“This could be the beginning of the end of the bond market,” said my friend, the legendary hedge fund manager, David Tepper.
Global Market Comments
April 23, 2024
Fiat Lux
Featured Trade:
(WHY MOST SPAC’S ARE A SCAM)
(DJT), (PSTH), (SPAK), (NKLA)
I have been watching with some amusement the trading of the Trump Media & Technology Group (DJT).
After the IPO was issued in 2023, it soared to $130, then collapsed to $15. It has just completed another round trip, plunging 50% over the last month. This is for a company that posted a horrific $58 million loss in 2023. In no way can that support a $5 billion market cap at the current $22 share price unless it’s the next AI stock we don’t know about. (DJT) has become the latest meme stock.
So many hedge funds have lined up to sell that the borrowing costs have skyrocketed to an incredible 550%. (DJT) has become the latest meme stock. The former president owns 60% of the shares. Accusations of insider trading and fraud are rife. If the former president loses the election, goes to jail, or dies as a result of his unhealthy lifestyle (he’s 50 pounds overweight) the shares become worthless. In other words, it’s a stock that no professional investor would touch with a ten-foot pole.
Every investment bubble creates its special instruments of self-destruction and this one is no different.
There were highly touted leveraged commodity and gold funds during the seventies, portfolio insurance during the eighties, money-losing tech companies with lots of “eyeballs” in the nineties, and subprime lending in the 2000s.
In this cycle, we have the Special Purpose Acquisition Companies, otherwise known as “SPACs.”
The goal of a SPAC is to raise money first on some generalized investment theme, and then merge with a target company to achieve those goals. This allows companies to go public while skipping most disclosure requirements.
SPACs have their advantages for some people. It enables start-up companies with no track record or earnings to go public faster without the costs and regulatory scrutiny of the burdensome public IPO process. Promoters promise to get investors into the next Amazon (AMZN) or Facebook FB) early.
Easier said than done.
Some $162 billion was raised for SPACs in 2021 followed by a much more modest $15 billion in 2022 and $125 million in 2023. The largest has been hedge fund manager Bill Ackman’s Pershing Square Tontine Holdings Ltd. (PSTH) at $4 billion. There is even a SPAC for SPACs, the Defiance Gen SPAC Derived ETF (SPAK).
The performance of SPACs so far has been dismal. There have been 915 SPACs created since 2015. Only 93 managed to invest their funds in a target company and only 29 of those have produced a profit. This was during one of the greatest runaway bull markets of all time.
You would have done better to simply buy the cheapest Vanguard index funds or 90-day T-bills. In the meantime, the issuers of SPACs for the most part became wealthy.
The quality of the management who had stepped forward to run SPACs has been mixed at best, including Ackman himself, who recently ran two gargantuan money-losing years back to back. They include former House Speaker Paul Ryan and NBA Hall of Famer Shaquille O’Neil, not exactly known as financial wizards.
Then there’s Nikola (NKLA), an electric/hydrogen vehicle company that has promised to take on Elon Musk, unfazed by the complete lack of a functioning vehicle. These shares have cratered by 92% since their market peak among multiple fraud allegations aimed at the founder.
The risks and limitations of SPACs are legion. You are essentially betting on the good faith and judgment of a single individual unmoored by any filings with the SEC. There are no guarantees they can achieve anything. These disclosures to the government are there to protect you. Without them, you are swimming without a swimsuit.
The conflicts of interest are enormous. SPAC issuers get to buy the equivalent of call options on their funds at deep discounts prior to the issue. When issuers make fortunes overnight with little money upfront, you want to run a mile.
And here is the big problem with SPACs. They are essentially roach motel investments, easy to check in but impossible to check out. Liquidity going in is unlimited but coming out is nil. You can often only redeem your investment at a huge discount, or if another buyer is willing to take out at any price. That makes marks to market challenging at best.
Investors that buy SPACs are giving up all the protections of SEC protections for much higher risks and lower returns.
Suffice it to say that if PT Barnum were working in the financial markets, he’d be up to his eyeballs with SPAC offerings.
Personally, I’ll give them a pass. You should too.
The Problem is that it’s a Dummy
"If there were no way to short stocks, the probability of stock market bubbles would be much greater," said hedge fund manager, Bill Ackman, of Pershing Square.
Global Market Comments
April 22, 2024
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or FACING HARSH REALITY)
($VIX), (FCX), (XOM), (WPM), (GLD), (TLT), (FCX), (NVDA), (JNK), (META), (MSFT), (TSLA), (HYG), (NFLX), (OXY), (XOM), (USO)
There comes a time in every trader’s life when it’s time to face harsh reality and admit that you’re just dead wrong.
As much as I thought a I had strong case for the best stocks to move sideways before continuing their upward drive, the markets decided otherwise. One thing I have learned over my half-century of trading is that you never argue with Mr. Market. He is always right.
So it was with some dismay that on Friday, I watched NVIDIA (NVDA) shares slice through its 50-day moving average at $840 like a hot knife through butter putting the shares into a free-fall. Virtually the next print was the low of the day at $760, down 10% on the day.
There was no new news about (NVDA). Its prospects look as bright as ever, and there are a series of conferences of earnings reports over the coming month to remind us of that. But sometimes, the market just doesn’t care.
(NVDA) has had a great run, up some 144% since October. During this time, I executed a dozen profitable long-side trades. But when you’re that aggressive you know in advance that the last trade is going to kill you and that is the case today. (NVDA) is falling because of the sheer weight of its price.
New flash: while (NVDA) is still the cheapest big tech stock in the market, cheap stocks can get cheaper as we all know.
With the advantage of 20/20 hindsight, I should have been paying more attention to the Magnificent Seven 50-day moving averages which have been falling like dominoes. First went Tesla (TSLA) in February and Apple in March. The S&P 500 (SPY) gave it up on Monday and Microsoft (MSFT) on Wednesday. Amazon (AMZN), (META), and (NVDA) were the last to go on Friday.
Sure you can blame the April 19 option expiration when traders were loaded to the hilt with expiring longs with all these stocks they had to dump. The dreaded month of May, when traders go to die, and the summer doldrums are just two weeks away. Algorithms poured gasoline on the fire exaggerating the moves, as they always do. But still, wrong is wrong.
And there’s my mea culpa for 2024. I am human after all. I’m not right all the time, I just act like it. If the horrific market action last week has one silver lining, it’s that it sets up the next great trades, for which there will be many. With my Mad Hedge AI Market Timing Index down to a lowly 31 that may not be far off.
Your next question is “How far down is down?” In the worst-case scenario, the 200-day moving average is in play for all of these. That is pegged at $463 for the S&P 500, $569 for (NVDA), $377 for (MSFT), $150 for (AMZN), and $308 for (META). (AAPL) and (TSLA) already lost their 200-days a long time ago. In other words, the market is in the process of giving up all its 2024 gains and then some.
Sure, the 200 days are all rising sharply so it's unlikely we’ll hit these dire numbers. Still, it's best to prepare your boss for the worst and then let serendipity work its magic.
Remarkably, my commodity and precious metal stocks, where I had eight of ten long positions, stuck to the script and moved sideways instead of down. If you throw bad news on a stock and it refuses to fall, you buy the hell out of it. So that will be my next move in the market, once I clean all the mud off my face and pull the arrows out of my rear.
Those of us who have been trading gold for a long time, I’ve been doing it for 50 years and 60 if you count the Kennedy silver dollars I collected, will tell you that this new bull market in the barbarous relic is a very strange one.
None of the traditional factors that drive gold up are present. Interest rates have lately been rising, not falling. ETF financial demand fell all last year, and much of that money was diverted to Bitcoin. Retail demand, especially from Asia, has also been falling off a cliff. Gold miners have in no way been leading the price of the yellow metal because of their excess leverage as they usually do. But gold has seen a 34% rally off the October low.
Go figure.
It turns out that central bank buying has increased dramatically, especially from China, enough to offset all the other no-shows. The conflict in the Middle East is also drawing in more flight to safety demand. The good news is that the Chinese buying will continue. The bad news is that this might be a precursor to the invasion of Taiwan as it flees the Western financial system.
What does all this mean? When the traditional demand for gold returns, interest rates, ETFs, and retail, the price of gold will move a lot higher. The barbarous relic can easily reach $2,800 this year and possibly $3,000. The miners will play catch up. Buy (GLD) on dips and silver (SLV) as well, which has a lot of catching up to do.
I just thought you’d like to know.
So far in April, we are down a heartbreaking -6.69%. My 2024 year-to-date performance is at +14.47%. The S&P 500 (SPY) is up +2.68% so far in 2024. My trailing one-year return reached +33.69% versus +29.71% for the S&P 500.
That brings my 16-year total return to +676.63%. My average annualized return has recovered to +50.94.
Some 63 of my 70 round trips were profitable in 2023. Some 20 of 28 trades have been profitable so far in 2024.
I stopped out of my long in Tesla last week at cost, expecting further downside, which happened. A week early the position had been at max profit. I let my April longs expire at a max profit on April 19 in Freeport McMoRan (FCX), Occidental Petroleum, ExxonMobile (XOM), Wheaton Precious Metals (WPM), and Gold (GLD).
That leaves me with my remaining May longs in (TLT) and (FCX) a double long in (NVDA) and 60% in cash.
Volatility Index ($VIX) Hits Six-Month High, on threats of a New Iran War, Oil Supply Cut-offs, and topping stocks. It’s been a long and dry desert crossing, but we are finally back to reach the $20 handle. The volatility trade is back. For a double bonus, the Mad Hedge Market Timing Index also dropped below 50 for the first time since October. Options traders will love it!
Junk Bonds See Biggest Outflows in a Year, as the Federal Reserve’s hawkish approach to inflation makes investors wary, sending yields soaring to 6.33%. Yields won’t peak until the Fed actually cuts rates. Buy (JNK) and (HYG) on dips.
Netflix (NFLX) Adds 9.33 Million New Subscribers, nearly double analyst forecasts, including my five kids who aren’t allowed to share my password anymore. But the shares dropped on weak Q2 guidance. Netflix has rebounded from a slowdown in 2021 and 2022 to grow at its fastest rate since the early days of the coronavirus pandemic. That is due in large part to its crackdown on people who were using someone else’s account. The company estimated more than 100 million people were using an account for which they didn’t pay.
Mortgage Rates Top 7.0% for the first time in 2024, adding dead weight to the housing market. Most borrowers are now taking out adjustable 5/1 ARMS and then praying for a Fed rate cut later this year.
Existing Home Sales Dive by 4.3% in March to 4.19 million units on a sign-contract basis. Inventories rose 4.47% to a 3.2-month supply, up 14% YOY. The median price of an existing home sold in March was $393,500, up 4.8% from the year before. Regionally, sales fell everywhere except in the North, where they rose 4.2% month-to-month. Sales fell hardest in the West, down 8.2%. Prices are highest in the West.
Housing Starts Plunge, down 14.5% in March. Permits for future construction of single-family houses fell to a five-month low. Residential investment rebounded in the second half of 2023 after contracting for nine straight quarters, the longest such stretch since the housing market collapse in 2006. But the recovery appears to be losing steam.
China Surprises with Q1 GDP Growth at 5.3%, but who knows how real these numbers really are? They don’t line up with individual data like international trade. Peak China is behind us. Avoid (FXI).
Tariff Wars Heat Up, US President Joe Biden is threatening China again, and this time he wants to triple the China tariff rate on steel and aluminum imports. On Wednesday, the president will visit the United Steelworkers headquarters in Pittsburgh and has vowed his saber-rattling is not just empty threats. His rhetoric on China could make relations between the US and the Middle Kingdom that much frostier as we enter into the heart of the US election race.
Biden Boosts the Cost of Alaska Oil Drilling Leases, from $10,000 to $160,000, the first increase since 1920. There is also a bump in the royalty on extracted oil, from 12.25% to 16.27%. The government is no longer giving away oil found on its land for free. Coddling of the oil companies is over. Oil companies will no longer bid for cheap oil leases with the intention of sitting on them for decades. The US is currently the largest oil (USO) producing country in history at 13 million barrels/day and hardly needs any subsidies, which date back to the Great Depression. Buy energy stocks on dips, like (XOM) and (OXY), which are posting record profits.
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 800% 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, April 22, at 7:00 AM EST, the Chicago Fed National Activity Index is announced.
On Tuesday, April 23 at 8:30 AM, New Home Sales are released.
On Wednesday, April 24 at 2:00 PM, Mortgage applications come out.
On Thursday, April 25 at 8:30 AM, the Weekly Jobless Claims are announced.
On Friday, April 26 at 8:30 AM, Consumer Expectations. At 2:00 PM, the Baker Hughes Rig Count is printed.
As for me, I spent a decade flying planes without a license in various remote war zones because nobody cared.
So, when I finally obtained my British Private Pilot’s License at the Elstree Aerodrome, home of the WWII Mosquito twin-engine bomber, in 1987, it was cause for celebration.
I decided to take on a great challenge to test my newly acquired skills. So, I looked at an aviation chart of Europe, researched the availability of 100LL aviation gasoline in Southern Europe, and concluded that the farthest I could go was the island nation of Malta.
Caution: new pilots with only 50 hours of flying time are the most dangerous people in the world!
Malta looms large in the history of aviation. At the onset of the Second World War, Malta was the only place that could interfere with the resupply of Rommel’s Africa Corps, situated halfway between Sicily and Tunisia. It was also crucial for the British defense of the Suez Canal.
So, Malta was mercilessly bombed, at first by Mussolini’s Regia Aeronautica, and later by the Luftwaffe. By April 1942, the port at Valletta became the single most bombed place on earth.
Initially, Malta had only three obsolete 1934 Gloster Gladiator biplanes to mount a defense, still in their original packing crates. Flown by volunteer pilots, they came to be known as “Faith, Hope, and Charity.”
The three planes held the Italians at bay, shooting down the slower bombers in droves. As my Italian grandmother constantly reminded me, “Italians are better lovers than fighters.” By the time the Germans showed up, the RAF had been able to resupply Malta with as many as 50 infinitely more powerful Spitfires a month, and the battle was won.
So Malta it was.
The flight school only had one plane they could lend me for ten days, a clapped-out, underpowered single-engine Grumman Tiger, which offered a cruising speed of only 160 miles per hour. I paid extra for an inflatable life raft.
Flying over the length of France in good weather at 500 feet was a piece of cake, taking in endless views of castles, vineyards, and bright yellow rapeseed fields. Italy was a little trickier because only four airports offered avgas, Milan, Rome, Naples, and Palermo. Since Italy had lost the war, they never experienced a postwar aviation boom as we did.
I figured that if I filled up in Naples, I could make it all the way to Malta nonstop, a distance of 450 miles, and still have a modest reserve.
Flying the entire length of Italy at 500 feet along the east coast was grand. Genoa, Cinque Terra, the Vatican, and Mount Vesuvius gently passed by. There was a 1,000-foot-high cable connecting Sicily with the mainland that could have been a problem, as it wasn’t marked on the charts. But my US Air Force charts were pretty old, printed just after WWII. But I spotted them in time and flew over.
When I passed Cape Passero, the southeast corner of Sicily, I should have been able to see Malta, but I didn’t. I flew on, figuring a heading of 190 degrees would eventually get me there.
It didn’t.
My fuel was showing only a quarter tank left and my concern was rising. There was now no avgas anywhere within range. I tried triangulating VORs (very high-frequency omnidirectional radar ranging).
No luck.
I tried dead reckoning. No luck there either.
Then I remembered my WWII history. I recalled that returning American bombers with their instruments shot out used to tune in to the BBC AM frequency to find their way back to London. Picking up the Andrews Sisters was confirmation they had the right frequency.
It just so happened that buried in my pilot’s case was a handbook of all European broadcast frequencies. I looked up Malta, and sure enough, there was a high-powered BBC repeater station broadcasting on AM.
I excitedly tuned in to my Automatic Direction Finder.
Nothing. And now my fuel was down to one-eighth tanks and it was getting dark!
In an act of desperation, I kept playing with the ADF dial and eventually picked up a faint signal.
As I got closer, the signal got louder, and I recognized that old familiar clipped English accent. It was the BBC (I did work there for ten years as their Tokyo correspondent).
But the only thing I could see were the shadows of clouds on the Mediterranean below. Eventually, I noticed that one of the shadows wasn’t moving.
It was Malta.
As I was flying at 10,000 feet to extend my range, I cut my engines to conserve fuel and coasted the rest of the way. I landed right as the sun set over Africa.
While on the island, I set myself up in the historic Excelsior Grand Hotel. Malta is bone dry and has almost no beaches. It is surrounded by 100-foot cliffs. I paid homage to Faith, the last of the three historic biplanes, in the National War Museum in Valetta.
The other thing I remember about Malta is that CIA agents were everywhere. Muammar Khadafy’s Libya was a major investor in Malta, recycling their oil riches, and by the late 1980s owned practically everything. How do you spot a CIA agent? Crewcut and pressed, creased blue jeans. It’s like a uniform. What they were doing in Malta I can only imagine.
Before heading back to London, I had to refuel the plane. A truck from air services drove up and dropped a 50-gallon drum of avgas on the tarmac along with a pump. Then they drove off. It took me an hour to hand pump the plane full.
My route home took me directly to Palermo, Sicily to visit my ancestral origins. On takeoff to Sardinia, wind shear flipped my plane over, caused me to crash, and I lost a disk in my back.
But that is a story for another day.
Who says history doesn’t pay!
Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
“Faith”
The Andrews Sisters
Spitfire
Grumman Tiger
There is growing evidence that China is starting to recover. If that happens, it is going to restart the entire global manufacturing cycle. Emerging markets have been the missing link for the entire year,” said Jim Paulsen, formerly the chief investment strategist of Wells Capital Management.
Global Market Comments
April 19, 2024
Fiat Lux
Featured Trade:
(THE SEVEN WORST FINANCIAL MISTAKES THAT RETIREES MAKE)
A significant proportion of my Mad Hedge subscribers are either retired or are about to do so. I have therefore gained a lot of valuable information about how retirees can best manage their financial resources, as well as the worst mistakes they commit, which I thought I might pass on.
I have also learned a lot by researching my retirement, not that it will ever happen, but it’s nice to know what choices are out there. So, let me get on with the show.
1) Spend Like There’s No Tomorrow
Because there might not be a tomorrow. We all had parents who suffered through the Great Depression, so Baby Boomers (those born between 1946 and 1962) are inveterate savers. They continue saving well after they retire, beyond any need to do so.
The cruel fact is that after the age of 80, it becomes physically impossible to do any expensive international travel. If you don’t believe me, try slinging some 50-pound suitcases onto a train in the three-minute window you’re allowed to board amid a teeming mass of other passengers.
This is where the “4% Rule” kicks in. You should be spending, not saving 4% of your assets every year to support your lifestyle. If you don’t retire until the mandatory Social Security payout year of 72 that’s enough to last until you’re 97. After that, you become the responsibility of your children, your grandchildren, your great-grandchildren, or the state. Note: you have only a 2.68% chance of making it to 97.
I had four aunts who lived to over 100. Believe me, it’s no fun. You can’t see or hear, taste your food, or have sex. You need full-time care. And your kids start to die off. That’s not for me. I have told my kids that if I ever reach that stage, take me on a long walk on a short pier and then pour my ashes into Lake Tahoe.
2) Invest Like a Retiree, not a 25-Year-Old
I have seen a number of my friends and clients completely change their investment styles once they quit work. Once they have all the time in the world to trade, they become more aggressive and overtrade. They take on more risks than they can handle.
They also subscribe to other newsletters that lead them into disastrous strategies, like naked put selling at market tops. As a result, they morph from money makers to money losers, right when they can least afford to do so.
3) Not Claiming Social Security
Incredible as it may seem, some retirees don’t claim the Social Security benefits they deserve. This happens because they think that the amounts will be too small to be worth the trouble, they forget, or they think Social Security is already bankrupt, a common Internet conspiracy theory.
Social Security will allow you your senior moment and let you apply for benefits up to the age of 72 ½ and still get your full benefits. In my case, I applied at the last possible moment and the Feds promptly sent me a check for $18,000. After that, you will lose them. Assuming you paid the maximum amount in Social Security taxes during your life you should receive around $36,000 a year. This is indexed for inflation, with the 2023 payout rising by a generous 8.7%. Add this up over 20 years of compounding and the total benefits can reach millions of dollars. As I tell my friends, you paid for it and deserve it, so take it.
4) Borrowing
One of the dumbest things I have seen retirees do is take out high-interest loans when they don’t need to. They do this by running up big credit card balances at 27% a year, coddling the above-errant kids, buying the above-mentioned boat or plane, or picking up a second home where the fire or flood insurance is higher than the mortgage payment.
The best investment you can make is to pay off your own debt, reduce your leverage, and eliminate nontax deductible interest payments. As a retiree, your life is about getting simpler, not more complex. My sole exception to this rule is if you are one of the millions who received a Covid Era 30-year government subsidized loan with an interest rate near the long-term average inflation rate of 3%. I don’t mind going to the grave (or the lake) owing the government a few bucks.
5) Don’t Coddle Your Children
While I was in New York working for Morgan Stanley during the 1980s, I had a lot of free time on my hands during the day because the Tokyo market didn’t open until 8:00 PM local time. So, the higher-ups handed me a lot of odd jobs. I taught an international economics course at Princeton, where I met Game Theory Nobel Prize winner John Nash. I took clients from obscure places like Kansas and Arkansas (The Walls of Wal-Mart fame) to lunch at Windows of the World at the top of the old World Trade Center.
I also was called to help out the kids of our largest clients. It seems becoming a billionaire takes a lot of time and there is certainly no time to raise your kids. They tried to atone for this lapse by giving their kids anything they wanted when they attained adulthood.
I ended up arranging cushy jobs, setting up meetings with politicians in Washington, scouting out Manhattan penthouse apartments, obtaining the best theater tickets, and even bailing some out of jail. I drew the line at buying drugs.
Over time, I observed that this excess coddling ruined these kids’ lives. They never developed careers, at best picking up expensive hobbies (like racing cars or falconry). They never learned financial responsibility, often investing in the failing startups of college buddies. Not a few died of drug overdoses.
The best favor you can do your kids is to train them well, invest in their education, provide a good role model, and let them stand on their own two feet. I have told my own kids that I plan to spend every penny I have and hope that the check to the undertaker bounces. If there’s any money left over it’s an accident.
6) Dial Back Your Lifestyle
Remember that you are not Jeff Bezos or Elon Musk, the richest man in the world. Match your lifestyle to your income. A friend of mine once told me that when he retired, suddenly everything became expensive. Writing this from Florida I can’t but notice the vast number of boats, which a friend described as “A hole in the water you throw money into.” Many of these are parked in a long-term mooring with barnacle-encrusted hulls because the owners can’t afford to sail them. I was a victim for many years of aircraft ownership, a “Hole in the sky you throw money into.” At least I could write these off as unreimbursed business expenses and claim the accelerated depreciation. The best case is to have a rich friend and borrow his boat. They’re usually unused.
7) How much is Enough?
I have surveyed many of my hedge fund friends as to the minimal amount of money needed to retire comfortably and the number of $10 million keeps coming up. That covers the 20% of any surprise medical expenses that Medicare won’t pay, $50,000 in the case of open-heart surgery. Sure, you could go to Mexico or Belize for much cheaper health care as I have seen many do but, that wouldn’t be MY first choice.
Other surveys put the minimum retirement number at $1.46 million, and 40% more if you live in California. But remember, even if you own your home outright, home ownership costs are skyrocketing, such as for insurance, association fees, utilities, and repairs. The world is changing, and you need to bank for the unexpected.
Send me Your Suggestions
I have great confidence in the ability of my subscribers to make mistakes and blow money. After all, I make them so why shouldn’t they? So, if you have any additional suggestions to the above, I’m all ears. Please email them in. I can make this a recurring piece which I update for the next 25 years.
Good Luck and Good Trading
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
A Friend’s Boat
“We are one budget deal away from being the hot spot of the world. Europe is in the toilet, China’s growth has fallen down, and the Middle East is going backwards. We have a lot of potential for fracking and innovation. If we can prove our nation is governable, we will be the golden spot in the world,” said David Brooks, a conservative columnist for the New York Times.