Mad Hedge Fund Trader

Is USA Inc. a Short?

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What would happen if I recommended a stock that had no profits, was losing $3 trillion a year and had a net worth of negative $44 trillion?

Chances are, you would cancel your subscription to the Mad Hedge Fund Trader, demand a refund, unfriend me from your Facebook account, and delete me from your Twitter network.

Yet, that is precisely what my former colleague at Morgan Stanley did a few years ago, technology guru Mary Meeker.

Now a partner at venture capital giant Kleiner Perkins, Mary has brought her formidable analytical talents to bear on analyzing the United States of America as a stand-alone corporation.

The bottom line: the challenges are so great they would daunt the best turnaround expert. The good news is that our problems are not hopeless or unsolvable.

The US government was a miniscule affair until the Great Depression and WWII when it exploded in size. Since 1965 when Lyndon Johnson’s “Great Society” began, GDP rose 2.7 times, while entitlement spending leaped 11.1 times.

If current trends continue, the Congressional Budget Office says that entitlements and interest payments will exceed all federal revenues by 2025.

Of course, the biggest problem is with healthcare spending, which will see no solution until healthcare costs are somehow capped. Despite spending more than any other nation, we get one of the worst results, with lagging quality of life, life spans, and infant mortality.

Some 28% of Medicare spending is devoted to a recipient’s final four months of life. Somewhere, there are emergency room cardiologists making a fortune off of this. A night in an American hospital costs 500% more than in any other country.

Social Security is an easier fix. Since it started in 1935, life expectancy has risen by 26% to 78, while the retirement age is up only 3% to 66. Any reforms have to involve raising the retirement age to at least 70 and means testing recipients. If you make $1 billion a year, you don’t need a monthly social security check.

The solutions to our other problems are simple but require political suicide for those making the case.

For example, you could eliminate all tax deductions, including those for home mortgage deductions, charitable contributions, IRA contributions, dependents, and medical expenses, and raise $1 trillion a year. That would only make a dent in our current $3 trillion a year budget deficit.

Mary reminds us that government spending on technology laid the foundations of our modern economy. If the old DARPANET had not been funded during the sixties, Google, Yahoo, eBay, Facebook, Cisco, and Oracle would be missing today. Tech generates about 50% of all the profits in the US today.

Global Positioning Systems (GPS) were also invented by and is still run by the government and has been another great wellspring of profits. (I got to use it during the 1980s while flying across Greenland when it was still top secret. The Air Force base that ran it was called “Sob Story”).

There are a few gaping holes in Mary’s “thought experiment”. I doubt she knows that the Treasury Department carries the value of America’s gold reserves, the world’s largest at 8,965 tons worth $832 billion, at only $34 an ounce, versus an actual current market price of $1,861. By the way, the stash has only been seen once in 50 years.

Nor is she aware that our ten aircraft carriers are valued at $1 each, against an actual cost of $10 billion each in today’s dollars. And what is Yosemite worth on the open market, or Yellowstone, or the Grand Canyon? These all render her net worth calculations meaningless.

No, the USA is not a short. In fact, it is a long term scream long. The arguments as to why show up in the Diary of a Mad Hedge Fund Trader every day of the year. During the publishing run of this letter, I have seen the Dow Average soar from 600 to 30,000.

How could I think otherwise?

Mary expounds at length on her analysis, which you can buy in a book entitled USA Inc. at Amazon by clicking here.

 

Worth More Than a Dollar?

/by
MHFTF

Hanging With Leonardo

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With the Volatility Index (VIX) going through the roof today, I think it is timely to remind everyone what it is.

At my advanced age, I have very few friends. Most of them are either puttering around some county golf course, or are dead.

By there is one who has stuck with me for my entire 50-year trading career, through thick and thin.

That would be Leonardo Fibonacci.

It always seemed like he could read my mind, as well as everyone else’s.

When a stock looks like it fell into a bottomless pit, it would bounce hard off of the precise price that he selected.

Similarly, he always knew high prices would rise before they topped out.

As a result, I think of Fibonacci as more of a magician than a mathematician.

I remember the 12th century like it was yesterday.

In those days, the leading intellectuals used to get together and drink wine by the gallon, which then was really little more than rotten grape juice.

The problem was that we all used to pass out before anybody came up with a great idea.

Then someone started importing coffee from the Middle East, and thinkers stayed awake long enough to produce great thoughts.

Enter the Renaissance.

One of the guys I used to hang out with then was named Leonardo Fibonacci.

Good old Leo was a man after my own heart, a world-class nerd and geek, with a penchant for mathematics.

His dad was a diplomat from the Court at Pisa to the Algiers sultanate who had a nice little import/export business on the side. 

It is safe to say that there was probably as little action in Algiers than as there is today. I know, because I’ve been there.

Instead of camping out in his dad’s basement and staying depressed like a lot of young men these days, Leo killed time trolling the local bazaars for interesting used books he could buy on the cheap.

Remember, this was before texting. 

That was not hard to do since most people couldn’t read. He took the trouble to learn Arabic and translated them back into Latin. Ancient math books were his specialty.

It didn’t take Leo long to figure out that the Arabs had developed a numbering system vastly superior to the Roman numerals then in use in Europe. 

Most importantly, they mastered the concept of zero and the placement of digits in addition and subtraction. The Arabs themselves, in fact, lifted these concepts from archaic Indian mathematicians as far back as the 6thcentury.

If you don’t believe me about the significance of this discovery, try multiplying CCVII by XXXIV. (The answer is VIIXXXVIII, or 7,038).

Good luck designing a house, a bridge, or a computer software program with such a cumbersome numbering system.

Leo didn’t just stop there.

He also discovered a series of numbers, which seemed to have magical predictive powers. The formula is extremely simple. Start with zero, add the next number, and you have the next number in the series.

Continue the progression and you get 0,1,1,2,3,5,8,13,21,34,55…. and so on. It’s no surprise that the sequence became known as the “Fibonacci Sequence”.

The great thing about this series is that if you divide any number in it by the next one, you get a product that has become known as the “Golden Ratio”. This number is 1:1.618, or 0.618 to one.

Fibonacci’s original application for this number was to predict the growth rate of a population of breeding rabbits. 

Then some other mathematicians started poking around with it. It turns out the Great Pyramid in Egypt was built to the specification of a Fibonacci ratio. 

So is the rate of change of the curvature in a seashell, or a human ear. So is the ratio of the length of your arms to your legs.

Upon closer inspection, the Fibonacci formula turned out to be absolutely everywhere, from the structure of the tiniest cell to the swirl of the largest galaxies in the universe.

Fibonacci introduced his findings in a book entitled “Liber Abaci”, or “Free Abacus” in English, which he published in 1202. 

In it, he proposed the 0-9 numbering system, place values, lattice multiplication, fractions, bookkeeping, commercial weights and measures, and the calculation of interest. 

It included everything we would recognize as modern mathematics.

The book launched the scientific revolution in Europe that led us to where we are today and was a major bestseller. In fact, you can still buy it on Amazon, making it the longest continuously published book in history.

Enter the stock market.

By the end of the 19thcentury, some observers noticed that share prices tended to move in predictable patterns on charts. 

In particular, they always seemed to advance and pull back around the numbers forecast by my friend, Fibonacci, seven hundred years earlier. 

These people came to be known as “technical analysts,” as opposed to fundamental analysts, who look at the underlying business behind each company.

By the 1930s, Fibonacci numbers had worked their way into mainstream technical analytical theories, such as Elliot Wave.

Today, most market tracking software and data systems, like Bloomberg, will automatically throw up Fibonacci support and resistance numbers on every stock chart.

Why am I talking about this?

Because I am frequently asked how I pick the precise strike prices for options in my own Trade Alert Service. 

I use a combination of moving averages, moving average convergence-divergence (MACD) indicators, Bollinger bands, Fibonacci numbers, and a mumbling chant taught to me by an old Yaqui Indian shaman.

And I do all of this only after going over the underlying fundamentals of the stock or index with a fine-tooth comb. I can’t be any clearer than that.

Enter the high-frequency traders. Knowing that the bulk of us rely on Fibonacci numbers for our short-term trading calls, they have developed algorithms that seek to exploit that preference.

They enter a large number of stop-loss orders to sell just below a “Fibo” support level, then put up fake, but extremely large offers just above it which are usually cancelled.

Only 1% of these orders ever get executed.

When conventional traders see these huge offers to sell, they panic, dump their stocks, and trigger the stop losses. The HFTs then jump in and cover their own shorts for a quick profit, sometimes only for a fraction of a penny.

The net effect of these shenanigans is to make Fibo numbers less effective. Fibo support is just not as rock solid as it used to be, nor is resistance.

This is why the performance of several leading technical analysts has seriously deteriorated in recent years.

Although their importance is now somewhat diluted, I still enjoy Fibonacci numbers as I see them in nature all around me. They occasionally have other uses such as in cryptography.

When I watched The Da Vinci Code sequel, “Angels & Demons,” and listened to the clues, I recognized the handiwork of my old friend Leo.

The rest of the audience sat there clueless, except for the group in the next row wearing “UC BERKELEY” hoodies.

For the fellow geeks and nerds among you, here are the precise Fibonacci numbers indicating support and resistance, which you will find on a stock chart.

Fibonacci Ratios

Fibonacci ratios are mathematical relationships, expressed as ratios, derived from the Fibonacci sequence. The key Fibonacci ratios are 0%, 23.6%, 38.2%, and 100%. 

          

 

The key Fibonacci ratio of 0.618 is derived by dividing any number in the sequence by the number that immediately follows it. For example: 8/13 is approximately 0.6154, and 55/89 is approximately 0.6180.

  

The 0.382 ratio is found by dividing any number in the sequence by the number that is found two places to the right. For example: 34/89 is approximately 0.3820.

The 0.236 ratio is found by dividing any number in the sequence by the number that is three places to the right. For example: 55/233 is approximately 0.2361.

The 0 ratio is :

 

Leonardo Fibonacci (Maybe)

 

 

 

/by
MHFTR

The Secret Fed Plan to Buy Gold

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With the latest effort to expand quantitative easing through the Fed purchase of individual corporate bonds, we must consider what else our central bank has up its sleeve.

With American interest rates already near zero, the markets will take the rates for all interest-bearing securities well into negative numbers. This has already happened in Japan and Germany.

At that point, our central bank’s primary tool for stimulating US businesses will become utterly useless, ineffective, and impotent.

What else is in the tool bag?

How about large-scale purchases of Gold (GLD)?

You are probably as shocked as I am with this possibility. But there is a rock-solid logic to the plan. As solid as the vault at Fort Knox.

This theory gained credence when my old friend, Judy Shelton, was appointed to the federal reserve, a noted gold bug.

The idea is to create asset price inflation that will spread to the rest of the economy. It already did this with great success from 2009-2014 with quantitative easing, whereby almost every class of debt securities were hoovered up by the government.

“QE on steroids”, to be implemented only after overnight rates go negative, would involve large-scale purchases of not only gold, but stocks, government bonds, and exchange-traded funds as well. Corporate bond purchases are simply a step in that direction.

If you think I’ve been smoking California’s largest cash export (it’s not the raisins) you would be in error. I should point out that the Japanese government is already pursuing QE to this extent, at least in terms of equity-type investments and ETFs, and already owns a substantial part of the Japanese stock market.

And, as the history buff that I am, I can tell you that it has been done in the US as well, with tremendous results.

If you thought that President Obama had it rough when he came into office in 2009 with the Great Recession on, it was nothing compared to what Franklin Delano Roosevelt inherited.

The country was in its fourth year of the Great Depression. US GDP had cratered by 43%, consumer prices crashed by 24%, the unemployment rate was 25%, and stock prices vaporized by 90%. Mass starvation loomed.

Drastic measures were called for.

FDR issued Executive Order 6102 banning private ownership of gold, ordering them to sell their holdings to the US Treasury at a lowly $20.67 an ounce.

He then urged Congress to pass the Gold Reserve Act of 1934, which instantly revalued the government’s holdings at $35.00, an increase of 69.32%. These and other measures caused the value of America’s gold holdings to leap from $4 to $12 billion. That’s a lot of money in 1934 dollars, about $208 billion in today’s money.

Since the US was still on the gold standard back then, this triggered an instant dollar devaluation of more than 50%. The high gold price sucked in massive amounts of the yellow metal from abroad creating, you guessed it, inflation.

The government then borrowed massively against this artificially created wealth to fund the landscape-altering infrastructure projects of the New Deal.

It worked.

During the following three years, the GDP skyrocketed by 48%, inflation eked out a 2% gain, the unemployment rate dropped to 18%, and stocks jumped by 80%. Happy days were here again.

Monetary conditions are remarkably similar today to those that prevailed during the last government gold buying binge.

There has been a de facto currency war underway since 2009. The Fed started when it launched QE, and Japan, Europe, and China have followed. Blue-collar unemployment and underpayment are at a decades high. The need for a national infrastructure program is overwhelming.

However, in the 21st century version of such a gold policy, it is highly unlikely that we would see another gold ownership ban.

Instead, the Fed would most likely move into the physical gold market, sitting on the bid for years, much like it recently did in the Treasury bond market for five years. Gold prices would increase by a multiple of current levels.

It would then borrow against its new gold holdings, plus the 4,176 metric tonnes worth $200 billion at today’s market prices already sitting in Fort Knox, to fund a multi trillion-dollar infrastructure spending program.

Heaven knows we need it. Millions of blue-collar jobs would be created, and inflation would come back from the dead.

Yes, this all sounds like a fantasy. But negative interest rates were considered an impossibility only years ago.

The Fed’s move on gold would be only one aspect of a multi-faceted package of desperate last-ditch measures to extend economic growth into the future which I outlined in a previous research piece (click here for “What Happens When QE Fails” by clicking here).

That’s assuming that the gold is still there. Treasury Secretary Stephen Mnuchin says he saw the gold himself during an inspection that took place on the last solar eclipse over Fort Knox in 2018. The door to the vault at Fort Knox had not been opened since September 23, 1974.

But then Steve Mnuchin says a lot of things. Persistent urban legends and internet rumors claim that the vault is actually empty or filled with fake steel bars painted gold. 

 

bringing back the gold standard

But is it Really Gold?

You Can See the Upside Breakout Coming Clear as Day

 

 

 

/by
Mad Hedge Fund Trader

2021 Annual Asset Class Review

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I am once again writing this report from a first-class sleeping cabin on Amtrak’s legendary California Zephyr.

By day, I have two comfortable seats facing each other next to a panoramic window. At night, they fold into two bunk beds, a single and a double. There is a shower, but only Houdini could navigate it.

I am anything but Houdini, so I go downstairs to use the larger public hot showers. They are divine.

 

 

We are now pulling away from Chicago’s Union Station, leaving its hurried commuters, buskers, panhandlers, and majestic great halls behind. I love this building as a monument to American exceptionalism.

I am headed for Emeryville, California, just across the bay from San Francisco, some 2,121.6 miles away. That gives me only 56 hours to complete this report.

I tip my porter, Raymond, $100 in advance to make sure everything goes well during the long adventure and to keep me up-to-date with the onboard gossip.

The rolling and pitching of the car is causing my fingers to dance all over the keyboard. Microsoft’s Spellchecker can catch most of the mistakes, but not all of them.

 

 

As both broadband and cell phone coverage are unavailable along most of the route, I have to rely on frenzied Internet searches during stops at major stations along the way to Google obscure data points and download the latest charts.

You know those cool maps in the Verizon stores that show the vast coverage of their cell phone networks? They are complete BS.

Who knew that 95% of America is off the grid? That explains so much about our country today.

I have posted many of my better photos from the trip below, although there is only so much you can do from a moving train and an iPhone 12 Pro.

After making the rounds with strategists, portfolio managers, and hedge fund traders in the run-up to this trip, I can confirm that 2020 was one of the most challenging for careers lasting 30, 40, or 50 years.

This was the year that EVERYTHING crashed, then posted heroic recoveries. Comparisons with 2008, 1999, and 1929 were frequently made. It truly was a year of extremes.

My own 66.64% return for last year is the best in the 13-year history of the Mad Hedge Fund Trader, nearly ten times the Dow Average performance of 7.3%. Yet, even during the darkest days of the March bottom, when the Dow was down 40%, we were never down more than 12%.

That took my eleven-year average annualized return up to an eye-popping 38.18%.

If you think I spend too much time absorbing conspiracy theories from the Internet, let me give you a list of the challenges I see financial markets are facing in the coming year:

 

 

The Ten Key Variables for 2020

1) Will the Covid-19 vaccine work, or will new mutations render it useless?
2) When will the pandemic peak, at 500,000 or 1 million deaths?
3) Will there be a double dip recession in Q1, or will the economy keep powering on?
4) Will the Democrats get control of the Senate through the Georgia Senate races, paving the way for more government spending?
5) Will technology stocks continue to dominate, or will domestic recovery stocks take over for good?
6) How long will the commodities boom continue?
7) Is the US dollar dead for good or are we approaching a bottom?
8) How long can the Fed artificially support the bond market, or is a crash imminent?
9) Has international trade been permanently impaired or will it recover?
10) Is oil seeing a dead cat bounce or is this a sustainable recovery?

 

 

 

The Thumbnail Portfolio

Equities – buy dips
Bonds – sell rallies
Foreign Currencies – buy dips
Commodities – buy dips
Precious Metals – buy dips
Energy – stand aside
Real Estate – buy dips

 

 

1) The Economy – The Roaring Twenties is Here

With the worst economic whipsaw in American history taking place in 2020, one might be hesitant about making forecasts for 2021. However, I shall press onward.

Last year saw a horrific 32.8% drawdown in Q2 GDP followed by an explosive 33.4% growth in Q3. It was the perfect “V” shaped recovery. However, we won’t see 2019 GDP levels until 2022, so there is plenty of growth to come, both nationally and on an individual company basis.

The reopening of the economy will bring us more double-digit growth after a Q1 slowdown mired by a peaking pandemic and delayed stimulus spending.

But it won’t be the same economy.

I figured out early that the pandemic was instantly moving us ten years into the future, placing a turbocharger on all existing trends. The economy is digitized at a rate that it has never seen before at the expense of mass closings of shopping malls and other old-line business models.

This will continue.

The online economy, working at home, and Zoom meetings are here to stay. You can’t get the genie back into the bottle. That has permanently increased the profitability of all the benefiting industries, while many others will never come back. As a result, the investment portfolio you should own in the future will look nothing like the one you had in the past. It’s not your father’s stock market.

It all sets out a base for an economic boom that could extend for another decade. Yes, Virginia, the Roaring Twenties are here. Better learn that Charleston!

A Rocky Mountain Moose Family

 

2) Equities (SPX), (QQQ), (IWM) (AAPL), (XLF), (BAC)

Stocks will finish much higher in 2021, and with much less volatility. I doubt we see pullbacks of more than 10%. The entire gain in stocks last year came from a massive expansion in earnings multiples. That could continue.

S&P 500 earnings per share will grow in 2021 from the current $180 per share to $200. If we increase the market earnings multiple from the current 18X to 22X, that brings us a combined gain in stock prices of 30%. That will take the (SPX) from a current $3,754 to $4,860. If that sounds high, remember that tech stocks reached 100X multiples in 2000. Many already have.

Why are earnings multiples headed to twenty-year highs? Because the pandemic has greatly increased the productivity of American companies, boosting their profitability and making them vastly more valuable.

Stocks also will rally from here because they are STILL receiving the greatest monetary stimulus in history, some $120 billion a month from the Fed alone, and this is a global trend. And Federal Reserve governor Jay Powell has promised NOT to raise interest rates from near zero for three years. Most of the excess cash is going into the stock market, either directly or indirectly.

Finally, the stock buybacks that drove the market from 2010 to 2019 but were frozen in 2020 will boisterously resume in 2021, exceeding $1 trillion a year.

And here’s the part you don’t want to hear. When QE ends a few years down the road and interest rates rise, the bull market in stocks will take a break. That’s when you get your cut churning 20% correction. I’ll give you the heads up right before that happens.

Technology stocks will continue their relentless rise, although less than at last year’s torrid pace. Love them or hate them, big tech accounts for 27% of stock market capitalization but 50% of US profits. It's why Willie Sutton robbed banks. That is where the money is.

However, in 2021, they will be joined by domestic recovery stocks, such as banks, online financials, constructions, commodities, delivery companies, hotels, airlines, and railroads. This, a barbell portfolio split between the two groups, will be the most effective strategy in 2021.

You can add on Biotech and Healthcare companies as a further diversification, which are entering a golden age of their own.

Passive index investing is over. This year, portfolio managers are going to have to earn their crust of bread through perfect market timing, sector selection, and individual name picking. Good luck with that. But then, that’s why you read this newsletter. I expect the blockbuster 2020 rally to continue into 2021. After that, I expect a correction. Piece of cake!

 

 

 

 

Frozen Headwaters of the Colorado River

 

3) Bonds (TLT), (TBT), (JNK), (PHB), (HYG), (MUB), (LQD)

Amtrak needs to fill every seat in the dining car to get everyone fed on time, so you never know who you will share a table with for breakfast, lunch, and dinner.

There was the Vietnam Vet Phantom Jet Pilot who now refused to fly because he was treated so badly at airports. A young couple desperately eloping from Omaha could only afford seats as far as Salt Lake City. After they sat up all night, I paid for their breakfast.

A retired British couple was circumnavigating the entire US in a month on a “See America Pass.” Mennonites returning home by train because their religion forbade automobiles or airplanes.

The national debt ballooned to an eye-popping $28 trillion in 2020, a gain of an incredible $5 trillion and a post-World War II record. Yet, as long as global central banks are flooding the money supply with trillions of dollars in liquidity, bonds will not fall in value too dramatically. I’m expecting a slow grind down in prices and up in yields.

With a stable Fed, the best-case scenario is that the ten-year Treasury bond yield (TLT) will rise from 0.95% to 1.25% in 2021, and the worst case is they rise all the way up to 2.00%. That would take the price of the (TLT) down from $158 to $136. Remove any of that record liquidity from the system sooner than expected, and the bond market crashes, causing interest rates to soar and prices to crater.

It’s not impossible. We now have a democratic president and a republican Fed governor. Suffice it to say that all risks and surprises in the bond market are overwhelmingly to the downside.

What is different this year is that the US dollar is in free fall. That will dampen foreign demand for US debt, about half of the total.

Bond investors today get an unbelievably bad deal. If they hang on to the longer maturities, they will get back only 90 cents worth of purchasing power at maturity for every dollar they invest a decade down the road, at best.

 

 

 

A Visit to the 19th Century

 

4) Foreign Currencies (FXE), (EUO), (FXC), (FXA), (YCS), (FXY), (CYB)

Throughout human history, whenever a country’s borrowing exceeded its GDP, its currency collapsed. It happened to the Roman Empire, Bourbon France, Weimer Germany, post-colonial Great Britain, and now the US. Quite simply, whenever you print more of a currency, it becomes less valuable.

The national debt just exploded from $23 trillion to $28 trillion in 2020, and we are in store for $32 trillion in a year or 152% of the US GDP of $21 trillion. How many people have noticed?

Check out your charts and you’ll see that the US dollar started to depreciate while the Japanese yen and Euro started to gain, after we topped the 100% mark. This greenback weakness could continue for a decade.

There is even more trouble.

I have pounded away at you for years that interest rate differentials are far and away the biggest decider of the direction in currencies.

This year will prove that concept once again.

With American overnight rates now at 0.25% and ten-year Treasury bonds at 0.92%, the US has the highest interest rates of any major industrialized economy with the exception of China. This means that the US will be the last to raise interest rates from here.

Compounding the problem is that a weak dollar begets selling from foreign investors. The Chinese government, the world’s largest buyer of government bonds, have been boycotting US Treasuries for three years now. Maybe it’s something the president said? They are in a mood to do so anyway, as they see a chronically high US trade deficit as a burgeoning threat to the value of the greenback.

So, the dollar will continue weak against all major currencies, especially the Japanese yen (FXY), the Australian (FXA), and Euro (FXE).

This explains the recent success with points all weak dollar plays, including emerging markets (EEM), commodities (FCX), and precious metals (GLD).

You can take that to the bank!

 

 

 

 

 

5) Commodities (FCX), (VALE), (DBA)

The global synchronized economic recovery now in play can mean only one thing, and that is sustainably higher commodity prices.

Industrial commodities, like copper and iron ore, have just posted their best years in a decade, the red metal rising by an eye-popping 87% off of the March market bottom.

The heady days of the 2011 commodity bubble top are now in play. That is as investors are already front running that move, loading the boat with Freeport McMoRan (FCX), US Steel (X), and BHP Group (BHP).

Now that this sector is convinced of a permanently weak US dollar and higher inflation, it is taking off like a scalded chimp.

China will still demand prodigious amounts of imported commodities, but not as much as in the past. Much of the country has seen its infrastructure build out, and it is turning from a heavy industrial to a service-based economy, like the US. Miners are keeping a sharp eye on India as the next major commodity consumer.

The great thing about commodities is that it takes a decade to bring new supply online, unlike stocks and bonds, which can merely be created by an entry in an excel spreadsheet. As a result, they always run far higher than you can imagine.

 

 

 

Snow Angel on the Continental Divide

 

6) Energy (DIG), (RIG), (USO), (DUG), (UNG), (USO), (XLE), (AMLP)

One of my best predictions of 2020 was that energy would be a complete disaster, and so it was. In fact, energy has been a horrific investment for the last 20 years. I never thought I’d see negative oil prices in the futures market, but we got them in April.

The industry invested trillions in infrastructure in a grand plan to export natural gas to China. Just as it was coming onstream, the president declared a trade war against China, its principal customer. Then the pandemic collapsed the global economy.

So, where does that leave us for 2021?

A lot of people have been piling into energy lately on the hope that happy days are here again.

I view carbon-based energy companies as the next generation of buggy whip makers. No matter how green the seven sisters talk, we are moving to an all-alternative energy economy over the next 20 years. That means you should sell energy NOW. Tesla (TSLA) shares rocketing from $3.30 to $600 in a decade tells you as much.

I believe what we are seeing is a lot of buying on technicals, on cheap prices, and of dogs of the Dow. No one is talking about an embedded structural oversupply of oil that will never be unwound.

Saudi Arabia said as much with the flotation of Saudi Aramco, which has a monopoly on oil production in the kingdom. After a three-year effort, they were only able to shift 1.5% of the company in a local stock exchange listing. It was one of the greatest accounting frauds in history. Only global index funds that HAD to buy shares picked it up. When Saudi Arabia wants to get out of the oil business, so should you.

OPEC Plus engineered a modest 500,000 production increase at their December Vienna meeting, and that has helped prices rise 10%. It is no more than a band-aid on a great gaping wound.

And now, ESG investing has banned new money from going into energy by most of the investment community. Like tobacco, that will leave a permanently cheap energy sector to a handful of niche players.

Use this as your last chance to get out at a decent price.

Our train has moved over to a siding to permit a freight train to pass, as it has priority on the Amtrak system.

Three Burlington Northern engines are heaving to pull over 100 black, spanking brand-new tank cars, each carrying 30,000 gallons of oil from the fracking fields in North Dakota.

There is another tank car train right behind it. No wonder Warren Buffett tap dances to work every day, as he owns the railroad.

We are also seeing relentless improvements on the energy conservation front with more electric vehicles, high mileage conventional cars, and newly efficient buildings. Electric cars are now 4% of US car sales and that could rise to 25% by 2025. Conventional Energy doesn’t fit anywhere in this industry.

In addition, the incoming administration is distinctly pro-environment and anti-energy and could deep six a 100-year accumulation of oil and gas subsidies in the next tax bill. The energy industry now carries far more political risk than the drug industry, once an unimaginable thought.

Any one of these inputs is miniscule on its own. But, add them all together, and you have a game-changer, a new paradigm.

We will never see $100/barrel crude again. The last peak in oil prices is the last one we ever see. The word is that leasing companies will stop offering five-year agreements in five years because cars with internal combustion engines will become worthless by then.

As a result, I think I will stand aside from the energy industry in 2021, and maybe, forever. You should too.

 

 

 

 

7) Precious Metals (GLD), (DGP), (SLV), (PPTL), (PALL)

The train has added extra engines at Denver, so now we may begin the long laboring climb up the Eastern slope of the Rocky Mountains.

On a steep curve, we pass along an antiquated freight train of hopper cars filled with large boulders.

The porter tells me this train is welded to the tracks to create a windbreak. Once, a gust howled out of the pass so swiftly that it blew a passenger train over on to its side.

In the snow-filled canyons, we sight a family of three moose, a huge herd of elk, and another group of wild mustangs. The engineer informs us that a rare bald eagle is flying along the left side of the train. It’s a good omen for the coming year.

We also see countless abandoned 19th century gold mines and the broken-down wooden trestles leading to them, relics of previous precious metals booms. So, it is timely here to speak about the future of precious metals.

Gold (GLD) brought in a respectable 21% return in 2020, its best performance in ten years. It’s not as much as many hot stocks, but better than a poke in the eye with a sharp stick.

As long as the world was clamoring for paper assets like stocks, gold was just another shiny rock. After all, who needs an insurance policy if you are going to live forever?

But the long-term bull case is still there. Gold is not dead; it is just resting.

If you forgot to buy gold at $35, $300, or $800, there is another entry point up here at $1,800 for those who, so far, have missed the gravy train.

To a certain extent, the belief that high interest rates are bad for gold is a myth. Wealth creation is a far bigger driver, and we have had plenty of that lately. Since the March bottom, stock has gained some $12.6 trillion in value, a meteoric 70% gain. To see what I mean, take a look at a gold chart for the 1970s when interest rates were going through the roof.

Remember, this is the asset class that takes the escalator up and the elevator down, and sometimes the window. 

If the institutional world devotes just 5% of their assets to a weighting in gold, and an emerging market central bank bidding war for gold reserves continues, it has to fly to at least $2,300, the inflation-adjusted all-time high, or more.

This is why emerging market central banks step in as large buyers every time we probe lower prices. China and India emerged as major buyers of gold in the final quarters of 2020.

They were joined by Russia, which was looking for non-dollar investments to dodge US economic and banking sanctions.

That means it’s just a matter of time before gold breaks out to a new all-time high, above $2,080 an ounce. ETF players can look at the 1X (GLD) or the 2X leveraged gold (DGP).
 
I would also be using the next bout of weakness to pick up the high beta, more volatile precious metal, silver (SLV), which I think could rise from the present $18 and hit $50 once more, and eventually $100. Next year will see the production of one million electric cars and 500,000 solar panels and all of them require some amount of silver.

The turbocharger for gold will hit sometime in 2021 with the return of inflation. Hello stagflation, it’s been a long time.

 

 

 

 

Would You Believe This is a Blue State?

 

8) Real Estate (ITB), (LEN)

The majestic snow-covered Rocky Mountains are behind me. There is now a paucity of scenery, with the endless ocean of sagebrush and salt flats of Northern Nevada outside my window, so there is nothing else to do but write. 

My apologies in advance to readers in Wells, Elko, Battle Mountain, and Winnemucca, Nevada.

It is a route long traversed by roving banks of Indians, itinerant fur traders, the Pony Express, my own immigrant forebearers in wagon trains, the transcontinental railroad, the Lincoln Highway, and finally US Interstate 80, which was built for the 1960 Winter Olympics at Squaw Valley.

Passing by shantytowns and the forlorn communities of the high desert, I am prompted to comment on the state of the US real estate market.

There is no doubt a long-term bull market in real estate is underway.

The good news is that we will not see a 2008 repeat when home values cratered by 50%-70%. There is just not enough leverage in the system yet to do any real damage. That has gone elsewhere, like in exchange traded funds, leveraged ETFs, Bitcoin, and SPACs. You can thank Dodd/Frank for that, which imposed capital rules so strict that it is now almost impossible for banks to commit suicide.

You are not going to see any serious damage in a market where there is a generational structural shortage of supply, as with housing.

We are probably ten years into an 18-year run at the next peak in 2028.

There are only three numbers you need to know in the housing market for the next 20 years: there are 80 million baby boomers, 65 million Generation Xer’s who follow them, and 86 million in the generation after that, the Millennials.

The boomers have been unloading dwellings to the Gen Xer’s since prices peaked in 2007. But there is not enough of the latter, and three decades of falling real incomes mean that they only earn a fraction of what their parents made. That’s what caused the financial crisis.

If they have prospered, banks won’t lend to them. Brokers used to say that their market was all about “location, location, location.” Now it is “financing, financing, financing.” Imminent deregulation is about to deep six that problem.

There is a happy ending to this story.

Millennials now aged 25-40 are already starting to kick in as the dominant buyers in the market. They are transitioning from 30% to 70% of all new buyers of homes.

The Great Millennial Migration to the suburbs has just begun. So has the migration from the coast to the American heartland.  Personally, I like Reno, Nevada. 

As a result, the price of single-family homes should rocket tenfold during the 2020s, as they did during the 1970s and the 1990s when similar demographic forces were at play.

This will happen in the context of a coming labor shortfall, soaring wages, and rising standards of living.

Rising rents are accelerating this trend. Renters now pay 35% of their gross income, compared to only 18% for owners, and less, when multiple deductions and tax subsidies are taken into account.

Remember, too, that the US will not have built any new houses in large numbers in 12 years. The 50% of small homebuilders that went under during the crash aren’t building new homes today.

We are still operating at only a half of the peak rate. Thanks to the Great Recession, the construction of five million new homes has gone missing in action.

That makes a home purchase now particularly attractive for the long term, to live in, and not to speculate with.

You will boast to your grandchildren how little you paid for your house, as my grandparents once did to me ($3,000 for a four-bedroom brownstone in Brooklyn in 1922), or I do to my kids ($180,000 for a two-bedroom in Upper East Side Manhattan high rise with a great view of the Empire State Building in 1983).

That means the major homebuilders like Lenar (LEN), Pulte Homes (PHM), and KB Homes (KBH) are a buy on the dip.

Quite honestly, of all the asset classes mentioned in this report, purchasing your abode is probably the single best investment you can make now.

If you borrow at a 2.8% 30-year fixed rate, and the long-term inflation rate is 3%, then, over time, you will get your house for free.

How hard is that to figure out?

 

 

 

Crossing the Bridge to Home Sweet Home



9) Postscript

We have pulled into the station at Truckee in the midst of a howling blizzard.

My loyal staff has made the ten-mile trek from my beachfront estate at Incline Village to welcome me to California with a couple of hot breakfast burritos and a chilled bottle of Dom Perignon Champagne, which has been resting in a nearby snowbank. I am thankfully spared from taking my last meal with Amtrak.

 

 

After that, it was over legendary Donner Pass, and then all downhill from the Sierras, across the Central Valley, and into the Sacramento River Delta.

Well, that’s all for now. We’ve just passed what left of the Pacific mothball fleet moored near the Benicia Bridge (2,000 ships down to six in 50 years). The pressure increase caused by a 7,200-foot descent from Donner Pass has crushed my plastic water bottle. Nice science experiment!

The Golden Gate Bridge and the soaring spire of Salesforce Tower are just around the next bend across San Francisco Bay.

A storm has blown through, leaving the air crystal clear and the bay as flat as glass. It is time for me to unplug my Macbook Pro and iPhone 12 Pro, pick up my various adapters, and pack up.

We arrive in Emeryville 45 minutes early. With any luck, I can squeeze in a ten-mile night hike up Grizzly Peak and still get home in time to watch the ball drop in New York’s Times Square.

I reach the ridge just in time to catch a spectacular pastel sunset over the Pacific Ocean. The omens are there. It is going to be another good year.

I’ll shoot you a Trade Alert whenever I see a window open at a sweet spot on any of the dozens of trades described above.

Good luck and good trading in 2021!

John Thomas
The Mad Hedge Fund Trader

 

The Omens Are Good for 2021!

/by
Mad Hedge Fund Trader

What Happened to the Dow?

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When I joined Morgan Stanley some 35 years ago, one of the grizzled old veterans took me aside and gave me a piece of sage advice.

“Never buy a Dow stock”, he said. “They are a guarantee of failure.”

That was quite a bold statement, given that at the time the closely watched index of 30 stocks included such high-flying darlings as Eastman Kodak (EK), Sears Roebuck & Company (S), and Bethlehem Steel (BS). It turned out to be excellent advice.

Only ten of the Dow stocks of 1983 are still in the index (see tables below), and almost all of the survivors changed names. Standard Oil of California became Chevron (CVX), E.I du Pont de Nemours & Company became DowDuPont, Inc. (DD), and Minnesota Mining & Manufacturing became 3M (MMM).

Almost all of the rest went out of business, like Union Carbide Corporation (the Bhopal disaster) and Johns-Manville (asbestos products) or were taken over. A small fragment of the old E.W. Woolworth is known as Foot Locker (FL) today.

Charles Dow created his namesake average on May 26, 1896, consisting of 12 names. Almost all were gigantic trusts and monopolies that were broken up only a few years later by the Sherman Antitrust Act.

In many ways, the index has evolved to reflect the maturing of the US economy, from an 18th century British agricultural colony, to the manufacturing powerhouse of the 20th century, to the technology and services-driven economy of today.

Of the original Dow stocks, only one, US Leather, vanished without a trace. It was the victim of the leap from horses to automobile transportation and the internal combustion engine. United States Rubber is now part of France’s Michelin Group (MGDDY).

American Tobacco reinvented itself as Fortune Brands (FBHS) to ditch the unpopular “tobacco” word. National Lead moved into paints with the Dutch Boy brand. It sold off that division when the prospects for leaded paints dimmed in 1970 (they cause mental illness in children).

What was the longest-lived of the original 1896 Dow stocks? General Electric (GE), originally founded by light bulb inventor Thomas Edison. It went down in flames thanks to poor management and was delisted in 2018. It was a 122-year run. Today, it is one of the great turnaround challenges facing American Industry.

Which company is the American Leather of today? My bet is that it’s General Motors (GM), which is greatly lagging behind Tesla (TSLA) in the development of electric cars (99% market share versus 1%). With a product development cycle of five years, it simply lacks the DNA to compete in the technology age.

What will be the largest Dow stock in a decade? Regular readers of the Mad Hedge Fund Trader already know the answer.

 

 

Sears: Not the Path to Wealth and Riches

 

Me Not Buying Dow Stocks in 1983

/by
Mad Hedge Fund Trader

The Market Outlook for the Week Ahead, or Raiding the Piggy Bank

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I remember the last time that the market went up 10% in ten days.

In the fall of 1982, I was in the office of Carl Van Horn, the chief investment officer of JP Morgan Bank. I was interviewing him about the long-term prospects for the stock market with the Dow Average at 600 and gurus like Joe Granville predicting Dow 300 by yearend.

The odd thing about the interview was that he kept ducking out of the room for a minute at a time and then coming back in. I finally asked him what he was doing. He answered, “Oh, I had to go out and buy $100 million worth of stock.”

And that was back when $100 million actually bought you something!

Over the last two weeks, the Dow Average has tacked on a historic $4,000 points. For a few fleeting second, it actually touched 30,000. Cassandras everywhere are tearing their hair out.

The monster rally began a few days before the election and has continued unabated. In my view, this is the second leg of a 20-fold move that started in 2009 when the Dow was at 6,000 and will continue all the way up to 120,000 by 2029.

No wonder investors are so bullish! It seems that recently, quite a few have come over to my way of thinking.

And how could they not be so bovine-inclined?

The most contentious election in history over. The pandemic is about to end. In a year we’ll, all have our Covid-19 vaccinations, at least those who want them. I’m planning on getting all six.

The greatest burst of economic growth in history is about to be unleased. Consumption wasn’t destroyed, just deferred into 2021 and 2022, unless you’re in the cruise, airline, or restaurant business. The exponential profit growth unleashed by the pandemic isn’t even close to being discounted.

This hasn’t been just any old rally. Stocks left for dead years ago, the old-line industrials and cyclicals have sprung back to life. Union Pacific (UNP) has exploded. JP Morgan Chase (JNP) has gone off to the races. Caterpillar (CAT) is in orbit.

The great thing about these moves is that it is very early days. They could run for years. But where will the money come from to pay for these? How about raising the big tech piggy bank, which has been leading markets for years and is now wildly overvalued.

However, $4,000 points is a lot. So, we may get some back and fill and a sideways “time” correction before we attempt higher highs by yearend. The only thing that could upset this scenario is if Covid-19 cases explode, which they are now doing.

Where will the market care? Who knows, but like stock prices, US Corona cases have doubled in ten days to 160,000.


Covid-19 is cured! News that Pfizer (PFE) has discovered a Covid-19 vaccine that is 90% effective has sent stocks soaring to new all-time highs! The Dow futures were up $1,800 at the highs pre-market. The Great Depression is over. Recovery stocks like banks, cruise ships, restaurants, energy, and railroads are exploding to the upside, with stay-at-home stocks such as couriers, precious metals, and streaming companies in free fall. Some 500,000 health care workers have priority in getting the two-shot regime. The US Army will begin national distribution almost immediately, but you may not get it until the summer.

Market volatility crashed, with the Volatility Index (VIX) down from $41 last week to $18. Happy times are here again, at least says the market, this minute. I told you to go short last week!

Walt Disney is the best recovery play in the market. With theme parks, hotels, and cruise ships, it had the most exposure of any blue-chip company to the pandemic. It is also best positioned for any recovery. The stock was up 26% at the highs this morning. Only its rock-solid balance sheet gets this company alive. My 2021 target is $200 a share. Back to waiting in lines for hours, packing shoulder to shoulder on rides, and paying $20 for hamburgers.

The end of the depression may be in sight, but the US still faces a massive loan default wave that could erode confidence in the economy. A full economic recovery in a year will be too late for millions of businesses, especially small ones. The Fed says the risks are “severe,” and Disneyland is still laying off workers. Just when you think we are risk-free; we are not.

A big recovery in dividend stocks is coming after sitting in the doghouse for years while big tech hogged the limelight. Phillip Morris (PM) at a 6.7% yield? AbbVie (ABBV) at 5.5%? Williams Co (WMB) at 8.3%? They certainly will draw some buyers in this near-zero interest rate world. High yields REITs are also in for some joy now that a vaccine is on the horizon.

Home Prices are soaring at the fastest rate in seven years. Ultra-low interest rates and a structural shortage create the perfect storm for higher prices. Houses are now seen as “safe” since they didn’t crash 40% like the stock market did in the spring. Mortgage brokers are so overloaded it takes three months to get a refi done. This could continue for another decade.

China’s “Single’s Day” breaks all records, bringing in an eye-popping $116 billion in sales for Alibaba (BABA). US customers were the biggest buyers, eclipsing our “Black Friday” by a huge margin. I told you (BABA) was a “BUY”.

Biden could lock down the economy for 4-6 weeks if new cases keep growing at their current rate. That would knock the pandemic on the nose for good, but is it worth the price? That is an idea making the rounds in the incoming Biden administration. Cases could be peaking at 250,000 a day right around the inauguration. I may not go this year.

Stocks may Go up for years. That’s is what the Volatility Index (VIX) is telling us down here at $22. If we break below $20 and stay there, then the long-term Bull market becomes a sure thing. Stocks are now discounting the end of the pandemic.

When we come out the other side of pandemic, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 400% to 120,000 or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 120,000 here we come!
 
My Global Trading Dispatch exploded to another new all-time high last week. November is up 12.31%, taking my 2020 year-to-date up to a new high of 48.34%. That brings my eleven-year total return to 404.25% or double the S&P 500 over the same period. My 11-year average annualized return now stands at a new high of 37.03%.

It was a week of profit-taking on the fully invested portfolio I piled on just before the election. My one new long was in the silver ETF (SLV) and my one new short was in (TLT), both of which turned immediately profitable. I used the one dip of the week to cover a short in the (SPY) close to cost.

It worked in spades.

The coming week will be a sleeper compared to the previous one. We also need to keep an eye on the number of US Coronavirus cases and deaths, now over 10 million and 240,000, which you can find here.

When the market starts to focus on this, we may have a problem.

On Monday, November 16 at 9:30 AM EST, the Empire State Manufacturing Index is out.

On Tuesday, November 17 at 9:30 AM, US Retail Sales are published.

On Wednesday, November 18 at 9:30 AM, US Housing Starts for October are released.

On Thursday, November 19 at 8:30 AM, the Weekly Jobless Claims are announced. At 11:00 AM, the big Existing Home Sales for October are announced.

On Friday, November 13, at 2:00 PM we learn the Baker-Hughes Rig Count.

As for me, I’ll be cleaning off the grime from the last Boy Scout trip of the year up to the giant redwoods of north Mendocino County. I haven’t been up there in 13 years and boy has it changed. The vineyards have ground enormous and entire new exurbs have been constructed. There are only a few apple farms left, where I picked up some nice cider, pie, and bags of fresh apples.

There are still a few bits of the old California left.

Stay healthy.

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

 

 

 

 

 

 

 

 

 

/by
Mad Hedge Fund Trader

November 11 Biweekly Strategy Webinar Q&A

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Below please find subscribers’ Q&A for the November 11 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Silicon Valley, CA with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!

Q: I bought Amazon (AMZN) on the dip and am concerned.

A: What I would say for all tech questions is take profits for the short term but keep them for the long term. All we’re seeing is a natural rotation out of big tech into domestic recovery stocks, which is long overdue; Where do you raid the piggy bank to get the money to buy domestic recovery stocks? Tech! But tech always comes back so if you can take the pain then keep them. Otherwise, if you’re a trader, then you probably should be looking at other new sectors like the one we’ve been calling.

Q: How does Tesla (TSLA) compete with Chinese electric vehicles? They copy, then improve, that’s their mojo.

A: Not actually; 12 years ago, I toured China visiting all of their electric car factories. They were pumping out tens of thousands of electric cars before Tesla ever produced even one of them. The problem is that the quality and safety standards are terrible, and they have a nasty habit of catching on fire. They have never been able to produce a car to compete in the US market and I expect that to remain true in the foreseeable future. What is more likely is Tesla will build more cars in China and invite the Chinese to participate as partners.

Q: Is there more downside in tech?

A: Probably, but not much. Apple (AAPL) down 40% from the high after a new iPhone generation launch is always a good rule of thumb. So far, it dropped 25% from the September high.

Q: Will we get another lockdown in the US?

A: Probably not; the states are handling it on a state-by-state basis. I don’t think we’ll ever go back to the total lockdown we had in March/April. It will be much more selective than it was, and the economy will be still able to function to some extent. Plus, it will be over in 3-6 months. The market is trading on recovery, not on the prospect of a further lockdown economy. Use the lockdown risk down days to buy.

Q: Do you see Facebook (FB) going down next year because of anti-trust issues?

A: No, antitrust will go absolutely nowhere; at the very worst they’ll put a disclosure on page 25 of their website, get fined a million dollars and then walk away. That's how these things always work. I was at Facebook quarters yesterday and antirust was the furthest thing from their minds.

Q: What happens to stocks if the vaccines don’t work?

A: We all die and stock go to new lows.

Q: Are you positive on Roku (ROKU)?

A: Yes, but it's overbought and having a correction just like all of the rest of tech.

Q: Would you sell homebuilders based on the chance of interest rates rising under a new administration?

A: Probably yes. Homebuilders (ITB) practically doubled this year. We’ve been recommending them for the entire year, and they have had a fantastic run, but there are better fish to fry right now buying these domestic stocks where you have much more upside potential. It a great place to raid the piggy bank.

Q: Are you saying the dollar (UUP) is going lower against all of the currencies?

A: Yes. The multiyear prospects for the greenback are grim. Sell every rally.

Q: Should we be buying the ProShares Ultra Short 20-year plus US Treasury Fund (TBT) now?

A: No, $14-$15 was the buy. Here you just want to run your long unless we get another $5-$7-point rally in the (TLT), then you want to go into the (TBT); but right now is a terrible entry point for any short bond plays.

Q: If we get a big increase in COVID-19, could the Treasury Bond ETF (TLT) make it back to $161?

A: That is entirely possible because then the fear will become a return to lockdown, and that could cause interest rates to crash and bonds to rally sharply.

Q: Is Advanced Micro Devices (AMD) a buy now or wait for pullback?

A: Wait for a pullback on all of tech, it looks like it has more to go. A lot of these domestic stocks haven’t been touched for years. That's where the money is going in now, and the only way to raid the piggy bank is to sell your tech stocks.

Q: Are the S&P 500 (SPY) put spreads you have risky?

A: Yes, but we don’t get $4,000 points in the Dow Average very often, basically once every 100 years, so I'm hanging on trying to get a better exit point. With any luck, the market will move sideways, and time decay will take our position to max profit next week. The rational thing to do here is at least to come out of one position for a small loss on the next big dip, and then run the other one into expiration and recover that loss.

Q: Can Chevron hit $100?

A: Maybe, as the entire sector is so oversold. But oil will still be the wrong industry to be in going into a Biden administration. Remember, the US had one million leatherworkers back when the population was only 100 million, or about 2% of the workforce. There are no more ten 10,000 leatherworkers today. You don’t want to be investing in the next leather industry.

Q: Any chance that Tesla will be added to the S&P 500 this December?

A: Probably not because all of the Tesla profits are coming from Zero Emission Vehicle (ZEV) credits they receive from other car companies. That’s considered accounting-based income, which Standard and Poor’s does not permit in their profit calculations. You have to have three quarters of consecutive operating profits to qualify for inclusion in the S&P 500, and these green credits don’t meet that qualification.

Q: Is Alibaba (BABA) a good buy now?

A: Probably yes, because the disaster over the Ant Financial listing is a short-term problem. I think eventually, they will list Ant Financial somewhere, they’ll get that money and then it’s off to the races again for (BABA). I predict that US China relations (FXI) are about to improve and that will be good for all Chinese assets.

Q: Is it too late to get into Copper (FCX) or wait for a pullback?

A: Wait for a pullback, that’s why I said stand aside on commodities. They really have had incredible runs already.

Q: Do you think once all the votes are recounted, Trump will be elected? And what will the market do?

A: Recounts never, or very rarely, produce changes in vote counts of more than 500 votes, so that is definitely a short-dated option. If Trump were elected, the Dow would drop about 4,000 points, probably in a day. We would give up the entire Biden rally that’s occurred over the last 6 days and a lot of you would end up jumping out of windows because your stocks have just been slaughtered.

Q: Is Chinese tech a buy?

A: Yes, and that’s one of the reasons I recommended Alibaba. We also like Baidu (BIDU), Tencent Holding (TCTZF), and several of the other Chinese majors. We think there's about to be an improvement in trade relations with China for some strange reason...

Q: Do you record this?

A: Yes, we post it on the website in about 2 hours later to allow for the format conversion. You just have to log in and go to your account section. If you can’t find it, just send an email to our customer support.

Q: Is International Paper (IP) a buy?

A: Yes, it is one of the domestic commodity plays that should do better.

Q: What about Natural Gas ($NATGAS)?

A: We’re not touching that right now because we’re trying to avoid the entire energy sector as the current tax system guarantees never-ending gluts of supply in the face of falling demand. That makes it very difficult to trade against unless you have inside information, on which 90% of all the trading in energy is indeed based.

Q: Best domestic stock play now?

A: Walt Disney Corp. (DIS). Buy Disney on the dip if we get one for some reason. Disney was a perfect storm on the downside, with theme parks, hotels, and cruise lines. It will become a perfect storm on the upside as well. It is also one of the best run companies in the world but hell to work for. Disney characters are not allowed to throw up on duty. They have to do it inside their character suits.

Q: Do you think the Vertex Pharmaceutical (VRTX) pipeline justifies a buy now?

A: Yes, we love the entire biotech sector; and the same is true for Biogen (BIIB).

 

Good Luck and Stay Healthy.

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

 

 

 

 

 

 

/by
Mad Hedge Fund Trader

The Market Outlook for the Week Ahead, or The Election is Here!

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That was a great lead into Halloween last week, where frightening share price movements scared the living daylights out of all of us. The Dow Average dove by 7.0% last week and is down 8.9% from the September 1 peak. It was the worst performance in seven months.

Of course, I saw it all coming a mile off, predicting a selloff going into the November 3 presidential election and a rally once the great uncertainty is removed. That’s why I have run several short positions over the past month, all of which proved successful, and am long flipping to the long side.

The next generational peak at 120,000 is now only 93,499 points away. Time to get moving.

Of course, technical analysts who were eternally bullish at the market top are now wringing their hands over the double top on the charts that even a two-year-old can spot. It’s only giving us a better entry point for longs that will carry us through to yearend.

The stock market has priced in a contested election. If that doesn’t happen, and the winning candidate takes the White House by a landslide, markets will have to immediately back out that dire scenario. Stocks could soar by 1,000 points immediately on the first whiff of a challenge0-proof victory margin.

This time, we have the luxury of trading against a line in the sand at a (SPY) of $310, the 200-day moving average.  Look at the chart below and you’ll see that this was not only close to the highs in 2018 and 2019 and a recent bottom in 2020. As if driven by the force of gravity, the market seems strangely driven to the $310 level.

It’s almost impossible to lose money on call spreads bought at market bottoms when the Volatility Index (VIX) is over 40%, as it was on Thursday and Friday. It’s time to strike while the iron is hot, and other investors are jumping off of bridges.

I’ll be piling into domestic recovery stocks like banks, construction, couriers, railroads, and gold and selling short bonds and the US dollar.

The election has already taken place, as 85 million votes have been cast in early voting. Many states have already seen double their 2016 turnouts. We just don’t know the outcome yet. It’s likely that new Covid-19 infections could top 100,000 on election day.

I’ll be up all night on Tuesday watching the results come in and keeping a hawk-eye on the overnight futures trading in Asia, the only open markets. Watch for Florida and North Carolina to report first.

One of the great ironies of trading last week was that after delivering the best earnings performance in stock market history, we saw one of the worst share price performances.

That’s because all of the great stimulants for the economy in recent months, the prospect of a massive stimulus package, declining Covid-19 cases, and plunging interest rates, will take a three-month vacation while the United States changes governments.

We really do work in a “what have you done for me lately” industry.

It was all about tech earnings last week, with Amazon (AMZN), Alphabet (GOOGL), and Microsoft all reporting. We have to wait until next week for Apple (AAPL). They all knocked the cover off the ball. Only Apple (AAPL) disappointed on a 20% YOY sales drop.

It seems everyone was waiting for the iPhone 12. Stock was off $10. Sales in China also took a big hit. Expect a massive resurgence in Q4. iPhones are selling faster than Apple can make them. Buy (AAPL) on dips. The stock jumps 8%. Forget about the DOJ antitrust suit. Buy (GOOGL) on dips.

Crashing bond prices show that a recovery is imminent, with ten-year US Treasury yields ($TNX) jumping 20 basis points in a month to a four-month high. Buy (SPY) on dips and sell short (TLT) on rallies.

Existing Home Sales soared by 9.4% in September, up a staggering 20% YOY. Inventories fell to a record low 2.7 months. Median prices are up an astounding 14.8% YOY to $311,800. Zillow believes this madness will continue for at least another year. Sales were strongest in the Northeast, with most of the action in single-family homes. Homes over $1 million have doubled, and vacation homes are up 35%.

Q3 GDP exploded with a 33.1% rate, double the highest on record and in line with expectations. All cylinders are firing, except for the 20% of the economy that went bankrupt during the pandemic. The stock market fully discounted this on September 1 when stocks peaked. The US won’t recover its 2019 GDP until 2023. With Corona cases now soaring, are we about to go back into the penalty box?

Weekly Jobless Claims posted at 751,000, an improvement, but still near a record high. It’s the lowest report since pre-pandemic March 14. I think a lot of these losses are structural….and permanent.

The World’s Biggest ETF is bleeding funds, with the (SPY) losing $33 billion this year. Massive selling at market tops has been a major factor. Most of the selling was in February and March when the pandemic started, and the money never came back. It also belies the widespread shift into tech stocks this year. Out with the boring, in with the exciting. Dry powder for the coming Roaring Twenties?

When we come out the other side of the pandemic, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 400% to 120,000 or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 120,000 here we come!
 
My Global Trading Dispatch hit another new all-time high last week. October closed out at a moderate 1.51% profit.

I took a big hit on a long in Visa (V), thanks to a surprise prosecution from the Department of Justice over their Plaid merger. I more than offset that with short positions in the (SPY) and (JPM). Then on Friday, I leaned into the close, picking up new longs in the (SPY), (TSLA), and (CAT) betting on a post-election rally.

That keeps our 2020 year-to-date performance at a blistering +36.03%, versus a LOSS of -7.5% for the Dow Average. That takes my 11-year average annualized performance back to +35.90%. My 11-year total return stood at a new all-time high at +391.94%. My trailing one-year return appreciated to +42.48%.

The coming week will be one of the most exciting in history as election results trickly out Tuesday night. As if we didn’t have enough to worry about,  it is also jobs week. We also need to keep an eye on the number of US Coronavirus cases and deaths, now over 9 million and 232,000, which you can find here.

On Monday, November 2 at 8:00 PM EST, US Vehicle Sales for October are released. Alibaba (BABA) and Sanofi (SNY) report earnings.

On Tuesday, November 3, we get the US Presidential Election. Early results in Florida will start coming out at 7:30 PM EST. TV networks, makers of campaign tchotchke and bumper stickers, and talking heads will go into mourning. Coca-Cola (K) reports earnings.

On Wednesday, November 4 at 9:15 AM EST, the ADP Private Employment Report is out.  QUALCOMM (QCOM) and Wynn Resorts (WYNN) report earnings.

On Thursday, November 5 at 8:30 AM EST, the Weekly Jobless Claims are announced.

On Friday, November 6 at 8:30 AM EST, the October Nonfarm Payroll Report is announced. Barrick Gold (GOLD) reports earnings. At 2:00 PM we learn the Baker-Hughes Rig Count.

As for me, I went to San Francisco for dinner with an old friend last night and I couldn’t believe what I saw. Storefronts were boarded up, the streets vacant, with only the homeless ever present. The cable cars have quit running.

We ate outside at my favorite Italian restaurant Perbacco on Market Street where the heat lamp blasted away. The restaurant is owned by my transplanted Venetian friend Umberto Gibin. He was running it at 50% capacity with 25% of the staff just to break even.

I hope he makes it.

Stay healthy.

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

 

 

 

 

 

 

 

 

With Pieces of a Zero Fighter in Guadalcanal

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Mad Hedge Fund Trader

October 28 Biweekly Strategy Webinar Q&A

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Below please find subscribers’ Q&A for the October 28 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Silicon Valley, CA with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!

Q: Do you think if Trump contests the election, it will be bad for stocks?

A: Yes, count on that knocking another 10% off of stocks. The market has spent the last six months pricing in a Biden win. Take that away and you have to price that back out again, about 6,000 Dow Average points (INDU). We’ve already dropped 2,500 points so that leaves another 3,500 points of downside t0 go in the event of a Trump win.

Q: Will that result in a crash?

 A: Yes. At least 1,000 points in the overnight session following.

Q: Do you think it’s going to happen?

A: No. According to the polls, Trump will lose by at least 15 million votes. While the polls missed the Electoral College result last time, they were dead on with the popular vote, with Hillary Clinton winning by 3 million votes. If the margin were only a few hundred or thousand votes in a single battleground state, Trump might win a court fight. But he can’t win if the margin is in ten states and tens of millions of votes. That is too much to fudge. That is how markets react: they hate surprises, and a second Trump win would be the surprise of the century.

Q: With all of the earnings positive, do you think markets will stay positive?

A: Earnings aren’t important right now. Everyone knew earnings would be great because we were coming off of hundred-year lows caused by the pandemic. So yes, we knew they’d be up 50%, 100%, 150%; that's not the surprise. The bigger issue is what the pandemic is going to do, and of course, only biochemists know that—most stock traders have no idea, which is reflected in these gigantic swings we’re seeing in the market both on the upside and the downside. As a biochemist, I can tell you that this is our final wave that's coming up and it could last several months. After that, we get a vaccine or herd immunity. When it's done, you have the bull market of a lifetime—up 400% in ten years from these levels. Dow 120,000 here we come!

Q: Do you see a tax selloff if Biden gets in? Should we get short?

A: Definitely; there will be a tax selloff. Past ones have only lasted a week or two and those were the last two weeks of December, so it really won’t be that bad. It’s not like it’s a surprise that Biden is ahead in the polls, because he has been for 6 months. Nor is it a surprise that he is going to raise taxes on the wealthy. I wouldn’t get short though. The short play was last week and the week before; and I did manage to get out three shorts but didn't want to get too big in front of an election. So those all worked. I'm out of all of them now, and now we’re looking only at long plays. And with the Volatility Index (VIX) over $40, you can go 20% or 30% in-the-money on these call spreads and still look to make 10%-20% profit on the position in a month.

Q: Isn’t the pandemic great for Amazon (AMZN)?

A: Yes, Amazon was taking over the world anyway, and forcing everyone to an online-only economy which couldn’t be better for them. A lot of this shifting is permanent and won’t be going back to the way it was before the pandemic with brick and mortar shops and malls. So yes, we love Amazon and I would buy on the dips. There’s a double from here.

Q: Do you have long term names I can buy to sit on?

A: Yes, we actually do have a long-term portfolio posted on the website. It would be listed under your subscription area once you log in—we rebalance that twice a year. And of course, we had a 10% holding in Tesla (TSLA) which went up ten times, so the performance of the long-term portfolio is through the roof. To find the long-term portfolio, please click here.

Q: Do you record this webinar?

A: Yes, we post it on the www.madhedgefundtrader.com  site in two hours.

Q: Do you still like the Internet security stocks like FireEye (FEYE)?

A: Yes. Hacking is growing faster than the Internet itself. You should also look at Palo Alto Networks (PANW) and the ETF (HACK).

Q: Should we hold on to the Visa (V) spread hoping it will come back after the election drop?

A: Hope is not an investment strategy. I always stop out of positions when they hit a 2% loss. The only time I have 4% losses is when we get these gigantic gap moves overnight, which tend to happen once every one or two years. In this case, Visa got hit with a surprise antitrust suit from the Department of Justice that knocked $10 off of the stock. So no, I will not hold on to it in the hope that it does better; I will try to minimize my losses, get out, and get into the next winning position. Hope is what turns a 4% loss into a complete 10% write off.

Q: What’s your view on the Canadian dollar (FXC)?

A: I like it, but it’s not as good as the Australian dollar (FXA) because Canada has a major oil exposure, and actually the worst kind of oil exposure—tar sands in northern Alberta. The outlook for oil is poor and that will be a drag on the currency in the form of fewer exports. Buy the (FXA). No oil troubles here. Kangaroos are another story.

Q: Will you be looking to sell short on the United States Treasury Bond Fund (TLT)?

A: Yes, if we can just get a little bit higher. We’re looking at an economic recovery next year, so we’d expect the (TLT) to be lower by at least $20 points in 2021.

Q: Do you think the San Francisco and New York housing markets will return to what they were before with so many people are moving out of the city?

A: Yes, they will come back, I’ve been through many of these cycles in San Francisco over the past 50 years; it always comes back. Once the pandemic is over, people will say, “Oh my gosh, I can’t believe you can get a two-bedroom apartment in San Francisco for only $2 million.” That's probably another year or two off after a vaccine is in widespread distribution.

Q: Is real estate in a bubble?

A: Absolutely, but real estate bubbles can go on for a long time, like ten years. The bubble in Australia has been going on for 30 years. Ultimately, real estate prices are driven by the earnings power of the local economy which, in the case of San Francisco, is huge. This time around, we have a record large millennial generation looking for real estate. There are 85 million millennia buyers with only 65 million Gen X-er’s selling homes. So, we have to make up a shortfall of 20 million houses at some point. That’s why building permits are through the roof every month.

Q: Zoom (ZM) and DocuSign (DOCU) are the darling stocks of COVID 2020—what do you think about them at these high prices?

A: Very high risk. If you bought these a year ago when we first started covering them, good for you as they're up ten times. However, there are better fish to fry than chasing these big pandemic winners at all-time highs.

Q: If Biden wins, what happens to defense stocks like Raytheon Technology (RTX)?

A: They go down. It turns out a lot of the defense business is in very long term contracts that can’t be broken. They have to supply so many planes a year to the government for a decade or more. However, the sentiment on these sectors sours under democratic administrations because they are not initiating new weapons systems where the big money is made. Lockheed Martin (LMT), Northrop Grumman (NOC), and General Dynamics (GD) all have the same problem. I grew up with these companies. They were the FANGs of their day.

Q: How does a Biden win affect Tesla (TSLA)?

A: Then $2,500 a share for Tesla looks cheap (it’s now at $410). Biden will do everything he can to slow climate change and accelerate alternative energy. Tesla is front and center on that. Under current law, car manufacturers are limited on the number of units they can sell to get the $7,500 tax break per vehicle. Tesla used up all their subsidies five years ago. My bet is that the limits will be eliminated and that leads to a huge surge in Tesla sales in the U.S., which is why the stock has gone up 10 times in the last year. Tesla has promised to drop their car price to $25,000 in three years. If you throw in $10,000 in federal and state tax subsidies you get the car for free. Then you can write off General Motors (GM) and Ford (F).

Good Luck and Stay Healthy.

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

 

 

 

 

 

Bear Sighting

 

/by
Mad Hedge Fund Trader

The Market Outlook for the Week Ahead, or Mixed Messages

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It was definitely a week of mixed messages in the stock market.

Is Covid-19 going to disappear by itself shortly, or is it the worst thing since the black plague?

Are we going to get a $2 trillion stimulus package out of Washington, or not?

Are stocks too expensive, or still cheap?

We are being told the answers to these questions loud and clear, we just can’t hear them.

For this election looks to set all records on turnout. Every city in the country is seeing lines of voters snaking around the block waiting 2-8 hours. But which way are they voting? Are there hoards of hidden Biden voters coming out of the woodwork, or Trump ones? We won’t know the result for eight more days.

In the meantime, the markets bide their time.

Which raises one last question: how low can stocks fall over the next seven trading days?

In the meantime, some asset classes aren’t willing to sit on their hands any longer. Interest rates have started to rise, hitting a four-month high. This has knocked 15 points off of bond (TLT) prices. Yet, contrary to expectations, the US dollar is hugging a multiyear low (UUP), while commodity prices (FCX) soar.

All of this spell a record economic recovery in 2021. All that remains is for stock prices to play catch-up.

The word is that there is over $1 trillion sitting on the stock market ready to dive in the day after the election, possibly tacking on at least 10% to the major indexes by yearend. There could be one hell of a post-election celebration, no matter who wins.

Baby Boomers are unloading stocks to Gen Xers mostly, but Millennials as well. Of course, they have all the money, with a 53% ownership of all stocks, compared to 27% for Gen Xer’s and a mere 3% for Millennials. The Greatest Generation, born before 1946, have been shrinking their share ownership since 1990 and own only 17% of the total now. A coming jump in capital gains taxes will accelerate the process.

China’s Economy soared by 4.9%, in Q3 YOY with the pandemic in the rear-view mirror. First into the Coronavirus brings first out. Retail sales are through the roof and industrial production and business investment is accelerating.

Goldman Sachs says a Blue Wave will increase spending and boost the stock market. Total one-party control of the government eliminates the haggling that we are currently seeing in Washington and will deliver more Covid-19 aid faster. It should more than offset the ill effects of tax increases.

Beware of the coming Tax Loss Selling. A Biden win could unleash a torrent of selling as investors rush to beat an increase in the capital gains tax. That’s when you buy.

US Housing Permits blow the roof off at 1.553 million, up a staggering 22% YOY and a 13-year high.  I wondered why I was suddenly getting a lot of flat tires on the freeway. They’re caused by nails and screws falling off the back up pickup trucks on the way to jobs. The long-term structural housing shortage continues. 30-year money at 2.75% makes a big difference.

Tesla generates a record profit for the fifth consecutive quarter in a row. The company is relying on its China factory to hit its 2020 target of 500,000 million units. Again, $397 million in regulatory credits drive earnings, payments from other carmakers who are lagging on electric car production. Gross margins rose 250 basis points to 23.5%. S&P 500 listing here we come! Next target $2,500!

Weekly Jobless Claims dropped to 787,000, better, but still horrible. California is finally reporting again.

When we come out the other side of this, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 400% or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 120,000 here we come!
 
My Global Trading Dispatch hit a new all-time high last week by staying 100% in cash. I was just as grateful for having no positions on the up 600-point days as I was on the down 600-point days. Safe to say that I will be an increasingly more aggressive buyer on ever smaller dips and a seller on bigger rallies. October has now reached to a welcome 1.89% profit.

That keeps our 2020 year-to-date performance at a blistering +36.29%, versus a LOSS of -0.57% for the Dow Average. That takes my eleven year average annualized performance back to +36.21%. My 11 year total return stood at new all-time high at +392.30%. My trailing one year return appreciated  to +42.86%.

The coming week will be a dull one on the data front. The only numbers that really count for the market are the number of US Coronavirus cases and deaths, now at 225,239, which you can find here.

On Monday, October 26 at 10:00 AM EST, New Home Sales are published. Ely Lilly (LLY) and Merck (MRK) report earnings.

On Tuesday, October 27 at 9:00 AM EST, the S&P Case Shiller Home Price Index for August is released. Microsoft (MSFT) and Pfizer (PFE) report earnings.

On Wednesday, October 28, at 2:00 PM EST, the EIA Cushing Crude Oil Stocks are out. Boeing (BA) and Visa (V) report earnings.

On Thursday, October 29 at 8:30 AM EST, the Weekly Jobless Claims are announced. At the same time, we get the first read on Q3 GDP. Alphabet (GOOGL) and Amazon (AMZN) report earnings.

On Friday, October 30, at 8:30 AM, Personal Income for September is printed. Exxon (XOM) reports earnings. At 2:00 PM we learn the Baker-Hughes Rig Count.

As for me, I’ll be charging up every electronic device I have as the San Francisco Bay Area is expected to suffer a complete power blackout for the next three days. PG&E is shutting off the juice because winds are expected to reach 70 miles per hour and it hasn’t raised in six months.

I won’t be affected because I am totally off the grid with my own solar and battery network. You can easily find me because mine will be the only house in the mountains with the lights on.

Stay healthy.

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

 

 

 

 

 

 

 

 

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