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Mad Hedge Fund Trader

August 24 Biweekly Strategy Webinar Q&A

Diary, Newsletter

Below please find subscribers’ Q&A for the August 24 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Silicon Valley in California.

Q: I’ve heard another speaker say that we are not heading for a Roaring Twenties; instead, we are heading for a Great Depression. Who is right?

A: There are many different possible comments to this. Number one, in the newsletter business, the easiest way to make money is to predict the Great Depression and panic people. Stock market Gurus have been predicting the next Great Depression for all of the 54 years that I have been in the financial markets. We’ve gone through a whole series of Dr. Doom's over this time. We had Nouriel Roubini, we had Henry Kaufman, and before that, there was Joe Granville who predicted Dow 300 when the Dow was at 600 and never gave up. The reason is very simple: the people making these dire forecasts are based in depressionary places. If you live in Puerto Rico, or Ukraine, or Europe, it’s easier to be depressed right now, because the economy is falling to pieces. If you live in Silicon Valley, like I do, and you see these incredible technologies delivering every day, it’s easy to be bullish about the future. So, that is another part of it. On top of that, we’ve just had a recession. And even during this last recession, earnings continued to grow at 5% for the main market, and 20-30% for individual technology companies. The market goes up 80% of the time so if you’re bullish, you’re right 80% of the time. In fact, that may increase going into the future because we just had six months of down days behind us.

Q: How do you know when to buy?

A: Well, I have about 100 different market indicators that I look at, but my favorite one is the Volatility Index (VIX). The (VIX) is the perfect contrary indicator because when fear is high the payoff for taking on risk is huge. The risk/reward swings overwhelmingly in your favor. The simplest indicators are usually the best ones. When (VIX) gets to $30—I don’t think I’ve ever lost money in my life adding on a new trade with (VIX) at $30. If I add positions with the (VIX) at under $30, the loss rate goes up; so, I’m inclined to only do trades when the (VIX) gets close to $30. If that means doing nothing for a month, that’s fine with me. If telling you to stay out of the market makes more money than getting you into the market, I’ll keep you out of the market. I’m not a broker so, I don’t get paid commission; I get paid to give you the highest annual returns so you’ll renew because I only get paid if you renew. Our renewal rate is about 80% these days, and the other 20% either die or retire.

Q: What about the Tesla (TSLA) 3:1 split?

A: In the short term I would stand back and do nothing because you often get a “buy the rumor sell the news” selloff in stocks after splits. Long term, Tesla is a strong buy; short term, we are up close to 60% in a couple of months. Betting that Tesla would rise going into this split was one of the most successful trades that I’ve ever done.

Q: Did you know Julian Robertson?

A: Yes, I did.   Julian was one of the first investors in my hedge fund, and then he was one of the first buyers of my Mad Hedge newsletter. He was also my first concierge client. He had one heck of a temper; if you didn’t know your stuff cold, he would just absolutely blow up at you. But he did tend to surround himself with geniuses. He drew on Morgan Stanley people a lot, so I knew a lot of the tiger cubs. But he certainly knew stocks, and he knew markets.

Q: What do we do on the SPDR S&P 500 ETF (SPY) position?

A: Just run it into expiration. As it is my only position, I don’t really have anything else to do and I don’t really see any explosive upside moves in markets this month. And then after that, we will be 10 days to expiration; so there may be enough profit there at that time.

Q: As a long-term investor, should I take Tesla profits now?

A: If you're really a long-term investor and sell now, you’ll miss the move to $10,000. However, if you’re a trader, you should take some profits now and look to buy and scale in down $50 and more down $100, and so on, depending on what the market does.

Q: What are your thoughts on Nvidia Corporation (NVDA) and semis?

A: When recession fears exist, you will have sharp downturns in the semis, because this is the most volatile sector in the market. However, in the long term in Nvidia you might be looking at a 20% of downside, and 200% of upside on a three-year view. It just depends on how much pain you want to take while keeping your long-term position.

Q: Why is September typically the worst month of the year for stocks?

A: You need to go back 120 years when farmers accounted for 50% of the US population. In the farming business, September/October is your maximum stress point, because you’ve put out all your money for seed, for water, for fertilizer, but you don’t get paid until you sell your crop in September/October. That creates a point of maximum stress—when farmers have to max out the loans from the banks, and that creates cascading stresses in the financial system.  That’s why almost every stock market crash happened in October. And of course, since that cycle started, it has become a self-fulfilling prophecy to this day. Even though only 2% of the population is in farming now, that selloff in September/October is still there. There’s no real current reason behind it.

Q: How do you find good spreads?

A: You find a good stock first, then a good chart, and then wait for the market to come to you with a high Volatility Index (VIX) with a good micro and macro tailwind. It’s that simple.

Q: Do you think healthcare will sell off once the recession fear is gone?

A: It may not because it had a massive selloff across the entire industry when COVID went away. They've taken that COVID hit. That's a recession if you’re a healthcare company. Now COVID is essentially gone, so they haven’t got it left to lose. In the meantime, technology continues to hyper-accelerate in the healthcare area, just in time for old people like me.

Q: How would you invest $1 million in a retirement portfolio today?

A: Call me—that’s a longer conversation. Or better yet, sign up for the concierge service, and we can talk as long as you want.

Q: Any hope for Facebook (META)?

A: No, when you’re advertising that you’re going to lose money and that you’re not going to make money for five years, that’s bad for the stock. I’m sorry Mr. Zuckerberg, but you should have taken those financial markets classes instead of just doing the programming ones.

Q: Will Powell be dovish or hawkish in his speech?

A: I think he has to go hawkish because he needs to justify the next interest rate hike in September. That’s why I’m 90% cash. The market is set up here not to take disappointments on top of a 4,000-point rally in two months. It’s very sensitive to disappointment, so it’s a good time to be in cash. 

Q: What stocks go down the most if we get a 5-10% correction?

A: Semiconductors. Nvidia (NVDA), Advanced Micro Devices (AMD), Micron Technology (MU) are your high beta stocks. Having said that, those are the ones you want to buy at market bottoms. I’ve caught many doubles on Nvidia over the years just using that strategy. When you’ve had a horrible market, you want to go for the highest beta stocks out there, and those are the semis. Plus, semis have a long-term undercurrent of always making more money, always improving their products, always increasing market shares. So, you want to invest with tailwinds behind you all the time. 30 years ago, a new car needed ten chips. Now they need 100. That accelerates exponentially as the entire auto industry goes EV.

Q: What’s your opinion on Lithium companies?

A: You know, I haven’t really done much in this area because it is a basic commodity. The profit margins are minimal, there is no Lithium shortage in the world like there is an oil shortage. Plus, no one has a secret method of mining Lithium that is more profitable than another. No one has an advantage.

Q: Is there a logical maximum number of stocks to have in a share portfolio?

A: I keep mine at ten. You should be able to cover every good sector in the market with ten. When I talk to new concierge customers and review their portfolios, one of the most common mistakes is they own too many stocks – there can be 50, 100, 200 stocks, even several gold stocks. And you never want to own more than you can follow on a daily basis. It’s better to follow ten stocks very closely than 100 stocks just occasionally.

Q: How low do you think Apple (APPL) will go on this dip?

A: Minimum 10%, maybe 20%. Just depends on how weak the market will go in this correction.

Q: What was your defensive plan when you sold short Tesla puts?

A: If they got exercised against me and the Tesla shares were sold to me at my strike price, I was going to take the stock, then let the stock rally. If my long-term view for Tesla is $10,000, it’s not such a problem having a $500 put exercise against you—you just take the stock and run the stock. That was always the strategy. Never sell short more puts than you can take delivery of in the stock. Your broker won’t let you do it anyway to protect themselves.

Q: Do you think we could get a strong rally on the next CPI report?

A: Yes.  The report is due out on September 13. But some of a sharp drop in the CPI in the next report is already in the market, so don’t expect another 2,000-point stock market rally like we got last time. It’ll be a much lesser move and after that, we’ll need to see more data. We may get 1,000 points out of it, probably not much more. After that, the November midterm election becomes the dominant factor in the market.

Q: When is natural gas (UNG) going to roll over?

A: When the Ukraine War ends, and that day is getting closer and closer. I think it’ll be sometime in 2023. And if you get an end to the war (and the resumption of Russian supplies is not necessarily a sure thing) you’d get a move in natgas from $9 down to $2. So, that’s why I’m very cautiously avoiding energy plays right now. The big money has been made; next to happen is that the big money gets lost.

Q: What are your thoughts on Florida’s pension fund now banning ESG stocks? I live on Florida state pension fund payments.

A: You might start checking out other income opportunities, like becoming an Uber (UBER) driver or working at MacDonalds (MCD). What the Florida governor has done is ban the pension fund from the sector that is most likely to go up over the next ten years and restricted them to the sector (oil) which is most likely to go down. That is very bad for Florida’s pension fund and any other pension funds that follow them. And I’ve seen this happen before, where a pension fund gets politicized, and it’s 100% of the time a disaster. Governors aren't great market timers; politicians are terrible at making market calls. There are too many examples to name. ESG stocks were one of the top performing sectors of the market for 5 years until we got the pandemic crash. So, that is an awful idea (and one of the many reasons I don’t live in Florida besides hurricanes, humidity, alligators, and the Bermuda Triangle).

To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in to www.madhedgefundtrader.com, go to MY ACCOUNT, click on GLOBAL TRADING DISPATCH or TECHNOLOGY LETTER, or BITCOIN LETTER, whichever applies to you, then select WEBINARS, and all the webinars from the last 12 years are there in all their glory.

Good Luck and Stay Healthy,

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

 

https://www.madhedgefundtrader.com/wp-content/uploads/2021/10/John-thomas-with-william-miller.png 430 612 Mad Hedge Fund Trader https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png Mad Hedge Fund Trader2022-08-26 10:02:392022-08-26 11:11:23August 24 Biweekly Strategy Webinar Q&A
Mad Hedge Fund Trader

August 19, 2022

Tech Letter

 Mad Hedge Technology Letter
August 19, 2022
Fiat Lux

Featured Trade:

(A WALK IN THE PARK)
(RIVN), (AAPL), (LCID)

https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png 0 0 Mad Hedge Fund Trader https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png Mad Hedge Fund Trader2022-08-19 15:04:262022-08-19 17:07:47August 19, 2022
Mad Hedge Fund Trader

A Walk in the Park

Tech Letter

Rivian (RIVN) produces nice EVs, but their business model still needs to work out the kinks.

Creating an EV company from scratch these days is something that doesn’t get a lot of attention.

Bellwether EV company Tesla (TSLA) built its reputation when doing something like this was easier. We assume it’s like a walk in the park.

Now the post-health situation world has really put the clamps on business with energy not cheap anymore, made in China not working smoothly, and the strong dollar making sales from abroad lower in greenback terms.

Naturally, RIVN has felt all these bottlenecks and the usual result is losing money.

This has forced RIVN to raise prices as it is discontinuing the cheapest versions of its pickup truck and SUV models, citing low customer demand.

Eliminating the base version, coined the Explore package, now means the most affordable pickup truck in the R1T model line will have a price of $73,000—an increase of $5,500, Rivian said. The least expensive version of its all-electric SUV, the R1S, is now $78,000.

These mid-$70,000 EV pickup trucks will most likely be closer to $100,000 in 2-3 years as inflation isn’t going anywhere.

RIVN isn’t profitable when selling at the lower price point and raising prices will effectively lower demand but not by too much.

This isn’t the first time RIVN has jacked up prices, but truthfully, it is just a sign of the times.

Actually, this is the second time that Rivian has gone rogue citing rising raw-material costs, particularly for batteries, and manufacturing difficulties that have led the company to report a $1.7 billion loss for the second quarter.

Today, the world's biggest nickel producer, Indonesia, may impose a tax on exports of the metal this year, President Joko Widodo says.

It pours fuel on the fire.

Back in March, RIVN raised prices by $20,000, even the ones who had already put down a $1,000 deposit to reserve their vehicles.

RIVN is now in an unenviable position of slashing costs to conserve cash and giving priority to certain trims of its vehicles in an effort to boost factory output.

Rivian said it aims to produce 25,000 vehicles this year from its plant in Normal, Ill.

Luckily, the Federal government has given EVs a new subsidy where any electric truck or SUV selling for over $80,000 would become ineligible for the $7,500 tax credit under the planned revisions.

Naturally, after the $80,000 price point breaches, it’s a mere formality that prices will need to compensate the lost tax credit and go straight to $90,000 and above like a runaway train.

As expected, the company is losing lots of money and at the end of June, it had about $15.46 billion in cash and cash equivalents, about $1.5 billion less than at the close of the first quarter.

The company has a great product that consumers want, but producing these cars at scale at an affordable price is the issue.

I would wait for the stock to drop from $35 to $25 then hold long term and incrementally add as the stock goes down.

If the operations teams can pull out a few victories here and there, then sourcing the next factory is in the cards to increase output.

It’s not just a RIVN problem, Tesla (TSLA) and Lucid (LCID) have also increased prices as well, but Tesla has a larger balance sheet and a profitable busine model.

Scale into this stock at lower levels and put it away for the long term. If the company survives, the stock price will be higher in the long term especially if someone can get the Chinese back in the factories.

 

rivn

 

https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png 0 0 Mad Hedge Fund Trader https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png Mad Hedge Fund Trader2022-08-19 15:02:142022-08-31 02:14:12A Walk in the Park
Mad Hedge Fund Trader

August 17, 2022

Tech Letter

 Mad Hedge Technology Letter
August 17, 2022
Fiat Lux

Featured Trade:

(HERE WE COME VIETNAM)
(AAPL), (WMT)

https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png 0 0 Mad Hedge Fund Trader https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png Mad Hedge Fund Trader2022-08-17 09:02:262022-08-17 17:45:38August 17, 2022
Mad Hedge Fund Trader

Here We Come Vietnam

Tech Letter

There is definitely jet fuel left in Apple’s (AAPL) tank.

I guarantee it.

I like some of their recent moves, like today when they announced that they are in talks with Vietnam for the Apple Watch and MacBook to be produced in the country.

Cutting the China risk is a big deal.

The lockdown-obsessed country is a terrible place to headquarter manufacturing operations.

Apple has deadlines to meet and shareholder value to accrue, and that’s not going to cut it when the government doesn’t allow workers to work.

Vietnam’s government and Apple most likely have a wink, wink – nod, nod agreement to chill on the overbearing lockdowns, otherwise, I cannot fathom why they would move from one lockdown-prone country to another one.

Maybe Apple management just like the Vietnamese spring rolls over the Chinese, but I bet most unlikely.

Oh yeh, almost forgot about the tax breaks, Vietnam most likely will load those up to the eyeballs to convince Apple to put factories there.

Brand name companies don’t put their resources in Podunk places for free.

Another bright spot in Apple is the massive stock buyback and large dividend.

Must love a tech company that rewards shareholders and that’s why Warren Buffet loves this gravy train.

Next, the biggest fish in the largest body of water is still churning out its prized iPhone.

Now we are onto number 14 coming to you later this winter!

Demand for the iPhone remains strong. During Apple's third quarter, revenue from this segment rose 2.8% to $40.7 billion.

Selling more iPhones isn't just a matter of generating revenue for Apple. It also helps the company grow its installed base, provided a customer not previously part of Apple's network purchases a new device. That seems to be at least part of the story, as Apple reported that its installed base reached all-time highs across all its products during its latest quarter.

The long-run implications of these developments are significant. The more people are plugged into Apple's services network, the more it can monetize these users, and the more it can grow its services revenue. During Apple's third quarter, the tech giant's services segment grew faster than the rest of its business, recording total sales of $19.6 billion, 12.1% higher than the year-ago period.

This segues nicely to more eyeballs viewing Apple ads. The annual $4 billion ad business will get upgraded as Apple plans to post more ads around its ecosystem. Ad buyers will be chomping at the bit to flood Apple’s network with ads galore. I see this as a great move to add strength to the balance sheet.

The consumer is still consuming. The top 39% of US income earners who are exposed to the stock market are responsible for 65% of consumption so it is a chicken and egg thing…they will feel like they have the license to spend because they feel wealthier.

That’s what I like because the people who cannot even afford iPhones, won’t buy the iPhone 14 and never had a chance to buy an iPhone when they are shopping at the Dollar store.

There will be zero churn here in iPhone usage and I would argue that the attrition rate becomes healthier.

True, I saw that report from Walmart about higher-income families more concerned about rising prices, but this doesn’t mean their budget will exclude the iPhone 14.

Many of these higher-income families need the iPhone 14 for work purposes and many of them have work-from-home jobs where they need an Apple device always glued to their face.

The Apple monster should keep chugging along, and out of all tech companies, this is the one to ride to profits.

 

apple vietnam

https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png 0 0 Mad Hedge Fund Trader https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png Mad Hedge Fund Trader2022-08-17 09:02:202022-08-31 02:29:51Here We Come Vietnam
Mad Hedge Fund Trader

August 15, 2022

Tech Letter

 Mad Hedge Technology Letter
August 15, 2022
Fiat Lux

Featured Trade:

(JUST LET IT FLOW)
(ADAM NEUMANN), (WE), (AAPL)

https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png 0 0 Mad Hedge Fund Trader https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png Mad Hedge Fund Trader2022-08-15 16:04:132022-08-16 07:30:50August 15, 2022
Mad Hedge Fund Trader

Just Let It Flow

Tech Letter

Flow, a residential real estate company helmed by a famous tech CEO, and a famous tech venture capitalist, is worth $1 billion and has 0 revenue.

Adam Neumann is back!

If many have forgotten, Neumann was that guy who shook down Softbank’s Masayoshi Son by buying up commercial offices and subletting them as shared office space with a pay-as-you-go subletting model.

This was bizarrely branded as a tech company called WeWork (WE).

From the get-go, the business model sounded illogical, but Softbank went with it and before downgrading the valuation to $9 billion, it was supposed to be worth around $50 billion.

Neumann exited the business with a $480 million payout after Softbank negotiated the payout down from $960 million.

The hefty golden parachute is the capital he’s leveraging for his new residential real estate business that now has venture capital backing it.  

Famous venture capital giant, known for investments in 100-baggers like Twitter, LinkedIn, and Facebook, Andreessen Horowitz led by Marc Andreesen said it would invest $350 million in Adam Neumann’s residential real estate company Flow.

Andreesen comically claimed that Neuman is a “visionary leader.”

In the same blog, Andreesen explains that renters need a “sense of genuine ownership.”

Smaller housing is now what developers are doing to combat inflation.

My guess from Andreesen’s blog is that giving “renters a sense of security” could mean taking Neumann’s massive real estate portfolio and creating an atrocious tiny house or sleeping pod network.

They could then resell these mini clusters for a giant profit before Neumann’s next victory lap.

Neumann might install free artisanal coffee or frisbee golf for the “making it cool” effect like he did for his office sharing space as well.

According to a Wall Street Journal report in January, Neumann had acquired majority stakes in over 4,000 apartments, valued at $1 billion altogether.

Why not chop them up into 20,000 units, claim these assets are $5 billion, and double the rent or sell them for a higher price?

It’s low-hanging fruit, right?

Flow is scheduled to launch in 2023 and I can tell you there is nothing “visionary” about Adam Neumann and his insidious entrepreneurial spirit.

This is just a glaring example of the late cycle euphoria of tech that will most likely result in the median American living worse off and Andreesen losing $350 million.

This is not only a late cycle but the latest this cycle can get with this type of idea.

We are still living off the Apple (AAPL) iPhone technology and we are on version 13 and up to well beyond a $1,000 price point.

Innovation has hit a saturation point, and once we start getting to iPhone 15 or 17 at a $3,000 or $5,000 price point, the diminishing returns will accelerate.

Investing in a “transformative” big tech-infused residential real estate company headed by Adam Neumann sounds like a suicide mission for Andreesen’s reputation.

Monetizing small apartments is bad optics for Andreesen. It’s not his bread and butter…it’s not cutting edge.

Andreesen’s behavior most likely reveals that one of the leading VCs thinks the metaverse is just a bunch of castles in the sky.

However, these developments also show how minuscule the opportunities are in the land of big tech today.  

Lastly, Flow has kept under wraps the master plan for this revolutionary company because of fear of giving away the new secret sauce to residential real estate.

It’s most likely because the secret sauce is not that tasty.

 

flow

THE GENIUS TECH CEO THAT IS NOT A TECH CEO

https://www.madhedgefundtrader.com/wp-content/uploads/2022/08/genius-tech-CEO.png 626 1356 Mad Hedge Fund Trader https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png Mad Hedge Fund Trader2022-08-15 16:02:232022-09-01 17:15:54Just Let It Flow
Mad Hedge Fund Trader

August 15, 2022

Diary, Newsletter, Summary

Global Market Comments
August 15, 2022
Fiat Lux

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD,
or WHAT THE MARKET IS REALLY DISCOUNTING NOW),
(SPY), (TLT), (AAPL), (AXP), (KO), (XOM). (TBT), (SNOW), (NFLX), (ARKK), (ETHE),
(NLR), (CCR), CORN), (WEAT), (SOYB), (DBA), (UUP), (FXA), (FXC), (BA), (TSLA)

https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png 0 0 Mad Hedge Fund Trader https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png Mad Hedge Fund Trader2022-08-15 09:04:352022-08-15 13:26:37August 15, 2022
Mad Hedge Fund Trader

The Market Outlook for the Week Ahead, or What the Market is Really Discounting Now

Diary, Newsletter

After a half-century in the markets, I have noticed that it is the investors with the correct long-term views who make the biggest money. My favorite example is my friend, Warren Buffet, who doesn’t care if an investment turns good in five minutes or five years.

Buffet’s Berkshire Hathaway (BRKB) is the largest outside investor in Apple (AAPL). And guess what his cost has been? By the time you add up the compounded dividends he has collected since he started buying the stock in 2011, it's zero. The value today? $15.5 billion.

Buffet didn’t buy Apple for its hardware, iPhone, or iTunes. He bought it for the brand, which has improved astronomically. Look at Berkshire’s portfolio and it is packed with brands, like American Express (AXP), Coca-Cola (KO), and Exxon (XOM).

When did Buffet last buy Apple? In May when it hit $130.

That’s why Warren Buffet is Warren Buffet and you are you.

While the inflation news last week has been great and it is likely to get better, I believe that investors are missing the bigger, more important long-term picture.

The fact is that markets are now discounting an earlier than expected end to the Ukraine War, much earlier.

I get constant updates on the war from the Joint Chiefs of Staff, Britain’s Defense Committee, and NATO headquarters and I can tell you that the war has taken a dramatic turn in Ukraine’s favor just in the last two weeks.

Russian casualties have topped 80,000, nearly half the standing army. They have lost 2,200 of their 2,800 operational tanks. Some 120 front line aircraft have been destroyed. This week, Ukraine attacked the principal Russian air base in Crimea, leaving the smoking ruins of seven more aircraft there.

Russia is in effect fighting a modern digitized war with 50-year-old Cold War weapons and it isn’t working. Its generals have no experience fighting wars against determined opposition. Putin would do better listening to the retired generals on CNN for military advice.

America’s High HIMARS (the M142 High Mobility Artillery Rocket System) has become the Stinger missile of this war. The Lockheed Martin (LMT) factory in Camden, Arkansas that makes these missiles is running 24/7 on doubled orders.

The sanctions against Russia have been wildly successful. The Russian economy is utterly collapsing. What oil they are selling now is at half price. Aircraft are being cannibalized for parts to keep others flying. Much of the educated middle class has fled the country. Draft dodging is rampant.

What does all this mean for you and me?

The commodity price spike the war prompted has ended and most are now in steep downtrends. Gold (GLD), where the Russians were major buyers, has been flat as a pancake. This has put our inflation numbers into freefall. Interest rate fears peaked in June and are now in the rear-view mirror.

As is always the case, markets have seen these developments and correctly ascertained their consequences far before we humans did (except for maybe me). It has been no surprise that they have been tracking the Russian defeat day by day and have been on an absolute tear since June 15.

Even small techs suffering 18-month bear markets have now begun major recoveries, with companies like Snowflake (SNOW), up 50%, Netflix (NFLX), up 39%, and Cathie Wood’s Innovation Fund (ARKK) up 57%. Even crypto has returned from the grave, with Ethereum (ETHE) up an eye-popping 105%.

But don’t go gaga over stocks just yet.

The Fed ramps up quantitative tightening in September to $95 billion a month and will deliver another interest rate hike. That's why I am running a double short in the bond market (TLT), (TBT) once again.

We also have the midterms to worry about which, with recent developments, promise to be more contentious than ever. Look for another round of tiring new election fraud claims.

That’s great because these events will give us good entry points lower down for trade alerts, not the short-term top we are looking at right now.

It helps that with ten-year US Treasury yields at 2.80%, it has an effective price earning multiple of 37, while stocks growing earnings at 10% a year boast a price earnings multiple of only 16. That sets up a massive, long stock/short bond trade which Mad Hedge will be pushing well on into 2023.

And you know what?

The smart guys I know in the hedge fund community are starting to model for the next Fed interest rate CUT. Markets will love it and discount this far in advance.

If you want to get on the train with me before it leaves the station, just keep reading this newsletter.

Yes, markets are now being driven by rate cuts and peace prospects, not rate rises and war!

Your retirement fund will love it.

I just thought you’d like to know.

CPI Dives to 8.5%, down 0.6% in July. The peak is in, and stocks rallied 500. Look for another drop in August, with gasoline prices falling daily. The 800-pound gorilla in the room has exited.

The Producer Price Index Dives 0.5%, confirming last week’s weak CPI number. And many core prices are indicating that we will get another drop when the August numbers are reported in September. It was worth another 300-point rally in the Dow Average, which is getting seriously overbought.

Consumer Inflation Expectations dive to 6.2% for the coming year and only 3.2% for three years. according to a New York Fed Survey. Expectations for food costs saw the largest decline. The CPI is out on Wednesday. No doubt a media onslaught over a coming recession has a lot to do with it.

Elon Musk Sells $6.9 billion worth of Tesla (TSLA) Stock, explaining the $100 drop in the shares last week. Ostensibly, this is to pay for Twitter if he loses his court case. Musk clearing took advantage of a 60% rise in (TSLA) to head off distress sales in the future. Musk also opened the door to share buy backs in the future. Buy (TSLA) on dips.

85,000 IRS Agents are Headed Your Way, but only if the government can hire them and only if you are a billionaire or a profitable large oil company. The rest of us will be ignored by this unpublicized portion of the Biden inflation bill.

US Dollar (UUP) Takes a Hit on CPI Report, which effectively showed that the US saw deflation in July. The greenback is pulling back the 20-year highs which gave you the cheapest European vacation in your lives. The prospect of interest rates rising at a slower pace is dollar negative. Buy (FXA) and (FXC) on dips.

Boeing (BA) Delivered its First 787 Dreamliner in a year, after long-awaited regulatory approval. The monster 30% rise in the shares off the June low predicted as much. A global aircraft shortage helps. Airbus is going to have to start earnings its money again. Keep buying (BA) on dips.

Weekly Jobless Claims Pop 12,000 to 262,000, a new high for the year. It’s not at concerning levels yet but is definitely headed in the wrong direction. Maybe it’s just a summer slowdown? Maybe not.

Shipping Container Charges are Plunging Everywhere, except in the US, which currently has the world’s strongest economy. It’s a sign that global supply chain problems are easing. But the US leads the world in demurrage, or delays, with New York the worst, followed by Long Beach.

Import Prices
are Plunging, thanks to a super strong dollar, taking more pressure off of inflation. They fell 1.4% in July according to the Department of Labor. Easing supply chain problems are helping. Biden has had the run of the table for months now

My Ten-Year View

When we come out the other side of pandemic and the recession, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With oil prices now rapidly declining, and technology hyper accelerating, there will be no reason not to. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The America coming out the other side will be far more efficient and profitable than the old. Dow 240,000 here we come!

My August performance climbed to +2.14%. My 2022 year-to-date performance ballooned to +56.97%, a new high. The Dow Average is down -7.0% so far in 2022. It is the greatest outperformance on an index since Mad Hedge Fund Trader started 14 years ago. My trailing one-year return maintains a sky-high 74.76%.

That brings my 14-year total return to 569.53%, some 2.56 times the S&P 500 (SPX) over the same period and a new all-time high. My average annualized return has ratcheted up to 44.96%, easily the highest in the industry.

We need to keep an eye on the number of US Coronavirus cases at 93 million, up 300,000 in a week and deaths topping 1,037,000 and have only increased by 2,000 in the past week. You can find the data here.

On Monday, August 15 at 8:30 AM EDT, the New York Empire State Manufacturing Index for August is released.

On Tuesday, August 16 at 8:30 AM, the Housing Starts for July are out.

On Wednesday, August 17 at 8:30 AM, Retail Sales for July are published. At 11:00 AM the Fed Minutes from the last meeting are printed.

On Thursday, August 18 at 8:30 AM, Weekly Jobless Claims are announced. Existing Home Sales for July are announced.

On Friday, August 19 at 2:00 the Baker Hughes Oil Rig Count is out.

As for me, while we’re all waiting for the dog days of August to end, it is time to reminisce about my old friend George Schultz who passed away last year at the age of 101.

My friend was having a hard time finding someone to attend a reception who was knowledgeable about financial markets, White House intrigue, international politics, and nuclear weapons.

I asked who was coming. She said Reagan’s Treasury Secretary George Shultz. I said I’d be there wearing my darkest suit, cleanest shirt, and would be on my best behavior, to boot.

It was a rare opportunity to grill a high-level official on a range of top-secret issues that I would have killed for during my days as a journalist for The Economist magazine. I guess arms control is not exactly a hot button issue these days.

I moved in for the kill.

I have known George Shultz for decades, back when he was the CEO of the San Francisco-based heavy engineering company, Bechtel Corp in the 1970s.

I saluted him as “Captain Schultz”, his WWII Marine Corp rank, which has been our inside joke for years. Now that I am a major, I guess I outrank him.

Since the Marine Corps didn’t know what to do with a PhD in economics from MIT, they put him in charge of an anti-aircraft unit in the South Pacific, as he was already familiar with ballistics, trajectories, and apogees.

I asked him why Reagan was so obsessed with Nicaragua, and if he really believed that if we didn’t fight them there, would we be fighting them in the streets of Los Angeles as the then-president claimed.

He replied that the socialist regime had granted the Soviets bases for listening posts that would be used to monitor US West Coast military movements in exchange for free arms supplies. Closing those bases was the true motivation for the entire Nicaragua policy.

To his credit, George was the only senior official to threaten resignation when he learned of the Iran-contra scandal.

I asked his reaction when he met Soviet premier Mikhail Gorbachev in Reykjavik in 1986 when he proposed total nuclear disarmament.

Shultz said he knew the breakthrough was coming because the KGB analyzed a Reagan speech in which he had made just such a proposal.

Reagan had in fact pursued this as a lifetime goal, wanting to return the world to the pre nuclear age he knew in the 1930s, although he never mentioned this in any election campaign. Reagan didn’t mention a lot of things.

As a result of the Reykjavik Treaty, the number of nuclear warheads in the world has dropped from 70,000 to under 10,000. The Soviets then sold their excess plutonium to the US, which has generated 20% of the total US electric power generation for two decades.

Shultz argued that nuclear weapons were not all they were cracked up to be. Despite the US being armed to the teeth, they did nothing to stop the invasions of Korea, Hungary, Vietnam, Afghanistan, and Kuwait.

Schultz told me that the world has been far closer to an accidental Armageddon than people realize.

Twice during his term as Secretary of State, he was awoken in the middle of the night by officers at the NORAD early warning system in Colorado to be told that there were 200 nuclear missiles inbound from the Soviet Union.

He was given five minutes to recommend to the president to launch a counterstrike. Four minutes later, they called back to tell him that there were no missiles, that it was just a computer glitch projecting ghost images on a screen.

When the US bombed Belgrade in 1989, Russian president Boris Yeltsin, in a drunken rage, ordered a full-scale nuclear alert, which would have triggered an immediate American counter-response. Fortunately, his generals ignored him.

I told Schultz that I doubted Iran had the depth of engineering talent needed to run a full-scale nuclear program of any substance.

He said that aid from North Korea and past contributions from the AQ Khan network in Pakistan had helped them address this shortfall.

Ever in search of the profitable trade, I asked Schultz if there was an opportunity in nuclear plays, like the Market Vectors Uranium and Nuclear Energy ETF (NLR) and Cameco Corp. (CCR), that have been severely beaten down by the Fukushima nuclear disaster.

He said there definitely was. In fact, he was personally going to lead efforts to restart the moribund US nuclear industry. The key here is to promote 5th generation technology that uses small, modular designs, and alternative low-risk fuels like thorium.

Schultz believed that the most likely nuclear war will occur between India and Pakistan. Islamic terrorists are planning another attack on Mumbai. This time, India will retaliate by invading Pakistan. The Pakistanis plan on wiping out this army by dropping an atomic bomb on their own territory, not expecting retaliation in kind.

But India will escalate and go nuclear too. Over 100 million would die from the initial exchange. But when you add in unforeseen factors, like the broader environmental effects and crop failures (CORN), (WEAT), (SOYB), (DBA), that number could rise to 1-2 billion. This could happen as early as 2023.

Schultz argued that further arms control talks with the Russians could be tough. They value these weapons more than we do because that’s all they have left.

Schultz delivered a stunner in telling me that Warren Buffet had contributed $50 million of his own money to enhance security at nuclear power plants in emerging markets.

I hadn’t heard that.

As the event ended, I returned to Secretary Shultz to grill him some more about the details of the Reykjavik conference held some 36 years ago.

He responded with incredible detail about names, numbers, and negotiating postures. I then asked him how old he was. He said he was 100.

I responded, “I want to be like you when I grow up”.

He answered that I was “a promising young man.” I took that as encouragement in the extreme.

Stay healthy,

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

 

We’re Getting Pretty High

 

 

 

 

 

 

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Mad Hedge Fund Trader

August 12, 2022

Diary, Newsletter, Summary

Global Market Comments
August 12, 2022
Fiat Lux

Featured Trade:

(AUGUST 10 BIWEEKLY STRATEGY WEBINAR Q&A),
(NVDA), (TSLA), (GOOGL), (ROM), (FCX), (AMZN), (AAPL), (MSFT), (MU), (ARKK), (TSLA), (F), (GM)

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