“There is one peculiarity about mass psychology in that when you are in a bubble, you can't see it. Bubbles are invisible when you are inside the bubble,” said the charming Jim Dines of The Dines Letter.
Global Market Comments
April 30, 2024
Fiat Lux
Featured Trade:
(MAY 8 GALAPAGOS ISLANDS STRATEGY LUNCHEON)
SPECIAL AMAZON ISSUE
(WHY I’M LOOKING AT AMAZON), (AMZN)
Come join me for lunch for my Global Strategy Luncheon, which I will be conducting in the Galapagos Islands at 12:00 PM on Friday, May 8, 2024. A three-course lunch is included.
I’ll be giving you my up-to-date view on stocks, bonds, currencies commodities, precious metals, and real estate.
And to keep you in suspense, I’ll be throwing a few surprises out there too. Enough charts, tables, graphs, and statistics will be thrown at you to keep your ears ringing for a week. Tickets are available for $279.
The Galapagos Islands are 600 miles west of South America in the middle of the Pacific Ocean and are a possession of Ecuador. It is one of the most remote places in the world.
The lunch will be held in the only city on the islands of San Cristobal. The Galapagos Islands are where Charles Darwin developed his Theory of Evolution back in 1835 courtesy of the HMS Beagle. The islands are overrun with marine iguanas (Amblyrhnchus Cristatus).
I’ll be arriving early and leaving late in case anyone wants to have a one-on-one discussion, or just sit around and chew the fat about the financial markets.
The lunch will be held at an exclusive hotel in San Cristobal, the details of which will be emailed to you.
I look forward to meeting you, and thank you for supporting my research.
To purchase tickets for this luncheon, please click here.
At the beginning of 2023, Amazon was universally despised. It shares having dropped by more than half during 2022, the company was believed to be hobbled by rising competition, an out-of-date business model, and an imminent antitrust suit.
What a difference 16 months makes.
I believe there is a good chance that this creation of Jeff Bezos will see its shares double from here over the next five years. If the antitrust suit succeeds it will double again.
Amazon, is in effect, taking over the world.
Jeff Bezos, born Jeff Jorgensen, is the son of an itinerant alcoholic circus clown and a low-level secretary in Albuquerque, New Mexico. When he was three, his father abandoned the family. His mother remarried a Cuban refugee, Miguel Bezos, who eventually became a chemical engineer for Exxon.
I have known Jeff Bezos for so long that he had hair when we first met in the 1980s. Not much though, even in those early days. He was a quantitative researcher in the bond department at Morgan Stanley, and I was the head of international trading.
Bezos was then recruited by the cutting-edge quantitative hedge fund, D.E. Shaw, which was making fortunes at the time, but nobody knew how. When I heard in 1994 that he left his certain success there to start an online bookstore, I thought he’d suffered a nervous breakdown, common in our industry.
Bezos incorporated his company in Washington state later that year, initially calling it “Cadabra” and then “Relentess.com.” He finally chose “Amazon” as the first interesting word that appeared in the dictionary, suggesting a river of endless supply. When I learned that Bezos would call his start-up “Amazon,” I thought he’d gone completely nuts.
Bezos funded his start-up with a $300,000 investment from his parents who he promised stood a 50% chance of losing their entire investment. But then his parents had already spent a lifetime running Bezos through a series of programs for gifted children, so they had the necessary confidence.
It was a classic garage start-up with three employees based in scenic Bellevue, Washington. The hours were long with all of the initial effort going into programming the initial site. To save money, Bezos bought second-hand pine doors, which he placed on sawhorses for desks.
Bezos initially considered 20 different industries to disrupt, including CDs and computer software. He quickly concluded that books were the ripest for disruption, as they were cheap, globally traded, and offered millions of titles.
When Amazon.com was finally launched in 1995, the day was spent fixing software bugs on the site, and the night wrapping and shipping the 50 or so orders a day. Growth was hyperbolic from the get-go, with sales reaching $20,000 a week by the end of the second month.
An early problem was obtaining supplies of books when wholesalers refused to offer him credit or deliver books on time. Eventually, he would ask suppliers to keep a copy of every book in existence at their own expense, which could ship within 24 hours.
When I bought my first Amazon book, I think it was HG Wells’ A Short History of the World, the operation was so dubious that I paid with a low-limit credit card. I figured that if the wheels fell off I’d only lose $500.
Venture capital rounds followed, eventually raising $200 million. Early participants all became billionaires, gaining returns of 10,000-fold or more, including his trusting parents. I know one guy who missed out on becoming a billionaire because he only checked his voicemail occasionally, missing the opportunity to subscribe to the (AMZN) IPO.
Bezos put the money to work, launching into a hiring binge of epic proportions. “Send us your freaks,” Bezos told the recruiting agencies, looking for the tattooed and the heavily pierced who were willing to work in shipping late at night for low wages. Keeping costs at rock bottom was always an essential part of the Amazon formula.
Bezos used his new capital to raid Wal-Mart (WMT) for its senior distribution staff, for which it was later sued.
Amazon rode on the coattails of the Dotcom Boom to go public on NASDAQ on May 15, 1997, at $18 a share. The shares quickly rocketed to an astonishing $105, and in 1999 Jeff Bezos became Time magazine’s “Man of the Year.”
Unfortunately, the company committed many of the mistakes common to inexperienced managements with too much cash on their hands. It blew $200 million on acquisitions that, for the most part, failed. Those include such losers as Pets.com and Drugstore.com. But Bezos’s philosophy has always been to try everything and fail them quickly, thus enabling Amazon to evolve 100 times faster than any other company.
Amazon went into the Dotcom crash with tons of money on its hands, thus enabling it to survive the long funding drought that followed. Thousands of other competitors failed. Amazon shares plunged to $5.
But the company kept on making money. Sales soared by 50% a month, eventually topping $1 billion by 2001. The media noticed Wall Street took note. The company moved from the garage to a warehouse to a decrepit office building in downtown Seattle.
Amazon moved beyond books to compact disc sales in 1999. Electronics and toys followed. At its New York toy announcement, Bezos realized that the company actually had no toys on hand. So, he ordered an employee to max out his credit card cleaning out the local Hammacher Schlemmer just to obtain some convincing props.
A pattern emerged. As Bezos entered a new industry, he originally offered to run the online commerce for the leading firm. This happened with Circuit City, Borders, and Toys “R” Us. The firms then offered to take over Amazon, but Bezos wasn’t selling.
In the end, Amazon came to dominate every field it entered. Please note that all three of the abovementioned firms no longer exist, thanks to extreme price competition from Amazon.
Amazon had a great subsidy in the early years as it did not charge state sales tax. As of 2011, it only charged sales tax in five states. That game is now over, with Amazon now collecting sales taxes in all 45 states that have them.
Amazon Web Services originally started out to manage the firm’s own website. It has since grown into a major profit center, with a monster $24.2 billion earned in 2024 Q4 alone. Full disclosure: Mad Hedge Fund Trader is a customer.
Amazon entered the hardware business with the launch of its e-reader Kindle in 2007, which sold $5 billion worth in its first year. The Amazon Echo smart speaker followed in 2015 and boasts a 71.9% market share. This is despite news stories that it records family conversations and randomly laughs.
Amazon Studios started in 2010, run by a former Disney executive, pumping out a series of high-grade film productions. In 2017 it became the first streaming studio to win an Oscar with Manchester by the Sea with Jeff Bezos visibly in the audience at the Hollywood awards ceremony.
Its acquisitions policy also became much more astute, picking up audiobook company Audible.com, shoe seller Zappos, Whole Foods, and PillPack. Since its inception, Amazon has purchased more than 115 outside companies, the most recent being the AWS firm Fig.
Sometimes, Amazon’s acquisition tactics are so predatory they would make John D. Rockefeller blush. It decided to get into the discount diaper business in 2010, and offered to buy Diapers.com, which was doing business under the name of “Quidsi.” The company refused, so Amazon began offering its own diapers for sale 30% cheaper for a loss. Diapers.com was driven to the wall and caved, selling out for $545 million. Diaper prices then popped back up to their original level.
Welcome to online commerce.
At the end of 2021, Amazon boasted some 1.6 million employees worldwide. In fact, it has been the largest single job creator in the United States for the past decade. Also, this year it disclosed the number of Amazon Prime members at 230 million, then raised the price from $120 to $139, thus creating an instant $4.37 billion in annual profit.
The company’s ability to instantly create profit like this is breathtaking. And this will make you cry. In 2023, Amazon made $3 billion from Amazon gift cards left unredeemed! Cleaning out my desk the other day I found $200 worth.
Amazon's annual revenue for 2023 is an eye-popping $574.785 billion, an 11.83% increase from 2022. It is currently capturing about 50% of all new online sales.
So, what’s on the menu for Amazon? There is a lot of new ground to pioneer.
Harvard-educated Andy Jassy took over as CEO of Amazon in July of 2021. Since then the shares have been unchanged but did recover a big drawdown. Jassy has since launched a ferocious cost-cutting program that has had an exponential effect on Amazon's profits.
That freed Bezos up to sell $8 billion worth of (AMZN) shares, dump his wife, date Hollywood movie stars, and fly into space on his own Blue Origin rocket as you would expect the richest man in the world today.
1) Health Care is the big one, accounting for $3 trillion, or 17% of U.S. GDP, but where Amazon has just scratched the surface. Its recent $1 billion purchase of PillPack signals a new focus on the area. Who knows? The hyper-competition Bezos always brings to a new market would solve the American healthcare crisis, which is largely cost-driven. Bezos can oust middlemen like no one else.
2) Food is the great untouched market for online commerce, which accounts for 20% of total U.S. retail spending, but sees only 2% take place online. Essentially this is a distribution problem, and you have to accomplish this within the prevailing subterranean 1% profit margins in the industry. Books don’t need to be frozen or shipped fresh. Wal-Mart (WMT) will be targeted as No. 1, which currently gets 56% of its sales from groceries. Amazon took a leap up the learning curve with its $13.7 billion purchase of Whole Foods (WFC) in 2017. What will follow will be interesting.
3) Banking is another ripe area for “Amazonification,” where excessive fees are rampant. It would be easy for the company to accelerate the process by buying a major bank that already had licenses in all 50 states. Amazon is already working on the credit card angle.
4) Overnight Delivery is natural, as Amazon is already the largest shipper in the U.S., sending out more than 1 million packages a day. The company has a nascent effort here, already acquiring several aircraft to cover its most heavily trafficked routes. Expect FedEx (FDX), UPS (UPS), DHL, and the United States Post Office to get severely disrupted.
5) Amazon is about to surpass Wal-Mart this year as the largest clothing retailer. The company has already launched 30 private labels, with half of them in the fashion area, such as Clifton Heritage (color and printed shirts), Buttoned Down (100% cotton shirts), and Goodthreads (casual shirts) as well as subscription services for all of the above.
6) Furniture is currently the fastest-growing category at Amazon. Customers can use an Amazon tool to design virtual rooms to see where new items and colors will fit best.
7) Event Ticketing firms like StubHub and Ticketmaster are among the most despised companies in the U.S., so they are great disruption candidates. Amazon has already started in the U.K., and a takeover of one of the above would ease its entry into the U.S.
8) Artificial Intelligence Amazon has a record of every mouse click of everything you bought for the past 25 years or even thought about buying. It has never deleted anything. In a world of rapidly accelerating AI, this is immensely valuable information. Amazon was making advances in AI when was just a term from science fiction for the rest of us. As with Tesla, this data is worth more than the company. That alone could double the value of the company.
If only SOME of these new business ventures succeed, they have the potential to DOUBLE Amazon’s shares from current levels, taking its market capitalization up from the present $1.86 trillion.
Perhaps this explains why institutional investors continue to pour into the shares, despite being up a torrid 155% from the 2023 lows.
Whatever happened to Bezos’s real father, Ted Jorgensen? He was discovered by an enterprising journalist in 2012 running a bicycle shop in Glendale, Arizona. He had long ago sobered up and remarried. He had no idea who Jeff Bezos was. Ted Jorgensen died in 2015. Bezos never took the time to meet him. Too busy running Amazon, I guess. I guess the richest man in the world had better things to do.
"Forget what you know about buying fair businesses at wonderful prices. Instead, buy wonderful business at fair prices," said Oracle of Omaha, Warren Buffett.
Global Market Comments
April 29, 2024
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or DIGESTION TIME)
(NVDA), (FCX), (META), (MSFT), (TLT), (TSLA), (AAPL), (VISA), (FCX), (COPX), (GOOGL),
(A TRIP TO CUBA)
Before you even ask, I’ll give you the answer you’ve all been waiting for: It’s too late to sell and too early to buy.
Stocks may still have some digesting to do having soared by 27% in six months. Nobody wants to look like an idiot by buying a market top. As I have learned over the decades, investors fear looking stupid more than they fear losing money, especially if they are professionals.
Everyone knows the market is eventually going higher so they are not selling in any meaningful way unless they are short-term, algos, or day traders.
This means we may have a whole lot of nothing going on in the coming weeks or months.
That leaves us time to examine the most interesting trends going on in the markets right now, especially the new bull market in commodities. Believe it or not, we are still unwinding the long-term effects of Covid 19 and commodities have only recently come to the fore.
Remember Covid?
Since October, copper prices have risen by 22%, oil by 23%, gold by 34%, and uranium by a gobsmacking 83%. What’s causing this sudden new interest? It’s not a recovering Chinese economy, that’s for sure. Investors have been waiting for a bounce back in the Middle Kingdom seemingly forever. But China remains hobbled by the bitter fruit of a 40-year one-child policy and an ineffective government. History tells us that the United States does not make a great enemy.
So what’s driving the new demand? Remember Covid? Believe it or not, we are still unwinding the long-term effects of Covid 19 and commodities have only recently started to play catch up.
Commodities are unique in that they have such a long lead time to add new supply. It can take 5-10 years, to map out new sites, get government approvals, deliver heavy equipment, and mine, process, refine, and ship the final product.
In the meantime, enormous new demand has arisen. There have been 10 million EVs manufactured in recent years and each one needs 200 pounds of copper. AI means the electric power grid has to double in size quickly. Commodity markets are unable to meet the supply. Therefore, prices can only go up.
That enabled Freeport McMoRan (FCX), the world’s largest copper producer, to handily beat its earnings expectations, helped by higher production and easing costs. The mining giant said its quarterly production of copper rose to 1.1 billion pounds from 965 million pounds a year earlier, helped by a 49% jump in output from its Indonesia operations. (FCX) said it was working with the Indonesian government, which has put a ban on raw material exports, to obtain approvals to continue shipping copper concentrates and anode slimes. Its current license is set to expire in May. Buy (FCX) and (COPX) on dips.
Corporate raiders have taken notice.
Activist Elliot is taking a Run at Mining Giant Anglo American, accumulating a $1 billion stake. BHP, the largest iron ore miner, is also making a takeover bid here on the coattails of which Elliot is trying to ride. It just highlights the global interest in mining shares.
Anglo American plc is a British multinational mining company that is the world's largest producer of platinum, with around 40% of world output, as well as being a major producer of diamonds, copper, nickel, iron ore, polyhalite, and steelmaking coal. On a side note, copper hit a two-year high above $10,000 per metric tonne in the London Market last week.
Needless to say, the commodity boom could continue for another decade.
So far in April, we are up +4.24%. My 2024 year-to-date performance is at +13.61%. The S&P 500 (SPY) is up +6.50% so far in 2024. My trailing one-year return reached +32.40% versus +23.14% for the S&P 500.
That brings my 16-year total return to +690.24%. My average annualized return has recovered to +51.77%.
Some 63 of my 70 round trips were profitable in 2023. Some 25 of 33 trades have been profitable so far in 2024.
Tesla Delivers Worst Earnings in 12 Years, with a 9% revenue drop, but the stock rallies big as the disappointment was well telegraphed. Revenue declined from $23.33 billion a year earlier and from $25.17 billion in the fourth quarter. Net income dropped 55% to $1.13 billion, or 34 cents a share, from $2.51 billion, or 73 cents a share, a year ago. The drop in sales was even steeper than the company’s last decline in 2020, which was due to disrupted production during the Covid-19 pandemic. Tesla’s automotive revenue declined 13% year over year to $17.38 billion in the first three months of 2024. I’ll watch (TSLA) from the sidelines from now.
Personal Consumption Expenditures (PCE) Comes in Warm for March, up 2.8% YOY, the same as for February. Service prices led. But the numbers were not as hot as feared so both bonds and stocks rose.
Big Tech Crashes, with all of the Magnificent Seven breaking 50-day moving averages. (NVDA) alone gave up 10% on Friday. The next stop is the 200-day moving averages, which are far, far away. If those hold this is just a correction. If they don’t the bear market is back.
Biggest Treasury Bill Auction in History is a Huge Success, at $69 billion for a two-year paper with a 4.898% yield. That is almost a risk-free government-guaranteed 10% yield in two years. Another $70 billion of five-year notes go on sale today. Half of this is going to foreign investors and central banks. Faith in America and the US dollar remains strong. Who else’s bonds would you rather buy? Passage of the Ukraine aid bill was probably a help. Wait for (TLT) to bottom.
Visa Pops on Earnings Beat, continuing as the powerhouse that it has been for years. Reported at $4.7 billion, showing a 10% increase year-over-year, slightly above the estimate of $4.943 billion. Visa is a call option on the growth of the Internet. Buy (V) on dips.
Apple China Sales Dive, by 19% as Chinese switch to cheaper Huawei phones for nationalism reasons. It’s also another sign of a slow Chinese economy. China remains one of the company’s biggest markets, but business there has grown harder after Beijing escalated a ban on foreign devices in state-backed firms and government agencies. Avoid (AAPL) until the turnaround.
Alphabet Earnings Beat Delivers Monster 10% Move, recovering a $2 trillion market cap. It also announced its first-ever dividend and a $70 billion share back, the second largest after Apple. Buy (GOOGL) on dips.
March New Home Sales Jump, by 8.1% when only 1.1% is expected, to 693,000. The median price of a home sold fell to $430,700 as builders pulled back on incentives like those cherry cabinets. It’s an uphill slog with those 7.0% mortgage rates.
CDC Birth Data Fall to Lowest Level Since the Great Depression, 1.1 births per 1,000 people. That is well below the Great Depression levels. Only 3,664,292 new Americans were born in 2021. It means there will be a shortage of consumers in 20 years so be out of stock by then. The good news is that Covid deaths have fallen from 4,000 per day to only 19 a day since January 2020.
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 29, at 10:30 AM EST, the Dallas Fed Manufacturing Index is announced.
On Tuesday, April 30 at 9:00 AM, S&P Case Shiller National Home Price Index is released.
On Wednesday, May 1 at 2:00 PM, the ADP Private Employment Change report will be published
On Thursday, May 2 at 8:30 AM, the Weekly Jobless Claims are announced.
On Friday, May 3 at 8:30 AM, the April Nonfarm Payroll Report is announced. At 2:00 PM, the Baker Hughes Rig Count is printed.
As for me, I have wanted to visit Cuba for decades. But relations with the US have run hot and cold over the years and whenever I had the time and money to go, the was a chill on, sometimes an extreme one.
So when I arrived in Key West and learned they were offering Cuba tour packages, I jumped at the chance. Unfortunately, you need to book three months in advance so that option was out.
Then I thought, “Why not fly there myself?” After payment of some hefty fees, commissions, and some outright bribes, I scored a Cuban visa and an aging Britten-Norman Islander twin built in the UK some 40 years ago. It was perhaps the smallest twin I have ever flown, with two minuscule 270 horsepower engines.
Although it was only 90 miles to Cuba, I had to load up with full tanks. Cuban aviation fuel is often contaminated with sludge or water and is unsafe to use. Losing both engines over shark-infested waters doesn’t fit in with my retirement plan. So I needed enough 100LL avgas to make the round drip, which meant skipping breakfast to stay within my weight limitations.
It was a clear and balmy morning when I received my clearance for takeoff, the sky dotted with fluffy white cumulus clouds. Of course, I had to skirt the Bermuda Triangle to get there, but no worries.
Amazingly Cuban air traffic control spoke English. Soon, the green hills of Cuba appeared on the horizon, and I received the words I will never forget: “N686KW you are cleared for landing in Havana.” I haven’t felt like that since I last landed in Moscow.
Much to my surprise, I found other US aircraft there as I was parked near jets from Southwest and American Airlines. I was greeted by an immigration officer who escorted me into the country, putting my Spanish skills to the test.
I had some concerns that I might be arrested in case Russia put me on a wanted list due to my recent work in Ukraine. But my fears proved unwarranted. You see, you get paranoid in your old age. A private car, a French Citroen van, a driver, and a government guide were waiting for me outside the airport.
Suddenly, I found myself in a strange new world. A darkly tanned people wore tired polyester clothes. Everyone was rail thin and the only obese people I saw were foreign tourists. There was an incredible variety of vehicles on the road, including ancient cars from Russia, China, Poland, and Japan. Apparently, Chevrolet had a great year in Cuba in 1956 because no American cars have entered the country since then and they are everywhere.
We headed straight for Earnest Hemingway’s Cuban home, known as Finca Vigia, or “Lookout Farm” built in 1886 on a hilltop overlooking Havana. The building was falling apart and showed large cracks, but going inside I was transported in time back to 1960, when Hemingway left the property ahead of the Cuban Revolution.
Finca Vigia has been untouched since. The walls are covered with an assortment of hunting trophies from Africa, including springboks, cape buffalo, lions, and leopards. They were collections of African spears and gun cases. Mounted on the walls were paintings of bullfights in Spain, cartoons about Hemingway, and family photos.
Magazine racks were stuffed with the 1960 issues of Life, Look, and The Saturday Evening Post. The National Geographic issues looked positively prehistoric. And there were thousands of books. Anyone who read his books would recognize all of this.
Hem, as his friends called him, bought the property in 1940 for $8,000, living there with wife three for five years, the famed war correspondent Martha Gellhorn, and wife four, Time magazine reporter Mary Welsch, who became his widow.
After passing on a Che Guevara T-shirt in the gift shop, I enjoyed a glass of freshly squeezed sugar cane juice. Then I headed into Havana, escorted by my guide, Eliar. The trip turned into a Hemingway bar crawl. I visited the well-known La Floridita, which made Hem’s favorite Daiquiri, La Bodegita, which mixed the best mojito and had lunch at his favorite roof terrace restaurant.
Cuba has long been one of the worst-managed countries in the world, second only to North Korea, and I learned why after grilling my guide all day about economic conditions. It’s 11.2 million people earn a per capita of $11,255, with 71% living below the poverty line. The real figure is a third of that as there are now 300 pesos to the US dollar, not the fictitious 120 that the government pretends.
When the Soviet Union collapsed in 1992, generous subsidies ended and Cuba quickly lost 33% of its GDP. With some of the richest farmland in the world, it imports 80% of its food and is currently suffering a food crisis. Even the bottled water I drank came from Panama.
Oil accounts for 100% of its energy supply which mostly comes from Russia and is paid for with raw sugar. Cuba’s largest exports are tobacco, nickel, and zinc most of which are exported to China. China also provided $11 billion in loans which Cuba promptly defaulted on.
The country would have been much better off if only Fidel Castro had accepted an offer from the Washington Senators to play US major league baseball in the early 1950s. Cuba is officially one of the last communist countries in the world, with Russia and China abandoning it years ago. After reforms in the 1990s, what they now practice is an odd mixture of communism and capitalism, with the government and the private sector competing side by side.
With thousands fleeing the country every year the real estate market has collapsed. You can buy a two-bedroom apartment in Havana for $30,000. Flying over the countryside at low altitude you fund vast expanses of agricultural land undeveloped for want of machinery and parts. There is unused labor everywhere. Cuba should be one of the richest countries in the world with all those beaches. The tourism possibilities are enormous. But with a 60-year trade and investment ban from the US, nothing can happen.
American credit cards and cell phones don’t work, so I brought in $200 in ones. You can’t bring back to the US the country’s only two worthy exports, rum and cigars. But there are buskers everywhere and by the end of the trip, I ended up giving it all away in tips. I did OK with the food, but only ate overcooked meals in high-end restaurants. Salads were out of the question but drink all the local beer and rum you can.
I ended my trip with a tour of the enormous Revolution Square where Fidel Castro used to give four-hour speeches to one million. One area the government did not skimp on spending was on the massive ministry buildings that surround the square. It seems the image of a strong government, especially the police, is essential in a workers’ socialist paradise.
Then it was back to the airport where surprisingly I obtained immediate clearance for takeoff. No passport stamps, as the government wanted to leave no evidence of my visit in an American passport. I returned to Key West just in time to catch a magnificent sunset over the Gulf of Mexico. US customs recognized my face and waved me right through.
Damn! Should have picked up some of those $5 bottles of rum.
It's all just another day in the life of John Thomas.
At Hemingway’s Cuban Home
A Look Back into 1960
Where Hem Wrote “Old Man and the Sea”, Standing
Hemingway’s Office
I passed on Che
Meeting an Old Friend for a Round at Floridita
Mixing it up with the Locals
One of Cuba’s Only Exports
Looks Like Chevy had a Great Year in 1956
Good Luck and Good Trading,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
“I think the market is going to get slammed this summer. The Fed is bad for financials, the dollar is a problem for industrials, and commodities are a problem for everybody,” said Scott Nations, president of NationShares.
Global Market Comments
April 25, 2024
Fiat Lux
Featured Trade:
(RISK CONTROL FOR DUMMIES) or (THE HEADS I WIN, TAILS YOU LOSE STRATEGY),
(SPY), (FCX), (NVDA), (TLT)
Whenever I change my positions, the market makes a major move, suffers a “black swan” or reaches a key level, I stress test my portfolio by inflicting various scenarios upon it and analyzing the outcome.
This is common practice and second nature for most hedge fund managers.
In fact, the larger ones will use top-of-the-line mainframes powered by $100 million worth of in-house custom programs to produce a real-time snapshot of their positions in hundreds of imaginable scenarios at all times. This is the sort of thing Ray Dalio used to do.
If you want to invest with these guys feel free to do so.
They require a $10-$25 million initial slug of capital, a one-year lock-up, charge a fixed management fee of 2%, and a performance bonus of 20% or more.
You have to show minimum liquid assets of $2 million and sign 100 pages of disclosure documents.
If you have ever sued a previous manager, forget it.
And, oh yes, the best-performing funds have a ten-year waiting list to get in, as with my friend David Tepper. Unless you are a major pension fund like the State of California, they don’t want to hear from you.
Individual investors are not so sophisticated and it clearly shows in their performance, which usually mirrors the indexes with less of a large haircut.
So, I am going to let you in on my own, vastly simplified, dumbed down, the seat of the pants, down-and-dirty style of scenario analysis and stress testing that replicates 95% of the results of my vastly more expensive competitors.
There is no management fee, performance bonus, disclosure document, lock up, or upfront cash requirement. There’s just my token $3,500 a year subscription and that’s it.
To make this even easier for you, you can perform your own analysis in the Excel spreadsheet I post every day in the paid-up members section of Global Trading Dispatch.
You can just download it and play around with it whenever you want, constructing your own best-case and worst-case scenarios. To make this easy, please log into your Mad Hedge Fund Trader, click on “MY ACCOUNT”, then click on Global Trading Dispatch, then Current Positions, and download the Excel spreadsheet for April 25, 2024.
There you will find my current trading portfolio showing:
Current Capital at Risk
Risk On
(NVDA) 5/$710-$720 call spread 10.00%
(TLT) 5/$82-$85 call spread 10.00%
(FCX) 5/$42-$45 call spread 10.00%
Risk Off
(NVDA) 5/$960-$970 put spread -10%
Total Net Position 30.00%
Total Aggregate Position 40.00%
Since this is a “for dummies” explanation, I’ll keep this as simple as possible.
No offense, we all started out as dummies, even me.
I’ll the returns in three possible scenarios: (1) The (SPY) is unchanged at $505 by the May 17 expiration of my front month option positions, which is 15 trading days away, (2) The S&P 500 rises 5.0% to $530 by then, and (3) The S&P 500 falls 5.0% to $480.
Scenario 1 – No Change
The value of the portfolio rises from a 5.07% profit to a 13.00% Profit. My existing longs in (FCX), (TLT), and (NVDA) expire at their maximum profits. So does my one short in (NVDA).
Scenario 2 – S&P 500 rises to $530
You can easily forget about the long positions in (FCX), (TLT), and (NVDA) as they will expire well in the money. If they go up fast enough, I might even take an early profit and roll into a June or July position. Our short in (NVDA) might take some heat. But in the current environment of going into the summer doldrums, there is no way (NVDA) shoots up to a new all-time high, right where our strike prices were set at on purpose. The net of all this is that our portfolio should expire at a maximum profit for the year at up 13.00%.
Scenario 3 – S&P 500 falls to $480
All three of my stocks fall, but not enough for my three call spreads to go out of the money. (FCX) will stay above my stop-out level at $45, (TLT) at $85, and (NVDA) at $720. Obviously, the short in (NVDA) becomes a chipshot. Again, we expire at a maximum profit for the year at up 13.00%.
Up we make money, down we make money, sideways we make money, I like it! This is why I run long/short baskets of options spreads whenever the market allows me. It’s a “Heads I win, tails you lose strategy”.
If the market goes up, I’m looking for stocks to sell. If the market goes down, I'm looking for securities to buy. Boy low, sell high, I’m thinking of patenting the idea.
This is the type of extremely asymmetric risk/reward ratio hedge funds are always attempting to engineer to achieve outsized returns. It is also the one you want after the stock market has risen by 25% a year since the 2020 pandemic.
All that’s really happened is that the world has gone from slightly good to better this year. I can rejigger this balance anytime I want. If I think that a change in the economy or the Fed’s interest rate policy is in the works.
Keep in mind that these are only estimates, not guarantees, nor are they set in stone. Future levels of securities, like index ETF’s are easy to estimate. For other positions, it is more of an educated guess. This analysis is only as good as its assumptions. As we used to do in the computer world, garbage in equals garbage out.
Professionals who may want to take this out a few iterations can make further assumptions about market volatility, options implied volatility or the future course of interest rates. Keep the number of positions small to keep your workload under control. I never have more than ten. Imagine being at Goldman Sachs and doing this for several thousand positions a day across all asset classes.
Once you get the hang of this, you can start projecting the effect on your portfolio of all kinds of outlying events. What if a major world leader is assassinated? Piece of cake. How about another 9/11? No problem. Oil at $150 a barrel? That’s a gimme. What if there is an Israeli attack on Iranian nuclear facilities? That might take you all of two minutes to figure out. The Federal Reserve launches a surprise interest rate rise? I think you already know the answer.
The bottom line here is that the harder I work, the luckier I get.
