Global Market Comments
September 30, 2021
Fiat Lux
Featured Trade:
(WHAT TO BUY AT MARKET TOPS?),
(CAT), ($COPPER), (FCX), (BHP), (RIO),
(EUROPEAN STYLE HOMELAND SECURITY),
(TESTIMONIAL)
I will start today’s letter by listing six more data points showing how overbought stocks have become.
1) While the number of outstanding shares in the US has remained unchanged since 2006, thanks to M&A, buybacks, bankruptcies, and privatizations, the average weighted share price has more than doubled from $50.15 to $137.00.
2) The Volatility Index (VIX) has just jumped from a recent high of $29 to $21 today.
3) The Mad Hedge Market Timing Index has just soared from a recent low of 19 eight months ago to 30 today, still in “BUY” territory.
4) 2022 forward stock earnings growth maintains at 20%.
5) Almost every investor is bullish once more, now that their stocks are going up.
6) The stock market has had its best 18 months in history. Grizzled, long in the tooth readers can’t be more cautious right now.
This all leads to the urgent question of the day, WHICH stocks do you buy as we approach market tops? The answer is very simple. You buy cheap ones. And what are the cheapest stocks out there?
Commodity stocks.
My friend, Jim Umpleby, said that we are just entering a ten-year super cycle in commodities.
Jim should know. He is the CEO of Caterpillar (CAT), a company I have been following for 45 years. I even have one of their cool worn yellow baseball caps from years past.
Thanks to the 2017 tax bill, companies can now buy Caterpillar’s bulldozers, backhoes, and heavy trucks, and expense 100% of the investment in the first year. (Last year, I bought a new $162,500 Tesla Model X using the same break). That makes a purchase of (CAT)’s products one of the best tax breaks ever.
Needless to say, this has created a stampede to buy the companies heavy machinery because they fear this tax windfall will be reversed by the next administration. This is equipment with a 30-year life or longer.
Industrial commodities are in fact the perfect sector to buy right now. Take a look at the long-term chart for copper prices, which are a great bellwether for the entire industry. They are imminently poised to make a long-term upside breakout.
Copper last peaked at the beginning of 2011, when the Chinese infrastructure build-out suddenly outdrew to a juddering halt. Prices cratered from $4.60 a pound to a lowly $1.90. Mines were sold off, mothballed, or permanently closed at a record rate.
Copper prices fell so low that the US Mint finally started making a profit on pennies they struck.
Then a funny thing happened.
Copper will soon bottom, assisted by the global synchronized economic recovery I have been writing about for years. The recent collapse of the Chinese real estate market prompted by the China Evergrande Group will eventually give us a great entry point.
The share prices of copper and other major commodity producers will go ballistic. Freeport McMoRan (FCX), the world’s largest copper producer, (whose management is a long-time reader of this letter) has just seen its stock jump ten-fold from a near $4.00 a share to $46.00. It is now back at $33.00.
You may think that it’s too late to get into the commodities space, but you’d be wrong. Having covered the sector for nearly a half-century there is one thing you learn quickly. While you can shut down a mine in weeks, it can take years to bring them back on line.
As for developing a new mine from scratch, that can take a decade by the time you get design, permits, infrastructure, equipment, and labor in place.
My Australian readers tell me that (BHP) is flying young skilled workers from Brisbane an incredible 2,000 miles to work in Northwest mines in a six weeks on - six weeks off work schedule and paying them $200,000 a year to do it. And they’re making a profit doing this!
The bottom line here is that a short squeeze has developed for industrial commodities which will last for years.
Oh, and that global economic recovery? It is on vacation until delta ends. That could happen in a few months, and no more than a year.
At least you have something to buy now besides more technology stocks. As much as we here at the Mad Hedge Fund Trader all love them for the long term, they are extremely overbought for the short term.
Tech always comes back.
Commodities Are In Our Blood
I have just seen the movie “Dunkirk” for the second time, a film that is close to me because I knew several of the participants. A boat that made the crossing memorialized with a bronze plaque moored in the canal in front of my West London mansion for several years.
I also recall a lunch I had with British comedian John Cleese many years ago (he is my height) soliciting an investment in my hedge fund. He kept his money, but I recall with great humor his version of homeland security.
The English are feeling the pinch in relation to recent geopolitical events, and have therefore raised their security level from "Miffed" to "Peeved."
Soon, security levels may be raised yet again to "Irritated" or even "A Bit Cross." The English have not been "A Bit Cross" since the blitz in 1940, when tea supplies nearly ran out.
Terrorists have been re-categorized from "Tiresome" to "A Bloody Nuisance." The last time the British issued a "Bloody Nuisance" warning level was in 1588, when threatened by the Spanish Armada.
The Scots have raised their threat level from "Pissed Off" to "Let's get the
Bastards." They don't have any other levels. This is the reason they have been used on the front line of the British army for the last 300 years.
The French government announced yesterday that it has raised its terror alert
level from "Run" to "Hide." The only two higher levels in France are "Collaborate" and "Surrender." The rise was precipitated by a recent fire that destroyed France 's white flag factory, effectively paralyzing the country's military capability.
Italy has increased the alert level from "Shout Loudly and Excitedly" to
"Elaborate Military Posturing." Two more levels remain: "Ineffective Combat Operations" and "Change Sides."
The Germans have increased their alert state from "Disdainful Arrogance" to
"Dress in Uniform and Sing Marching Songs." They also have two higher levels: "Invade a Neighbor" and "Lose."
Belgians, on the other hand, are all on holiday as usual; the only threat they
are worried about is NATO pulling out of Brussels.
The Spanish are all excited to see their new submarines ready to deploy. These beautifully designed subs have glass bottoms so the new Spanish navy can get a really good look at the old Spanish navy.
Australia, meanwhile, has raised its security level from "No worries" to
"She'll be alright, Mate." Two more escalation levels remain: "Crikey! I think we'll need to cancel the barbie this weekend!" and "The barbie is canceled." So far no situation has ever warranted use of the final escalation level.
-- John Cleese - British writer, actor and tall person.
Global Market Comments
September 29, 2021
Fiat Lux
Featured Trade:
(PLEASE SIGN UP NOW FOR MY FREE TEXT ALERT SERVICE NOW),
(BIDDING MORE FOR THE STARS)
The stock market has turned into the real estate market, where everyone is afraid to sell for fear of being unable to find a replacement. Will it next turn into the Bitcoin market, which has gone ballistic?
Risk assets everywhere are now facing a good news glut.
My 2021 market top target of 40,000 for the Dow Average has come within range.
This year’s price action really gives you the feeling of an approaching short-term blow-off market top. If Covid-19 crashed the market, will the vaccine boosters the recovery?
A few years ago, I went to a charity fundraiser at San Francisco’s priciest jewelry store, Shreve & Co., where the well-heeled men bid for dates with the local high society beauties, dripping in diamonds and Channel No. 5.
Amply fueled with Dom Perignon champagne, I jumped into a spirited bidding war over one of the Bay Area’s premier hotties, who shall remain nameless. Suffice to say, she is now married to a well-known tech titan and has a local sports stadium named after her.
Obviously, I didn’t work hard enough.
The bids soared to $33,000, $34,000, $35,000.
After all, it was for a good cause. But when it hit $36,000, I suddenly developed a severe case of lockjaw. Later, the sheepish winner with a rampant case of buyer’s remorse came to me and offered his date back to me for $35,000. I said, “no thanks.” $34,000, $33,000, $32,000?
I passed.
The altitude of the stock market right now reminds me of that evening.
If you rode the S&P 500 (SPX) from 700 to 4,50 and the Dow Average (INDU) from 7,000 to 35,000, why sweat trying to eke out a few more basis points.
And if there was ever an excuse to take a break it is the blistering 18,000 point rally off the March 2020 bottom.
I realize that many of you are not hedge fund managers and that running a prop desk, mutual fund, 401k, pension fund, or day trading account has its own demands.
But let me quote what my favorite Chinese general, Deng Xiaoping, once told me in person: “There is a time to fish, and a time to hang your nets out to dry. You don’t have to chase every trade.
At least then I’ll have plenty of dry powder for when the window of opportunity reopens for business. So, while I’m mending my nets, I’ll be building new lists of trades for you to strap on when the sun, moon, and stars align once again.
What Am I Bid?
Global Market Comments
September 28, 2021
Fiat Lux
Featured Trade:
(TESTIMONIAL),
(THE DEATH OF KING COAL),
(BTU), (ARCH)
Hi John,
You have been doing this for a long time indeed. The recent bounce has been nice. How did you feel that it was going to bounce given the Fed meeting and the noise around the China Evergrande Group?
Or have you seen this movie so many times that unless it was a major black swan event (like February-March 2020) that this was always buy the dip?
Or does it even matter as long as you are controlling your risk given how much you have made in the market in your lifetime?
For someone trying to reset and start growing their account, I don't have this luxury but have been selectively choosing the trades to take.
Again, great trading.
Regards,
Dallas
Melbourne, Australia
Virtually all of the research you receive are about stocks you should buy. This report is about stocks you should sell….with both hands as fast as you can.
It is perhaps the most important data release of the last several years that no one noticed. As a result, one of the best shorting opportunities in years is rearing its ugly head.
US coal production hit a 41-year low in 2020. Coal as a percentage of US power output has plunged from 28% to 10% over the last decade to only 437 million short tons. Total coal production has plunged by 64% during this time.
The end result will be a massive shift of wealth out of the major coal-producing regions of the US in the east.
If energy has a proverbial buggy whip maker, it is king coal. And while US coal production has been in free fall, alternatives have been rising sharply, especially solar, now accounting for 20% of US energy consumption.
The implications for the US economy are enormous. I used to be kept awake at night by the wailing whistles of Union Pacific (UNP) engines delivering Wyoming coal to California ports for shipment on to China. They have all disappeared.
Those trains are now moving oil south from Canada and North Dakota to the oil distribution hub in Cushing, Oklahoma, or even all the way to Gulf ports, except that this time they are using a North/South rail line like Norfolk Southern (NSC) rather than the East/West running Union Pacific. Clearly, there are consequences.
In recent the last year, the few listed coal names left have enjoyed a nice rally. This is because of the generalized global “RISK ON” move that has unfolded since the pandemic peaked. The Van Eck Vectors Coal ETF was shut down in 2020 for lack of interest.
It also helps that the incoming Biden administration is unlikely to hammer away at China on trade front as did the previous one. China is far and away the world’s largest buyer of coal.
I believe that in the coming years, the entire US coal industry will go bankrupt and get purchased by the Chinese for pennies on the dollar, or for their outstanding debt alone at a big discount. Needless to say, this makes the entire sector a great candidate for a core short.
Coal is hopelessly uncompetitive with natural gas. Burning gas produces a fraction of the carbon dioxide of coal, and alternatives like wind and solar produce none whatsoever. Coal faces onerous environmental regulation, which will almost certainly get worse under a future administration. US utilities are therefore closing coal-fired power plants as fast as they can.
The outgoing administration was the most pro-coal one in American history. Yet, not a single new coal-fired was built during their reign.
However, coal-dependent communities are not about to turn into ghost towns. They have the great advantage of offering some of the lowest operating costs anywhere in the country. Free rent is becoming common. You'd be nuts to start a new business in the San Francisco Bay Area these days, which has become a haven of the wealthy.
Throw in some decent broadband and they can handily join the global economic community. Yes, you can turn coal miners into programmers, at least the young ones. They all grew up playing video games just like the rest of us.
I Don’t See Any Future in This, Do You?
Global Market Comments
September 27, 2021
Fiat Lux
Featured Trade:
(THE MAD HEDGE SUMMIT VIDEOS ARE UP)
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE YEAREND RALLY HAS BEGUN),
(DIS), (TLT), (SPY), (GS), (JPM), (BLK), (MS), (BRKB), (GOOG)
The calls started coming in as soon as the market closed.
More than a dozen subscribers called, emailed, and texted me on Thursday to say that they just had the best day in the market this year, and for some, their entire lives.
Holding fire until you saw the whites of their eyes worked. I used both visits to the (SPY) to $430 to load the boat with financial stocks, which then took off like a tribe of scalded chimps.
Mad Hedge made 5.6% on that day alone. One Concierge client reported a breathtaking $5.3 million profit after dumping a lot of his techs and piling into banks and brokers. Suffice it to say that I am very welcome in a well-to-do suburb of Seattle, Washington.
The washout was so dramatic and the recovery so rapid I think it is safe to say that our fall correction is over. We may get some small retracements and sideways chop from here. But the writing is on the wall. We are headed to new all-time highs in stocks by the end of 2022.
I received a lot of questions about how easily I was able to spot the bottom so easily. A Volatility Index (VIX) of $29 was a big help. So was the outflow of $34 billion from equity ETFs and mutual funds the previous week, the most in six months. And when the Mad Hedge Market Timing Index hits a rare low of 19, you don’t sit on your hands very long.
The $300 billion China Evergrande Group debt crisis gave us the crisis and the final flush we needed to establish a clear bottom.
Nothing else can stop this. New Covid cases are falling off a cliff, and childhood vaccinations out next month will accelerate this trend.
A massive infrastructure budget will pass in congress. It is almost irrelevant whether it’s a $3.5 trillion or $1.5 trillion. It will be more than can be spent in any reasonable amount of time.
In the meantime, the ultimate driver of share prices, the exponential growth of post covid corporate profits, continues unabated.
The wall of money keeps getting ever larger. The Fed reported that in Q2, Household Net Worth soared by $5.9 trillion is an incredible $141.7 trillion largely through the appreciation of stock and home prices. The Fed balance sheet has exploded from $4.1 trillion to $8.4 trillion in a mere 18 months.
This will continue for another decade. Keep piling on those leveraged long-term LEAPS. Flat is the new down.
Enjoy.
Four to six Interest RatesRises by 2024 which may start as early as 2024, says Fed governor Jay Powell. The taper could start in November. Bonds rose slightly on the news, but the writing is now definitely on the wall. The Fed now expects a stratospheric 5.9% GDP for 2021 and 3.8% for 2022. Sell all rallies in the (TLT) and buy all financial stocks.
Bonds Crash, down -$3.43 points after Jay Powell’s super bearish comments from Wednesday soak in. The 50-day moving average has been smashed and the next target is the 200-day at $1344.59. Watch the 50-day rollover from here on. My final target is a 1.76% yield on the ten-year US Treasury bond by January.
Back up the Truck, it’s time to load up on stocks on the back of yesterday’s 985-point swan dive. You especially want domestic recovery ones that benefit from rising interest rates, like banks, brokers, fund managers, commodities, and steel. The taper may be only weeks away and will drive stocks to new highs by yearend. You wanted a dip to buy, so buy the dip. Don’t expect much from technology stocks for a while.
China’s Largest Real Estate Developer Goes Bust, China Evergrande Group, with $300 billion in debt. The move smashed risk markets globally, opening the Dow Average down 650. Bitcoin plunged 10%. Is this China’s Lehman moment, or just another day at the office? It does take them another step back towards real communism.
China Bans Crypto, triggering a 7% plunge in Bitcoin. Financial systems the government can’t control are forbidden in the Forbidden City. It’s all part of a flight out of a restricted Yuan into unrestricted crypto by wealthy Chinese. China used to account for 99% of all Bitcoin mining and now it is at zero. The business will flock to the US, Canada, and any other country with cheap electricity. It’s a short-term negative for crypto but a long term positive. Buy Bitcoin and Ethereum on the dip.
Pfizer Boosters for over 65 were approved by the FDA for immediate distribution. Those younger will have to wait. It turns out that the Pfizer effectiveness drops from 99% to 66% in eight months. That puts older recipients, like me, at risk. Under 12 kids to come in October. See you at Costco! Buy (PFE) on dips.
Pandemic Tops 1918 US Death Toll at 675,000, although on a per capita basis we are still only a third of the Spanish Flu. We are not even close to this ending yet. We need vaccinations for kids and booster shots for all to be dome with this, getting national immunity up to 90%.
Housing Starts for August up 3.9% with apartment buildings the big driver. Single family homes fell. Building Permits are up 6.0% and are a 50% increase from the summer lows.
Existing Home Sales Drop, by 2% in August to 5.88 million units annualized according to a signed contract basis. Only 1.29 million homes are for sale, a 2.6-month supply, down 13% YOY. The Median Price rose to an eye-popping $356,700, up 14.9% YOY. Million-dollar homes are up 40% YOY.
Google (GOOG) Buys $2.1 Billion in New York Office Space, which is why I love this company. You can forget about those end of New York City stories. Always follow the money, where companies are putting their money, and you will find great stock. Or so the chairman of JP Morgan Bank taught me 40 years ago. Buy (GOOG) on dips.
Weekly Jobless Claims Pop to 351,000 last week, up 16,000. Leading Economic Indicators jump in August, coming in at 0.9%. March saw the high for the year at 1.3%. Getting a lot of noisy and conflicting economic data points this week as delta works its way through the system.
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!
My Mad Hedge Global Trading Dispatch saw a robust +6.63% gain so far in September. My 2021 year-to-date performance soared to 85.20%. The Dow Average was up 13.60% so far in 2021. September 23 saw my biggest up day of the year, some 5.61%
I held fire until the Dow Average 1,000-point washout, then loaded the boat with financial stocks, writing the trade alerts as fast as I could. That leaves me 70% long financial stocks, 10% in cash, and 20% in short (TLT).
That brings my 12-year total return to 507.75%, some 2.00 times the S&P 500 (SPX) over the same period. My 12-year average annualized return now stands at an unbelievable 43.52%, easily the highest in the industry.
My trailing one-year return popped back to positively eye-popping 117.34%. I truly have to pinch myself when I see numbers like this. I bet many of you are making the biggest money of your long lives.
We need to keep an eye on the number of US Coronavirus cases at 43 million and rising quickly and deaths topping 685,000, which you can find here.
The coming week will be slow on the data front.
On Monday, September 27 at 8:30 AM, Durable Goods are for August are reported.
On Tuesday, September 28 at 9:00 AM, The S&P Case Shiller National Home Price Index for July is published.
On Wednesday, September 29 at 10:00 AM, we get Pending Home Sales for August.
On Thursday, September 30 at 8:30 AM, Weekly Jobless Claims are announced. The final report of the Q2 US GDP is disclosed.
On Friday, October 1 at 8:30 AM, we learn Personal Income and Spending for August. The September Nonfarm Payroll Report is not out for another week due to the first day of the month rule. At 2:00 PM, the Baker Hughes Oil Rig Count is disclosed.
As for me, when I first met Andrew Knight, the editor of The Economist magazine in London 45 years ago, he almost fell off his feet. Andrew was well known in the financial community because his father was a famous WWII Battle of Britain Spitfire pilot from New Zealand.
At 34, he had just been appointed the second youngest editor in the magazine’s 150-year history. I had been reporting from Tokyo for years, filing two stories a week about Japanese banking, finance, and politics.
The Economist shared an office in Tokyo with the Financial Times, and to pay the rent, I had to file an additional two stories a week for them as well. That’s where I saw my first fax machine, which then was as large as a washing machine even though the actual electronics would fit in a notebook. It cost $5,000.
The Economist was the greatest calling card to the establishment one could ever have. Any president, prime minister, CEO, central banker, or war criminal were suddenly available for a one-hour chat about the important affairs of the world.
Some of my biggest catches? Presidents Gerald Ford, Jimmy Carter, Ronald Reagan, George Bush, and Bill Clinton, China’s Zhou Enlai and Deng Xiaoping, Japan’s Emperor Hirohito, terrorist Yasir Arafat, and Teddy Roosevelt’s oldest daughter, Alice Roosevelt Longworth, the first woman to smoke cigarettes in the White House in 1805.
Andrew thought that the quality of my posts was so good that I had to be a retired banker at least 55 years old. We didn’t meet in person until I was invited to work the summer out of the magazine’s St. James Street office tower, just down the street from the palace of Prince Charles.
When he was introduced to a gangly 25-year-old instead, he thought it was a practical joke, which The Economist was famous for. As for me, I was impressed with Andrew’s ironed and creased blue jeans, an unheard-of concept in the Wild West.
The first unusual thing I noticed working in the office was that we were each handed a bottle of whisky, gin, and wine every Friday. That was to keep us in the office working and out of the pub next door, the former embassy of the Republic of Texas from pre-1845. There is still a big white star on the front door.
Andrew told me I had just saved the magazine.
After the first oil shock in 1972, a global recession ensued, and all magazine advertising was cancelled. But because of the shock, it was assumed that heavily oil-dependent Japan would go bankrupt. As a result, the country’s banks were forced to pay a ruinous 2% premium on all international borrowing. These were known as “Japan rates.”
To restore Japan’s reputation and credit rating, the government and the banks launched an advertising campaign unprecedented in modern times. At one point, Japan accounted for 80% of all business advertising worldwide. To attract these ads, the global media was screaming for more Japanese banking stories, and I was the only person in the world writing them.
Not only did I bail out The Economist, I ended up writing for over 50 business publications around the world in every English-speaking country. I was knocking out 60 stories a month, or about two a day. By 26, I became the highest-paid journalist in the Foreign Correspondents’ Club of Japan and a familiar figure in every bank head office in Tokyo.
The Economist was notorious for running practical jokes as real news every April Fool’s Day. In the late 1970s, an April 1 issue once did a full-page survey on a country off the west coast of India called San Serif.
It warned that if the West coast kept eroding, and the East coast continued silting up, the country would eventually run into India, creating serious geopolitical problems.
It wasn’t until someone figured out that the country, the prime minister, and every town on the map was named after a type font that the hoax was uncovered.
This was way back, in the pre-Microsoft Word era, when no one outside the London Typesetter’s Union knew what Times Roman, Calibri, or Mangal meant.
Andrew is now 82 and I haven’t seen him in yonks. My business editor, the brilliant Peter Martin, died of cancer in 2002 at a very young 54, and the magazine still awards an annual journalism scholarship in his name.
My boss at The Economist Intelligence Unit, which was modelled on Britain’s MI5 spy service, was Marjorie Deane, who was one of the first women to work in business journalism. She passed away in 2008 at 94. Today, her foundation awards an annual internship at the magazine.
When I stopped by the London office a few years ago, I asked if they still handed out the free alcohol on Fridays. A young writer ruefully told me, “No, they don’t do that anymore.”
Good Luck and Good Trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
