Global Market Comments
September 25, 2024
Fiat Lux
Featured Trade:
(THE NEXT COMMODITY SUPER CYCLE HAS JUST BEGUN),
(COPX), (GLD), (FCX), (BHP), (RIO), (SIL), (CCJ),
(PPLT), (PALL), (GOLD), (ECH), (EWZ), (IDX)
Global Market Comments
September 24, 2024
Fiat Lux
Featured Trade:
(THE MAD HEDGE DECEMBER 6-8 SUMMIT REPLAYS ARE UP),
(THE LONG VIEW ON EMERGING MARKETS),
(TESTIMONIAL)
I managed to catch a few comments in the distinct northern English accent of Jim O'Neil, the fabled analyst who invented the “BRIC” term, and who was later kicked upstairs to the chairman's seat at Goldman Sachs International (GS) in London.
Now that the US dollar is in free fall, Jim thinks that it is still the early days for the space, and that these countries have another ten years of high growth ahead of them. As I have been pushing emerging markets all year, this is music to my ears.
By 2030, the combined GDP of these emerging markets, Brazil (EWZ), India (PIN), and China (FXI), will match that of the US. The “BRIC” term is no longer used because the Ukraine War has made Russia the Pariah of international investment.
China alone will reach two-thirds of the American figure for gross domestic product. All that requires is for China to maintain a steady 5% annual growth rate for six more years, the official Beijing forecast, while the US plods along at an arthritic 3.0% rate. China's most recent quarterly growth rate came in at low single digits.
“BRIC” almost became the “RIC” when O'Neil was formulating his strategy two decades ago. Conservative Brazilian businessmen were convinced that the then-newly elected Luiz Ignacio Lula da Silva would wreck the country with his socialist ways.
He ignored them and Brazil became the top-performing market of the G-20 since 2000. An independent central bank that adopted a strategy of inflation targeting was transformative.
This is not to say that you should rush out and load up on emerging markets tomorrow, as they are still being weighed down by weak commodity prices. This will go away.
American big-cap technology stocks are the flavor of the day, and as long as this is the case, emerging markets will continue to blend in with the wallpaper. Still, with growth rates triple or quadruple our own, they will not stay “resting” for long.
First and foremost, thank you for what you do.
The small cost of this newsletter pays for itself a thousand times over. My returns mimic those of your portfolio for the year and for that I am grateful.
The only suggestion I would offer is to keep doing what you are doing. It is people like you that will help return the once storied name to Wall Street.
Regards,
Shirin
Tampa, Florida
"A central bank is best that governs least, but is prepared to govern radically when called upon," said 19th century man of letters, Walter Bagehot, the first editor of The Economist magazine in London.
Global Market Comments
September 23, 2024
Fiat Lux
Featured Trade:
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD or THE DOCTOR JEKYLL AND MR. HYDE MARKET),
(NVDA), (MSFT), (GLD), (NEM), (TSLA). (CCJ), (DHI), (TLT)
I have to tell you that every year I do this, calling the market gets easier and easier. That’s because when you go from year 62 to 63 in the market, you actually learn quite a lot.
What gets more frustrating every year is convincing people to execute my trades because they are increasingly out of consensus, as opposed to conventional wisdom, tradition-shattering, or downright Mad.
Nuclear stocks? Are you out of your mind? Haven’t you heard of Three Mile Island?
So, the Fed went with 50.
Initially, the stock reaction was “Oh my gosh, the free lunch is bigger than we thought!” By the close, this morphed to “Oh my gosh, the economy must be worse than we thought!” This opens the way to another possible 50 basis point rate cut in November, which happens to be the day after the presidential election. It only took 5 seconds for most investors to realize that they had way too much cash.
By acting so aggressively and out of character, Fed governor Jay Powell is admitting that he blundered, blew it, dropped the ball, and scored an own goal all at once by not lowering interest rates in July.
By doing his best impression of a deer frozen in the headlights in H1, all Powell got us were six more weeks of job losses, taking the headline Unemployment Rate up to 4.2%.
Don’t get too complacent though. Look at the chart below and you will see that when the Fed began an aggressive round of interest rate cuts in 2007, the market launched into a major crash of 57%.
Dow 42,000.
It may seem commonplace and ordinary for mere mortals to see this number. But for those of us who remember when it was only 600 back in 1982 (and predicted to immediately plunge to 300 by the late Joe Granville), we are now in the realm of science fiction.
However, in Q3 this year, the character of the bull market suddenly changed, from a Dr. Jekyll to a Mr. Hyde. The Magnificent Seven has shrunk to the Pitiful Seven, with long boring sideways-range trades. In the meantime, growth and interest rate-sensitive value stocks that I have been pounding the table about for six months have begun trading like red-hot must-own biotech IPOs.
The choice is very simple. Do I buy a stock that has a single-digit price-earnings multiple that is flying like a bat out of hell, or do I choose an incredibly expensive tech stock with a PE multiple of 27X or worse that is stagnating?
I know what I’m going to do with my money, which reached new all-time highs almost every day this month. I’ll go with the former all day long.
Don’t get me wrong. The Mag Seven aren’t going to stay out of favor for very long. It’s like holding a basketball underwater that keeps inflating. Their earnings are still growing at an explosive rate. Personally, I think Nvidia (NVDA) will hit $160 a share by early 2025.
If there is one common factor in all financial markets today, it is the vast underestimation of the potential of AI and the impact on stock prices, which keeps surreptitiously sneaking into our lives every day.
My Cameco (CCJ) trade alert came through in a week, immediately tacking on 10%. I have to tell you that reading my email, there is a lot of demand for positions that rise by 15% in a week. But that is better than the two-week wait for the Concierge clients who bought the 2026 $40-$42 LEAPS for only 75 cents. The consolation is that they will make a lot more money, potentially some 167% by expiration. The big money is always made with long-term trades.
I can honestly say that I put 54 years of work into this trade, dating back to when I started my work at the Atomic Energy Commission Nuclear Test Site in Nevada. While advanced nuclear power plant design and fuels (low enriched uranium oxide with an M5TM zirconium-based cladding) have been around for a long time, the industry had the kiss of death on it thanks to Three Mile Island (watch the movie China Syndrome), Chornobyl, and Fukushima.
It was going to take someone bold with deep pockets to restart this industry. Then out of the blue Microsoft (MSFT) announced the reopening of Three Mile Island, the site of the worst nuclear accident in US history in 1979.
Constellation Energy announced Friday that its Unit 1 reactor, which closed five years ago, is expected to be revived in 2028, dependent on Nuclear Regulatory Commission approval. Microsoft will purchase the carbon-free energy produced from it to power its data centers to support artificial intelligence.
Twelve U.S. nuclear power reactors have permanently closed since 2012, with the most recent being Indian Point 3 on April 30, 2021. Another seven U.S. reactor retirements have been announced through 2025, with a total generating capacity of 7,109 MW (equal to roughly 7% of U.S. nuclear capacity).
I have a feeling that all of these will get reopened, which cost about $4 billion each to build and can be bought now for pennies on the dollar. In the meantime, the world’s largest uranium supplier, Kazakhstan, is cutting supplies. Buy all nuclear plays in dips.
I have to tell you that this was one of those weeks that by making 6.74% it makes all the barbarically early mornings and exhausting late nights worth it. While all my friends are working on their golf swings or improving their bowling scores, I am scoring the Internet search for the next original investment theme. Every customer I have spoken to lately is having a great year.
So far in September, we are up by a spectacular +9.67%. My 2024 year-to-date performance is at +44.36%. The S&P 500 (SPY) is up +19.08% so far in 2024. My trailing one-year return reached +63.00%. That brings my 16-year total return to +720.99%. My average annualized return has recovered to +52.43%.
I front-ran the Fed move by adding positions in interest rate sensitives like (GLD), (NEM), and (TSLA). I added (CCJ) based on the arguments above. Once the Fed showed its hand, I added another interest rate sensitives with (DHI). I also added a short in (TLT).
My logic on (TLT) was very simple. I think it is safe to say that we won’t have any downside surprises in interest rates until the next Fed meeting on November 6. We don’t even get a Nonfarm Payroll Report until October 4.
In any case, the bond market has already fully priced in half of the 250 basis points worth of interest rate cuts now discounted by the June Fed futures markets. We have just witnessed a massive $20 rally off the (TLT) bottom. Upside surprises in prices from here should be nil.
If you couldn’t get into (TLT), you are not alone. As soon as the big hedge funds saw my trade alerts, they started hammering not only the options market but the underlying bond market as well with several large $100 million sales. That pushed the trade to near max profit almost immediately and made my trade alert impossible to execute.
At The Economist, they used to say that imitation is the sincerest form of flattery.
Some 63 of my 75 round trips, or 90%, were profitable in 2023. Some 57 of 75 trades have been profitable so far in 2024, and several of those losses were break-even. That is a success rate of +76%.
Try beating that anywhere.
FedEx Gets Crushed 10%, on disappointing earnings and guidance. Cost control is a big issue. Right now, investors are presented with the Dow Industrials at all-time highs and Transports barely positive for the year. Transports are up just 2.7% year to date, and a 13% drop in FedEx shares early Friday will likely drag it into the red for 2024. Buy (FDX) on dips, a great economic recovery play.
Existing Home Sales Drop 4.2%, in August to a seasonally adjusted annualized rate of 3.86 million units, according to the National Association of Realtors. There were 1.35 million units for sale at the end of August. That’s up 0.7% from July and up 22.7% year over year. median price of an existing home sold in August was $416,700, up 3.1% from August 2023, a new all-time high. Real estate should pick up once lower interest rates feed through.
Weekly Jobless Claims Hit 4 Month Low at 219,000. This flies in the face of yesterday’s 50 basis point rate cut by the Fed yesterday based on a weakening jobs market.
Alaska Airlines Takeover of Hawaiian Gets Approval, in a rare case of agreement from the government. The Feds have opposed the most concentration of industry. I think without the deal Hawaiian would have gone under. Expect prices to go and services to decline. Avoid the airlines.
Berkshire Hathaway Cash Approaches $300 Billion. Berkshire ended the second quarter with cash and equivalents (mostly Treasury bills) of $277 billion, up from $168 billion at year-end 2023, mostly due to heavy sales of Apple (AAPL). It highlights how much money is sitting on the sidelines waiting to come in on the next dip. It's also an indication that in the 75 years of Warren Buffet’s investing experience, stocks are expensive.
The Entire Energy Sector is About to Double, once the Chinese economy starts to recover. A recovering US economy powered by lower interest rates will also help. Everything from oil futures to master limited partnerships and stocks are on sale with the highest dividends in the market. It’s almost the only place Warren Buffet is buying.
Amazon Puts AI to Work, using it to plan new delivery routes which saves time and millions of gallons of gasoline. It’s a simple application with vast results. It all goes straight to the bottom line. AI is spreading throughout the economy far faster than most people realize. Buy (AMZN) on dips.
Foreign Direct Investment into China Collapses, down 31.5% in the first eight months of 2024 the Chinese Commerce Ministry said on Saturday. This could be a drag on the recovery of global commodity prices.
US Import Prices are in Free Fall, showing the biggest drop in eight months in August, driven by a broad decline in the costs of goods.
Ebbing price pressures give the Federal Reserve ample room to focus on the labor market which has slowed considerably from last year's robust job growth. Expectations of lower interest rates as well as slowing inflation results are making people feel better about the outlook for the economy.
Foreign Investors Pour $31 Billion into Emerging Markets in August. Fixed income funds ex-China accounted for $27.8 billion of inflows, with $1.4 billion funneled to Chinese debt, the data show. The net inflow to stocks stood at $1.7 billion despite a $1.5 billion outflow from Chinese equities. It’s all about falling US interest rates and a US dollar that is expected to be weak for years.
My Ten-Year View
When we come out the other side of the recession, we will be perfectly poised to launch into my new American Golden Age or the next Roaring Twenties. The economy decarbonizing and technology hyper accelerating, creating enormous investment opportunities. The Dow Average will rise by 600% to 240,000 or more in the coming decade. The new America will be far more efficient and profitable than the old.
Dow 240,000 here we come!
On Monday, September 23 at 8:30 AM EST, the S&P Global Flash PMI
is out
On Tuesday, September 24 at 6:00 AM, the S&P Case Shiller National Home Price Index is released.
On Wednesday, September 25 at 7:30 AM, New Home Sales are printed.
On Thursday, September 26 at 8:30 AM EST, the Weekly Jobless Claims are announced. We also get the final read on Q2 GDP.
On Friday, September 27 at 8:30 AM, we learn the Fed’s favorite inflation indicator, the Core PCE Price Index. At 2:00 PM EST, the 2:00 PM the Baker Hughes Rig Count is printed.
As for me, when the Cold War ended in 1992, the United States judiciously stepped in and bought the collapsing Soviet Union’s entire uranium and plutonium supply.
For good measure, my client George Soros provided a $50 million grant to hire every Soviet nuclear engineer. The fear then was that starving scientists would go to work for Libya, North Korea, or Pakistan, which all had active nuclear programs. They ended up here instead.
That provided the fuel to run all US nuclear power plants and warships for 20 years. That fuel has now run out and chances of a resupply from Russia are zero. The Department of Defense attempted to reopen our last plutonium factory in Amarillo, Texas, a legacy of the Johnson administration.
But the facilities were deemed too old and out of date, and it is cheaper to build a new factory from scratch anyway. What better place to do so than Los Alamos, which has the greatest concentration of nuclear expertise in the world?
Los Alamos is a funny sort of place. It sits at 7,320 feet on a mesa on the edge of an ancient volcano so if things go wrong, they won’t blow up the rest of the state. The homes are mid-century modern built when defense budgets were essentially unlimited. As a prime target in a nuclear war, there are said to be miles of secret underground tunnels hacked out of solid rock.
You need to bring a Geiger counter to garage sales because sometimes interesting items are work castaways. A friend almost bought a cool coffee table which turned out to be part of an old cyclotron. And for a town designing the instruments to bring on the possible end of the world, it seems to have an abnormal number of churches. They’re everywhere.
I have hundreds of stories from the old nuclear days passed down from those who worked for J. Robert Oppenheimer and General Leslie Groves, who ran the Manhattan Project in the early 1940s. They were young mathematicians, physicists, and engineers at the time, in their 20’s and 30’s, who later became my university professors. The A-bomb was the most important event of their lives.
Unfortunately, I couldn’t relay this precious unwritten history to anyone without a security clearance. So, it stayed buried with me for a half century, until now.
Some 1,200 engineers will be hired for the first phase of the new plutonium plant, which I got a chance to see. That will create challenges for a town of 13,000 where existing housing shortages already force interns and graduate students to live in tents. It gets cold at night and dropped to 13 degrees F when I was there.
I was allowed to visit the Trinity site at the White Sands Missile Test Range, the first visitor to do so in many years. This is where the first atomic bomb was exploded on July 16, 1945. The 20-kiloton explosion set off burglar alarms for 200 miles and was double to ten times the expected yield.
Enormous targets hundreds of yards away were thrown about like toys (they are still there). Half the scientists thought the bomb might ignite the atmosphere and destroy the world but they went ahead anyway because so much money had been spent, 3% of US GDP for four years. Of the original 100-foot tower, only a tiny stump of concrete is left (picture below).
With the other visitors, there was a carnival atmosphere as people worked so hard to get there. My Army escort never left me out of their sight. Some 78 years after the explosion, the background radiation was ten times normal, so I couldn’t stay more than an hour.
Needless to say, that makes uranium plays like Cameco (CCJ), NextGen Energy (NXE), Uranium Energy (UEC), and Energy Fuels (UUUU) great long-term plays, as prices will almost certainly rise and all of which look cheap. US government demand for uranium and yellow cake, its commercial byproduct, is going to be huge. Uranium is also being touted as a carbon-free energy source needed to replace oil.
At Ground Zero in 1945
What’s Left of a Trinity Target 200 Yards Out
Playing With My Geiger Counter
Atomic Bomb No.3 Which was Never Used in Tokyo
What’s Left from the Original Test
Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
“All over the world, money managers are waiting for the signal that the Fed is going to end tightening. I think everyone is on a hair trigger,” said oracle of Omaha, Warren Buffett.
Global Market Comments
September 20, 2024
Fiat Lux
Featured Trade:
(THIS WILL BE YOUR BEST PERFORMING ASSET FOR THE NEXT 30 YEARS),
(IYR), (PHM), (LEN), (DHI), (TLT), (HYG), (MUB), (SPY)
Lately, I have spent my free time strolling the worst slums of Oakland, CA.
No, I’m not trying to score a drug deal, hook up with some ladies of ill repute, or get myself killed.
I was looking for the best-performing investment for the next 30 years.
Yup, I was looking for new homes to buy.
As most of you know, I try to call all of my readers at least once a year and address their individual concerns.
Not only do I pick up some great information about regions, industries, businesses, and companies, but I also learn how to rapidly evolve the Diary of a Mad Hedge Fund Trader service to best suit my voracious, profit-seeking readers.
So when a gentleman asked me the other day to reveal to him the top-performing asset of the next 30 years, I didn’t hesitate: your home equity.
He was shocked.
I then went into the economics of the Oakland trade with him.
West Oakland was built as a working-class neighborhood in the late 1890s. Many structures still possess their original Victorian designs and fittings.
Today, it is a 5-minute BART ride under the Bay to the San Francisco financial district.
A one-three bedroom two bath home I saw was purchased a year ago for $450,000, with a $50,000 down payment and a 6.5% loan on the balance.
The investor quickly poured $50,000 into the property, with new paint, heating, hot water, windows, a kitchen, bathrooms, and flooring.
A year later, he listed it for sale at $650,00, and the agent said there was a bidding war that would probably take the final price up to $700,000.
Excuse me, gentlemen, but that is a 400% return on a 50,000 investment in 12 months.
As Oakland rapidly gentrifies, the next buyer will probably see a doubling in the value of this home in the next five years.
Try doing that in the stock market.
Needless to say, housing stocks like Lennar Homes (LEN), DH Horton (DHI), and Pulte Homes (PHM) need to be at the core of any long-term stock portfolio.
I then proceeded to list off to my amazed subscriber the many reasons why residential housing is just entering a Golden Age that will drive prices up tenfold, if not 100-fold, in the decades to come. After all, over the last 60 years, the value of my Dad’s home in LA went up 100-fold and the equity 1,000-fold.
1) Demographics. This started out as the hard decade for housing when 80 million downsizing baby boomers unloaded their homes for greener pastures at retirement condos and assisted living facilities.
The 65 million Gen Xers who followed were not only far fewer in number, they earned much less, thanks to globalization and hyper-accelerating technology.
All of this conspired to bring us a real estate crash that bottomed out in 2011.
During the 2020s, the demographics math reverses.
That’s when 85 million millennials start chasing the homes owned by 65 million Gen Xers.
And as they age, this group will be earning a lot more disposable income, thanks to a labor shortage.
2) Population Growth
If you think it's crowded now, you haven’t seen anything yet.
Over the next 30 years, the US population is expected to soar from 335 million today to 450 million. California alone will rocket from 38 million to 50 million.
That means housing for 115 million new Americans will have to come from somewhere. It sets up a classic supply/demand squeeze.
That’s why megaprojects like the San Francisco to Los Angeles bullet train, which may seem wasteful and insane today, might be totally viable by the time they are finished.
3) They’re Not Building Them Anymore
Or at least not as much as they used to.
Total housing starts for 2023 were 1.55 million, a 3% decline from the 1.60 million total from 2022. Single-family starts in 2023 totaled 1.01 million, down 10.6% from the previous year. That means they are producing a half of peak levels.
The home building industry has to more than triple production just to meet current demand.
Builders blame regulation, zooming, the availability of buildable land, lack of financing, and labor shortages.
The reality is that the companies that survived the 2008 crash are a much more conservative bunch than they used to be. They are looking for profits, not market share. They are targeting a specific return on capital for their business, probably 20% a year pretax.
It is no accident that new homebuilders like Lennar (LEN), Pulte Homes (PHM), and (DHI) make a fortune when building into rising prices and restricted supply. Their share prices have been on an absolute tear and are at all-time highs. And that is with a 6.1% mortgage rate.
This strategy is creating a structural shortage of 10 million new homes in this decade alone.
4) The Rear View Mirror
The Case Shiller CoreLogic National Home Price Index (see below) has started to rise again after a year of declines. Net out of the many tax breaks that come with ownership, the real annual return is closer to 8%.
That beats 90-day T-bills at 4.75%, tax-free municipal bonds (MUB) at 2.20%, US Treasury bonds (TLT) at 3.70%, S&P 500 (SPY) equities with dividends at 2.2%, and junk (HYG) bonds at 6.0%.
Unless you have a new Internet start-up percolating in your garage, it is going to be very hard to beat your own home’s net return.
5) The Last Leverage Left
A typical down payment on a new home these days is 25%. That gives you leverage of 4:1. So, in a market that is rising by 5.0% a year, your increase in home equity is really 20% a year.
Pay a higher interest rate, and down payments as low as 10% are possible, bringing your annual increase in home equity to an eye-popping 50%.
And if you qualify for an FHA loan up to $633,000, only a 3.5% deposit is required.
There are very few traders who can make this kind of return, even during the most spectacular runaway bull market. And to earn this money in your house, all you have to do is sleep in it at night.
6) The Tax Breaks are Great
The mortgage interest on loans up to $750,000 million is deductible on your Form 1040, Schedule “A” with a $10,000 limitation.
You can duck the capital gains entirely if the profit is less than $500,000, you’re married and lived in the house for two years or more.
Any gains above that are taxed at only a maximum 20% rate. These are the best tax breaks you can get anywhere without being a member of the 1%. Profits can also be deducted on the sale of a house if you buy another one at the equivalent value within 18 months.
7) Job Growth is Good and Getting Better
The monthly Non-Farm Payroll reports are averaging out at about 150,000 a month. As long as we maintain this level or higher, enough entry-level homeowners are entering the market to keep prices rising.
And you know those much-maligned millennials? They are finally starting to have kids, need larger residences, and are turning from renting to buying.
8) There is No Overbuilding Anywhere
You know those forests of cranes that blighted the landscape in 2006? They are nowhere to be seen.
The other signs of excess speculation, liars’ loans, artificially high appraisals, and rapid flipping no longer exist. Much of this is now illegal, thanks to new regulations.
No bubble means no crash. Prices should just continue grinding upwards in a very boring, non-volatile way.
9) Foreign Capital is Pouring In
The problem has become so endemic that the US Treasury is demanding proof of beneficial ownership on sales over $2 million to get behind shell companies and frustrate money laundering and tax evasion.
Remember, they are fleeing negative rates at home.
US real estate has become the world’s largest high-yield asset class.
So, the outlook is a petty rose for individual homeownership in the foreseeable future.
Just don’t forget to sell by 2030.
That is when the next round of trouble begins.
For Sale