Global Market Comments
February 2, 2022
Fiat Lux
Featured Trades:
(A NOTE ON OPTIONS CALLED AWAY)
(TLT)
Global Market Comments
February 1, 2022
Fiat Lux
Featured Trades:
(A NEW THEORY OF THE AMERICAN ECONOMY)
The US economy is currently recovering at double the rate of past recoveries. No one has ever seen anything like this before.
Sometimes a trader can turn wildly bullish, not really understanding why. He is just responding the market price action. Often the reasons why don’t become obvious for months, or even years after the event.
This is one of those times.
A year ago you could come up with all kinds of theories as to why stocks should rise in two years: valuation, QE, ultra-low interest rates, lack of alternatives, end of the pandemic. But they were just that: theories.
However, the price action was indicating that the biggest bull markets of all time were underway. That is exactly what we got.
Now, we are slowly starting to understand why.
It turns out, the American economy coming out of the pandemic is very different from the one that went in. The end result is that stock prices will rise faster to greater levels than ever imagined possible.
I am looking for another 15% gain in the (SPX) from current levels to over $5,000 by the end of this year, and $36,000 by 2030. If I’m wrong, we’ll get $36,000 by 2025.
There is an abundance of reasons why.
US corporations are now immensely more profitable and productive than only two years ago. All of the cost savings taken as emergency measures in 2020 will become permanent.
Perhaps one-third of all employees sent home to work will stay there forever. Workers who don’t have to commute are happier and work cheaper. And we didn’t really like them anyway.
As we reopen, some big tech companies are asking workers back to the head office only two days a week. You’ll have a Monday/Wednesday shift, a Tuesday/Thursday shift, and nobody comes to the office on Friday. This drops office expenses by half, a huge overhead item for many firms.
So will commercial real estate crash? No. Hypergrowth will refill that space in a year or two and they’ll sublease until then. Most big tech companies own their own office buildings in any case.
Legacy bank branches were cut by half and those remaining are chronically understaffed. Legacy banks have been trying to figure out how to unload these expensive branch networks for years. The pandemic just did it for them.
Customer support has virtually ceased to exist. Want to call Interactive Brokers with a question about your account? Expect to remain on hold for 2 ½ hours, as I did last week.
Business travel is now the equivalent of flying in a private jet. A friend of mine had to fly to New York and was required to fill out an 11-page form detailing the necessity of an in-person meeting. The cost savings will be enormous.
While costs are plunging, revenues are soaring. The pandemic hyper-accelerated the development of new technologies allowing us to be inundated with countless new products and services.
Zoom (ZM) is a perfect example. No one heard of it in 2019 except a handful of Bay Area tech nerds like me. Now, it is a daily factor in most people’s lives. Some people, like me, join a dozen Zoom calls a day, from staff meetings to customer calls to Boy Scout meetings. Mad Hedge followers already know that this has led to a 12X move in the (ZM) share prices. (ZM) in San Jose is hiring as fast as it can.
Another effect of the pandemic has been to digitize the global economy far faster than once imagined possible. This is not a bad thing when you live in the digital capital of the world. Unlike a store accepting cash, you can’t catch a virus from a digital transaction. This is important not just in this pandemic, but the next one and the one after that.
Exploding digitization also automatically leads to vastly accelerated globalization. Another friend of mine runs an online business in Australia but, after a decade, was only able to attract local interest. Suddenly, his business doubled. An analysis of the new subscriber addresses showed that all the new customers came from China. It turns out that there are a lot of Chinese surfing the net to kill time as well.
By default, America has evolved into a disease-free economy in a mere 12 months. The telling statistic here is that the Rite-Aid drug store chain saw earnings crash because no one catches the flu of a cold anymore. These viruses can get through a mask or survive hand sanitizers either.
Of course, I would be remiss not to mention massive government spending and Federal Reserve quantitative easing. Cassandras worry about a shut-off of the money spigot when inflation returns and an ensuing market crash.
Here’s a news flash for you: Inflation is temporary at best.
The end effect of accelerating technology is to drive prices ever downward, especially the cost of labor. When Treasury Secretary Janet Yellen (I can’t believe I’m saying that!) says she won’t want interest rates rises until she sees the whites of inflation’s eyes, she means inflation is NEVER coming back. Deflation will be the greater challenge, as it has been for the last 40 years.
That means the US government could keep stimulating until the headline Unemployment Rate returns to 3.0%, with no consequences whatsoever.
If this sounds like a Goldilocks scenario, it is. Enjoy your bull market.
The Goldilocks Economy is Here
“Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years.” – Said Legendary U.S. Investors Warren Buffet
Global Market Comments
January 31, 2022
Fiat Lux
Featured Trades:
(TESTIMONIAL),
(MARKET OUTLOOK FOR THE WEEK AHEAD, or DEATH OF THE FED PUT),
(SPY), (TLT), (TBT), (MSFT), (AAPL), (TSLA), (BRKB)
I am Ari, the son of Ed, who had a subscription to your service for the past several years.
Unfortunately, my dad passed last week, and we had a beautiful memorial service for him. I spoke of his interest in the stock market and how he also introduced me to the financial markets and the world of stocks and investing.
As we are getting the estate and other affairs in order, we have not logged into your service for the past several months. I was wondering if you might be able to transfer the remaining subscription time and possibly add any more time, as he did not use the service to utilize the information.
I always enjoy your presentations and remember watching a debate between you and Harry Dent several years ago, sitting next to my dad and watching on the computer. Harry of course seems to be a perma-bear and was arguing against the roaring 20's thesis...
At any rate, I wanted to reach out and let you know that of all the newsletters, I think my dad enjoyed yours the most. Thanks, and I look forward to being in touch and carrying on the subscription.
Best regards,
Ari
Crossing Iceland
That great wellspring of your personal wealth for the last 13 years, the Fed put, is no more.
No longer can you count on an endless expansion of the money supply to boost the value of your share and real estate portfolios.
In fact, since our central bank embarked on an endless effort to restore the economy during the 2008 financial crisis, the Fed balance sheet has ballooned from $400 million to $9 trillion. And it is still expanding, although at a much smaller rate.
Long time Fed watchers like myself, will tell you that the Fed is always slow, behind the curve, and is often responding to data a year late. We have an hour late and dollar short central bank.
That is certainly true with this cycle when it took 12 months for the Open Market Committee to notice that a decade-plus of zero interest rates had caused inflation to explode to 6.9%.
But just as we have to reinvent ourselves every day with a constantly evolving stock market, so does the Fed with its interest rates policy. As a result, this new interest rate cycle will be like no others.
There can be no doubt that the Fed is taking away the punch bowl. Overnight, the futures market is gone from discounting three-quarter point interest rate hikes to six. That means a rate increase at every meeting for the rest of 2022.
Quantitative easing has been thrown into the dustbin of history as well. Fed Bond buying will taper down from $120 billion in December to zero by March. The big guess now is how soon quantitative tightening will start.
In the meantime, the glass has gone from half full to half-empty for the stock market. That means selling every rally rather than buying every dip. It’s a new World.
Since the beginning of the year, I have been playing roulette. Except for that numbers one through 35 are colored black and I have only been betting black. That is the percentage of trade alerts that have been profitable so far in 2022. And you know what? I am going to keep on playing!
I’ll tell you how all this ends. Eventually, big technology prices will drop 20% and earnings will rise by 30%, producing a 50% valuation haircut. That will be enough of a bargain to draw back even the most cautious of investors. But that is still months off.
Ukraine? You’re worried about the Ukraine? Last week Biden moved the USS Harry S. Truman into the Black Sea. Other US carriers are close by. That puts a massive air counterstrike against a Russian tank invasion a phone call away.
The last time this contest played out was during the first Iraq War. Russian supplied forces lost 5,000 tanks and we lost one (he parked on a ridgeline). Putin may like chess, but he doesn’t play Russian roulette. This is all just a ploy to get oil prices high, on which Russia relies on for 70% of government revenues.
By the end of this year, the supply chain will be restored, inflation tamed, the economy will be booming, we will be at full employment, and big technology earnings will be at new records. Higher share prices are a bet I am more than willing to make, especially with 35:1 ods in my favor.
The Dow Dives Nearly $4,000 points in 14 days, in the mother of all corrections. And while the market has discounted the next four quarter-point rate hikes, it hasn’t even thought about the eight after that. Yes, overnight rates may peak at 3.25% in three years. In addition, my friends at the Fed are considering taking $3 trillion in liquidity out of the system by the end of 2023. US earnings growth will more than cover this but it may take months for markets to figure that out. That makes H1 all about preserving capital and then swinging for the fences in H2. In the meantime, make volatility your friend and not your enemy.
Don’t Buy this Dip, says Morgan Stanley. We are in for more punishment, especially in non-earning technology stocks. Too many investors missed the top and are still looking to get out. Growth is dead. But it won’t be as bad as the 2000 Dotcom bust. At a certain point, sellers will get exhausted.
The Fed Leaves Rates Unchanged but says rates will rise soon and signaled the end of quantitative easing in March. No mention was made of quantitative tightening. The economy is still very strong, but omicron is a concern. The universal feeling is that the Fed is a year late in its unfolding tightening, prompting runaway inflation. The was little market reaction as the comments were largely expected. The Volatility Index is back down to $27.
Apple Blows it Away with Q4 revenues of an eye-popping $124 billion, up 11% YOY. Some $27 billion in dividends and share buybacks was returned to shareholders. iPhone sales were up 9.2% YOY and 57% of the total. The bottom may not be in yet for this bear move but I see the shares at $250 by next year, powered by the rollout of new product lines and services. Taking profits on my short-term long right here.
Mortgage Interest Rates Hit 22-Month High, with the 30-year fixed hitting 3.56%. So far, no effect on the housing market, which is hotter than ever. But homebuilder stocks like (LEN), (KBH), and (TOL) have been getting hit hard.
S&P Case Shiller Rockets 18.8%, in November with its National Home Price Index. Phoenix 32.2%, Tampa (29%), and Miami (26.6%) were the big gainers. The real estate boom is years away from a peak.
New Home Sales Skyrocket to an eye-popping 811,000 in December, up 11.7% YOY. Median sales prices jump to $377,700, up 3% YOY. Inventories further shrink to six months. Builders can’t build them fast enough, thanks to labor and supply chain shortages. With a 50-basis point rise in mortgage rates, next month’s report may be a different story.
Oil Could Hit $100 in a Day if Russia attacks the Ukraine. Inventories are already short from lack of investment and Europe is facing a Russian engineered energy squeeze. A Chinese economic recovery, the world’s largest importer, could make matters worse. Watch (USO).
Caterpillar Announces Robust Earnings, but the stock sells off anyway. Total 2021 profits came to $505 million, up 72% from 2020. Enormous construction demand is a major boost, as well as ongoing commodity and agricultural booms. Buy (CAT) on dips as a major pro-cyclical play.
My Ten-Year View
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 800% to 240,000 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 240,000 here we come!
With the pandemic-driven meltdown on Friday, my January month-to-date performance rocketed to 12.05%. My 2022 year-to-date performance ended at 12.05%. The Dow Average is down -5.2% so far in 2022.
With 26 trade alerts issued so far in January, there was too much going on to describe here.
That brings my 12-year total return to 524.61%, some 2.00 times the S&P 500 (SPX) over the same period. My 12-year average annualized return has ratcheted up to 43.19%, easily the highest in the industry.
We need to keep an eye on the number of US Coronavirus cases at 74 million and rising quickly and deaths topping 884,000, which you can find here.
On Monday, January 31 at 6:45 AM, the Chicago PMI for January is out.
On Tuesday, February 1 at 7:00 AM, the JOLTS Job Openings for December are announced.
On Wednesday, February 2 at 8:30 AM, the ADP private jobs figures for December are released.
On Thursday, February 3 at 8:30 AM the Weekly Jobless Claims are disclosed. At 7:00 AM the ISM Non-Manufacturing PMI is printed.
On Friday, February 4 at 8:30 AM the January Nonfarm Payroll Report is released. At 2:00 PM, the Baker Hughes Oil Rig Count is out.
As for me, those of you who have followed me for a long time will not be surprised to learn that I once made a living as a male model in Japan.
I took fairly conservative gigs, a TV commercial for Mazda Motors, a testimonial for Mitsubishi television sets, and print ads for Toyota. The X-rated requests I passed on to my friends at the karate school.
Then the casting call went out for the tallest, meanest-looking foreigner in Japan.
They picked me.
Koikei Potato Chips was unique among competing brands in Tokyo in that they were sprinkled with seaweed flakes. I couldn’t stand them.
The script set me in a boxing ring beating the daylights out of a small Japanese competitor. I knocked him flat. Then a Japanese girl rushed up to the ring and fed the downed man Koikei Potato Chips. Instantly, he jumped up and won the fight.
In the last scene, the Japanese man is seen sitting on top of me with two black eyes eating more potato chips. Oh, and the whole thing was set in a 19th century format so I was wearing tights the entire time.
I took my 10,000 yen home and considered it a good day’s work.
Ten years later, I was touring Japan as a director of Morgan Stanley with some of the firm’s largest clients. We stopped for lunch at a rural restaurant with a TV on the wall. Suddenly, one of the clients asked, “Hey John, isn’t that you on the TV?”
It was my Koike Potato Chip commercial. After ten years, they were still running it. Who knew? I was never so embarrassed. When the final scene came, everyone burst into laughter. I feebly explained my need for spare cash a decade earlier, but no one paid attention.
I continued with my tour of Japan but somehow the customer reaction was just not the same.
Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
January 28, 2022
Fiat Lux
Featured Trades:
(GUIDE TO THE MAD HEDGE DAILY POSITION SHEET)
One of the benefits of subscribing to the Diary of a Mad Hedge Fund Trader is that you get a daily accounting of the recommendation we have made, marked to market at the close of each day.
The goal is to make you feel like an actual hedge fund trader yourself, which means being held to strict accounting guidelines and principles as well as the harsh disciplines of the market.
It also shows you where your risk is and how well your hedges are working. At the end of the day, it distills your efforts down to a few single numbers: how well are you doing on the day, month, and year.
To access the most recent daily position sheet, login into your account here, click on My Account, click on the blue Current Positions box, and click on the download in excel (XLSX) blue hyperlink. You will find the positions spreadsheet in your “downloads” folder.
To access the subject of today’s detailed explanation of the January 27, 2022 position sheet, please click here and download the spreadsheet.
This spreadsheet is an update and a simplified version of the accounting software I wrote to monitor the performance of my own hedge fund during the 1990s. It has truly ancient origins, but it works.
All the key performance numbers are at the top of the “F” column.
F9 – Performance since the onset of the Trade Alert Service since 2010
F13 – Current Year to Date Performance
F11 – Month to Date Performance
Next, you want to look at the top of column “A” which shows the Mad Hedge Fund Trader Model Trading Book Asset Class Breakdown on a Risk-Adjusted Basis.
In column “A”, you will find individual positions like the (TLT) 2/$149-$152 put spread and in column “B” you will find the portfolio weighting of that position of 10%.
Lower down in column “B” you will find position totals. Long positions are shown in positive numbers and short positions in negative numbers.
The Total Net Position in cell B31, the sum of the positive and negative numbers above and indicates my net market exposure.
Total Aggregate Position is the sum of all positions long and short and lets me know how close I’m getting to a 100% invested position. When markets are doing nothing, I rarely go over 50% invested. During extreme selloffs, I go 100% long. During extreme bubble tops, I go 100% short.
The pie chart shows the size of each position relative to the total.
I divide positions into “Risk On”, or the world is getting better, and “Risk Off”, or the world is getting worse.
The goal is to run a balanced portfolio where “Risk On” and “Risk Off” positions are always balanced and provide a net market position of zero. This is the “hedge” in Mad Hedge Fund Trader and greatly increases your performance while reducing portfolio volatility.
Sometimes, it is not possible to run balanced risk portfolios. This happened during the March 2020 market pandemic meltdown when stocks fell almost every day. Then I ran one-sided “Risk Off” positions. During the enormous rally that followed, I ran 100% only “Risk On” portfolios.
In fact, while the market nearly doubled during 2020-2021, I ran 100% long-only portfolios four times.
And here’s a spanner in the works. Sometimes, asset classes change character and flip from being “Risk On” to “Risk Off” and visa versa. A classic example is when both bonds and stocks go up at the same time. This is theoretically impossible but happens nonetheless, usually when there are abundant liquidity and low-interest rates.
If you don’t adjust your risk models to reflect what is actually happening in the market, you are facing an early and impoverished retirement.
Scroll down to lines 45 and 46 and you will find the details of the matched pair of positions that make up the (TLT) 2/$149-$152 vertical bear put spread.
Column “A” shows the Date Opened
Column “B” shows the Date Closed after we sell or let the position expire
Column “C” shows the security position with ticker symbol, maturity, and strike prices.
Column “D” shows the Asset Class (equity, bonds, precious metals, etc.)
Column “E” shows whether we are “Long/Short” that security.
Column “F” shows the Underlying Stop Loss of the position. If the share price falls below that position, sell it as soon as possible to limit your loss. When stocks go against you, the math on options spreads turns against you very quickly.
Column “G” shows the “Notional Cost” of the position.
Column “H” shows the “Current Market Price” of the position.
Column “I” shows the “Profit & Loss” for the position.
Column “J” shows the “Net Profit” of the two combined positions that make up the option spread.
Column “K” shows the “Portfolio Weighting” of the position.
Column “L” shows the “Leverage” on that position. 100% means no leverage is used.
Column “M” shows “Portfolio Net Exposure” which is another way of showing position size.
Columns “N” and “O” you can skip as we are not using them in our current strategy.
Column “P” shows the “Number of Contracts” for each position.
Go down to Line 77 and you will find the profit & loss for every position we have closed since January 1, 2022. We have the data going back to 2010 on another spreadsheet. Keeping all the data on one sheet made it too slow as there were tens of thousands of formulae.
I hope you find all of this useful. Please feel free to alter the spreadsheet to meet your needs once you have downloaded it.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hege Fund Trader
Global Market Comments
January 27, 2022
Fiat Lux
Featured Trades:
(GUIDE TO THE MAD HEDGE DAILY POSITION SHEET)
