Global Market Comments
January 19, 2022
Fiat Lux
Featured Trades:
(NOW THE FAT LADY IS REALLY SINGING FOR THE BOND MARKET),
(TLT), (TBT), ($TNX)
The most significant market development so far in 2022 has not been the epic stock market fail, the explosive growth of the Omicron virus, or the runaway prices at the supermarket, although that is quite a list.
Far from it.
It has been the utter collapse in the bond market, which has seen the (TLT) plunge a gut-punching $15 in only six weeks. Since the beginning of this year, the yields on ten-year US Treasury bonds have rocketed, from 1.34% to 1.82%.
I love it when my short, medium and long-term calls play out according to script. I absolutely hate it when they happen so fast that I and my readers are unable to get in at decent prices.
That is what has happened with my short call for the (TLT), which has been performing a near-perfect swan dive since November. The move has been enough to already boost me into positive numbers for 2022, some 2.5%.
The concierge members who accumulated many bond put LEAPS have made much more.
Lucky borrowers who demanded rate locks in real estate financings in October are now thanking their lucky stars. We may be saying goodbye to the 2% handle on 5/1 ARMS and the 30-year fixed for the rest of our lives.
The technical damage has been near-fatal. The writing is on the wall. A 2.00% yield for the ten-year is now easily on the menu for 2022, if not 2.5% or 3.0%.
This is crucially important for financial markets, as interest rates are the wellspring from which all other market trends arise.
Wiser thinkers are peeved that the promised bleeding of federal tax revenues is causing the annual budget deficit to balloon from a low of a $450 billion annual rate in 2016 to $3 trillion last year and another $3 trillion in 2022.
It will all end in tears for bond and US dollar holders.
With a massive infrastructure budget just ahead of us, that number could soar by the end of the year.
Weimar Republic, eat your heart out! (Millennials please Google this).
It is all a bond short seller’s dream come true.
As rates rise, so does the debt service costs of the world’s largest borrower, the US government. The burden will soar in a hockey stick-like manner, currently at 5% of the total budget.
What is of far greater concern is what the tax bill does to the National Debt, taking it from $30 trillion to $33 trillion over the next year, a staggering rise. Even Tojo and Hitler couldn’t get the US to buy that much during WWII.
Better teach your kids to drive for UBER early, as they are the ones who are going to have to pay off this gargantuan debt. That is if (UBER) is still around.
So what the heck are you supposed to do now? Keep selling those bond rallies, even the little ones. It will be the closest thing to a rich uncle you will ever have, if you don’t already have one, writing you big checks every month.
Make your year now because the longer you put it off, the harder it will be to earn.
Global Market Comments
January 18, 2022
Fiat Lux
Featured Trades:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or SOARING WITH THE EAGLES)
(SPY), (TLT), (MSFT), (JPM), (AAPL)
Here I am, locked up again. Another day, another pandemic. There is nothing left for me to do but think.
When I turned negative on technology stocks at the end of November, many readers protested, accusing me of high treason, sedition, perfidy, and insisted I be hung from the nearest lamppost.
After last week’s drubbing on technology stocks, those claims are fading fast.
As a math graduate from UCLA, I can tell you it’s not about incompetence, delusion, or dementia, it’s simply all about the numbers.
Over the last five years, the S&P 500 (SPY) rose by 2X, while NASDAQ jumped by 3X, a 50% premium to the main market.
Most of this outperformance was due to multiple expansions. As interest rates fell further and further, investors were willing to pay ever more for tech stocks. As a result, 30% of tech stocks lose money and 30% trade for a nosebleed 10X sales or more.
Roll the interest rate move in reverse, and the tech premium disappears in a puff of smoke. And that has been happening with a vengeance since early December, with yields on the ten-year US Treasury bond soaring an eye-popping 58 basis points, from 1.34% to 1.82%.
Tech stocks are also coming off a pandemic tailwind of hurricane force. Now that every home in the country is equipped with four home offices and the hardware and software to support them, the turbocharger is failing.
Apple (AAPL) is a perfect example. From 2015 to 2019, Steve Jobs creation grew earnings by an average of 4% a year. Then the perfect storm hit, and earnings grew by an astonishing 60% in 2021. That delivered a gobsmacking 58% gain in the share price since March.
Tech momentum is now dead. In two-thirds of the tech market, a Dotcom bust has already played out, with non-earning pandemic darlings like Peloton (PTON) and Zoom (ZM) falling by 60%-70%.
It is not, however, the end of the world (usually, the world doesn’t end). If you are a long-term investor, big (earning) tech won’t fall enough to make it worth selling out and buying back lower. Non-earning small tech has already fallen so much it's no longer worth selling down here.
Back to the numbers, me the mathematician.
It’s all about margins, which are still expanding, and will be up by another 40-basis point in 2022 for the S&P 500 as a whole. For big tech, it’s just a matter of time before earnings catch up with valuations and it's off to the races again. It will take longer for small tech, possibly a lot longer.
The Economy is the Strongest in Decades, according to JP Morgan CEO Jamie Diamond. I agree. That’s because banks prosper most early in an interest-raising cycle. The Fed could raise rates four times this year. Keep buying financials on dips.
Quantitative Tightening to Start in July, says Goldman Sachs. That’s when the Fed starts selling its vast holdings of US Treasury bonds, about $8.5 trillion worth. They will continue QT until the pain becomes too great. Four rate hikes in 2022 are in the bag. It’s not a stock market-friendly scenario.
This is Not the Year to Own Money-Losing Tech, says my friend Goldman’s David Kostin. For investors, the glass has gone from half full to half empty. The big ones will be OK but are still due for a pullback. NASDAQ price-earnings are still at a 20 year high at 38X. Rising interest rates were the stick that broke the camel’s back. Don’t buy the dip too soon.
What is the Cheapest Sector in the Market? Biotech and Healthcare, which are at valuation lows not seen since the 2009 and 2000 lows. It also has the best decade-long growth outlook after technology. The problem is that no one wants to buy them on the back nine of a global pandemic. They will rally hard….someday.
Inflation Hits 7.0%, with the Consumer Price Index hitting a 39-year high. Bonds ended a $3.00 rally and resumed a downtrend. Rents and used cars led the gains. I remember 1982 well. My first home mortgage had an 18% interest rate. Expect worse to come.
S&P 500 Profits Jump 22.4% in Q4, possibly taking the full-year figure up an incredible 49%. It makes stocks look like a bargain, which were up only 27% in 2021. Expect cooler numbers and a quieter stock market in 2022.
Wholesale Prices Soar 9.7% YOY, the most in 11 years. It augers for more interest rate hikes sooner, with overnight rates targeting 1.25% by yearend.
Weekly Jobless Claims Hit Two-Month High at 230,000. No doubt it is due to the omicron surge. A million cases a day is certainly going to make a dent in the workforce. Some people are afraid to get sick, while others know they can get away with it.
Auto Stocks Will Be Top Performers in 2022, says value legend Mario Gabelli. Dealers are extremely short of inventory and demanding more production. Used car prices are soaring. Average industry sales prices have soared from $40,000 to $45,000 in a year. Buy (F) on a dip. (TSLA) has topped out for now with the rest of the tech stocks.
Bitcoin Breaks $40,000, as the flight from all interest-bearing securities continues. Don’t buy the dip yet.
China Posts Record Trade Surplus in 2021 at $676 billion on global economic recovery. The US ran a massive deficit with the Middle Kingdom last year, which is clearly dollar negative. None of the trade deals negotiated by Trump were honored. Exports were up 21% YOY in December.
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 a new year at hand, it’s off to the races once again. I exploded out of the gate with a hardy 2.5% profit last week. I used fleeting rallies to sell short the S&P 500, Microsoft (MSFT), and the bond market (TLT). The Friday collapse in JP Morgan (JPM) tempted me into a long position there.
Yes, last year’s mighty 90.02% performance is a lot to top. But even the highest mountain is climbed with the first step (been there, done that).
That brings my 12-year total return to a record 515.11%, some 2.00 times the S&P 500 (SPX) over the same period. My 12-year average annualized return has ratcheted up to a record 42.62%, easily the highest in the industry.
We need to keep an eye on the number of US Coronavirus cases at 66 million and rising quickly and deaths topping 851,000, which you can find here.
On Monday, January 17 markets are closed for Martin Luther King Day.
On Tuesday, January 18 at 7:00 AM, the NAHB Housing Index for January is released.
On Wednesday, January 19 at 8:30 AM, Housing Starts for December are announced.
On Thursday, January 20 at 7:00 AM, the Existing Homes Sales for December are printed. At 8:30 AM, the Weekly Jobless Claims are disclosed.
On Friday, January 21 at 2:00 PM, the Baker Hughes Oil Rig Count is out.
As for me, during the 1980s, my late wife and I embarked on a National Geographic Expedition to the remote Greek islands, including Santorini, which in those days didn’t have an airport.
At dinner, we sat at our assigned table and I noticed that the elderly gentleman next to me spoke the same unique form of High German as I. I asked his name and he replied “Adolph.”
And what did Adolph do for a living? He was a pilot. And what kind of plane did he fly?
A Messerschmitt 262, the world’s first jet fighter.
What was his last name? Galland. Adolph Galland.
I couldn’t believe my luck. Adolph Galland was the most senior Luftwaffe general to survive WWII. He was one of Germany’s top aces and is credited with 109 kills. He only survived the war because he was shot down during the final weeks and ended up in a military hospital.
And that was the end of the cruise for the rest of the table, as Galland and I spent the rest of the week discussing the finer points of aviation history.
It was made especially interesting by the fact that I had already flown most of the allied planes that Galland went up against, including the P51 Mustang and the Spitfire.
Galland started life as a Versailles Treaty glider pilot and joined the civilian airline Lufthansa in 1932. He transferred to the Luftwaffe in 1937 to fight with Franco in the Spanish Civil War and participated in the invasion of Poland in 1939.
He flew a Messerschmitt 109 as cover for German bombers during the Battle of Britain. In 1941, he was promoted to the general in charge of Germany’s fighter force until 1945 when he was sidelined due to his opposition to Goring and Hitler.
It was a fascinating opportunity for me to learn many undisclosed historical anecdotes. Germany actually had a functioning jet fighter in 1939. But Hitler, with a WWI mindset, diverted development money to twin-engine bombers and artillery.
The army eventually produced a canon that fired a monster one-meter-wide shell but was so heavy that it needed double railroad tracks to move anywhere. The canon was virtually useless in a modern war and was a colossal waste of money. Galland believed the decision cost Germany the war.
The ME 262 was a fabulous plane. But it was too little too late. Of the 1,000 produced, 500 were destroyed on the ground and most of the rest during takeoff and landing.
A big problem with the plane was that its jet engines were made out of steel and would only last ten hours. Turkish titanium needed for longer-lived engines was embargoed by the allies.
Today, a beautiful example hangs from the ceiling of the Deutsches Museum in Munich.
Galland negotiated the handover of his jet fighter wing to the Americans from a hospital bed so they could be used in an imminent war against the Russians. The atomic bomb ended that idea.
Galland was one of the few German generals never subjected to a war crimes trial. Pilots on both sides saw themselves as modern knights of the air with their own code of conduct. Parachuting pilots were never attacked and lowering your landing gear was a respected sign of surrender.
After the war, Galland emigrated to Argentina to train Juan Peron’s Air Force. He also test flew Gloster Meteor jets for the Royal Air Force. He participated in the 1972 film, The Battle of Britain and many WWII memorials. By the time I met him, his eyesight was failing. He died in 1996 at 84 of natural causes.
I give thanks to the good luck I had in meeting him, and that I had the history behind me to understand the historical figure I was sitting next to. It isn’t everyone that gets six dinners with Germany’s top fighter ace.
A year later saw me on a top-secret mission flying from Cyprus back to the American airbase at Ramstein. I plotted my course directly over Santorini.
When I approached the volcanic island, I put my Cessna 340 into a steep descent, dove straight into the mouth of the volcano, and leveled out at 100 feet above the water, no doubt terrifying the many yachts at anchor.
Greek Military Air Control gave me hell, but it was my own private way of honoring the principlals of Adolph Galland.
Stay Healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
January 14, 2022
Fiat Lux
Featured Trades:
(LEARNING THE ART OF RISK CONTROL)
Global Market Comments
January 13, 2022
Fiat Lux
Featured Trades:
(WHY A US HOUSING BOOM WILL CONTINUE),
(LEN), (PHM), (KBH),
(WHY SENIORS NEVER CHANGE THEIR PASSWORDS)
Lately, my inbox has been flooded with emails from subscribers asking if the housing market is about to crash as a result of the housing bubble and if they should sell their homes.
They have a lot to protect.
Since prices hit rock bottom in 2011 and foreclosures crested, the national real estate market has risen by 50%.
The hottest markets, like those in Seattle, San Francisco, and Reno, are up by more than 125%, and certain neighborhoods of Oakland, CA have shot up by 500%.
Looking at the recent housing statistics, I can understand their concern. The data are the hottest on record across the board:
* Housing prices are still exploding to the upside with S&P Case Shiller Rising 10.4% in December, the one-month biggest spike in history
*Your Check is in the Mail, with the passage of the $1.9 trillion rescue package. A big chunk of this is going into housing upgrades
* Goldman Sachs is Forecasting a Jobs Boom, which will take the headline Unemployment Rate down to 4.1% by yearend. Employed people buy houses.
*Rising rates haven’t touched the housing market, and won’t for years.
*Workforce at home will double post-pandemic, maintaining demand for large homes
*30-year fixed-rate mortgages still a mere 3.26%, still near a historic low
*$45 billion in rental assistance is now available, thanks to Biden’s Rescue Package.
I have a much better indicator of future housing prices than the depressing numbers above. The way homebuilder stocks like Lennar (LEN), KB Homes (KBH), and Pulte Homes (PHM) are trading I’d say your home will be worth a lot more in a year, and possibly double in another five years. Many of these stocks are up nearly 200% since the March 23 bottom.
What I call “intergenerational arbitrage” will be the principal impetus. The main reason that we are just endured two “lost decades” of economic growth over the last 20 years is that 85 million baby boomers are retiring to be followed by only 65 million “Gen Xers”. When you are losing 20 million consumer economies, don’t grow very fast. For more about millennial investing habits,x please click here.
When the majority of the population is in retirement mode, it means that there are fewer buyers of real estate, home appliances, and “RISK ON” assets like equities, and more buyers of assisted living facilities, healthcare, and “RISK OFF” assets like bonds. That’s what got us to a 0.32% yield in the ten-year.
The net result of this is slower economic growth, higher budget deficits, a weak currency, and registered investment advisors who have distilled their practices down to only municipal bond sales.
Fast forward to the other side of the pandemic and the reverse happens. The baby boomers will be out of the economy, worried about whether their diapers get changed on time or if their favorite flavor of Ensure is in stock at the nursing home.
That is when you have 65 million Gen Xers being chased by 85 million of the “millennial” generation trying to buy their assets!
By then, we will not have built new homes in appreciable numbers for 14 years, and a severe scarcity of housing hits. Even before the pandemic, new home construction was taking place at half the 2008 peak. Residential real estate prices will naturally soar. Labor shortages will force wage hikes.
The middle-class standard of living will then reverse a 40-year decline. Annual GDP growth will return from the subdued 2% rate of the past four years to near the torrid 4% seen during the 1990s. It all leads to my “Return of the Roaring Twenties” scenario which you can learn about by clicking here.
It gets better.
It is certain that the current administration will restore tax deductions for state and local real estate taxes (SALT) lost in the 2017 tax bill. The cap on home mortgage interest rate deductions will also rise.
These two events will trigger an immediate 10% increase in the value of your home on an after-tax basis and more on the coasts.
So, if someone approaches you with a discount offer for your home, I would turn around and run a mile the other way.
You should also pile into the stocks, options, and LEAPS of housing stocks in any future market dip.
Global Market Comments
January 12, 2022
Fiat Lux
Featured Trades:
(WHY GLOBALIZATION WORKS)
I am writing this to you from the Amtrak California Zephyr. Having got my Pfizer Covid-19 shots, it is now finally safe to ride public transport.
I am riding the rails in a first class sleeping compartment from Oakland, CA to Truckee, CA to reposition a car from my Lake Tahoe lakefront estate now that winter is over.
Pulling out of the station, I couldn’t help but notice the gigantic cargo ships from China and South Korea unloading containers by the tens of thousands.
Mountains of these containers dot the horizon.
The cranes that used to automatically unload them were the models for George Lucas’s AT walkers in Star Wars.
Having been a vociferous supporter of globalization since its dawn a half century ago, first during a decade spent as a reporter for The Economist magazine, and then as an investor, I will explain how our international trading system works, and especially why it works for us.
There was a polyglot of travelers from all over the world on my train.
Large groups of Chinese were led by flag-bearing guides.
Italian Millennials mobbed the bar.
A retired English couple strolled the observation car.
There was even the occasional American student backpacker repeating my own adventure from the 1960s.
And you know what? This disparate international group shared many things in common.
Most of them spent much of the day glued to iPhones or Androids run by US-designed apps.
Many were staying in accommodation organized by Airbnb.
Like me, they may have made the trip from and to the train station in an Uber cab.
They wore Levi Strauss blue jeans. American pop music pulsed through their earbuds. Probably half of them arrived in America on a Boeing jet financed by the US Export-Import Bank.
In short, they were all sending enormous amounts of money to US companies and shareholders in more ways than they could possibly count, without realizing it.
You never used to see tourists from most countries, like Russia, Spain, Portugal, Italy, or Ireland.
They were too poor.
Rapidly rising standards of living created by globalization changed all of that, creating an enormous new market for American products, especially technology ones.
You can see some of this impact in international balance of trade statistics. In 2020, the US ran a trade deficit with the world of $689 billion.
There is a more elegant way to describe this trade. We are in fact running a massive goods deficit, where foreigners send us $290 billion a month worth of stuff and we give them paper in return, US dollars, which has been steadily depreciating in value for the past 50 years.
Who is the big winner here? The US consumer, i.e. you and I. Sounds like a good deal to me. Without this inflow of cheap goods the US, inflation rate would be at least double or triple what it is now.
Subtract our $402.8 billion surplus in services, which includes, financial services, education, patents, and other intellectual property, and that brings our current account deficit down by more than half to only $488.5 billion. Some 78.6% of private sector US GDP is now accounted for by services.
But that doesn’t tell the whole story.
Trade data completely miss the enormous number of products and services that are now given away FOR FREE in exchange for the chance of earning some uncertain revenue at some future date.
In a pre-Internet, pre-globalized world, a service like the Diary of a Mad hedge Fund Trader covering so many asset classes and individual stocks real-time might have cost $100,000, if not $1 million.
And you know what? It would have been worth it!
Multiply this effect on a global scale and you see what I am talking about.
Give up your name, email address, and phone number and you can obtain almost any kind of online service for nothing. And as far as I know, no government agency has any measurement of this whatsoever.
Needless to say, the United States is far and away the leader in this immeasurable field.
By the way, this might also be the reason why the published productivity data has been so poor, despite the fact that US GDP has grown by 20% since 2009. Everywhere I look, productivity is skyrocketing, including my own.
It also might be the reason why Amazon continuously sports a nosebleed valuation. Much of what they provide is FREE, and therefore immeasurable.
Of course, globalization wrought havoc on your life if you went into it with the wrong job in the wrong industry and an inadequate skill set.
Blue-collar workers tied to textiles, shoes, toys, and other low value-added manufacturing were toast, as their jobs fled offshore.
If you didn’t retrain or adapt, you became an angry, mostly white man.
As my friend, New York Times columnist Tom Friedman, likes to say, “Average doesn’t cut it anymore.”
However, while the jobs are gone, the bulk of the profits stayed here in the US. American companies offshored the $2 an hour jobs (mass assembly), but kept the $150 an hour ones (design and marketing).
As my friends in the Chinese government never fail to point out, if they build the iPhone for $100 and we sell it for $1,000, we are the big winners, not them.
They believe we are perpetuating 19th century colonialism by making wage slaves of their workers.
They are correct.
Globalization enables the US dollar to continue as the world’s reserve currency, as almost all international trade is conducted in the buck.
That is one of the greatest free lunches of all time.
It enables the US government to indirectly control the global economy through its own monetary policy. Some half of all of the $22 trillion in US government debt is owned by foreigners.
When sanctions forced Iran to drop out of the international trading system, what did they get? A Great Depression that cut their GDP by 25%. You can’t run a country of 80 million with oil barter deals, gold, and bitcoins alone.
There are also the huge defense benefits that globalization brings us.
Back in the early days, the main reason to steer a country into capitalism was to prevent it from going communist, and therefore becoming an enemy.
Grow your allies and shrink your enemies, and your defense costs shrink dramatically, raising our friends’ standards of living.
That is what has happened on a massive scale.
Increased trade also boosted foreign standards of living, therefore creating a growing market for American goods and services.
This was the whole point of the World Trade Organization, NAFTA, the Trans-Pacific Partnership.
Humans rarely bite the hands that feed them. They are also highly unlikely to set fire to their paycheck or bomb the sources of income.
Make a foreigner a millionaire, and you turn him into a pacifist. I have seen this unfold time and again over the past half century, be it in China, Russia, Vietnam, Cambodia, and most recently in Iran.
Create an embedded base of businessmen in any country who are getting rich off of you, and international relations invariably improve.
Any system based on greed is guaranteed to succeed.
A side benefit of all of this is that stock markets for up forever.
Since globalization started in earnest in 1951, the Dow Average has risen from $239 to $21,800, a prodigious gain of some 92-fold.
And you wondered why?
Globalization is the mechanism through which America is paid the dividend for all of the good deeds it has done and inventions it has created for the past century.
I am thinking about the construction of the Panama Canal, Lend Lease, and the Marshall Plan, as well as the transistor, memory chip, microprocessor, personal computer, Windows, the Internet, online commerce, the iPhone, and social media.
That is why globalization is a win-win-win for everyone.
There are really only two true communist countries left in the world, Cuba and North Korea, which never joined the international trading community. They also happen to have the planet’s lowest standard of living.
And Cuba will become totally capitalist within two years. Just give them a million iPhones, get them talking, and see what happens. Castro will become just another neighborhood in South San Francisco.
So why end a trading system from which America and its people have profited so mightily?
That is a very good question, one that someone might ask the former president.
AT-AT Walkers from Star Wars
“Consumers are going to do best and that is consume,” said Brian Jacobsen of Wells Fargo.