Global Market Comments
January 3, 2024
Fiat Lux
2024 Annual Asset Class Review
A Global Vision
FOR PAID SUBSCRIBERS ONLY
Featured Trades:
(SPX), (QQQ), (IWM) (AAPL), (XLF), (BAC) (JPM), (BAC), (C), (MS), (GS),
(X), (CAT), (DE),(TLT), (TBT), (JNK), (PHB), (HYG), (MUB), (LQD), (FXE), (EUO),
(FXC), (FXA), (YCS), (FXY), (CYB), (DIG), (RIG), (USO), (DUG), (UNG), (USO),
(XLE), (AMLP),(GLD), (DGP), (SLV), (PPTL), (PALL), (ITB), (LEN), (KBH), (PHM)
Global Market Comments
March 24, 2023
Fiat Lux
Featured Trade:
(MARCH 22 BIWEEKLY STRATEGY WEBINAR Q&A),
(IBB), (INTC), (AMD), (XLU), (NVDA), (TSLA), (FRC), (QQQ), (SPY), (TLT), (UNG), (USO), (VLO), (DINO), (SUN), (FCX), (JPM), (RIVN), (DVN), (LNG), (KMI), (DAL)
CLICK HERE to download today's position sheet.
Below please find subscribers’ Q&A for the March 22 Mad Hedge Fund Trader Global Strategy Webinar, broadcast from Silicon Valley, CA.
Q: I have big losses in biotech (IBB) but am a long-term believer—do you think it will recover?
A: Yes, I do. But we are still looking at the post-COVID hangover, where Biotechs rocketed for about a year. We’re simply coming off that overbought situation. In the meantime, the industry continues to generate groundbreaking discoveries at the fastest rate in history. When those translate into profit-making products, the stocks will perform, and many of them already have.
Q: Advanced Micro Devices (AMD) appears to be overbought, what are your thoughts?
A: Yes absolutely, the whole chip sector is overbought, because guess what, they benefit from falling interest rates and an economic recovery. That group will absolutely lead going into the future, and it’s hard to get into—these things just go up in a straight line. Look at Nvidia (NVDA), it has more than doubled since the October low and you barely get pullbacks. It’s looking like Nvidia is going to take over the world; we’d love to get into it but it seems like it will only be a high-risk/high-reward stock. They are now having the tailwind with Chat GPT—which everyone has to own now or go out of business—and buy Nvidia chips to make it work.
Q: Would you recommend banks and brokerages here?
A; Yes, because of the banking crisis, they’ll be the best performers as we come out of it. The end of the interest rate rising cycle is now in sight, and we are about to enter the golden age of banking. Institutions are buying stocks for that now. And your next entry point will be Friday because the pattern has been to sell off everything on Fridays in expectation of a new bank going under on the weekend. If nothing happens, then you have a big rally on Monday morning. So that you can probably play.
Q: Are there recordings of this webinar?
A: Yes, to find all past recordings, just go to www.madhedgefundtrader.com and log in.
Q: When does Intel (INTC) become a buy, if ever?
A: It’s probably a “BUY” right here. You never want to buy a tech company run by a salesman, and that’s what happened with Intel. As soon as you had a salesman guaranteeing he’d turn the company around, the stock dropped by half. So down here, it’s looking more likely that they’ll fire the head of Intel, get an engineer back in charge, and the stock should double. But clearly, it’s the only value left in the semiconductor area.
Q: Would you double up on the United States Natural Gas Fund (UNG)?
A: Yes, and I'd be doing 2-year (UNG) LEAPS. There’s no way you have an economic recovery over the next two years that will get us a double, triple, or quadruple in the price of natural gas, and (UNG) will catch that move less 35% for the contango (the 1-year differential between front month and one-year futures contracts).
Q: What’s your favorite tech stock to buy on the dip?
A: It has to be Tesla (TSLA). And I’m in the middle of writing a massive opus on the Tesla Investors Day, which included far more news and content than people realize. That's because you have journalists covering investors' day, not engineers. So I’ll get to the engineers’ and scientists view, which is much more interesting.
Q: Buy bitcoin after the financial contagion?
A: No, bitcoin is what you bought at the market top because there was nothing else to buy because everything else was so expensive. Now everything else is cheap when you can buy Apple (AAPL) at $160, Nvidia at $272 (NVDA), or Tesla (TSLA) at $200. Those are far better choices than a purely speculative asset class which you may never see again once you send in your money. That has been the experience of a lot of people.
Q: Should I sell short the Utility ETF (XLU) if investors head into growth stocks?
A: No, utilities are very heavy borrowers with big capital requirements, and also will benefit heavily from falling interest rates. Basically, everything goes up on an economic recovery. So, your short ideas were great a year ago, not so much now. Now we’re looking for long plays, and just a few hedges, like in bonds, to control risk.
Q: What's the net entry point for Freeport McMoRan (FCX)?
A: I would say here, and my target for this year for Freeport is at the very least hitting $50 again; someday we hit $100, once we get another ramp-up for EV production and the demand for copper sores accordingly.
Q: I hear China has a battery that will go 600 miles and is coming soon.
A: Tesla has a battery that will go 1,000 miles now, but it can only be recharged once. It turns out that the military is very interested in using these, converting Humvees to EVs; then you could parachute them charged batteries which you just pop in. That eliminates having to move these giant bladders of gasoline which easily explode. So yes, the 1,000-mile battery has actually been around for 10 years but can’t be mass-produced. That is the issue.
Q: How will Tesla deal with hydrogen?
A: It will ignore it. Hydrogen will never go mainstream—it can’t compete with an existing electric power grid. But there are fleet or utility applications that make sense; so other than a small, limited fleet confined to a local area, I don't see hydrogen ever catching up. And Saudi Arabia can easily convert their entire oil supply into hydrogen to create a “green” carbon-free fuel. Remember, the cost of electric power cars is dropping dramatically—at about 20% a year—so hydrogen has to keep up with that too which they’re not.
Q: Please explain a bank LEAPS.
A: You buy a call option, you sell short a call option higher up, and you do it with a maturity of one year longer, or more. That’s what makes it a LEAPS. If you want more details, just go to www.madhedgefundtrader.com, and search LEAPS and a full explanation of how to execute these will come up.
Q: What do you think of Rivian (RIVN)?
A: It’s a long-term play—they got knocked down by half on their latest $1.2 billion capital raise, which everybody knew was coming, but still seemed to surprise some traders. It’s a long-term hold, not a short term trade. That said, it’s tempting to do LEAPS on Rivian right here going out two years. The stock is down 95% from the highs.
Q: What level LEAPS do you do on JP Morgan (JPM)?
A: I sent that out to everybody last week—that would be to buy the $130 call option and sell short the $135 call option for January of 2024. That way the stock only has to go up 4% for you to make a 100% return on that investment. That’s why we love LEAPS.
Q: I had First Republic Bank (FRC) at $30, took a bath, and got rid of it. Should I have held on?
A: Yes. There's nothing wrong with First Republic's business, and that’s what's new in all of this current round of bank failures—the assets are fine. Usually when a bank goes under it’s because they extended too many dubious loans that defaulted. First Republic not only has a great loan book, but a great asset base in high-net-worth individuals. This is not a bank you would normally expect to go under. Which is why private banks are pouring money into it to save it. I’d be a buyer at the $10 level if we get down that far again. And I actually bought a little bit of First Republic myself on Monday, the meltdown day at $15, with the theory that it will get bailed out and the stock goes up ten times.
Q: Would you do vertical credit spreads on the SPDR S&P 500 ETF Fund (SPY) or Invesco QQQ ETF (QQQ) with the $2 spread?
A: No, the big money is made on single stocks, which have double or triple the volatility of indexes, and you know which single stocks to buy right now—the ones that just had a big selloff. You want more volatility at market bottoms, not less; and I would recommend doing all the financial and call spreads and LEAPS right here. They will have higher volatility and deliver much better risk/reward ratios. That is basic trading 101: you short indexes on the way down, you buy single stocks on the way up. That's what every hedge fund worth its salt does.
Q: Do you have an opinion on Zero Days to Expiration causing greater volatility?
A: Absolutely, it is—especially on Fridays. And I'm not doing these because they are basically lottery tickets. But, if it's a coin toss on whether you make money or not, and you write off the bad ones and make a nice profit on the good ones, that could be a profitable trade. I actually have several followers experimenting with that type of strategy, so I'll let you know if they make any money on it.
Q: What do you think about oil in this environment?
A: It’s discounting a recession which is never going to happen; so oil and oil plays are probably a good trade here, especially with front-month calls. I would be going for Valero Energy (VLO) and the refiners like Sinclair (DINO) and Sunoco (SUN), rather than the big producers because they have already had big moves which they have held onto mostly. Expect oil to go up—I’d be buying the commodity here (USO) and I’d be buying the United States Natural Gas Fund (UNG).
Q: What's the maximum downside in the next 30 days?
A: Well I showed you on that S&P 500 (SPY) chart at the beginning—$350 is the worst-case scenario with a deep recession, and that assumes the banking crisis doesn’t go away and gets worse. I think the banking crisis is done and getting better so we won’t test the downside, but the unanticipated can happen, so you have to be ready for anything. The non-recessionary low looks to be $375.
Q: What if you can’t do spreads in an IRA, like for iShares 20 Plus Year Treasury Bond ETF (TLT)?
A: Just buy the (TLT) outright, or buy it on 2:1 margin. (TLT) is probably a great buy around 100 or 101. ProShares has the 2X long Ultra Treasury ETF (UBT), but the fees are high, the spreads are wide, and the tracking error is large, as is standard for these kinds of instruments.
Q: When taking a position in LEAPS, how do you decide the position size per holding?
A: I send out all the LEAPS assuming one contract, then you can adjust your size according to your own experience level and risk tolerance. Keep in mind that if I’m wrong on everything, the value of all LEAPS goes to zero, so it may not be for you. On the other hand, if I am right on my one-year and two-year views, all these LEAPS will deliver a 100-120% return. You decide.
Q: Are you expecting a seasonal rally in oil?
A: Yes I am, and we’re coming off very low levels. Buy the United States Oil ETF (USO) and buy the United States Natural Gas Fund (UNG).
Q: Is a recession still on the table with all the banking crises?
A: No, if anything, it brings the end of any possibility of a recession because it’s bringing interest rate cuts sooner than expected, which brings a recovery that’s sooner than expected. And that’s why you’re getting interest-rate-sensitive stocks holding here and starting to rally.
Q: My retirement account won’t let me buy (UNG)—Are there any other good companies I can buy?
A: Yes, Devon Energy (DVN) is big in the gas area. So are Cheniere Energy (LNG) and Kinder Morgan (KMI).
Q: If the market is oversupplied with oil, why is gasoline so expensive?
A: Endless middlemen add-ons. This is one of the greatest continuing rip-offs in human history—gasoline prices always take the elevator up and the escalator down, it’s always that way. And that's how oil companies make money—by squeezing consumers. I’ve been tracking it for 50 years and that’s my conclusion. The State of California has done a lot of research on this and learned that only half of their higher prices are from taxes to pay for roads and the other half comes from a myriad of markups. Also, a lot of businessmen just don’t want to be in the gasoline retailing business and will only enter when the returns are very high. Plus, oil companies are trying to milk companies for all their worth right now because the industry may disappear in 10 years. Go electric, that’s my solution. I haven’t bought gasoline for 13 years, except for my kids. I only buy cars for my kids at junkyards and fix them up. If they want to do better they can go out and earn it.
Q: Do we need to worry about China supporting Russia in the war against Ukraine?
A: Not really, because all we have to do to cut off Chinese supplies for Russia is to cut off trade with China, and their economy will completely collapse. China knows this, so they may do some token support for Russia like send them sweatshirts or something like that. If they start a large arms supply, which they could, then the political costs and the trade costs would be more than it’s worth. And at the end of the day, China has no principles, it really is only interested in itself and its own people and will do business with anybody.
Q: What do you think about the recovery in solar?
A: What’s been going on in solar is very interesting because for the last 20 years, solar has moved one to one with oil. So, you would expect that from collapsing oil prices and more price competition from oil, solar would collapse too. Instead, solar has had tremendous moves up and is close to highs for the year. The difference has to be the Biden alternative energy subsidies, which are floating the entire industry and accelerating the entire conversion of the United States to an all-electric economy. So they've had great runs. I wouldn’t get involved here, but it’s nice to contemplate what this means for the long-term future of the country.
Q: Should I buy the airline stocks here?
A: Yes, I’d go for Delta (DAL). Again, it’s one of the sectors that’s discounting a recession that’s not going to happen. They’re going to have the biggest airline boom ever this summer as the reopening trade continues on for another year, and a lot of pent-up travel demand hits the market.
Q: Do you like platinum?
A: I do—not because of EVs but because of hydrogen. You need platinum for hydrogen fuel cells to work. That’s a brand new demand, and there’s supposed to be a shortage of half a million ounces of platinum this year.
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, 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
November 7, 2018
Fiat Lux
SPECIAL ELECTION ISSUE
Featured Trade:
(THROWING RED MEAT TO MY BASE)
(RTN), (LMT), (NOC), (HON), (XOM), (CVX), (DVN)
Be nice to investors on the way up, because you always meet them again on the way down. This is the harsh reality of those who have placed their money in the fracking space this year.
The hottest sector in the market for the first half of the year, investors have recently fallen on hard times, with the price of oil collapsing from a $107 high in June to under $77 this morning, a haircut of some 28% in just five months.
Prices just seem to be immune to all the good news that is thrown at them, be it ISIL, the Ukraine, or Syria.
It wasn?t supposed to be like that. Using this revolutionary new technology, drillers are in the process of ramping up US domestic oil production from 6 million to 10 million barrels a day.
The implications for the American economy have been extraordinarily positive. It has created a hiring boom in the oil patch states, which has substantially reduced blue-collar unemployment. It has added several points to US GDP growth.
It has also reduced our dependence on energy imports, from a peak of 30 quadrillion Btu?s in 2005 to only 13 quadrillion Btu?s at the end of last year. We are probably shipping in under 10 quadrillion Btu?s right now, a plunge of 66% from the top in only 9 years.
The foreign exchange markets have taken note. Falling imports means sending hundreds of billions of dollars less to hostile sellers abroad. Am I the only one who has noticed that we are funding both sides of all the Middle Eastern conflicts? The upshot has been the igniting of a huge bull market in the US dollar that will continue for decades.
That has justified the withdrawal of US military forces in this volatile part of the world, creating enormous savings in defense spending, rapidly bringing the US Federal budget into balance.
The oil boom has also provided ample fodder for the stock market, with the major indexes tripling off the 2009 bottom. Energy plays, especially those revolving around fracking infrastructure, took the lead.
Readers lapped up my recommendations in the area. Cheniere Energy (LNG) soared from $6 to $85. Linn Energy (LINE) ratcheted up from $7 to $36. Occidental Petroleum moved by leaps and bounds, from $35 to $110.
Is the party now over? Are we to dump our energy holdings in the wake of the recent calamitous falls in prices?
I think not.
One of the purposes of this letter is to assist readers in separating out the wheat from the chaff on the information front, both the kind that bombards us from the media, and the more mundane variety emailed to us by brokers.
When I see the quality of this data, I want to throw up my hands and cry. Pundits speculate that the troubles stem from Saudi Arabia?s desire to put Russia, Iran, the US fracking industry, and all alternative energy projects out of business by pummeling prices.
The only problem is that these experts have never been to Saudi Arabia, Iran, the Barnett Shale, and wouldn?t know which end of a solar panel to face towards the sun. Best case, they are guessing, worst case, they are making it up to fill up airtime. And you want to invest your life savings based on what they are telling you?
I call this bullpuckey.
I have traveled in the Middle East for 46 years. I covered the neighborhood wars for The Economist magazine during the 1970?s.
When representing Morgan Stanley in the firm?s dealings with the Saudi royal family in the 1980?s, I paused to stick my finger in the crack in the Riyadh city gate left by a spear thrown by King Abdul Aziz al Saud when he captured the city in the 1920?s, creating modern Saudi Arabia.
They only mistake I made in my Texas fracking investments is that I sold out too soon in 2005, when natural gas traded at $5 and missed the spike to $17.
So let me tell you about the price of oil.
There are a few tried and true rules about this industry. It is far bigger than you realize. It has taken 150 years to build. Nothing ever happens in a hurry. Any changes here take decades and billions of dollars to implement.
Nobody has ever controlled the market, just chipped away at the margins. Oh, and occasionally the stuff blows up and kills you.
As one time Vladimir Lenin advisor and Occidental Petroleum founder, the late Dr. Armand Hammer, once told me, ?Follow the oil. Everything springs from there.?
China is the big factor that most people are missing. Media coverage has been unremittingly negative. But their energy imports have never stopped rising, whether the economy is up, down, or going nowhere, which in any case are rigged, guessed, or manufactured. The major cities still suffer brownouts in the summer, and the government has ordered offices to limit air conditioning to a sweltering 82 degrees.
Chinese oil demand doubled to 8 million barrels a day from 2000-2010, and will double again in the current decade. This assumes that Chinese standards of living reach only a fraction of our own. Lack of critical infrastructure and storage prevents it from rising faster.
Any fall in American purchases of Middle Eastern oil are immediately offset by new sales to Asia. Some 80% of Persian Gulf oil now goes to Asia, and soon it will be 100%. This is why the Middle Kingdom has suddenly started investing in aircraft carriers.
So, we are not entering a prolonged, never ending collapse in oil prices. Run that theory past senior management at Exxon Mobil (XOM) and Occidental (OXY), as I have done, and you?ll summon a great guffaw.
It will reorganize, restructure, and move into new technologies and markets, as they have already done with fracking. My theory is that they will buy the entire alternative energy industry the second it become sustainably profitable. It certainly has the cash and the management and engineering expertise to do so.
What we are really seeing is the growing up of the fracking industry, from rambunctious teenage years to a more mature young adulthood. This is its first real recession.
For years I have heard complaints of rocketing costs and endless shortages of key supplies and equipment. This setback will shake out over-leveraged marginal players and allow costs to settle back to earth.
Roustabouts who recently made a stratospheric $200,000 a year will go back to earning $70,000. This will all be great for industry profitability.
What all of this means is that we are entering a generational opportunity to get into energy investments of every description. After all, it is the only sector in the market that is now cheap which, unlike coal, has a reasonable opportunity to recover.
Oil will probably hit a low sometime next year. Where is anybody?s guess, so don?t bother asking me. It is unknowable.
When it does, I?ll be shooting out the Trade Alerts as fast as I can write them.
Where to focus? I?ll unfurl the roll call of the usual suspects. They include Occidental Petroleum (OXY), Exxon Mobil (XOM), Devon Energy (DVN), Anadarko Petroleum (APC) Cabot Oil & Gas (COG), and the ProShares 2X Ultra Oil & Gas ETF (DIG).
Fracking investments should be especially immune to the downturn, because their primary product is natural gas, which has not fallen anywhere as much as Texas tea. Oil was always just a byproduct and a bonus.
CH4 was the main show, which has rocketed by an eye popping 29% to $4.57 in the past two weeks, thanks to the return of the polar vortex this winter. We are now close to the highs for the year in natural gas.
The cost of production of domestic US oil runs everywhere from $28 a barrel for older legacy fields, to $100 for recent deep offshore. Many recent developments were brought on-stream around the $70-$80 area. So $76 a barrel is not the end of the world.
On the other hand, natural gas uniformly cost just under $2/Btu, and that number is falling. Producers are currently getting more than double that in the market.
And while on the subject of this simple molecule, don?t let ground water pollution ever both you. It does happen, but it?s an easy fix.
Of the 50 cases of pollution investigated by MIT, most were found to be the result of subcontractor incompetence, natural causes, or pollution that occurred 50 or more years ago. Properly regulated, it shouldn?t be happening at all.
When I fracked in the Barnett Shale 15 years ago, we used greywater, or runoff from irrigation, to accelerate our underground expositions. The industry has since gotten fancy, bringing in highly toxic chemicals like Guar Gum, Petroleum Distillates, Triethanolamine Zirconate, and Potassium Metaborate.
However, the marginal production gains of using these new additives are not worth the environmental risk. Scale back on the most toxic chemicals and go back to groundwater, and the environmental, as well as the political opposition melts away.
By the way, can any readers tell me if my favorite restaurant in Kuwait, the ship Al Boom, is still in business? The lamb kabob there was to die for.
Don?t Throw Out the Baby with the Bathwater