Mad Hedge Technology Letter
August 17, 2022
Fiat Lux
Featured Trade:
(HERE WE COME VIETNAM)
(AAPL), (WMT)
Tag Archive for: (AAPL)
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.
Mad Hedge Technology Letter
August 15, 2022
Fiat Lux
Featured Trade:
(JUST LET IT FLOW)
(ADAM NEUMANN), (WE), (AAPL)
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.
THE GENIUS TECH CEO THAT IS NOT A TECH CEO
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)
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
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)
Below please find subscribers’ Q&A for the August 10 Mad HedgeFund Trader Global Strategy Webinar broadcast from Silicon Valley in California.
Q: What are your yearend targets for Nvidia (NVDA), Tesla (TSLA), and Google (GOOGL)?
A: Higher for all but I can’t give you the exact date and time. Google has a special situation in that they might be hit with an anti-trust suit in September, so that could cap things. For Tesla, we have the Twitter overhang, and Elon Musk sold $6.9 billion worth of stock last week to fund that. And then Nvidia could have another dive, depending on how much of a glut in chips there is, but I'd be buying any chips from here on. By the way, if Tesla breaks the old high of $1,200, which I expect by the end of the year, we could get to $2,000 very rapidly on yet another massive short squeeze against the permanent Tesla haters, who’ve already been completely decimated by the last 60% move.
Q: How would I play Amazon (AMZN) going forward?
A: Buy the dips. I think they’re going to be the world's dominant retailer going forward and they’re doing the right things and going crazy.
Q: Which sectors?
A: Well, for ETFs, you can look at the ProShares Ultra Technology ETF (ROM). That’s 2x leveraged long tech. But only do that on dips because the volatility of the ROM is enormous since it’s 2x in the most volatile sector. Also, I think we can start taking a look at banks again, what with interest rates rising and a recovery on the horizon, banks could come back into play after sitting at the bottom for the last 3 or 4 months.
Q: I’m doing a LEAP on Freeport-McMoRan Inc. (FCX); should I go for January 2025 or 2024?
A: I’d go longer dated—that way you can get a bigger move and will almost certainly be on a full-on economic recovery, and massive electrification of the auto fleet by 2025, thanks to the climate bill that will be passed Friday. That means the demand for copper is about to go absolutely through the roof—I'm looking for (FCX) to go from $30 to $100 in the next 3 years.
Q: Thoughts on Disney (DIS)?
A: No one can believe how cheap Disney has gotten, it’s been a disaster. Obviously (DIS) took it on the nose with the recession and some of the parks still have limitations on the number of visitors. It should do better and I'm amazed it got this cheap. I would expect a move to the $200 level by the end of next year.
Q: What LEAPS do you recommend for January 2023?
A: Well it’s not really a LEAPS if you’re only going out 6 months; that’s just a long-dated call spread. LEAPS are usually a year or longer. I’d say pretty much anything in any sector will be higher except maybe energy by 2023. We’re not at LEAPS territory yet, but we’re getting close. The next major selloff I might start putting LEAPS out there.
Q: Is the Consumer Price Index (CPI) dropping from 9.1% YOY down to 8.5% meaning the top is in and deflation’s over?
A: I think so, because there are a lot of price declines that were not reflected in this July number that have yet to come. I'm talking about wheat, lumber, and energy. So yes, we could get another big move down in August, and if that’s the case, the Fed may only raise by 50 basis points in September. That's the hope. The things that aren’t going to go down are rental costs and labor costs. We may never get back to the inflation rate that we had 2 years ago of 2%. The long-term average for the last 100 years is 3% and certainly a move down to 4% is possible this year (and would be very welcome by the stock market as part of my long-term bull case).
Q: What are your thoughts on Elon Musk selling $6.9 billion worth of Tesla shares?
A: It’s amazing he sold that amount of stock last week and only went down $100. It does remove a big overhang on the stock and paves the way on a much bigger move up later in the year. By selling the $9 in January and $7 now, that’s $16 billion he sold this year. He could almost pay for Twitter with a little outside bank financing.
Q: How far above current prices should I place a LEAPS?
A: It depends on where the market is; if we’re having a cataclysmic selloff down 1,000-point days, then you can have the luxury of going 10%, 20%, or even 30% out-of-the-money; and that of course gets you a 100%, 200% and 300% returns. If we have a higher low, then you may want to go lower risk and go at the money, that might get you a 50% return. On LEAPS that are only slightly in-the-money, even those generate 25% returns one year out with the most conservative possible position.
Q: Would you load the boat on dips?
A: I would but remember: a dip is not one hour or on down days, it’s like half of the recent gain, which would be down 1,500 Dow points, or all of the recent gain, which would be down 3,000 points. So be careful that you don’t get too aggressive just because you’ve gotten bullish.
Q: Do you think the semiconductor chips will lead the tech recovery in the second half of the year?
A: I do, but we do have an inventory problem to digest first, and we have to figure out the implications of the CHIPS act that was signed this week which makes available a couple hundred billion dollars to build new chip factories in the US. Chip companies are particularly challenged right now because they have to provision for a recession which is going to cut chip demand, and they also have to provision for a potential oversupply created by the CHIPS Act. Remember that for the industry, creating safe supplies of chips means more lots of chips at lower prices for consumers. Great for us, great for the auto industry, not so great for chip companies. You have to be careful. On the other hand, on the bullish side, chips are being designed into more products faster and in larger numbers than ever before. This is the main reason why most investors underestimated the chip industry for the last 10 years. That also is a factor that’s accelerating. The average car now has 100 chips. 20 years ago they had maybe 10 chips, and 30 years ago they had none.
Q: Will the eventual big win of Ukraine against Russia result in inflation going back to 2%?
A: No, but it will result in it going back to 3% or 4%, which we could hit next year. You get oil back down below $50, gasoline down to $2/gallon, and the world's food supply opened up once again, and inflation will disappear in a heartbeat.
Q: What’s the deal with the 1% buyback tax in the inflation reduction package?
A: Well they had to get revenue somewhere, and 1% is so small it won’t inhibit anyone from buying back stock, especially if it makes the CEO a billionaire. That is a great incentive—even if you had a 50% tax, they would still be doing buybacks for things like Apple (AAPL), Microsoft (MSFT), and the other buyback players.
Q: What will high energy prices do to crypto?
A: It might actually make it go up because the cost of electricity feeds straight into the manufacturing/programming cost of crypto. And if you notice, Bitcoin bottomed at $17,000 per bitcoin. But that's exactly where the new mining cost is. Just like all of the commodities, when you hit cost of production, the supply suddenly dries up because nobody can make any money at it.
Q: Will US homebuyers buy the dip since mortgage rates have come down?
A: Yes, and we’re already seeing that in the statistics. The fact is we still have a huge housing shortage in the United States. You don’t get big price falls when you have a shortage of supply, and you have 10 million millennials who still need to trade up from their one and two-bedroom apartments all over the country. So, things may stall a bit in home buying, but I don’t think you get very big price drops.
Q: Do you think the US consumer is strong?
A: They never stopped being strong, even throughout recession fears. Never, ever bet against the propensity of Americans to spend money, both individuals and governments.
Q: What are the chances the US goes to war with China over Taiwan?
A: Zero. # 1 China doesn't have ships, #2 we have the 7th Fleet there, and #3 they have been threatening to invade Taiwan for 70 years and done nothing. The Taiwanese are used to this. Though there is the other side issue that most of the other private companies in Taiwan are already owned by the Chinese and have Chinese capital, so it’s unlikely they want to blow up their own facilities. So, the answer is no.
Q: What is the Long term outlook for gold and silver?
A: It’s been dead for so long that I’m not inclined to rush into gold. But you have to expect that when you get a recovery in the commodity boom, it’s going drag gold and silver along with it. I see upsides for both of these, especially silver.
Q: Should student loans be paid off by the federal government?
A: I think yes, because as long as these people have massive debts, they cannot borrow and they cannot enter the US economy as consumers. If you forgive all student debt, you unleash 10 million new customers onto the market who can now borrow, get credit cards, and take out home mortgages. As long as they have massive debts, they can’t do that.
Q: With all the major companies in the world moving to EVs, where are we going to get these commodities?
A: We’re not. Tesla (TSLA) has already locked up major supplies of commodities over the next 10 years, and everyone else will have to pay more money. Some of the weaker producers like Ford (F) and General Motors (GM), are being restrained on shortages of not just chips but also basic commodities like chromium for stainless steel. They’re going to have a real problem competing with Tesla, which is why you own Tesla.
Q: What do you think about the unprofitable tech companies like those in the ARK ETFs (ARKK)?
A: I would avoid those for now. Why take on additional risk buying a non-earning company when the highest quality companies are selling at the cheapest valuations in ten years? Maybe when the big companies like Apple get overvalued—go up another 100% — then you might look at the smaller companies if they’re still cheap. But the risk/reward on the nonearners right now is no good, while it’s fantastic in the large tech companies. That is my opinion and I’m sticking to it.
Q: It seems Russia’s strategy has mirrored those of the Czars.
A: Actually, what they’re doing is repeating their WWII strategy, which worked in 1945— not so much in 2022; and that was massive artillery barrages against retreating Germans. Except this time Ukrainians are not retreating and have far more modern weapons than the Russians.
Q: Would you buy Micron Technology (MU) on bigger dips?
A: Absolutely yes; but again, wait for the down days. You have plenty of volatility in chip stocks, no need to pay up or chase higher prices.
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, then 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
Global Market Comments
August 8, 2022
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE BOTTOM IS IN),
(AAPL), (AMZN), (GOOGL), (MSFT), (TSLA)
When the train conductor says “Run”, it’s generally not a good sign.
That’s what happened to me when I had to make a crucial transfer in Visp, Switzerland last month. I’m fine with running. With 200 pounds of luggage? Not so much.
A lot of fund managers started running from their cash positions last week. Tesla (TSLA) shorts ran even faster.
There is a rising sense of panic among money managers today.
The stock market just brought in a blockbuster 7.9% return in July, and they are underweight stocks and loaded with cash. What they DO own are in all the wrong defensive sectors.
A panic is imminent.
A soft landing for the economy is in the cards. There are still plenty of risks out there, as there always are. But bond yields have collapsed, commodity and energy prices are in free fall, and the futures markets are indicating that interest rate hikes ahead will be modest at best.
The Fed is also getting an assist in its tightening efforts from a strong dollar, which pares U.S. multinational earnings, and a recessionary China and Europe. Those two alone are the equivalent of another 100 basis points in rate rises.
The Fed’s work has already been done for it.
The Fed’s Quantitative Tightening is also sucking $120 million a month out of the economy.
The bond vigilantes who were riding hard in the first half have gone to sleep, or at least gone on vacation. That has dropped ten-year US Treasury yields by an amazing 100 basis points in seven weeks. That doesn’t seem to warrant an over-aggressive Fed to me.
Remember also that interest rates no longer have the impact on the economy they once had. The stock of every company I buy has no net debt and are in fact huge net creditors, like Apple (AAPL), Amazon (AMZN), Alphabet (GOOGL), and Microsoft (MSFT).
Those that have refinanced their debts at 150-year lows over the last three years, including myself (30-year fixed rate mortgage at 2.75%, some 6.35% under the current inflation rate!).
No credit crunch here, or distressed financial institutions, the fodder of past recessions.
Sure, earnings have come down. But they are being shaved, not decimated. Again, the companies I buy aren’t growing at a modest 5%-10%, but more like 40%-50%, like Tesla (TSLA). Slow growing companies are other peoples’ problems, not mine.
Better yet, they are likely to bounce back hard next year, which is what the market is discounting now.
I’m buying next year’s market, while everyone else is still selling this year’s.
The bottom line is that the U.S. has the strongest economy and currency in the world, making its stocks deserving of a serious premium. Add up rate rises, QT, a strong greenback, a recessionary world, the largest deficit reduction in history, war, and stocks STILL can’t go down.
It's an old trader’s nostrum that if you dump bad news on a market and it fails to go down, you buy the heck out of it. This is one of those times.
That makes my yearend forecast of an S&P 500 of 4,800 by year-end not only possible but likely. Buy every substantial dip in every one of your favorite stocks from here on out. You might be risking 10%-20% over the short term but gain 100% on a three-year view.
The risk/reward is overwhelmingly in your favor.
I hope this helps.
July Nonfarm Payroll Hits a Blockbuster 528,000, double expectations, the best since February. The Headline Unemployment rate fell to 3.5%, a new post pandemic low. No recession here. Average hourly earnings popped 0.5%. The Dow dropped $250 as possible scenarios were already discounted in the market in a classic “Buy the rumor, sell the news” move. Bond yields soared. The difficulty in finding workers is overwhelming recession fears. Hotels and restaurants created enormous numbers of jobs. The Fed now has a license to maintain aggressive interest rate rises. My bond short in the (TLT) is looking good.
Weekly Jobless Claims hit 260,000, an 8-month high, as recession fears fan the flames. That beats the 1 million figure we saw at the pandemic high two years ago. Layoffs are falling. That makes tomorrows July Nonfarm Payroll Report more important than usual.
Fed Says More Rate Hikes Coming but No Recession, says St Louis Fed president James Bullard. I couldn’t agree more. If inflation dips look for only a 50-basis point rate hike in September. Stocks will soar.
England Predicts Major Recession after hiking interest rates by 0.50% to 1.75%. The Bank of England expects inflation to peak at 13.3%. Europe economy is in the toilet and China is weak. It all highlights how America now has the strongest economy in the world and is therefore the first choice for equity investors.
Weak Chinese Data Torpedoes Oil, down 34% from its February peak. Oil is now lower than when the Ukraine War started. Manufacturing PMI dropped from 51.7 to 50.4, barely outside recessionary data. New Chinese Covid shutdowns are the cause. Could this recession go global?
Home Prices fall at a Record Pace, down from a 19.3% annual gain to 17.3% in June, according to Black Knight, a mortgage analytics firm. Some 25% of major U.S. markets saw growth slow by three percentage points in June. It’s all about interest rates.
Mortgage Rates Drop Below 5%, for the 30-year fixed, a four-month low. It’s putting a floor under the housing market. Refi’s are still near zero. The collapse in bond yields is feeding through.
Half of U.S. Homes are Equity Rich, indicating homeowner equity is more than 50% of market value. That makes available trillions of dollars in potential second mortgages to support the economy. Americans are richer than they think.
Tesla Voted to Split Shares. The 3:1 split will make the shares more affordable for lower-end (poorer) investors who want to make the millions we have for the past decade. Watch for a spike in the price as share splits always attract a hoard of short-term meme investors. The last 5:1 split in 2020 brought an eye-popping near doubling of the shares in six months
ISM Non-Manufacturing Gains 2%, in June where tech lives. It shows that our “recessionary” economy may be stronger than you think, especially in the right sectors. No wonder stocks are going up every day.
Carried Interest Lives Again, with Arizona’s Kristin Sinema stopping the abolishment of tax-free treatment of hedge funds and private equity funds as her pound of flesh for backing Biden’s stimulus bill. People have been trying to end carried interest since President Carter pushed it through in 1979 to jump-start venture capital and Silicon Valley. It truly demonstrates the power of lobbying and will lead to more concentration of wealth at the top. Look for a vote next week.
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 peaking out soon, 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!
With some of the greatest market volatility in market history, my August month-to-date performance reached +0.46%.
My 2022 year-to-date performance expanded to 55.29%, a new high. The Dow Average is down -9.64% 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 74.73%.
That brings my 14-year total return to 567.85%, some 2.39 times the S&P 500 (SPX) over the same period and a new all-time high. My average annualized return has ratcheted up to 44.83%, easily the highest in the industry.
We need to keep an eye on the number of US Coronavirus cases at 91 million, up 300,000 in a week, and deaths topping 1,033,000 and have only increased by 2,000 in the past week. You can find the data here at https://coronavirus.jhu.edu.
On Monday, August 8, there is no data of note.
On Tuesday, August 9 at 8:30 AM, the NFIB Business Optimism Index for July is out.
On Wednesday, August 10 at 8:30 AM, the CPI Index for July is published.
On Thursday, August 11 at 8:30 AM, Weekly Jobless Claims are announced. The Producer Price Index for August is printed.
On Friday, August 12 at 7:00 AM, the University of Michigan Consumer Sentiment Index is disclosed. At 2:00 the Baker Hughes Oil Rig Count is out.
As for me, I had the good fortune to live with a Nazi family in West Berlin during the 1960s. While working at the Sarotti chocolate factory in Templehof, my boss took pity on me and invited me to move in with his family. I jumped at the chance of free rent and all the German food I could eat.
What I learned was amazing.
Even though the Germans had lost WWII 20 years earlier, they still believed in the core Nazi beliefs. However, they loved Americans as we had saved them from the Bolsheviks, especially in Berlin. President Kennedy had delivered his famous “Ich bin ein Berliner” speech only seven years earlier.
There have been thousands of books written about wartime Germany, but almost none about what happened afterwards. I absorbed dozens of stories from my adopted German family, and I’ll tell you one of the most unbelievable ones.
In the weeks after the German surrender on May 7, 1945, Berlin was shattered. The city had been the subject of countless 1,000 bomber raids and the population had shrunk from 5 million to only 1.5 million. Most of the military-aged men were absent. Survivors were living under the rubble.
What’s worse, everyone knew that the allies would soon declare the German currency, the Reichsmark, worthless and replace it with a new one, wiping out everyone’s life savings. So, they had to spend as fast as they could. But with the economy in ruins, there was nothing to buy. In any case, the only thing they really wanted was food, which they could get on a thriving black market.
It turned out that there was only one thing they could buy in unlimited quantities:
Movie tickets.
When Hitler came to power in 1933, one of the first things he did was ban American movies. The industry was taken over by propaganda minister Joseph Goebbels who only permitted propaganda films promoting Nazi values for domestic consumption.
The only American film permitted in Germany during the 1930s was Grapes of Wrath because it highlighted U.S. weaknesses. Movie production was shut down completely in 1943 because of the war’s demands on supplies.
When the war ended, suddenly, the iconic movies of the Great Depression became available, such as the works of the Marx Brothers, Shirley Temple, The Wizard of Oz, Gone with the Wind, and King Kong.
Impromptu movie theaters were thrown up against standing walls of destroyed buildings. Within two weeks of the surrender, half of Berlin’s prewar 550 theaters had reopened. Of a population of 1.5 million, 850,000 movie tickets were sold every weekend. The summer of 1945 became one long film festival. The Germans laughed, cried, and were enthralled.
Every weekend was a sellout. The only movie that bombed that summer was a U.S. Army documentary about the concentration camps. But even that one sold 400,000 tickets.
The movies had a therapeutic effect on the German people. It distracted them from their daily privations, starvation, and suffering. It also allowed them to reconnect with western civilization. Ask any Berliner about what they did after the war and all they will talk about are the movies.
The allies finally did withdraw the Reichsmark in 1948. Individuals were only permitted to convert $40 out of the old currency into the new Deutschmark, which was then worth 25 cents. Only those who had title to land maintained their wealth, and most of those were farmers in the new West Germany.
I hope you enjoyed this little fragment of unwritten history, which I find amazing. But then, I find everything amazing.
Stay healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Berlin in 1945
Berlin in 1968
