT). Higher rates may bring some of that money back to Japan. It’s all an indication that the US dollar has hit a decades-long peak.
Existing Home Sales Collapse, down 7.7% in November to a seasonally adjusted 4.09 million units. They are off 35.4% YOY. The median sales price is still rising, up 3.5%, to $370,700. Supplies are still tight, so 61% of homes sold in less than a month.
Wells Fargo Gets Tagged for $3.7 Billion, in fines for its seemingly never-ending supply of past offenses. The shares dropped 10% on the news. Avoid (WFC) for now. There are better banks to buy, like (JPM), (BAC), and (C).
Shipping Costs Dive 40%, as supply chain problems end. Container prices from China cratered from $40,000 to $6,000. The market is now discounting a 2023 recession when nobody buys anything. Some retailers are dropping prices by 70%-80%, especially in clothing. The pandemic era over-ordering has come back to haunt buyers.
Case Shiller Drops to 9.24% Annual Gain in October with its National Home Price Index, the fourth consecutive monthly decline. Miami (+21.0%), Tampa (+20.5%), and Charlotte (15.0%) led the gains. The price increase rate has dropped by half in a year.
Fed Minutes Remain Restrictive at the December 12 meeting, with inflation cited as the greatest threat to the economy. Actually, I think the Fed is the threat. All governors voted to maintain a tight policy. They cautioned against an unwarranted early easing. They cited “data dependence,” meaning that when the recession hits in the coming year, they will lower rates then expect a below-trend growth for 2023. Not what a bull wanted to hear.
Natural Gas Crashes, down 10% on the first trading day of 2023 to a new one-year low. Oil also took a 3% hit. The European gas crisis is over and energy markets are discounting a Russian surrender sometime this year. Gas may also be discounting a full-blown recession and warmer weather to come. Avoid all energy plays like the plague. Gas is now cheaper than coal in a race to the bottom.
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 is 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, January 9 at 8:00 AM, the Consumer Inflation Expectations are published.
On Tuesday, January 10 at 8:30 AM, the NFIB Business Optimism Index is out
On Wednesday, January 11 at 8:00 AM, a new batch of Mortgage Data is announced.
On Thursday, January 12 at 8:30 AM EST, the Weekly Jobless Claims are announced. So is the Consumer Price Index for December.
On Friday, January 13 at 8:30 AM EST, the Michigan Consumer Sentiment is disclosed. At 2:00, the Baker Hughes Oil Rig Count is out.
As for me, having visited and lived in Lake Tahoe for most of my life, I thought I’d pass on a few stories from this historic and beautiful place.
The lake didn’t get its name until 1949 when the Washoe Indian name was bastardized to come up with “Tahoe”. Before that, it was called the much less romantic Lake Bigler after the first governor of California.
A young Mark Twain walked here in 1863 from nearby Virginia City where he was writing for the Territorial Enterprise about the silver boom. He described boats as “floating in the air” as the water clarity at 100 feet made them appear to be levitating. Today, clarity is at 50 feet, but it should go back to 100 feet when cars go all-electric.
One of the great engineering feats of the 19th century was the construction of the Transcontinental Railroad. Some 10,000 Chinese workers used black powder to blast a one-mile-long tunnel through solid granite. They tried nitroglycerine for a few months but so many died in accidents they went back to powder.
The Union Pacific moved the line a mile south in the 1950s to make a shorter route. The old tunnel is still there, and you can drive through it at any time if you know the secret entrance. The roof is still covered with soot from woodfired steam engines. At midpoint, you find a shaft to surface where workers were hung from their ankles with ropes to place charges so they could work on four faces at once.
By the late 19th century, every tree around the lake had been cut down for shoring at the silver mines. Look at photos from the time and the mountains are completely barren. That is except for the southwest corner, which was privately owned by Lucky Baldwin who won the land in a card game. The 300-year-old growth pine trees are still there.
During the 20th century, the entire East shore was owned by one man, George Whittell Jr., son of one of the original silver barons. A man of eclectic tastes, he owned a Boeing 247 private aircraft, a custom mahogany boat powered by two Alison aircraft engines, and kept lions in heated cages.
Thanks to a few well-placed campaign donations, he obtained prison labor from the State of Nevada to build a palatial granite waterfront mansion called Thunderbird, which you can still visit today (click here). During Prohibition, female “guests” from California crossed the lake and entered the home through a secret tunnel.
When Whittell died in 1969, a Mad Hedge Concierge Client bought the entire East Shore from the estate on behalf of the Fred Harvey Company and then traded it for a huge chunk of land in Arizona. Today, the East Shore is a Nevada State Park, including the majestic Sand Harbor, the finest beach in the High Sierras.
When a Hollywood scriptwriter took a Tahoe vacation in the early 1960s, he so fell in love with the place that he wrote Bonanza, the top TV show of the decade (in front of Hogan’s Heroes). He created the fictional Ponderosa Ranch, which tourists from Europe come to look for in Incline Village today.
In 1943, a Pan Am pilot named Wayne Poulsen who had a love of skiing bought Squaw Valley for $35,000. This was back when it took two days to drive from San Francisco. Wayne flew the China Clippers to Asia in the famed Sikorski flying boats, the first commercial planes to cross the Pacific Ocean. He spent time between flights at a ranch house he built right in the middle of the valley.
His wife Sandy bought baskets from the Washoe Indians who still lived on the land to keep them from starving during the Great Depression. The Poulsens had eight children and today, each has a street named after them at Squaw.
Not much happened until the late forties when a New York Investor group led by Alex Cushing started building lifts. Through some miracle, and with backing from the Rockefeller family, Cushing won the competition to host the 1960 Winter Olympics, beating out the legendary Innsbruck, Austria, and St. Moritz, Switzerland.
He quickly got the State of California to build Interstate 80, which shortened the trip to Tahoe to only three hours. He also got the state to pass a liability limit for ski accidents to only $2,000, something I learned when my kids plowed into someone, and the money really poured in.
Attending the 1960 Olympics opening ceremony is still one of my fondest childhood memories, produced by Walt Disney, who owned the nearby Sugar Bowl ski resort.
While the Cushing group had bought the rights to the mountains, Poulsen owned the valley floor, and he made a fortune as a vacation home developer. The inevitable disputes arose and the two quit talking in the 1980s.
I used to run into a crusty old Cushing at High Camp now and then and I milked him for local history in exchange for stock tips and a few stiff drinks. Cushing died in 2003 at 92 (click here for the obituary)
I first came to Lake Tahoe in the 1950s with my grandfather who had two horses, a mule, and a Winchester. He was one-quarter Cherokee Indian and knew everything there was to know about the outdoors. Although I am only one-sixteenth Cherokee with some Delaware and Sioux mixed in, I got the full Indian dose. Thanks to him I can live off the land when I need to. Even today, we invite the family medicine man to important events, like births, weddings, and funerals.
We camped on the beach at Incline Beach before the town was built and the Weyerhaeuser lumber mill was still operating. We caught our limit of trout every day, ten back in those days, ate some, and put the rest on ice. It was paradise.
During the late 1990s when I built a home in Squaw Valley, I frequently flew with Glen Poulsen, who owned a vintage 1947 Cessna 150 tailwheel, looking for untouched high-country lakes to fish. He said his mother was lonely since her husband died in 1995 and asked me to have tea with her and tell her some stories.
Sandy told me that in the seventies she asked her kids to clean out the barn and they tossed hundreds of old Washoe baskets. Today Washoe baskets are very rare, highly sought after by wealthy collectors, and sell for $50,000 to $100,000 at auction. “If I had only known,” she sighed. Sandy passed away in 2006 and the remaining 30-acre ranch was sold for $15 million.
To stay in shape, I used to pack up my skis and boots and snowshoe up the 2,000 feet from the Squaw Valley parking lot to High Camp, then ski down. On the way up, I provided first aid to injured skiers and made regular calls to the ski patrol.
After doing this for many winters, I finally got busted when they realized I didn’t have a ski pass. It turns out that when you buy a lift ticket you are agreeing to a liability release which they absolutely had to have. I was banned from the mountain.
Today Squaw Valley is owned by the Colorado-based Altera Mountain Company, which along with Vail Resorts owns most of the ski resorts in North America. The concentration has been relentless. Last year Squaw Valley’s name was changed to the Palisades Resort for the sake of political correctness. Last weekend, a gondola connected it with Alpine Meadows next door, creating the largest ski area in the US.
Today, there are no Washoe Indians left on the lake. The nearest reservation is 25 miles away in the desert in Gardnerville, NV. They sold or traded away their land for pennies on the current value.
Living at Tahoe has been great, and I get up here whenever I can. I am now one of the few surviving original mountain men and volunteer for North Tahoe Search & Rescue.
On Donner Day, every October 1, I volunteer as a docent to guide visitors up the original trail over Donner Pass. Some 175 years later, the oldest trees still bear the scars of being scrapped by passing covered wagon wheels, my own ancestors among them. There is also a wealth of ancient petroglyphs, as the pass was a major meeting place between Indian tribes in ancient times.
The good news is that residents aged 70 or more get free season ski passes at Diamond Peak, where I sponsored the ski team for several years. My will specifies that my ashes be placed in the Middle of Lake Tahoe. At least, I’ll be recycled. I’ll be joining my younger brother who was an early Covid-19 victim and whose ashes we placed there in 2020.
The Ponderosa Ranch
The Poulsen Ranch
At the Reno Airport
Donner Pass Petroglyphs
An Original Mountain Man
Global Market Comments
August 27, 2021
Fiat Lux
Featured Trade:
(AUGUST 25 BIWEEKLY STRATEGY WEBINAR Q&A),
(ROM), (EEM), (FXI), (DIS), (AMZN), (NFLX), (CHPT), (TLT), (TBT), (AAPL),
(GOOG), (WPM), (GOLD), (NEM), (GDX), (X), (SLV), (FCX), (BA), (HOOD), (USO)
Below please find subscribers’ Q&A for the August 25 Mad Hedge Fund Trader Global Strategy Webinar broadcast from The Atlantis Casino Hotel in Reno, NV.
Q: How does a 2X ProShares Ultra Technology ETF (ROM) February 2022 vertical bull call spread on the ROM look? Would you do $110-$115 or $115-$120?
A: I would do nothing here at $112.50 because we’ve just gone up 10 points in a week. I’d wait for some kind of pullback, even just $5 or $10 points, and then I would do the $110-$115. I’m leaning towards more conservative LEAPS these days—bets that the market goes sideways to up small rather than going ballistic, which it has done for the last 18 months. Think at-the-money strikes, not deep out-of-the-money on your LEAPS from here on for the rest of this economic cycle. The potential profits are still enormous. The only problem with (ROM) is that the longest maturities on the options are only six months.
Q: How do you recommend entering your long-term portfolio?
A: I would use the one-third rule: you put on ⅓ now, ⅓ higher or lower later on, and ⅓ higher or lower again. That way you get a good average price. Long term, everything goes up until we hit the next recession, which is probably several years off.
Q: I keep reading that the Delta variant is a market risk, but I don’t think that investors will look through this. Is Delta already priced into the shares?
A: Yes, what is not priced into the shares is the end of Delta, the end of the pandemic—and that will lead to my “everything” rally that I’ve been talking about for a month now. And we have already seen the beginning of that, especially with the price action this week. So yes, Delta in: dead market; Delta out: roaring market.
Q: Do you think there will eventually be a rotation into emerging markets (EEM), or has the virus battered these markets too much to even consider it?
A: Sometime in our future—not yet—the emerging markets will be our core holding. And the trigger for that will be the collapse of the dollar, which is hitting an interim high right now. When the greenback rolls over and dies, you can expect emerging markets, especially China, to take off like a rocket. That’s going to be our next big trade. I don't know if it will be this year or next year but it’s coming, so start doing your emerging market research now, and keep reading my newsletter.
Q: Is the coming tax hike a problem for the stock market?
A: No, I don’t think so. First off, I don’t think they’re going to do a tax bill this year; they don’t want anything to interfere with the 2022 election, so it may be next year’s business. Also, any new taxes are going to be overwhelmingly focused on billionaires, carried interest, offshoring, and large corporations. The middle class, people who make less than $400,000 a year, will not see any tax hike at all, possibly even getting some tax cuts via restored SALT deductions. So, I don't really see it affecting the stock market at all.
Q: What do you think about Chinese stocks (FXI)?
A: Long-term they’re okay, short term possibly more downside. Interestingly, the bigger risk may not be China itself and how the government is beating up its own tech companies, but the SEC. It has indicated they don’t really like these offshore vehicles that have been listed on the New York Stock Exchange, and they may move to ban them. I’m not rushing into China right now, only because there are just so many better opportunities in the US stock market for the time being. I may go back in the future—it’s a case where I’d rather buy them on the way up than trying to catch a falling knife on China right now.
Q: Do you expect any market impact from the Jackson Hole meeting?
A: Yes, whatever J Powell says, even if he says nothing, will have a market impact. And it will have a bigger impact on the bond market than it will on the stock market, which is down a full point this morning. So yes, but not yet. I imagine we’ll hear something very soon.
Q: September and October tend to be volatile; do you see us having a 5% or 10% pullback in those months?
A: I don’t see any more than 5%, with the hyper liquidity that we have in the system now. There just aren’t any events out there that could trigger a pullback of 10%—no geopolitical events, and the economy will be getting stronger, not worse. So yes, an “everything rally” doesn’t give you many long side entry points, so I just don’t see 10% happening.
Q: What about a Walt Disney (DIS) January 2022 $180-$220 LEAPS?
A: I would do the $180-$200. I think you can afford to be tighter on your spread there, take some more risk because I think it’s just going to go nuts to the upside once we get a drop in COVID cases. By the way, Disney parks are only operating at 70% capacity, so if you go back up to 100% that's a near 50% increase in profits for the company. And it’s not just Disney, but Netflix (NFLX), Amazon (AMZN), and everybody else that’s about to have the greatest number of blockbuster movies released of all time. They’re holding back their big-ticket movies for the end of the pandemic when people can go back into theaters. We’ll start seeing those movies come out in the last quarter of this year, and I’m particularly looking forward to the next James Bond movie, a man after my own heart.
Q: Are EV car charging companies like ChargePoint Holdings (CHPT) going to do as well as the car companies?
A: No. They’re low margin business, so it’s not a business model for me. I like high-profit margins, huge barriers to entry, and very wide moats, which pretty much characterizes everything I own. The big profits in EVs are going to be in the cars themselves. Charging the cars is a very capital-intensive, highly regulated, and low-margin business.
Q: Would a Fed taper cause a 10% pullback?
A: Absolutely not; in fact, I think a taper would make the market go up because Jay Powell has been talking it into the market all year. And that’s his goal, is to minimize the impact of a taper so when they finally do it, they say ho-hum and “okay you can take that risk out of the market.” That’s the way these things work.
Q: What is your yearend target for United States Treasury Bond Fund (TLT)?
A: $132. Call it bold, but I'm all about bold. I think the first stop will be at $144, then $138, then bombs away!
Q: What will it take for (TLT) to dip below $130?
A: Another year of hot economic growth, which Congress seems hell-bent on delivering us.
Q: What are your ProShares Ultra Short 20+ Year Treasury ETF (TBT) targets?
A: When we were at 1.76% on the 10-year bond, the (TBT) made it all the way back to 22 ½. Next year we go higher, probably to $25, maybe even $30.
Q: What’s your 10-year view on the (TBT)?
A: $200. That’s when you get interest rates back to 10% in 10 years on the 10-year bond. So yes, that’s a great long-term play.
Q: How long can we hold (TBT)?
A: As long as you want. Ten years would be a good time frame if you want to catch that $17 to $200 move. The (TBT) is an ETF, not an option, therefore it doesn’t expire.
Q: Are you working on an electrification stock list?
A: I am not, because it’s such a fragmented sector. It’s tough to really nail down specific stocks. I think it’s safe to say that the electric power grid is going to change beyond all recognition, but they won’t necessarily be in high margin companies, and I tend to prefer high-profit-margin, large-moat companies which nobody else can get into, like Apple (AAPL) or Google (GOOG).
Q: What about gas pipelines with high yields?
A: They have a high yield for a reason; because they’re very high risk. If you're going to a carbon-free economy, you don’t necessarily want to own pipelines whose main job is moving carbon; it’s another buggy whip-type industry I would avoid. I’ve seen people get wiped out by these things more times than I could count. If you remember Master Limited Partnerships, quite a few of them went bankrupt last year with the oil crash, so I would avoid that area. These tend to be very highly leveraged and poorly managed instruments.
Q: Best play on silver (SLV)?
A: Wheaton Precious Metals (WPM) is the highest leveraged silver play out there, and a great LEAPS candidate. Go out 2 years and triple your money.
Q: Geopolitical oil (USO) risks?
A: No, nobody cares about oil anymore—that’s why we’re giving up on Afghanistan. China is buying 80% of the Persian Gulf oil right now. We don’t really need it at all, so why have our military over there to protect China’s oil supply?
Q: What about Freeport McMoRan (FCX)?
A: I absolutely love it. Any big economic recovery can’t happen without copper, and you have a huge tailwind there from electric cars which need 200 pounds of copper each, as opposed to 20 pounds in conventional cars.
Q: I see AMC Entertainment Holdings (AMC) is up 20% today; should everyone be chasing this stock?
A: No, absolutely not. (AMC) and all the meme stocks aren’t investments, they’re gambling, and there are better ways to gamble.
Q: Should I buy the lumber dip?
A: Yes. I think the slowdown on housing is temporary because it will take 10 years for supply and demand in the housing market to come back into balance because of all the millennials entering the housing market for the first time. So, that would be a yes on lumber and all the other commodities out there that go into housing like copper, steel, and aluminum.
Q: Should I put money into Canadian Junior Gold Miners (GDX)?
A: No, I would rather go out and take a long nap first. These are just so high risk, and they often go bankrupt. The liquidity is terrible, and the dealing spreads are wide. I would stick with the bigger precious metal plays like Newmont Mining (NEM), Barrick Gold (GOLD), and Wheaton Precious Metals (WPM).
Q: Is Boeing (BA) a buy here?
A: Yes, we’re back at the bottom end of the trading range for the stock. It’s just a matter of time before they get things right, and the 737 Max orders are rolling in like crazy now that there’s an airplane shortage.
Q: What do you think about Robinhood (HOOD)?
A: I like it quite a lot; I got flushed out of my long position on Friday with a 10% down move. Of course, 90% of my stop losses end up expiring at their maximum profit points, but I have to do it to keep the volatility of the portfolio down. So yes, I’ll try to buy it again on the next dip. The trouble is it’s kind of a quasi-meme stock in its own right, hence the volatility; so I would say on the next 10% down day, you go into Robinhood, and I probably will too.
Q: How are the wildfires around Tahoe?
A: They’re terrible and there are three of them. I did a hike two days ago there, and out of a parking lot with 100 spaces, I was the only one there. It’s the only time I’d ever seen Tahoe deserted in August. With visibility of 500 yards, it's just terrible. Fortunately, I was able to hike without coughing my guts out—it’s not so thick that you can’t breathe.
Q: What do you think of US Steel (X)?
A: I like it, I think the whole industrial commodity complex rallies like crazy going into the end of the year.
Q: As a new member, where is the best place to start? It’s just kind of like drinking from a fire hose.
A: Wait for the trade alerts; they only happen at sweet spots and you may have to wait a few days or weeks to get one since we only like to enter them at good points. That’s the best place to enter new positions for the first time. In the meantime, keep reading all the research, because when these trade alerts do come out, they’re not surprises because I’m pumping out research on them every day, across multiple fronts. Be patient— we are running a 93% success rate, but only because we take our time on entering good trades. The services that guarantee a trade alert every day lose money hand over fist.
Q: If they do delist Chinese stocks, will US investors be left holding the bag?
A: Yes, and that will be the only reason they don’t delist them, that they don’t want to wipe out all current US investors.
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 (whichever applies to you), then select WEBINARS and all the webinars from the last ten years are there in all their glory.
Good Luck and Stay Healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
August 13, 2021
Fiat Lux9
(AUGUST 11 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPY), (DIS), (FDX), (AMZN), (PAVE), (NUE), (X), (FCX), (AA), (AMD), (GLD), (SLV), (GDX), (WPM), (COIN)
Below please find subscribers’ Q&A for the August 11 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Silicon Valley, CA.
Q: If we see a correction in stocks, what would you do?
A: Buy more stocks (SPY). All of our positions expire next week, and we go 100% into cash. I’m looking for just a 5% correction and then I’m just going to go piling in 100% invested with a barbell portfolio since everything is working now and some of the best tech stocks like Amazon have already had 10% corrections.
Q: Time for LEAPS again on Amazon (AMZN)?
A: Yes, but let Amazon have more time to bottom out. It may just be a “time” correction where it goes sideways for a month or two. The company is still growing at an incredible rate.
Q: What about FedEx (FDX) and Walt Disney (DIS) LEAPS?
A: Those LEAPS I would do, right here, right now. We’ve had our corrections already in those sectors and they’re ready to take off. It’s just a matter of time before these sectors come back into favor. These are both delta peaking plays.
Q: It seems that the US government is taking the stance that they can tax their way out of the fiscal hole; is this true?
A: No, they don’t need to tax their way out of the fiscal hole; deflation will wipe out all US government debt on a 30-year view, and this is what’s happened to not only all the government debt in US history but all government debts all over the world starting with France in the 1600s. By the time the government has to pay back its 30-year bonds, the purchasing power of that dollar will have fallen by 80% or 90%, meaning that essentially the bonds get deflated away to nothing. And this is why we have governments, so they can borrow that money now, spend it now to rescue the economy, and then they never have to pay it back in real dollars. This is why governments borrow. The investors who really have to pick up the bill for this are bond owners, who see the purchasing power of the bonds decline by 2%-3% a year.
Q: When do you see a correction, and what would you do?
A: It’s either going to be in the next couple of weeks or never. If we get one, I would load the boat again with more long positions. Of the five positions out of 100 I’ve lost money this year, four have been short positions, so you can see why we’re really trying to limit the short positions here.
Q: Visa (V) is going ex-dividend tomorrow—is there a risk of early assignment?
A: There is, but if you get an early assignment, just say thank you very much, Mr. Market, call your broker to tell them to exercise your long call position to cover your call short position, and you will get the maximum profit several days earlier than expiration. This happens sometimes as hedge funds try to get the quarterly dividend on the cheap, but you have to act fast, otherwise, you’ll end up with a short position in Visa on your hands, and most likely a margin call. Brokers are not allowed to automatically exercise longs to meet calls anymore. You have to call them and order them to exercise that long. So, pay attention going into quarterly option expirations.
Q: I don’t trust your COVID information any more than I trust the government line.
A: All of my Covid data comes from Johns Hopkins University and is interdependently collated from every country in the United States. If you have any complaints you can go to them. All I can say is there are 620,000 bodies in the country that died of something. Oh, and we had the lowest population growth last month in 50 years. I’ve had family members die from it so I believe that.
Q: If the Republicans win in 2022 and 2024, will the bull market continue?
A: Absolutely not. We get a new recession and another bear market. Everything that’s going well now reverses, the entire environmental infrastructure strategy goes down the toilet, and Covid makes a huge recovery. I would go with what’s working, and 6.5% economic growth now and a market going up 30% a year totally works for me. Of course, I would make another fortune on the short side.
Q: How should you play infrastructure?
A: There is an infrastructure ETF called the Global X Funds Infrastructure ETF (PAVE) that has already had a big move, up 176% in 17 months. Other than that you can just play your basic commodity stocks like US Steel (X), Nucor (NUE), and Freeport McMoRan (FCX).
Q: How long will the hot housing market continue?
A: Ten more years. That's how long it will take to digest the current 85 million strong millennial generation who are now buying first-time homes or upgrading what they’ve got. And remember, we’re still operating with half of the new home construction capacity that we had 15 years ago before the last financial crisis.
Q: What's your prognosis for semiconductors?
A: They just had a super-heated spike; I expect them to take a break. That's why I took profits on Advanced Micro Devices (AMD). We’ll find a new bottom, and then I want to buy back into it. It’s taking a break with the rest of technology right now, which is perfectly normal.
Q: Would you take this dip to add to mRNA and BioNTech?
A: I would say yes. This is an industry that’s on the eve of a biotech revolution—the cure of all human diseases. And these two companies with their mRNA technologies are in the best place to take advantage of that.
Q: Will there be a big spike down in August?
A: It looks like it’s not happening. Like I said, if it doesn’t happen in the next few weeks, it’s not going to happen. Excess liquidity is just driving all investment decisions. If it doesn’t go down now, what’s the reason for it to go down in October? I just see no negatives at all on the horizon except for another out-of-the-blue variant like a Lambda or an Epsilon variant.
Q: Does slow population growth include illegal immigration?
A: It does, immigration both legal and illegal has been constant for decades and decades, it’s about a million people a year. But Americans are not reproducing like they used to, the birth rate hit a 50-year low last year because women did not want to go to the hospitals which were full of COVID patients. A lower population growth over the long term is very bad for economic growth. That is why Japan has essentially been in a nonstop recession for the last 32 years, because of their baby bust.
Q: Do you have political debt ceiling concerns?
A: No, these are always last-minute before midnight deals. I don't see this being any different, never underestimate the ability of Congress to spend more money, no matter who is in power.
Q: What do you think of oil in the short run?
A: Short term it may go sideways, we may even have a rally to new highs, but the long-term trade for oil is that it’s going out of business. EVs, mean you lose 50% of demand for oil in the next 10 years, and they will start discounting that now in the price of oil.
Q: Why is silver down so much?
A: It’s being dragged down by Gold (GLD), and silver (SLV) always moves twice as fast as gold.
Q: How are muni bonds going forward?
A: I don’t see them going much further. They had a massive rally, discounting an increase in taxes which hasn’t happened. So even if they do raise taxes which may be next year’s business, that is fully discounted in the Muni market already.
Q: What am I missing? You’ve been saying for months not to get involved with Bitcoin but then I heard you say you bought LEAPS.
A: No, I didn’t buy the LEAPS. I tried to buy the LEAPS but missed them and it ran away and they ended up tripling in two weeks. It’s just not like buying a normal stock. Once these things turn, they just start going up every day for weeks with no pullbacks whatsoever. This is valuation-free security with no dividend, interest, or earnings. It’s driven by pure supply and demand.
Q: What do you think of the precious metal miners like the Van Eck Vectors Gold Miners ETF (GDX)?
A: Let the current meltdown burn out and then go into long term LEAPS.
Q: What’s the best way to buy silver?
A: The best way is doing 2-year LEAPS on Wheaton Precious Metals (WPM) at current levels.
Q: What do you think about Coinbase (COIN)?
A: It’s definitely a candidate, but you want to get it on a down day. Coinbase is in the “selling shovels to the gold miners” business which is always a fantastic business model and we here in California know all about it. It’s just a question of when and where to get involved. It’s been gyrating this week because of their new burden of doing the tax reporting on all crypto buyers among their customers. That will definitely be a drag on the business.
Q: What's your short-term view on the big commodity plays like Freeport McMoRan (FCX), Alcoa Aluminum (AA), and US Steel (X)?
A: I would say they’re all going up. Maybe half the infrastructure bill has been discounted into the metals prices, but not all of it, therefore they have more to go to the upside.
Q: What are the best real estate buys?
A: There are none anywhere; maybe somewhere in eastern Europe, but still unlikely. It’s the best time ever now to rent. Buying here would be madness. And by the way, I predicted this property boom 10 years ago, if you go back in my research because 2021 was when the millennials would show up as massive buyers in the housing market, right when there was going to be a demographic shortage. That’s why I think the real estate boom goes on for another 10 years. But you won't see the gains that we’ve seen this year. You will maybe see 5% or 10% gains a year, definitely not 50% or 100% gains that we’ve just seen.
To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in here, go to MY ACCOUNT, click on GLOBAL TRADING DISPATCH, then WEBINARS, and all the webinars from the last ten years are there in all their glory.
Good Luck and Stay Healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
April 1, 2021
Fiat Lux
Featured Trade:
(MARCH 31 BIWEEKLY STRATEGY WEBINAR Q&A),
(FB), (ZM), ($INDU), (X), (NUE), (WPM), (GLD), (SLV), (KMI), (TLT), (TBT), (BA), (SQ), (PYPL), (JNP), (CP), (UNP), (TSLA), (GS), (GM), (F)
Below please find subscribers’ Q&A for the March 31 Mad Hedge Fund Trader Global Strategy Webinar broadcast from frozen Incline Village, NV.
Q: Would you buy Facebook (FB) or Zoom (ZM) right here?
A: Well, Zoom was kind of a one-hit wonder; it went up 12 times on the pandemic as we moved to a Zoom economy, and while Zoom will permanently remain a part of our life, you’re not going to get that kind of growth in stock prices in the future. Facebook on the other hand is going to new highs, they just announced they’re laying a new fiber optic cable to Asia to handle a 70% increase in traffic there. So, for the longer term and buying here, I think you get a new high on Facebook soon; there's maybe another 20-30% move in Facebook this year.
Q: I can’t really chase these trades here, right?
A: Correct; if you wait any more than a day or 2 on executing a trade alert, you’re missing out on all of the market timing value we bring to the game. So that's why I include an entry price and the “don’t pay more than” price. And we never like to chase, except last year, when we did it almost all the time. But last year was a chase market, this year not so much.
Q: How are LEAP purchase notifications transmitted?
A: Those go out in the daily newsletter Global Trading Dispatch when I see a rare entry point for a LEAP, then we’ll send out a piece and notify everybody. But it’s very unusual to get those. Of course, a year ago we were sending out lists of LEAPS ten at a time when the Dow Average ($INDU) is at 18,000. But that is not now, you only wait for those once or twice a year. On huge selloffs to get into two-year-long options trades, and that is definitely not now. The only other place I've been looking out for LEAPS right now are really bombed out technology stocks begging for a rotation. Concierge members get more input on LEAPS and that is a $10,000 a year upgrade.
Q: What are your thoughts on silver (SLV) and long-term gold (GLD)?
A: I see silver going to $50 and eventually $100 in this economic cycle, but it's out of favor right now because of rising interest rates. So, once we hit 2.00% in the ten years, it’s not only off to the races for tech but also gold and silver. Watch that carefully because your entry point may be on the horizon. That makes Wheaton Precious Metals (WPM) a very attractive “BUY” right now.
Q: Are you going to trade the (TLT)?
A: Absolutely yes, but I’m kind of getting picky now that I’m up 42% on the year; and I only like to sell 5-point rallies, which we got for about 15 minutes last week. And I also only like to buy 5- or 10-point dips. Keep your trading discipline and you’ll make a ton of money in this market. Last year we made about 30% trading bonds on about 30 round trips.
Q: How much further upside is there for US Steel (X) and Nucor Corp. (NUE)?
A: More. There's no way you do infrastructure without using millions of tons of steel. And I kind of missed the bottom on US Steel because it had been a short for so long that it kind of dropped off the radar for me. I think we have gone from $4 to 27 since last year, but I think it goes higher. It turns out the US has been shutting down steel production for decades because it couldn't compete with China or Japan, and now all of a sudden, we need steel, and we don’t even make the right kind of steel to build bridges or subways anymore—that has to be imported. So, most of the steel industry here now is working for the car industry, which produces cold-rolled steel for the car body panels. Even that disappears fairly soon as that gets taken over by carbon fiber. So enough about steel, buy the dips on (X) and (NUE).
Q: What stocks should I consider for the infrastructure project?
A: Well, US Steel (X) and Nucor Corp (NUE) would be good choices; but really you can buy anything because the infrastructure package, the way it’s been designed, is to benefit the entire economy, not just the bridge and freeway part of it. Some of it is for charging stations and electric car subsidies. Other parts are for rural broadband, which is great for chip stocks. There is even money to cap abandoned oil wells to rope in Texas supporters. All of this is going to require a massive upgrade of the power grid, which will generate lots of blue-collar jobs. Really everybody benefits, which is how they get it through Congress. No Congressperson will want to vote against a new bridge or freeway for their district. That’s always the case in Washington, which is why it will take several months to get this through congress because so many thousands of deals need to be cut. I’ve been in Washington when they’ve done these things, and the amount of horse-trading that goes on is incredible.
Q: Is it a good thing that I’ve had the United States Treasury Bond Fund (TLT) LEAPS $125 puts for a long time.
A: Yes. Good for you, you read my research. Remember, the (TLT) low in this economic cycle is probably around $80, so you probably want to keep rolling forward your position….and double up on any ten-point rally.
Q: Do you think we get a pop back up?
A: We do but from a lower level. I think any rallies in the bond market are going to be extremely limited until we hit the 2.00%, and then you’re going to get an absolute rip-your-face-off rally to clean out all the short term shorts. If you're running put LEAPS on the (TLT) I would hang on, it’s going to pay off big time eventually.
Q: If we see 3.00% on the 10-year this year, do you see the stock market crashing?
A: I don’t think we’ll hit 3.00% until well into next year, but when we do, that will be time for a good 10% stock market correction. Then everyone will look around again and say, “wow nothing happened,” and that will take the market to new highs again; that's usually the way it plays out. Remember, then year yields topped all the way up at 5.00% when the Dotcom Bubble topped in April 2020.
Q: Has the airline hospitality industry already priced in the reopening of travel?
A: No, I think they priced in the hope of a reopening, but that hasn’t actually happened yet, and on these giant recovery plays there are two legs: the “hope for it” leg, which has already happened, and then the actual “happening” leg which is still ahead of us. There you can get another double in these stocks. When they actually reopen international travel to Europe and Asia, which may not happen this year, the only reopening we’re going to see in the airline business is in North America. That means there is more to go in the stock price. Also coming back from the brink of death on their financial reports will be an additional positive.
Q: Do you think a corporate tax increase will drive companies out of the US again and raise the unemployment rate?
A: Absolutely not. First of all, more than half of the S&P 500 don’t even pay taxes, so they’re not going anywhere. Second, I think they will make these offshoring moves to tax-free domiciles like Ireland illegal and bring a lot of tax revenues back to the US. And third, all Biden is doing is returning the tax rate to where it was in 2017; and while the corporate tax rate was 35%, the stock market went up 400% during the Obama administration, if you recall. So stocks aren't really that sensitive to their tax rates, at least not in the last 50 years that I’ve been watching. I'm not worried at all. And Biden was up on the polls a year ago talking about a 28% tax rate; and since then, the stock market has nearly doubled. The word has been out for a year and priced in for a year, and I don't think anybody cares.
Q: What about quantum computers?
A: I’m following this very closely, it’s the next major generation for technology. Quantum computers will allow a trillion-fold improvement in computing power at zero cost. And when there's a stock play, I will do it; but unfortunately, it’s not (IBM), because we’re not at the money-making stage on these yet. We are still at the deep research stage. The big beneficiaries now are Alphabet (GOOGL), Microsoft (MSFT), and Amazon (AMZN).
Q: Is it time to buy Chinese stocks?
A: I would say yes. I would start dipping in here, especially on the quality names like Tencent (TME), Baidu (BIDU), and Alibaba (BABA), because they’ve just been trashed. A lot of the selloff was hedge fund-driven which has now gone bust, and I think relations with China improve under Biden.
Q: Your timing on Tesla (TSLA) has been impeccable; what do you look for in times of pivots?
A: Tesla trades like no other stock, I have actually lost money on a couple of Tesla trades. You have to wait for things to go to extremes, and then wait two more days. That seems to be the magic formula. On the first big selloff go take a long nap and when you wake up, the temptation to buy it will have gone away. It always goes up higher than you expect, and down lower than you expect. But because the implied volatilities go anywhere from 70% to 100%, you can go like 200 points out of the money on a 3-week view and still make good money every month. And that’s exactly what we’re going to do for the rest of the year, as long as the trading’s down here in the $500-$600 range.
Q: Is Editas Medicine (EDIT), a DNA editing stock, still good?
A: Buy both (EDIT) and Crisper (CRSP); they both look great down here with an easy double ahead. This is a great long-term investment play with gene editing about to dominate the medical field. If you want to learn more about (EDIT) and (CRSP) and many others like them, subscribe to the Mad Hedge Fund Biotech & Healthcare Letter because we cover this stuff multiple times a week (click here).
Q: Is the XME Metals ETF a buy?
A: I would say yes, but I'd wait for a bigger dip. It’s already gone up like 10X in a year, but the outlook for the economy looks fantastic. (XME) has to double from here just to get to the old 2008 high and we have A LOT more stimulus this time around.
Q: What about hydrogen?
A: Sorry, I am just not a believer in hydrogen. You have to find someone else to be bullish on hydrogen because it’s not me. I've been following the technology for 50 years and all I can say is: go do an image Google for the name “Hindenburg” and tell me if you want to buy hydrogen. Electricity is exponentially scalable, but Hydrogen is analog and has to be moved around in trucks that can tip over and blow up at any time. Hydrogen batteries are nowhere near economic. We are now on the eve of solid-state lithium-ion batteries which improve battery densities 20X, dropping Tesla battery weights from 1,200 points to 60 pounds. So “NO” on hydrogen. Am I clear?
Q: Why do you do deep-in-the-money call and put spreads?
A: We do these because they make money whether the stock goes up down or sideways, we can do them on a monthly basis, we can do them on volatility spikes, and make double the money you normally do. The day-to-day volatility on these positions is very low, so people following a newsletter don’t get these huge selloffs and sell at bottoms, which is the number one source of retail investor losses. After 13 years of trade alerts, I have delivered a 40.30% average annualized return with a quarter of the market volatility. Most people will take that.
Q: Is ProShares Ultra Short 20 Year Plus Treasury ETF(TBT) still a play for the intermediate term?
A: I would say yes. If ten-year US Treasury bonds Yields soar from 1.75% to 5.00% the (TBT) should rise from $21 to $100 because it is a 2X short on bonds. That sounds like a win for me, as long as you can take short term pain.
Q: What is the timing to buy TLT LEAPS?
A: The answer was in January when we were in the $155-162 range for the (TLT). Down here I would be reluctant to do LEAPS on the TLT because we’ve already had a $25 point drop this year, and a drop of $48 from $180 high in a year. So LEAP territory was a year ago but now I wouldn’t be going for giant leveraged trades. That train has left the station. That ship has sailed. And I can’t think of a third Metaphone for being too late.
Q: Would you buy Kinder Morgan (KMI) here?
A: That’s an oil exploration infrastructure company. No, all the oil plays were a year ago, and even six months ago you could have bought them. But remember, in oil you’re assuming you can get in and out before it crashes again, it’s just a matter of time before it does. I can do that but most of you probably can’t, unless you sit in front of your screens all day. You’re betting against the long-term trend. It works if you’re a hedge fund trader, not so much if you are a long-term investor. Never bet against the long-term trend and you always have a tailwind behind you. All surprises work to your benefit.
Q: If you get a head and shoulders top on bitcoin, how far does it fall?
A: How about zero? 80% is the traditional selloff amount for Bitcoin. So, the thing is: if bitcoin falls you have to worry about all other investments that have attracted speculative interest, which is essentially everything these days. You also have to worry about Square (SQ), PayPal (PYPL), and Tesla (TSLA), which have started processing Bitcoin transactions. Bitcoin risk is spread all over the economy right now. Those who rode the bandwagon up will ride it back down.
Q: Is Boeing (BA) a long-term buy?
A: Yes, especially because the 737 Max is back up in the air and China is back in the market as a huge buyer of U.S. products after a four-year vacation. Airlines are on the verge of seeing a huge plane shortage.
Q: What about Ags?
A: We quit covering years ago because they’re in permanent long-term downtrends and very hard to play. US farmers are just too good at their jobs. Efficiencies have double or tripled in 60 years. Ag prices are in a secular 150-year bear market thanks to technology.
Q: Is this recorded to watch later?
A: Yes, it goes on our website in about two hours. For directions on where to find it, log in to your www.madhedgefundrader.com account, go to “My Account,” and it will be listed under there, as are all the recorded webinars of the last 12 years.
Q: Would you buy Canadian Pacific (CP) here, the railroad?
A: No, that news is in the price. Go buy the other ones—Union Pacific (UNP) especially.
Q: What are your thoughts on Bitcoin?
A: We don’t cover Bitcoin because I think the whole thing is a Ponzi scheme, but who am I to say. There is almost ten times more research and newsletters out there on Bitcoin as there is on stock trading right now. They seem to be growing like mushrooms after a spring storm. There are always a lot of exports out there at market tops, as we saw with gold in 2010 and tech stock in 2000.
Q: What do you think about Juniper Networks (JNP)?
A: It’s a Screaming “BUY” right here with a double ahead of it in two years. I’m just waiting for the tech rotation to get going. This is a long-term accumulate on dips and selloffs.
Q: Did the Archagos Investments hedge fund blow threaten systemic risk?
A: No, it seems to be limited just to this one hedge fund and just to the people who lent to it. You can bet banks are paring back lending to the hedge fund industry like crazy right now to protect their earnings. I don’t think it gets to the systemic point, but this is the Long Term Capital Management for our generation. I was involved in the unwind of the last LTCM capital, which was 23 years ago. I was one of the handful of people who understood what these people were even doing. So, they had to bring me in on the unwind and huge fortunes were made on that blowup by a lot of different parties, one of which was Goldman Sachs (GS). I can tell you now that the statute of limitations has run out and now that it's unlikely I'll ever get a job there, but Goldman made a killing on long-term capital, for sure.
Q: Will Tesla benefit from the Biden infrastructure plan?
A: I would say Tesla is at the top of the list of companies the Biden administration wants to encourage. That means more charging stations and more roads, which you need to drive cars on, and bridges, and more tax subsidies for purchases of new electric cars. It’s good not just Tesla but everybody’s, now that GM (GM) and Ford (F) are finally starting to gear up big numbers of EVs of their own. By the way, I don't see any of the new startups ever posing a threat to Tesla. The only possible threats would be General Motors, Ford, and Volkswagen, which are all ten years behind.
Q: Would you put 10% of your retirement fund into cryptocurrencies?
A: Better to flush it down the toilet because there’s no commission on doing that.
Q: Is growing debt a threat to the economy? How much more can the government borrow?
A: It appears a lot more, because Biden has already indicated he’s going to spend ten trillion dollars this year, and the bond market is at a 1.70%—it’s incredibly low. I think as long as the Fed keeps overnight rates at near-zero and inflation doesn't go over 3%, that the amount the government can borrow is essentially unlimited, so why stop at $10 or $20 trillion? They will keep borrowing and keep stimulating until they see actual inflation, and I don’t think we will see that for years because inflation is being wiped out by technology improvements, as it has done for the last 40 years. The market is certainly saying we can borrow a lot more with no serious impact on the economy. But how much more nobody knows because we are in uncharted territory, or terra incognita.
To watch a replay of this webinar just log in to www.madhedgefundtrader.com , go to MY ACCOUNT, click on GLOBAL TRADING DISPATCH, then WEBINARS, and all the webinars from the last ten years are there in all their glory.
Good Luck and Stay Healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
January 18, 2021
Fiat LuxFeatured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or WHAT WOULD KILL THIS MARKET?)
($INDU), (TLT), (TBT), (GLD), (GOLD), (WPM), (TESLA)
With the Dow Average now up 13,300 points, or 73.89%, since April, I’m getting besieged by questions from readers as to what could make the market go down. This is, after all, the sharpest move up in stocks in history.
With $20 trillion about to hit the US economy, $10 trillion in stimulus, $10 trillion in quantitative easing, and overnight interest rates remaining at zero for three years, there’s not much.
Still, even the most Teflon of bull markets eventually go down. Let’s explore the reasons why. I’m not intending to give you sleepless nights. But the best traders always believe that anything can happen to markets all the time.
1) The Pandemic Ends – If Covid-19 can take the market up 13,300 points in nine months, its disappearance may take it down. That’s because the all-clear on the disease may prompt investors to pull money out of stocks and put it in the real economy.
A lot of people are buying stocks because there is nothing else to do and you can execute trades in the safety of your own home without going outside. Still, this effect may be muted as there are at least 2 million fewer businesses today than before the pandemic.
2) Interest Rates Rise – The Fed has promised not to raise overnight rates for three years, or until the inflation rates top 2% for at least a year (it’s now 0.4%). That seems to give the most aggressive investors a green light for the foreseeable future.
However, the Fed has no control over long term rates, which are set by the bond market. Since January 1, the yield on the ten-year US Treasury bond has soared from 0.90% to an eye-popping $1.20%, and 1.50% is certainly within reach during the first half.
The markets could easily handle that. But if the ten-year yield jumps to 3.0%, which it could do in two years, stocks could suffer, especially if we are at much higher levels by then.
3) Stocks Go Down – A lot of new traders are buying stocks simply because they are going up, independent of the thought process. What if stocks go down? Scads of you are now promising to buy on the next 10% pullback. I guarantee you that when we ARE down 10%, the only thing on your mind will be selling. That’s the way it always works. Loss of upside momentum could easily turn into vicious downside momentum.
4) The Pandemic Gets a Lot Worse – The Teflon market (which was invented during the Manhattan Project to prevent the corrosion of the insides of steel pipes by uranium or plutonium) has matched rising share prices with increasing Corona deaths tic for tic since March. We are now at 4,000 deaths a day and many hospitals now have fleets of freezer trucks parked outside because they can’t bury the bodies fast enough.
Government health officials tell us the pandemic is peaking right now. What if they are wrong? What if in the coming months, deaths top 10,000 a day? That would definitely be worth a 10% correction, if not a 20% one.
Summary
It all sets up a continuing run for stocks that could last at least two years and take the Dow as high at 45,000, or up 50% from here.
Which leads me to a different subject.
What if I am wrong?
I know that many of you have invested in two-year call options (LEAPS, or long term equity participation securities) at the March-May bottom and are sitting on the biggest profits in your life. Lots of these are several thousand percent in the money and have turned into 10X leveraged long equity positions, essentially synthetic futures. As a result, you now have no downside protection whatsoever.
If you bought the 2022 $120-$130 call spread at $20, it is now worth $765, a gain of 38.25X, or 3,825%. You have essentially just won the lottery.
This is what you need to do right now: roll up your strikes.
I shall explain.
Let’s say that when Tesla was at $80 on a split-adjusted basis, I begged many of you to buy the 2022 $120-$130 call spread. Tesla shares then rose by a mind-boggling 1,006%.
Here’s what you do. Sell your 2022 $120-$130 call spread immediately. Lock in the profit. Then buy a 2023 $900-$950 call spread. If Tesla falls, it will be at a much slower rate than your existing position.
Long-dated out-of-the-money options fall at a much slower rate than stocks because they have immense time value. They demonstrate a downside “hockey stick” effect. Very roughly speaking and without doing any math, a 50% drop in the stock will deliver only a 25% drop in the options. However, if Tesla shares rise, you will still participate in the upside and get 95% of the gain.
It’s a classic “heads I win, tails you lose” set up.
This is what professional traders do automatically, without thinking about it as if it were second nature.
I just thought you’d like to know.
About Last Week
A second insurrection is in play for January 20 according to the FBI, with armed demonstrations planned in the capitols of all 50 states. Don’t plan on traveling that day. Public access to the capitol building has ceased for the foreseeable future. Washington is now an armed camp, with 25,000 National Guard called in. The FBI is attempting to arrest the ring leaders as fast as possible. Market will keep seeing this as a buying opportunity, the fires under the market are burning so hot.
The US budget deficit soared to $573 billion in Q4, up 61% YOY. For the full calendar year, the deficit reached a mind-boggling $3.3 trillion, triple the previous year. Almost all the increase went to spending on pandemic related benefits. It’s another nail in the coffin for the bond market. Keep selling the (TLT), even on small rallies. This could be the trade of the century.
The US has 3 million fewer jobs than when Trump took office four years ago. It’s the worst performance since Herbert Hoover took office in 1928. That’s exactly what I predicted back in 2016. Up to March 2020, we also had a zero return in the stock market under Trump, which only started to improve when Biden took the lead in the primaries in May. In the meantime, the National Debt soared from $20 trillion to $28 trillion and it is still soaring. Over 100% of US growth during the Trump administration has been borrowed from the future on credit. It’s not a way to run a country.
The semiconductor shortage is slowing the auto industry, with Toyota, Ford, and Fiat cutting back production. It’s a global problem. Modern cars use more than 100 chips each and are becoming more apps than hardware. I’ve been predicting this for a year, and the problem will continue as it takes billions of dollars and years to ramp up new production. Buy the daylights out of (NVDA), (AMD), and (MU).
Technology is 2% of US employment but 27% of market capitalization and 38% of profits, says my old friend Jeffrey Gundlach of Double Line. Bitcoin is a bubble, inflation will be 3% by June, and bonds (TLT) are beyond terrible. Stocks are expensive but could run for a long time.
Weekly Jobless Claims delivered a horrific print, up 181,000 to 965,000, the worst since the spring. Covid-19 is clearly the reason. Stocks could care less and pushed on to new all-time highs, up eight days in a row. It really is a “Look Through” market.
No rate hike until 2% inflation for a year, said Fed Governor Clarida. It could be a long wait as indicated by the recent 0.4% report.
US air travel is down 61% in November YOY, and that includes the big Thanksgiving travel bump. A trend up will start later this year, but airlines will still emerge from the pandemic with tons of debt. Avoid.
Netflix is launching a movie a day, for all of 2021. It’s disrupting legacy Hollywood at Internet speed, which Covid-19 has brought to a screeching halt. The stock has seen a sideways correction since tech peaked in sideways. Buy at the bottom end of the recent range.
When we come out the other side of pandemic, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 400% to 120,000 or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 120,000 here we come!
My Mad Hedge Global Trading Dispatch shot out of the gate with an immediate 6.25% profit for the first ten trading days of the year. That is net of a 4% loss on a Tesla short which I added one day too soon. I went pedal to the metal immediately, again going 100% invested with a 50% long/50% short market-neutral portfolio.
That brings my eleven-year total return to 428.80% double the S&P 500 over the same period. My 11-year average annualized return now stands at a nosebleed new high of 38.63%, a new high. My trailing one-year return exploded to 72.34%, the highest in the 13-year history of the Mad Hedge Fund Trader. We have earned 90% since the March low.
I did bail on my precious metals positions on (GOLD), (NEM), and (WPM) for small profits. The metals hate rising interest rates and competition from Bitcoin. They have effectively gone into a long bond, short Bitcoin position and I am not interested in either.
The coming week will be a slow one on the data front with Q4 earnings reports coming out daily.
We also need to keep an eye on the number of US Coronavirus cases at 24 million and deaths at 400,000, which you can find here. We are now running at a staggering 4,000 deaths a day.
When the market starts to focus on this, we may have a problem.
On Monday, January 18 at 11:00 AM EST, the US Markets will be closed for Martin Luther King Day.
On Tuesday, January 19 at 4:30 PM, Bank of America (BAC), Goldman Sachs (GS), and Netflix (NFLX) report.
On Wednesday, January 20 at 10:00 AM, we get the NAHB Housing Market Index. Morgan Stanley (MS) and Proctor and Gamble (PG) report.
On Thursday, January 21 at 8:30 AM, December Housing Starts are printed. Intel (INTC) and Union Pacific (UNP) report.
On Friday, January 22 at 10:00 AM, Existing Home Sales for December are out. Schlumberger (SLB) reports. At 2:00 PM, we learn the Baker-Hughes Rig Count.
As for me, I’m still waiting for orders on where to report for my Pfizer Covid-19 vaccination. In the meantime, since I will still be locked up for months to come, I have been viewing precious old pictures and videos from my past travel extravaganzas.
In 2019, I took my girls around the world via New Zealand, Sydney, Brisbane, Melbourne, Perth, Manila, New Delhi, Dubai, Cairo, Athens, Venice, Budapest, Brussels, Zermatt, and then back to San Francisco. We don’t do anything small in my family. Click here for the link to my favorite video of us arriving in Venice.
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
