There was probably no more broken promise in the investment world over the last several years than that energy master limited partnerships (MLPs) would hold up even if the price of oil fell.
These guys were toll takers, it was said, and profited from the volume of crude pumped through their pipelines. The price of oil was somebody else’s problem.
In any case, double-digit yields would provide more than ample support in any kind of sell-off.
It didn’t quite work out like that.
Once the price of Texas tea (USO) began its plunge in 2014 from $107 to negative $37 at the pandemic low, any investment tarred with an oil connection got slaughtered.
It was the classic flash fire in the movie theater.
Bids for MLP’s vaporized.
Making matters worse is that many retail investors bought highly leveraged MLPs on margin, turning 10% yields into 20% ones. When the sushi hit the fan, it didn’t take long for those positions to go to zero.
Most of the leveraged plays went bankrupt or were unwound in a variety of creative ways with enormous losses.
I always find it a useful exercise to sift through the wreckage of past investment disasters. Not only are there valuable lessons to be learned, but sometimes great trades emerge.
I have been doing that lately in the energy sector, a hedge fund favorite these days, and guess what?
MLPs are back. And no, I’m not talking about the Maui Land and Pineapple Company (MLP) (yes, there is such a thing!).
But these are not your father’s MLPs.
Let me start with my investment thesis.
It is always better to invest in an asset class that has its crash behind it (energy) than ahead of it (the US dollar).
And let’s face it, the final bottom for oil this year at $68 is in.
We may bounce around a bottom for a while as recession fears prevail. But eventually, I expect a global synchronized economic recovery to take it sustainably higher, $100 a barrel or better.
And while I have never been a fan of OPEC, they are showing rare discipline in honoring the production quotas negotiated in November.
That eliminates much of the downside from MLPs and makes it one of the more attractive risk/reward trades out there.
Except that this time it’s different.
Thanks to hyper-accelerating technology (yes, there’s that term again), new wells employ a fraction of the labor of the old ones and are therefore more profitable.
That means they can function, and even prosper, with a much lower oil price.
The surviving MLPs are now a much better quality investment.
Balance sheet quality has improved as a result of deleveraging in the last 14-18 months, and the worst of the rating downgrade cycle is likely behind us.
Importantly, some $50 billion‒$60 billion of growth opportunities for MLPs are expected during FY2024-2025.
That makes the industry one of the great secular growth stories out there today.
As an old fracker myself, I can tell you that the potential of the revolutionary new technology has barely been scratched.
Thanks to technology that is improving by the day, Saudi Arabia’s worth of energy reserves remains to be exploited, potentially turning the US into an energy-exporting powerhouse as the world’s largest producer at 13 million barrels a day.
Industry experts expect MLP distributions to grow by 3%‒5% annually over the coming years. Few other industries can beat this.
That means avoiding upstream Exploration and Production companies; where there is still a ton of risk, and placing your bets on midstream companies that operate pipelines.
And by midstream, I don’t just mean pipelines but also processing facilities for natural gas liquids and storage and terminal facilities.
You especially want to look at companies with high barriers to entry and attractive assets in high-growth and low-cost production regions. I’m all about big moats (see (NVDA)).
Companies with a sustainable cost advantage, operated by experienced management with proven geological are further pluses.
MLPs also stack up nicely as a diversifier for your overall portfolio.
Over longer time periods, MLPs have generated similar returns to equities, with similar to slightly higher levels of volatility.
Historically they have traded at lower yields than high-yield bonds, but currently, they are yielding 150 basis points more.
And now for the warning labels.
This is not a new story.
As you can see from the charts below, MLPs have been rallying hard since oil bottomed at the pandemic low in April 2020.
And if my oil forecast is wrong and we plumb new generational lows once again, investment in this sector will suffer.
Still, with yields in the 7%-10% range, a certain amount of pain is worth it.
Still interested?
Take a look at the Alerian MLP ETF (AMLP) (7.36%) and the Global X MLP Energy Infrastructure ETF (MLPX) (4.91%), Western Midstream Partners (WES) (9.20%), and Energy Transfer LP (ET) (7.96%).
Global Market Comments
May 21, 2024
Fiat Lux
Featured Trade:
(TESTIMONIAL)
(UPDATE ON THE (WPM) JANUARY 17, 2025 $42-$45 LEAPS)
Those were really great trade that just expired, the longs in gold (GLD) and silver (SLV) and the short in Microsoft (MSFT). I made some good money. Thankyou. Enjoy the weekend.
Richard
Fitchburg, Wisconsin
Standing Astride the Equator in Ecuador
For those of you fortunate enough to get into the January 17, 2025 $42-$45 vertical bull call debit spread LEAPS when I first recommended them ten months ago on July 25, 2023, you are now at 71% of your maximum potential profit. That means the LEAPS you bought for $1.40 last year is now worth $2.60, a gain of 85.71%.
If you are an active trader, you may want to take profits on the massive 20% rise in silver over the past 10 days. Metal producers are unable to rush supplies to the market fast enough to cover their shorts in the futures market, creating a massive short squeeze. These are conditions that most silver investors only dream about.
Long may it continue.
If you are cash-heavy, you may want to run this position eight more months into the January 17, 2025 option expiration and capture the full 114% profit over a total of 18 months. As long as silver prices stay over $45, this will be a big win.
For those new to the service, please find the full text of the July 25, 2023 trade alert below.
Mad Hedge AI
Trade Alert - (WPM) – BUY
BUY the Wheaton Precious Metals (WPM) January 2025 $42-$45 out-of-the-money vertical Bull Call spread LEAPS at $1.40 or best
Opening Trade
7-25-2023
expiration date: January 17, 2025
Number of Contracts = 1 contract
It's easy to see why AI picked this trade.
Look at the chart below and you see a perfect inverse head and shoulders in place. There is also a golden cross setting up in a month or so, with the 50-day moving average charging towards to 200-Day.
AI knows that human buyers love these things.
The entire interest rate-sensitive sector has been walloped over the last three months over fears that the Fed will keep interest rates higher for longer. That is now in the price of the gold miners.
This position is a bet that our nation’s central bank will embark on a path of interest rate CUTS sometime in the next 18 months. And the shares of Barrack Gold (GOLD) only have to return to where they were in March for the position to hit max profit.
While the chance of winning a real lottery is something like a million to one, this one is more like 10:1 in your favor. And the payoff is a double in little more than a year. That is the probability that (WPM) shares will rise over the next 18 months.
The logic behind this LEAPS is fairly simple.
After keeping interest rates too low for too long, then raising them too far too fast, what does the Fed do next? It then lowers interest rates too far too fast. In other words, a mistake-prone Jay Powell will keep on making mistakes. That’s what you get with a Fed chair who only has a degree in political science.
The rate of interest rate rises has been the most rapid in history and is possibly going to trigger a modest recession by the end of 2023. When the recession hits, demand for money will dry up and interest rates will collapse. Yields on ten-year US Treasury bonds that bottomed at 0.32% in 2020 and reached a peak of 4.46% in October will easily fall back down to 2.50% by the time this LEAPS matures.
And guess which asset class is one of the most sensitive to falling interest rates? That would be precious metals, especially gold. A drop in interest rates of this magnitude should allow the price of Barrick Gold to double. That’s where we were in March of 2021 when (GOLD) traded at $30.
Another factor driving down interest rates is the fact that the US government budget deficit is shrinking at the fast rate in history, down from $3 trillion to $1.5 trillion in the past year. A shrinking supply of bonds brings higher bond prices and lower interest rates.
I am therefore buying the Wheaton Precious Metals (WPM) January 2025 $42-$45 out-of-the-money vertical Bull Call spread LEAPS at $1.40 or best.
Don’t pay more than $1.80 or you’ll be chasing on a risk/reward basis.
During bull markets in precious metals, silver historically rises 2.5 faster than gold.
Wheaton Precious Metals Corp is a Canadian multinational precious metals streaming company. It produces over 26 million ounces and sells over 29 million ounces of silver mined by other companies (including Barrick Gold and Goldcorp) as a by-product of their main operations.
The silver (WPM) has agreed to purchase is in Mexico (40%), Portugal (20%), USA (10%), Chile (9%), Peru (9%), Argentina (7%), Sweden (4%), Greece and Canada (about 1%). (WPM) doesn't own or operate the mines but the contracts it has with their owners give it full access to any silver (gold at the Minto Mine) mined there. For more about Wheaton Precious Metals (WPM), please visit their website by clicking here.
Please note that these options are illiquid, and it may take some work to get in or out. Executing these trades is more an art than a science.
Let’s say the Wheaton Precious Metals (WPM) January 2025 $42-$45 out-of-the-money vertical Bull Call spread LEAPS are showing a bid/offer spread of $1.00-$2.00, which is typical. Enter an order for one contract at $1.20, another for $1.30, another for $1.40, and so on. Eventually, you will enter a price that gets filled immediately. That is the real price. Then enter an order for your full position at that real price.
A lot of people ask me about the appropriate size. Remember, if the (WPM) does NOT rise by 4.12% in 18 months, the value of your investment goes to zero. The way to play this is to buy LEAPS in ten different names. If one out of ten increases ten times, you break even. If two of ten work, you double your money, and if only three of ten work, you triple your money.
You never should have a position that is so big that you can’t sleep at night, or worse, need to call John Thomas asking if you should sell at a market bottom.
There is another way to cash in. Let’s say we get half of your 4.12% in the next six months, which from these low levels is entirely possible. Then you could earn half of the maximum potential profit in months. You can decide whether to keep the threefold return or go for the full ten bagger. It’s a nice problem to have.
Notice that the day-to-day volatility of LEAPS prices is miniscule since the time value is so great. This means that the day-to-day moves in your P&L will be small. It also means you can buy your position over the course of a month just entering new orders every day. I know this can be tedious but getting screwed by overpaying for a position is even more tedious.
Look at the math below and you will see that a 4.12% rise in (GOLD) shares will generate a 114% profit with this position, such is the wonder of LEAPS.
Only use a limit order. DO NOT USE MARKET ORDERS UNDER ANY CIRCUMSTANCES. Just enter a limit order and work it.
This is a bet that the (WPM) will not fall below $45 by the January 17, 2025 option expiration in 18 months.
Here are the specific trades you need to execute this position:
Buy 1 January 2025 (WPM) $42 calls at………….………$9.00
Sell short 1 January 2025 (WPM) $45 calls at…….……$7.60
Net Cost:………………………….………..…........……….….....$1.40
Potential Profit: $3.00 - $1.40 = $1.60
(1 X 100 X $1.60) = $160 or 114% in 18 months.
“Gold is my cash. Over the long term it is not the best investment. But when you are having a monetary crisis it should be part of every portfolio,” said hedge fund legend, Ray Dalio of Bridgewater Associates.
Global Market Comments
May 20, 2024
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or DOW 40,000 AND HANGING WITH THE AMAZON HEADHUNTERS)
(TLT), (JNK), (WES), (ET), (GLD), (SLV), (MSFT),
(NVDA), (AAPL), (SPY), (FXI), (COPX), (FCX)
When I entered the stock market in 1982 when the Dow was at 600 and you told me the Average would reach 40,000 in 42 years, I would have thought you delusional, out of your mind, and stark raving mad.
Yet, here it is 2024 and here we are, with the index up an eye-popping 66.6 times. The good news is that we are now only one triple away from reaching my long-term target of 120,000. Never underestimate the power of compounding, which my friend Warren Buffet describes as a snowball.
You can’t help but be impressed with the performance of precious metals over the last two weeks, up 6.50% for (GLD) and a ballistic 20% for (SLV). Metals producers are unable to rush supplies to the market fast enough to cover their shorts in the futures market, creating a massive short squeeze.
Long may it continue.
The moves validate my own forecasts for the barbarous relic to hit $3,000 and the white metal to reach $50 sometime in 2025.
One cannot underestimate the power of the weakening economic data over the last fortnight. As a result, we have gone from “Higher for longer” to “Lower sooner”, with huge consequences for all asset classes.
That brings to the fore investment in fixed-income securities. There are two ways to make money on a fixed income. Coupon interest rates are still at historically high levels. And as rates fall, fixed-income prices rise, opening the door to capital gains, which could reach 10%-20% in the coming year.
The fixed-income market, at $100 trillion is double the size of the stock market. And there are many more bond listings than stock ones. So the number of possible investments is almost endless. I shall give you a brief overview of some of the more interesting subsectors.
US Government bonds – are the gold standard with a guaranteed return. But you pay for the extra security with lower rates; the current ten-year US Treasury bond yield is 4.42%, much lower than the present 90-day T-bill of 5.25%. The easiest way to buy these is through the (TLT). The 30-year government bond should be avoided as the extra 0.14% in yield doesn’t adequately compensate you for the extra 20 years of risk
Junk Bonds – Also known as “high yield” bonds have always been misnamed. The default rates never remotely approached the levels that justified their high yields, not even during the financial crisis, as my old friend former junk bond king Michael Milliken has amply proven. The (JNK) is currently yielding 6.59% and has the potential for larger capital gains than government bonds.
Master Limited Partnerships – These are partnerships granted generous tax benefits with the goal of producing oil. They issue annual Form K-1’s to include with your tax return. Dividends are deferred until the MLP’s investment reaches the end of its useful lives, which can be decades. MLP’s used to be a huge industry with dozens of listed companies.
When the price of oil went to negative numbers during the pandemic, most of them got wiped out. Because of this rocky past, there are a handful of large, well-capitalized MLP’s that with extremely high yields. One is Western Midstream Partners (WES) with a 9.20% yield. Energy Transfer Partners (ET) pay a 7.96% yield.
These yields will remain safe as long as oil prices are stable or rising, as I expect in a long-term global economic recovery. Take oil back to zero again in another pandemic and these returns will get turned on their head.
With the normalizing of interest rates, it's time to normalize investment strategies as well. That means bringing back the old 60/40 strategy where one half of the portfolio ensures the other, with a modern twist. You can put 60% of your assets in stocks, with half on technology and half on domestic cyclicals.
The other 40% should be allocated to some mix of the above fixed-income investments guaranteeing annual high returns. In not a bad strategy for mature investors, especially if they would rather be on a golf course instead of spending all day in front of a screen picking bottoms and tops for stocks, like Millennials.
So far in May, we are up +3.01%. My 2024 year-to-date performance is at +17.62%. The S&P 500 (SPY) is up +10.90% so far in 2024. My trailing one-year return reached +32.80% versus +29.02% for the S&P 500.
That brings my 16-year total return to +694.56%. My average annualized return has recovered to +51.77%.
As the market reaches higher and higher, I continue to pare back risk in my portfolio. I let my (GLD) and (SLV) positions expire at max profit. I did the same with my (MSFT) short. I sold my (NVDA) and (TLT) shorts for a nice profit. That leaves me with just two positions, a long in (SLV), which has gone ballistic, and a short in (AAPL).
Some 63 of my 70 round trips were profitable in 2023. Some 27 of 37 trades have been profitable so far in 2024.
The Bull Market has Five More Years to Run, with S&P 500 (SPY) growing earnings at 10% a year for the foreseeable future. Last year brought in $222 per share, 2024 will see $250, 2025 $270, and $300 for 2026. The Great American Golden Age has only just begun. Profit margins will expand to all-time record highs. Falling rates and a weak dollar will boost exports to a recovering Europe and Japan. Inflation should hit the Fed’s 2% in 2025 as AI chatbots replace workers at a breakneck rate, cutting costs dramatically. The future is happening fast. Buy everything on dips, even bonds.
CPI Comes in Cool, in April at 0.3% versus 0.4% expected, taking stocks to new all-time highs. Inflation resumed its downward trend at the start of the second quarter in a boost to financial market expectations for a September interest rate cut. Buy em!
PPI Comes in Hot at 0.5%, and up 2.2% YOY, putting up another potential roadblock to interest rate cuts anytime soon. The PPI is a gauge of prices received at the wholesale level that came in higher than the 0.3% estimate. Higher for longer rules. The last mile, or the last 1$ drop in inflation is always the hardest and usually requires a recession. Higher for longer rules.
Retail Sales Come in Surprisingly Flat in April, setting up a Goldilocks economy for the Fed to cut rates in September. The unchanged reading in retail sales last month followed a slightly downwardly revised 0.6% increase in March, the Commerce Department's Census Bureau said on Wednesday. Retail sales were previously reported to have risen 0.7% in March.
Biden to Increase China Tariffs (FXI) to 100%, on key sectors including electric vehicles, batteries, solar cells, steel, and aluminum. Biden has previously announced the steel and aluminum tariffs, which will increase to 25% on some products that have a 7.5% rate or no tariffs now. The EV rate aims to protect the US from a potential flood of Chinese autos that could upend the politically sensitive auto sector. The total tariff on Chinese electric vehicles will rise to 102.5% from 27.5. Biden’s union support is clear for all to see.
Copper Hits Record Highs, as hedge funds, trend followers, bearish shorts, and Chinese speculators pile in. New York prices hit $5 a pound, while London reached $11,000 per metric tonne. The price action is similar to other commodities with disrupted supplies like Cocoa and Nickel. The runaway market will continue. Buy (FCX) and (COPX) on dips.
As the Dow Tops 40,000, investors are pouring money into both bonds and stocks, according to the Bank of America. Equity funds saw $11.9 billion in inflows, while bond funds drew in $11.7 billion. Within fixed income, Treasury inflation-protected securities (TIPS) saw outflows of $700 million, the most in nine weeks. Keep buying those dips.
Weekly Jobless Claims Drop 10,000, to 222,000, after seasonal factors caused a significant increase in New York claims in the prior week. The four-week moving average, which helps smooth short-term fluctuations in weekly claims figures, increased to 217,750, the highest level since November.
Solar Storm Hits Starlink, taking out several hundred satellites and degrading service, says Elon Musk. Starlink, the satellite arm of Elon Musk's SpaceX, is suffering as the Earth is battered by the biggest geomagnetic storm due to solar activity in two decades. Starlink owns around 60% of the roughly 7,500 satellites orbiting Earth and is a dominant player in satellite internet. The U.S. National Oceanic and Atmospheric Administration has said the storm is the biggest since October 2003 and is likely to persist over the weekend, posing risks to navigation systems, power grids, and satellite navigation.
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, May 20, nothing of note takes place.
On Tuesday, May 21 at 1:30 PM EST, API Crude Oil Stocks are released.
On Wednesday, May 22 at 2:00 PM, the Existing Homes Sales are published
On Thursday, May 23 at 7:00 AM, we get New Home Sales. And at 8:30 AM, the Weekly Jobless Claims are announced.
On Friday, May 24 at 8:30 AM, the Durable Goods Report is announced. At 2:00 PM, the Baker Hughes Rig Count is printed.
As for me, when I crossed the Continental Divide at 13,300 in the Andes Mountains of Ecuador last week, the vast expanse of the Amazon Basin lay before me. Clouds danced in and out of the treetops, waterfalls plunged down precipitous slopes, and the jungle spread out for 2,000 miles east. I was somewhat buzzed by the altitude but still enjoyed every minute.
My destination was the Termos Papallacta spa on the slopes of an ancient volcano which offered steaming hot sulfuric waters and a brisk massage for $50. Colorful exotic flowers abounded. This is where the wealthy of Quito come to salve arthritis and aches and pains in magical waters.
How do you get wealthy in Ecuador? Bananas, tourism, real estate speculation, and flower exports to the US. Given my experience with Japanese onsens, I had no problem with their ultra-hot waters.
This is the land of the Jivaro Clan, the world’s last known headhunters. Their final victim was a National Geographic Society explorer in 1961. Recently, his grandson traveled to Ecuador to retrieve the head and return it to the US for a respectful burial, all to great fanfare in the local press. The Jivaro still shrinks heads, but only of animals which they sell to tourists just to keep the practice alive.
Ecuador is the great test bed for monetary experts around the world. In 1999, they suffered a financial crisis where the value of their currency, the Sucre, collapsed to 25,000 to the dollar. The central bank responded by changing the national currency to the US dollar and only permitting conversion from the old currency at $2 per person.
The move had several unintended consequences. The savings of everyone in the country were wiped out overnight. But it also eliminated their debt. Those with relatives sending back remittances from the US suddenly became wealthy and bought up all the real estate they could. In the end, it created an economic boom that continues to today.
Today, Ecuador is one of the friendliest, and cheapest countries in South America. It elected Daniel Noboa as president in 2023, the scion of a banana fortune, who has been hugely popular. The government cracked down on the drug gangs, arresting everyone with a suspect tattoo. Today the police and army are everywhere, and the streets are safe. There are armed checkpoints at key intersections. The ownership of firearms and even long knives has been banned.
The country has no seasons, sitting right on the Equator, and is temperate all year long. Even at 13,300 feet, there is no snow. I had no problem with the food, but then I had a cast iron stomach battle-tested in 135 countries. Not even the locals drink the tap water, which is only used for washing. It has to be all bottled water all the time or you die and you often see people lugging around one-gallon bottles.
Retiring Americans have noticed and some 20,000 now live in the country on their Social Security checks at one-third the cost of home. They concentrate on cultural hot spots, like the ancient city of Cuenca, where the local hospitals speak English, are experts in gerontology, and accept Medicare. You can buy a nice home in a mountain urban area for $250,000 and beachfront digs for $500,000. The Marriot Hotel in Quito cost me $160 a night and a steak dinner was $19 and to die for.
You can’t go to Quito without visiting the Equator for which the country was named, a tourist mecca where everyone gets pictures straddling the northern and southern hemispheres. The country has two summer solstices a year, one in the spring and one in the fall, as the sun transits from north to south, then south to north.
I passed on the shrunken head, which I thought grotesque, and got the T-shirt instead. Besides, US Customs might have questions (Do you have any shrunken heads to declare?). I think I’ll be returning to Ecuador soon.
Descending into the Amazon
Jivaro Indian
Shopping for Breakfast
A Slow Day at the Flower Market
A Smoothie for Lunch
Standing on the Equator, One Foot in Each Hemisphere
Good Luck and Good Trading,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
“Our economic machine really works. It’s worked since 1776….Look at any milestone you want to pick, and over time it’s gotten so much better,”
said Oracle of Omaha, Warren Buffett.
Global Market Comments
May 17, 2024
Fiat Lux
Featured Trade:
(MAY 15 BIWEEKLY STRATEGY WEBINAR Q&A),
(GME), (CCI), (ABNB), (TLT), (TSLA), (LMT),
(RTX), (USO), (GLD), (GOLD), (WPM)
Below please find subscribers’ Q&A for the May 15 Mad Hedge Fund Trader Global Strategy Webinar, broadcast from Incline Village, NV.
Q: Is it time to get out of the 94/97 (TLT) spread?
A: No. We're getting close to a stop, but I think markets will peak out in the next couple of days and we can get out with a small profit. The weak PPI/CPI/Nonfarm, payroll was a game changer. So watch carefully as always. I could have come out of that with 2/3 of the profit last week, but who knew the market would go up 10 out of 11 days?
Q: What are your thoughts on meme stocks? I see that GameStop (GME) is up 550% in a week.
A: This is not investment, it's pure gambling. And if you do want to gamble, there are much better games to play than meme stocks. For example, Blackjack gives you a 51-49% risk in your favor, and slot machines are not too far off at 55-45%. This is not the same meme stock run that we had three years ago. Back then, the short interest in (GME) was 125%, which is more than the outstanding shares that existed. People are still trying to figure out how that happened. Now, the short interest is only 20%, so this may peak out a lot quicker than last time. In any case, it’s a totally random movement. It's just for kids to do because if kids lose all their money, they can start over again and still have enough money to retire. Chances are if you lose all your money, you won't have enough money to retire, so just another reason to stay out of meme stocks.
Q: I'm noticing the REITs are beginning to make a comeback. Can you comment?
A: They've actually been on a terrific run the last several weeks. Some of my favorites like Crown Castle Inc. (CCI) have had really big moves, and this is just the beginning of a major upside; and not only REITs, but all interest rate plays, and it turns out almost everything is an interest rate play when you look at it. Utilities, secured loans, junk bonds—it's a huge universe. So that's why I say buy everything; everything that's going to go up at all is especially positively affected by lower rates, especially precious metals—gold and silver. And when things go up, the definition of a precious metal expands. It now includes copper, palladium, and platinum, which has had an enormous run.
Q: Can we expect a recession to hit in 2025?
A: Absolutely not. We're in the early stages of a golden age of a decade, of appreciating assets of all kinds; not only stocks and bonds, but real estate, collectibles, baseball teams—you name it. So don't leave the game after the first inning, to use a baseball metaphor. And for you foreigners out there who know nothing about baseball, that means don't leave too early.
Q: Is the housing market overvalued in the US?
A: Good question, you'd certainly think that if you're out there trying to buy a house (and I've been shopping myself lately). The answer is absolutely not. It may be overpriced in the most expensive US markets like Manhattan, Honolulu, Hawaii, or San Diego, but it's still a fraction of what you have to pay in Hong Kong, Australia, or Vancouver, Canada. So prices can go a lot higher. Remember, we have a structural shortage of 10 million homes in the US and they’re not building new ones fast enough. They could double in price from here, especially if the Fed starts to cut interest rates, which they have promised to do. I think we're on the verge of another big housing boom, which will create more home equity, and guess what happens to that home equity? It eventually ends up in the stock market. It becomes a virtual love fest with housing prices making stocks go up and stocks making housing prices go up.
Q: Would you consider Bitcoin now?
A: Absolutely not, especially when you can buy things like Wheaton Precious Metals (WPM) and Barrick Gold (GOLD), which will probably double in the next year and actually have real assets with real earnings flows. With Bitcoin, you're essentially buying ether, and the time to buy Bitcoin was at $6,000, not at $60,000. You don't buy stuff after it's gone up 10 times. So again, just from a market timing point of view, it's a terrible idea. So there are better things to do. You can buy high-quality stocks at reasonable multiples right now.
Q: Is Airbnb (ABNB) a buy here?
A: I would. It is the world's largest hotel in an economic recovery. There's a huge demand for hotels and revenge travel. They're also branching out into higher-margin items like experiences. So yes, I do love the company and the quality of its management for sure.
Q: Markets are all-time high. Should I sell in May and go away?
A: Only if you're a short-term trader. If you’re a long-term investor and you sell now, I guarantee you'll miss the next bottom to get back in. So for short-term traders, yes, take profits like crazy—markets are way overbought. They either need some kind of correction or flat-line move for a period of time.
Q: Is buying American farmland a good investment for buying an index fund?
A: Well, if you look at the big portfolios of the great wealthy names like the Rockefellers, the Duponts, and all of my former clients at Morgan Stanley basically; they have loads of farmland and loads of forests—lots of forests. In fact, forests are trading at a big premium right now. It's considered the world's safest long-term asset. And as long as you don't have debt on it, it always goes up in value over time. So yes, that is a good investment. US farmland is the most productive in the world, and the number of people in the world isn't shrinking. In fact, the main reason China will never start a war with the US is because they're dependent on the US for about half its total food supply. So that's why I can always ignore all these China or Taiwan invasion warnings.
Q: Should I take a look at defense stocks?
A: Absolutely, yes, thanks to the invasion of Ukraine. Virtually every country in the world that has any money is expanding defense spending. This is not a short-term thing. Defense is a very long-time lag industry. When countries like the US buy planes, it's often for ten or twenty years, and then you have the upgrades to follow that, and third-country sales. So the big stocks are Lockheed Martin (LMT) and Raytheon (RTX). I would buy both of those on the dips. They have already had good moves, but what hasn't? Though there are not a lot of bargains left in this market after a heroic six to seven-month run.
Q: Is the webinar recorded for replay?
A: Yes, just go to our website madhedgefundtrader.com. Log in, go to My Account, and you'll see the opportunity to review the video of this presentation.
Q: Is it time to buy Google (GOOG)?
A: Yes, I think we're on an uptrend that continues for the rest of the year, and Google will keep leaking out its advantage in AI in bits and pieces. I saw the video you were talking about; you just leave the phone’s video on all the time, and then you could say, “Where are my glasses?” and it'll tell you where your glasses are: “You left them on the table in the dining room.” That's one of the many millions of applications we will see.
Q: Thoughts on Tesla (TSLA)?
A: We're trying to put in a bottom here. Get ready for the buy alerts—I think on the next plunge down I may actually jump in. We still have a very high volatility, and you have plenty of great pickings in the options market with high implied volatilities.
Q: Where are we on refilling the strategic oil reserves (USO)?
A: Biden made no effort to refill them. They were about at half-full levels when we hit the bottom last time, so maybe he will next time. I think he's more interested in just getting out of the oil business altogether, moving to alternative energy, and getting rid of the strategic oil reserve since we are now a net energy producer, net oil exporter, the world's largest oil producer in the world. We don't really need emergency reserves like we did in 1970 when these were first set up.
Q: Sometime back, you said to avoid miners of precious metals. Is that still your opinion?
A: No, I think we're in a position now where the miners can start to catch up with the metals. In the beginning of the year, it was clear the metals were going to outperform the miners because the miners were seeing their margins cut by high inflation. That's still the case. My first choice is still the metal, but you could get a big catch-up trade in the silver and gold miners. So, as I keep saying, buy Barrick Gold (GOLD) and (WPM).
To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in to www.madhedgefundtrader.com, go to MY ACCOUNT, select your subscription (GLOBAL TRADING DISPATCH, TECHNOLOGY LETTER, or Jacquie's Post), then click on WEBINARS, and all the webinars from the last 12 years are there in all their glory
Good Luck and Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
