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John Thomas graduated with a bachelor’s degree in biochemistry with honors and a minor in mathematics from the University of California at Los Angeles (U.C.L.A.) in 1974. He moved to Tokyo, Japan where he was employed by a medium-sized Japanese securities house. Thomas became fluent in Japanese... More
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  • Why I Have Become So Boring

    Editors note: Originally published August 20, 2015 - madhedgefundtrader.com

    I have recently received a few complaints from readers that I have become boring. I have to confess that they are right.

    I am not a person who boredom comes to easily. I'm the guy who climbed the Matterhorn, crossed the Sahara Desert on the back of a camel, and went to surfing school at age 63.

    And that's just what I did last month!

    However, I do admit that I have become boring on the trading front.

    If I get a request for one thing more than any other, it is for recommendations of stocks that will rise by at least ten times over the next ten years.

    Readers want to know the names of shares of companies that they can just buy and forget about, and then retire rich as Croesus a decade down the road.

    What could be more reasonable?

    I happen to have sent out quite a few of these over the years.

    Whenever I attend my global strategy luncheons around the world, someone inevitably thanks me for my effort to cajole them into buying Chinese Internet giant, Baidu (NASDAQ:BIDU) at $12. Nothing seemed more questionable at the time (2008). It hit $260 at the end of 2014.

    At my New York luncheon in June, a guest pressed a one ounce American Gold Eagle into my hand and said thanks for Cheniere Energy (NYSEMKT:LNG). He bought it at $6 and rode it all the way up to $85.

    He then doubled his money by jumping into Apple (NASDAQ:AAPL) at $56 (on a split-adjusted basis) and rode the express train to $135, again after my pleading.

    Then there was the reader who offered me his mega yacht in the Mediterranean for a week for free. He bought the liberal conspiracy of all liberal conspiracies, Tesla (NASDAQ:TSLA), at my urging at $16. Elon Musk's bet on a car of the future hit a high of $290 in the spring.

    It's not that I have suddenly become averse to dishing out ten-baggers. I have not suddenly grown weary in my old age either, although I confess to finding those erectile dysfunction ads on TV more fascinating by the month.

    No, the real problem is that the stock markets are just not offering anything right now. And here is where I give you some great trading tips.

    When stock markets are rising and financial assets are generally in "RISK ON" mode, you want to own single stocks.

    Individual shares have "betas", or a propensity to move, that are far greater than indexes. If an index rises 10%, some of its individual components can move anywhere from 15%-100%.

    When stock markets are in correction (down) or consolidation (sideways) mode, as we are now, the higher betas of stocks work against you. They fall faster than the index.

    Therefore, in flat and falling markets you want to trade indexes, like the S&P 500 big cap index (NYSEARCA:SPY), the NASDAQ technology index (NASDAQ:QQQ), and the Russell 2000 small cap index (NYSEARCA:IWM).

    Your mistakes trading these relatively un volatile (read boring) instruments earn you less money. But your mistakes cost you less as well.

    Therefore, through trading stocks in up markets and indexes in down markets, you create an inbuilt bias in your portfolio that works to your favor.

    A classic example of how this works was to see the market reactions to corporate earnings announcements in July. In these risk averse times, winners were rewarded modestly, but losers were taken out to the woodshed and beaten senseless.

    Look at the recent charts for Apple , Tesla , and Disney (NYSE:DIS) and you'll see what I mean.

    All three disappointed, but just barely. I bet the owners of these companies wish they had been trading indexes that month, which barely moved.

    These are all fundamentally great companies for the long term. But when people run for cash, they will often sell whatever has the most profit, and all three of these names met that standard. Investors were, in effect, raiding the piggy bank.

    Of course you can try and be clever and go long stocks in rising markets, and then sell them short in falling ones.

    My half-century of experience tells me that this is easier said than done.

    While many managers will promise this bit of investing gymnastics, very few can actually delivery. Most professionals are unable to time markets with this precision, let alone individuals.

    Needless to say, don't try this at home.

    BIDU 8-19-15

    TSLA 8-19-15

    LNG 8-19-15

    John Thomas What? Me Boring?
    Tags: SPY, QQQ, IWM
    Aug 25 12:09 PM | Link | Comment!
  • My Yearend Stock Market View

    Editors note: Originally published August 17, 2015 - madhedgefundtrader.com

    I hate to be the bearer of sad tidings guys.

    But I think the choppy, volatile, trendless, trading conditions we are all suffering right now will continue for a few more weeks, and possibly all the way out to the September 17-18 Federal Reserve interest rate decision.

    Man! I wish I were still back in the Sahara Desert. There, I only had to worry about scorpions, poisonous snakes, heat stroke, and raiding Berber tribesmen.

    I can afford to be flippant. I have just enjoyed my best trading summer ever, adding 10% to the value of my trading book since I took off for Europe in June.

    This, I did with rickety Internet access, only occasional access to market information, and a six-hour time difference.

    My secret? I kept my book small, my cash levels high, and didn't check prices every 15 minutes.

    Above all, I stayed patient, holding back from buying stocks that suddenly became cheap. Apple (NASDAQ:AAPL) at $120? Disney (NYSE:DIS) at $110? Tesla (NASDAQ:TSLA) at $250?

    Most importantly, whenever I thought about buying energy or commodity plays, I lay down and took a long nap instead. When I woke up, the temptation went away.

    That said, we are clearly in a capitulation mode for the entire oil space (NYSEARCA:USO), and could reach a bottom in weeks, given the current rate of decay (an old nuclear physics term). The $30 handle seems to be begging for attention.

    In fact, a bottom in energy could signal a bottom for the entire market, and trigger one of the great generational buys of all time. China, the marginal big buyer of all things energy, hasn't died; it is just resting.

    So back to the stock market.

    Since April, I have seen a long sideways triangle unfolding for the S&P 500 (NYSEARCA:SPY). I think we will reach an apex in September, right around a confluence of several news events (Fed decision, energy bottom).

    The initial direction will be down, probably through the 200 day moving average. But that will be a head fake, and the real move will start right after that.

    Around then, the calendar will flip from hostile to friendly, as we enter the half year period which sees the greatest amount of stock buying (at least it has for the past 60 years). Also about now, the daily data releases will show a dramatic improvement in the economy.

    That presents us with a rally into 2016 and a new all time high.

    Sectors? You want to know about sectors? Jeez, you're a tough crowd to please.

    I think we can go back to our old reliables of technology (NASDAQ:QQQ), health care (NASDAQ:GILD), consumer discretionaries , cyber security (NYSE:PANW), and biotech (NASDAQ:IBB).

    This coming cycle will see some new additions. They include interest sensitives, like banks (NYSE:GS) and regional banks (NYSEARCA:KBE), homebuilders (NYSE:LEN), energy (NYSE:XOM), (NYSE:OXY), (NYSE:COP) and solar (NASDAQ:SCTY), (NASDAQ:FSLR), if oil doesn't go to zero.

    As for Apple, expect the slumber to continue until the next new product cycle for the iPhone 7 launches next year. In between cycles is never a great time to buy Apple, although we may get a pop going into the Christmas selling season.

    For those who have been prudently sitting on their hands all year waiting for a chance to put more long term, non-trading money to work, this is it. Your entry point will open up over the next few weeks.

    Let me tell you that I have an unfair advantage in making market calls like this that are bold, confident, and possibly bordering on hubris.

    I have the good fortune to live in the San Francisco Bay area. It is like living 10-20 years in the future.

    The GDP here is definitely not growing at a feeble 2% annual rate, as it may be for much of the rest of the country (like North Dakota, Oklahoma, and Texas). It is really growing at a 5% rate, and possibly much more.

    The technology boom in the City by the Bay is reaching a 1990's fever pitch. You can't get restaurant reservations or lease office space. Companies have launched serial poaching of staff with only the most limited experience at eye-popping salaries. Contractors everywhere have turned into prima donnas.

    Housing is a joke. A friend of mine managed to score a tiny, rent controlled pre-war studio apartment for $2,000 a month after winning a lottery against 50 other entrants. He had to pay a $100 "application fee" just to enter the lottery.

    Oh, and since this is one of the few dog friendly buildings in the city, the whole place smells like crap and dog hair, as every resident owns a pet. Open the door, and you get a slap in the face.

    Yes, I know that the United States is not San Francisco. However, the tools and services they are creating here, at a breakneck pace, can be used by the rest of the world to dramatically improve productivity and profitability. That boosts growth and share valuations everywhere.

    By the way, if any of you has a twenty something kid looking for a job and a purpose in life, send them to San Francisco immediately. With any luck, they will be able to gain a foothold and pick up some skills before the next crash occurs.

    As for me, I am going to try and maintain discipline and not chase every little gyration of the market.

    You can't take advantage of the coming best buying opportunity in a year if you blew all your money trying to catch the small fry.

    SPY 8-14-15

    WTIC 8-13-15

    AAPL 8-14-15

    John Thomas I Much Prefer Being Here Than in the Market
    Aug 25 12:05 PM | Link | Comment!
  • Why The “Underground” Economy Is Growing

    Editors note: Originally published August 14, 2015 - madhedgefundtrader.com

    There is no doubt that the "underground" economy is growing.

    No, I'm not talking about violent crime, drug dealing, or prostitution. Those are largely driven by demographics, which right now, are at a low ebb.

    I'm referring to the portion of the economy that the government can't see, and therefore is not counted in its daily data releases.

    This is a big problem. Most investors rely on economic data to dictate their trading strategies. When the data is strong, they aggressively buy stocks, assuming that a healthy economy will boost corporate profits.

    When data is weak, we get the flip side, and investors bail on equities. They also sell commodities, precious metals, oil, and plow their spare cash into the bond market.

    We are now half way through a decade that has delivered unrelentingly low annual GDP growth, around the 2%-2.5% level.

    We all know the reasons. Retiring baby boomers, some 85 million of them, are a huge drag on the system, as they save, and don't spend.

    Generation X-ers do spend, but there are only 65 million of them. And many Millennials are still living in their parents' basements - broke and unable to land paying jobs in this ultra cost conscious world.

    But what if these numbers were wrong? What if the Feds were missing a big part of the picture?

    I believe this is in fact what is happening.

    I think the economy is now evolving so fast, thanks to the simultaneous hyper acceleration of multiple new technologies, that the government is unable to keep up.

    They are, in effect, reading from a playbook that is a decade or more old.

    What if the economy was really growing at a 3-4% pace, but we just didn't know it.

    I'll give you a good example.

    The government's Consumer Price Index is a basket of hundreds of different prices for the things we buy. But the Index rarely changes, while we do.

    The figure the Index uses for Internet connections hasn't changed in ten years.

    Gee, do you think that the price of broadband has risen in a decade, with the 1,000-fold increase in speeds?

    In the early 2,000's you could barely watch a snippet of video on YouTube without your computer freezing up. Now, I can download a two-hour movie in High Definition in just ten minutes on my Comcast 180 megabyte per second business line.

    And many people now watch movies on their iPhones. I see them in the rush hour traffic.

    I'll give you another example of the burgeoning black economy: Me.

    My business shows up nowhere in the government economic data because it is entirely online. No bricks and mortar here!

    Yet, I employ a dozen people, provide services to thousands of individuals, institutions, and governments in 140 countries, and take in millions of dollars in revenues in the process.

    I pay a lot of American taxes too.

    How many more me's are out there? I would bet millions.

    If the government were understating the strength of the economy, what would the stock market look like?

    It would keep going up every year like clockwork, as ever-rising profits feed into stronger share prices.

    But multiples would never get very high (now at 17 times earnings) because no one believed in the rally, since the economic data was so weak.

    That would leave them constantly underweight equities in a bull market.

    Stocks would miraculously and eternally climb a wall of worry.

    On the other hand, bonds would remain strong as well, and interest rates low, because so many individuals and corporations were plowing excess, unexpected profits into fixed income securities. Structural deflation would also give them a big tailwind.

    If any of this sounds familiar, please raise your hand.

    I have been analyzing economic data for a half century, so I am used to government statistics being incorrect.

    It was a particular problem in emerging economies, like Japan and China, which were just getting a handle on what comprised their economies for the first time.

    But to make this claim about the United States government, that has been counting things for 225 years, is a bit like saying the emperor has no clothes.

    Sure, there has always been a lag between the government numbers and reality. In the old days they used horses to collect data, and during the Great Depression numbers were kept on 3" X 5" index cards.

    But today, the disconnect is greater than it ever has been, by a large margin, thanks to technology.

    Is this unbelievable? Yes, but you better get used to it.

    As for that bull market in stocks, it just might keep on going.

    US GDP Growth Rate

    Emperor - No ClothesThere May Be More Here Than Meets the Eye
    Aug 25 12:01 PM | Link | Comment!
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