It’s been one heck of a party for the last two months. We’ve been wearing lampshades on our heads, dancing the Lindyhop, and drinking hopium by the barrel.
But even the best of parties must come to an end.
It's time to put the empty bottles into the recycling bin. I’ve called Uber for the guests who can no longer walk. The hangovers have already started. The cleaning lady is probably going to fire me tomorrow.
The Party is Over, at least for now, as are the big money vacations at the Hamptons, Aspen, and Lake Tahoe. This year, wildly overbought markets are perfectly coinciding with peak vacation time.
September brings bigger worries with a Fed rate rise, doubled QT, and a looming election. I’m now net short for the first time since March.
A Volatility Index (VIX) at $19, a Mad Hedge Market Timing Index at 51, and a rally worth half of this year’s losses are telling you to stay away in droves.
Cash is king right now. Just sit back and count all the money you made with me this year. The reality is that there is a honking great dilemma in the market right now. The Fed is talking hawkish, while traders are trading dovish. The Fed ALWAYS wins this kind of bust-up.
I’m looking for stocks to give up at least half their heroic (SPY) 70-point June-August gains. That would take us down to (SPY) 50-day Moving Average at $395.
After that, we might bounce between the 50-day moving average at $395 and the 200-day at $432 all the way until the November midterm elections. Thereafter, we will launch on a meteoric yearend rally that could take us all the way up to (SPY) $480.
It couldn’t go any other way because there is too much cash lying around. In fact, short term positioning is only at 10% of historical norms, and there is still at least $500 billion worth of company share buybacks still in the pipeline, especially in tech.
That’s all fine with me because at $395, the free money trades start to set up again. At (SPY) $395, the (VIX) should be back up to $30. That means you can set up call spreads, assume we will double bottom at (SPY) $362, and STILL make the maximum potential profit. Such is the magic of vertical bull call debit spreads.
In the meantime, we might be able to squeeze out $30 or $40 worth of short-term trading profits in short positions. This will be the only place to make money for the next month or two. If you’re interested, I’m currently short the (SPY), (QQQ), and (TLT).
Yes, trading is all about alternating pain and pleasure. That’s why you must be a sadomasochist to be a great trader.
It all totally works for me.
It's no surprise that the second the yield on the ten-year US Treasury yield recovered 3.00%, the stock market rally promptly died. Message: watch the ten-year US Treasury yield like an eagle.
Tesla (TSLA) Production Tops 3 million and Elon Musk is aiming for 100 million by 2030. Mine was chassis number 125 and my name is still on the Fremont factory wall. They have driven 40 million miles since 2010, pushing their autonomous learning program far down the road when compared to others. Tesla is the third largest car maker in China. It was worth a $40 pop in the stock. The shares split 3:1 on Friday, sucking in meme interest.
Oil (USO) Collapses to New Two-Month Low to $88 a barrel, down $44, or 33% from the highs. There’s another 50-cent decline in gasoline prices in the cards. Disastrous battlefield setbacks for Russia have been the real driver. Putin has resorted to clearing out the prisons to reinforce his army. He is also forcing Ukrainian POWs to fight their own countrymen. Maybe he'll let our woman’s basketball star go free?
The Fed Minutes are out from the last meeting six weeks ago. Interest rates will rise, but not as much as expected. A pivot to flat or lower interest rates may come sooner than expected. Look for 3.50% for the overnight rate sometime in 2023, up 100 basis points from here.
Why Isn’t the Fed Balance Sheet Falling? It’s still stuck at $9 trillion, despite a massive reduction on bond buybacks via QT. The dam is about to break, with $2-$3 trillion in bond buybacks disappearing in the coming months.
Money Supply Growth Has Ground to a Halt, showing zero growth so far in 2022. It is about to start shrinking dramatically, once QT doubles up to $95 billion a month in September. This could deliver our next buying opportunity for stocks, but also might give us a recession.
Housing Starts Collapse, down 9.6% YOY in July. Labor costs are still soaring while affordability has been shattered. If you’re thinking of buying stocks now, lie down and take a long nap first, a very long nap.
Existing Home Sales Dive 6%, off for the sixth consecutive month. Sales dropped to a seasonally adjusted 4.81 million units. It’s no surprise that we are now in a housing recession while the rest of the economy remains small. Homebuyers are also still contending with tight supply. There were 1.31 million homes for sale at the end of July, unchanged from July 2021. At the current sales pace, that represents a 3.3-month supply.
20 Electric Vehicles Will Get the $7,500 Tax Credit on Day One, Biden just signed the climate bill, with Tesla far and away the leader. Only cars with 70% or more of its parts coming from the US qualify. Used EVs get a $4,000 tax credit. MSRPs must be below $55,000 and individual income no more than $150,000. The credit begins in 2023. Left out in the cold are EVs made in Japan and South Korea.
Bitcoin Hits Three-Week Low, as “RISK OFF” returns. Suddenly, stocks, oil prices, and interest rates have started going the wrong way. Avoid Crypto.
Why the IRS is Not Interested in You. Treasury secretary Yellen says the priorities will be clearing the backlog of unprocessed tax returns and improving customer service, overhauling technology, and hiring workers.
My Ten-Year View
When we come out the other side of pandemic and the recession, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With oil prices now rapidly declining, and technology hyper-accelerating, there will be no reason not to. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The America coming out the other side will be far more efficient and profitable than the old. Dow 240,000 here we come!
With some of the market volatility (VIX) now dying, my August month-to-date performance appreciated to +3.96%.
My 2022 year-to-date performance ballooned to +58.79%, a new high. The Dow Average is down -5.91% so far in 2022. It is the greatest outperformance on an index since Mad Hedge Fund Trader started 14 years ago. My trailing one-year return maintains a sky-high +73.78%.
That brings my 14-year total return to +571.35%, some 2.56 times the S&P 500 (SPX) over the same period and a new all-time high. My average annualized return has ratcheted up to +45.11%, easily the highest in the industry.
We need to keep an eye on the number of US Coronavirus cases soon reaching 94 million, up 300,000 in a week and deaths topping 1,040,000. You can find the data here.
On Monday, August 22 at 8:30 AM, the Chicago Fed National Activity Index for July is released.
On Tuesday, August 23 at 7:00 AM, New Home Sales for July are out.
On Wednesday, August 24 at 7:00 AM, Durable Goods for July are published.
On Thursday, August 25 at 8:30 AM, Weekly Jobless Claims are announced. US GDP for Q2 is released.
On Friday, August 26 at 7:00 AM, the Personal Income and Spending are disclosed. At 2:00, the Baker Hughes Oil Rig Count is out.
As for me, I have met countless billionaires, titans of industry, and rock stars over the last half-century, and one of my favorites has always been Sir Richard Branson.
I first met Richard when I was living in London’s Little Venice neighborhood in the 1970s. He lived on a canal boat around the corner. I often jogged past him sitting alone on a bench and reading a book at Regent’s Park’s London Zoo, far from the maddening crowds.
Richard was an entrepreneur from day one, starting a magazine when he was 16. That became the Virgin magazine reviewing new records, then the Virgin record stores, and later the Virgin Megastore where he built his first fortune.
When the money really started to pour in, Richard moved to a mansion in Kensington in London’s West End. It wouldn’t be long before Richard owned his own Caribbean Island.
In 1984, Branson was stuck in the Virgin Islands because of a cancelled British Airways flight. He became so angry that he chartered a plane and started Virgin Airlines on the spot, which soon became a dominant Transatlantic carrier and my favorite today.
A British Airways CEO later admitted that they did not take Branson seriously because “He did not wear a tie.” The British flag carrier resorted to unscrupulous means to force Virgin out of business. They hired teams of people to call Virgin customers, cancel their fights, and move them over to BA.
When British Airways got caught, Branson won a massive lawsuit again BA over the issue. He turned the award over to his employees.
Richard would do anything to promote the Virgin brand. He attempted to become the first man to cross the Atlantic Ocean by balloon, making it as far as Ireland.
When he opened a hotel in Las Vegas, he jumped off the roof in a hang glider. The wind immediately shifted and blew him against the building, nearly killing him.
Richard later went on to start ventures in rail, telecommunications, package tours, and eventually space.
When I flew to Moscow in 1992 for my MiG 29 flight, I picked Virgin Atlantic, one of the few airlines flying direct from London to Moscow (I never trusted Aeroflot). Who was in the first-class seat next to me but Richard Branson. We spent hours trading aviation stories, of which I have an ample supply.
As we approached Sheremetyevo Airport, he invited me up to the cockpit and told the pilot “This is my friend Captain Thomas. Would you mind if he joined you for the landing?”
He handed me a headset so I could listen in on a rare Moscow landing. When the tower called in the field air pressure, they were off by 1,000 feet. If we were flying under instrument flight rules, we would have crashed. I pointed this out to the pilot, and he commented that this was not the first time they had had a problem landing in Moscow.
Richard once confided in me that he was terrible at math and didn’t understand the slightest thing about balance sheets and income statements. A board member once tried to explain that business was like using a net (company) to catch a fish (profit) but to no avail.
Branson had built up his entire business empire through relationships, using other people to run the numbers. He was the ultimate content and product creator.
I always thought of Richard Branson as a kindred spirit. He is just better at finding and retaining great people than I am. That is always the case with billionaires, both the boring and the adventurous, iconoclastic kind.
Stay healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
