Global Market Comments
March 27, 2023
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE BANKING CRISIS IS OVER),
(SPY), (TLT), (SCHW), (NFLX), (CS), (GLD), (USO), (BRK/B), (TSLA), (BAC), (C), (JPM), (IBKR), (MS)
CLICK HERE to download today's position sheet.
I think it is safe to say that the banking crisis is now in the market. You saw this in the ritual Friday selloff of bank stocks, which last week made back two-thirds of its losses by the end of the day.
Treasury Secretary Janet Yellen has made it clear that she will use her emergency authority to bail out the depositors of any US banks and leave the shareholders drifting in the wind. That’s OK as long as failures happen in ones and twos and not hundreds.
So after this coming dead, data-less week, we may launch into a serious rally next month, often the strongest of the year, back up to the top of the recent trading range. After that, it will be time to “Sell in May and go away,” and not come back until an interest rate collapse is imminent.
Personally, I have suites on the Queen Mary II and the Orient Express waiting for me. How about you?
And what happens when a crisis winds down? The need for protection ebbs as well. That means that big tech stocks with large balance sheets which had a great March will be due for a rest.
You see this in other flight-to-safety assets, like gold (GLD), which gave up some of its recent gains.
Given the failure of the Volatility Index ($VIX) to maintain a sustainable rally this year, it is clear that something important has changed in that market. That would be same-day options, which are stealing the thunder of the old ($VIX).
Instead of panicking and buying the ($VIX) at market, hedge fund algorithms are now programmed to buy individual same-day stock put options. That vastly increases the volatility of single stocks, with one day 10%-15% moves becoming normal.
When a piece of bad news erupts about the banking system, same-day put options across the entire sector rocket, regardless of whether any individual bank is having problems or not.
Needless to say, as ($VIX) opportunities fade, spectacular new trades are opening up in single stocks which Mad Hedge is happily taking advantage of. As a result, the profitability of our trading strategy has near doubled. This has produced the blowout numbers which I list below.
When panic put buying tanks a stock, we pile on call spreads, as we did two weeks ago with many bank and broker stocks. When fears of recession drive bond prices insanely high, we buy (TLT) put spreads.
Buy low, sell high, it’s my new investment strategy. I’m thinking of patenting it.
With some of the most extreme volatility of the year, Mad Hedge continued on up tear, with March up an eye-popping +12.52%.
My 2023 year-to-date performance is now at an incredible +38.28%. The S&P 500 (SPY) is up a miniscule +0.77% so far in 2023. My trailing one-year return maintains a sky-high +95.52% versus -10.23% for the S&P 500.
That brings my 15-year total return to +635.47%, some 2.8 times the S&P 500 (SPY) over the same period. My average annualized return has recovered to +48.26%, another new high.
I executed only two trades last week, content to leave alone my remaining eight positions that are profitable. I used a bond selloff to take profits with my bond short (TLT). A frenetic 25% rally prompted me to close out my long in Charles Schwab (SCHW) as we were nearing our maximum profit.
Fed Raises Interest Rates 25 basis points, to an overnight range of 4.75% to 5.00%, a 15-year high. But it left the door open to a further 25 basis points on May 3. The statement substantially weakened the prospect for future interest rate hikes, a de facto pause. Stocks loved the move, especially brokerage and technology stocks. Powell said the US banking system is sound and announced further support measures for small banks.
Yellen to Guarantee Deposits if More Banks Fail, which traders are taking to the bank as a nationwide government backstop. That explains the ballistic moves in financials yesterday. Today, Fed governor Jay Powell plays his hand.
Will the Banking Crisis End the Bear Market? I think so, as a drop in interest rates is the only possible solution. The Fed may have to guarantee all US bank deposits for a year to get there. Bank and technology stocks certainly think so, which have been on a tear this week.
Fed Window Increases By $94 Billion on the Week, and $400 billion in two weeks, in its so far successful effort to float the banking system. Some $60 billion went to foreign borrowers. It has to be viewed as a positive and the emergency need for funding is declining.
Netflix (NFLX) Soars 10%, by ending password sharing in Canada. The United States is expected to be next. The move is expected to boost paid subscriptions. I took profits on my long in (NFLX).
Oil (USO) Dives 1%, as the US energy secretary says it may take “years” to refill the Strategic Petroleum Reserve. How about never?
Existing Home Sales Soar 14.5% in February, a three-year high on a signed contract basis. The annualized rate was 4.58 million according to the National Association of Home Builders. Inventories shrink to an incredible 2.6 months or 980,000 homes. The median home prices fell 0.2% to $363,000, the first decline in 11 years. The sharp drop in interest rates last week will further turbocharge sales. Cash sales were 28% of total sales.
Gold (GLD) Tops $2,000 an Ounce, as the flight to safety bid continues. Lower interest rates sooner will also provide less yield competition for precious metals. Silver will provide the higher beta from here, as it always does.
UBS Buys Credit Suisse (CS) for $3.25 Billion, less than half of where it traded on Friday, eliminating another threat to the global financial system. It looks like there were $5 billion in hidden trading losses. Some $17 billion in lower tier bonds were written down to zero, which several US bond funds like Pimco owned. The deal includes a sweetheart $100 billion loan facility from my friends at the Swiss National Bank. The forced marriage will create one of the largest banks in Europe. Some 9,000 CS jobs will get axed.
Berkshire Hathaway Steps up Share Buybacks, totaling $1.8 billion in 2022. The three-year total is an incredible $60 billion. It explains why (BRK/B) was unchanged in an otherwise horrific year. Buffet still holds a stunning $147 billion in cash, most of which is invested in US Treasury short terms bills.
My Ten-Year View
When we come out the other side of the recession, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. The economy decarbonizing and technology hyper accelerating, creating enormous investment opportunities. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The new America will be far more efficient and profitable than the old.
Dow 240,000 here we come!
On Monday, March 27 at 7:30 AM EST, the Dallas Fed Manufacturing Index is out.
On Tuesday, March 28 at 6:00 AM, the S&P Case Shiller National Home Price Index is announced.
On Wednesday, March 29 at 7:00 AM, the Pending Home Sales for February are printed.
On Thursday, March 30 at 8:30 AM, the Weekly Jobless Claims are announced. The final read on Q4 GDP is disclosed.
On Friday, March 31 at 8:30 AM, the Personal Income & Spending are released.
As for me, not a lot of people get a chance to board a WWII battleship these days. So when I got the chance, I jumped at it.
As part of my grand tour of the South Pacific for Continental Airlines in 1981, I stopped at the US missile test site at Kwajalein Atoll in the Marshall Islands, a mere 2,000 miles west southwest of Hawaii and just north of the equator.
Of course, TOP SECRET clearance was required and no civilians are allowed.
No problem there, as clearance from my days at the Nuclear Test Site in Nevada was still valid. Still, the FBI visited my parents in California just to be sure that I hadn’t adopted any inconvenient ideologies in the intervening years.
I met with the admiral in charge to get an update on the current strategic state of the Pacific. China was nowhere back then, so there wasn’t much to talk about in the wake of the Vietnam War.
As our meeting wound down, the admiral asked me if I had been on a German battleship. “It’s a bit before my time,” I replied. “How would you like to board the Prinz Eugen?" he responded.
The Prinz Eugen was a heavy cruiser, otherwise known as a pocket battleship built by Nazi Germany. It launched in 1938 at 16,000 tons and with eight 8-inch guns. Its sister ship was the Admiral Graf Spee, which was scuttled in the famous Battle of the River Platte in South America in 1939.
Early in the war, it helped sink the British battleship HMS Hood and damaged the HMS Prince of Wales. The Prinz Eugen spent much of the war holed up in a Norwegian fjord and later provided artillery support for the retreating German Army on the eastern front. At the end of the war, the ship was handed over to the US Navy as a war prize.
The US postwar atomic testing was just beginning so the Prinz Eugen was towed through the Panama Canal to be used as a target. Some 200 ships were assembled, including those from Germany, Japan, Britain, and even some American ships deemed no longer seaworthy like the USS Saratoga. One of the first hydrogen bombs was dropped in the middle of the fleet.
The Prinz Eugen was the only ship to remain afloat. In the Navy film of the explosion, you can see the Prinz Eugen jump 200 feet into the air and come down upright. The ship was then towed back to Kwajalein Atoll and put at anchor. A typhoon came later in 1946, capsizing and sinking it.
It was a bright at sunny day when I pulled up to the Prinz Eugen in a small boat with some Navy divers. There was no way the Navy was going to let me visit the ship alone.
The ship was upside-down, with the stern beached to the bow in 300 feet of pristine turquoise water. The propellers had recently been sent off to a war memorial in Germany. The ship’s eight cannons lay scattered on the bottom, falling out of their turrets when the ship tipped over.
The small part of the Prinz Eugen above water had already started to rust through. But once underwater it was like entering a live aquarium.
A lot of coral, seaweed, starfish, and sea urchins can accumulate in 36 years and every inch of the ship was covered. Brightly tropical fish swam in schools. A six-foot mako shark with a hungry look warily swam by.
My diver friends knew the ship well and showed me the highlights to a depth of 50 feet. The controls in the engine room were labeled in German Fraktur, the preferred prewar script. Broken dishes displayed the Nazi swastika. Anti-aircraft guns frozen in time pointed towards the bottom. No one had been allowed to remove anything from the ship since the war, and in the Navy, most men follow orders.
It was amazing what was still intact on a ship that had been blown up by a hydrogen bomb. You can’t beat “Made in Germany.” Our time on the ship was limited as the hull was still radioactive, and in any case, I was running low on oxygen.
A few years later the Navy banned all diving on the Prinz Eugen. Three divers had gotten lost in the dark, tangled in cables, and downed. I was one of the last to visit the historic ship.
I checked with my friends in the Navy and the Prinz Eugen is still there, but in deteriorating condition. When the ship started leaking oil in 2018 and staining the immaculate beaches nearby, the Navy launched a major effort to drain what was left from the 80-year-old tanks. No doubt a future typhoon will claim what is left.
So if someone asks if you know anybody who’s been on a German battleship, you can say “Yes,” you know me. And yes, my German is still pretty good these days.
Vielen dank!
Good Luck and Good Trading,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
The Prinz Eugen in 1940
The Prinz Eugen Today
Global Market Comments
March 20, 2023
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or QE IS BACK!)
(SPY), (BITCOIN), (GLD), (SLV), (ARKK), (NVDA), (AAPL), (GOOGL), (META), (SCHW), (MS), (FRC), (TLT), (KBWH)
CLICK HERE to download today's position sheet.
Remember the endless flood of the money supply that went on for a decade, floating all boats?
It's back!
One need look no further than the Fed balance sheet, which ratcheted up a breathtaking $297 billion last week. That offsets three months worth of quantitative tightening if it even still exists.
This is further confirmed by the classic QE asset classes, which saw their best week in a year. Bitcoin jumped by 30%, gold (GLD) gained 8%, silver (SLV) popped 12%, and technology stocks went on a tear. Even bonds did well, with the (TLT) up $8.00 from the previous week’s low.
Big tech stocks like (NVDA), (AAPL), (GOOGL), and (META) are now seen as the new “safe “stocks, thanks to their gigantic balance sheets and immense cash flows. Tech funds have seen net inflows for the past four consecutive weeks, delivering the largest new investment in three years. The ARK Innovation Fund (ARKK) saw its biggest inflows since the 2021 peak.
It's the regional banking crisis that is reverting the Fed to its old habits, all prompted by the mindless management of Silicon Valley Bank. All California assets were dumped as California was about to fall into the ocean, like Charles Schwab (SCHW), Bank of America (BAC), and First Republic Bank (FRC).
That puts the Fed in a quandary, which renders its interest rate decision on Wednesday, March 22 at 2:00 PM EST, because the last thing you do in a financial crisis is raise interest rates. That’s what the Fed did in 1929, extending the Great Depression from 10 days to 10 years.
My bet is that they raise by 25 basis point one more time because it’s already in the mail. The regional banking crisis has pulled forward any recession and therefore the recovery.
After that, there will be no interest rate rises for a decade, which the Fed may hint at in its statement and the following press conference. The cuts will start in June and continue rapidly after that. That’s when the economic data catch up with the reality that is happening right now, which is hugely deflationary.
(NVDA) and (TSLA) already know this, which are rising sharply on Friday.
The action certainly caught the attention of the US Treasury, which seemed willing to jump in with guarantees at the drop of a hat. There has been a massive flight of capital from the heartland to the coasts where the top 20 “too big to fail” banks live.
It’s another example of an industry deregulating itself out of existence, which obtained looser capital requirements after heavy lobbying in 2018. At one point, JP Morgan bank, the safest of the safe, was turning down new account applications. This means that the trade of the decade is setting up for the banks. In the wake of the 2008 financial crisis, the Invesco Bank ETF (KBWB) rose 75% in a year. I expect the same to happen this time around. It has already plunged by 30% in 2023, so it has to rise by 50% just to get back to where it was in January, but with bank deposits now guaranteed and more safeguards in place.
And if you are worried about hidden unrealized losses on bank balance sheets, I list below the safest banks ranked by capital ratios NET of losses when marked to market.
14.5% Goldman Sachs (GS)
13.4% Morgan Stanley (MS)
11.5% JP Morgan Bank (JPM)
11.3% Citigroup (C)
8.7% State Street
5.9% Bank of America (BAC)
No surprise that (GS) and (MS) is at the top where the mark-to-market culture is strong. A strong dose of regulation from the SEC helps too. (BAC) takes a big hit because of the largest holdings of low-yielding mortgages which can’t be marked to market unless they are sold or defaulted.
The crisis brought the traditional recession indicators out of the closet last week. A big one is crude oil prices, which hit a 2 ½ year low at $65 a barrel. It turns out that not only banks but oil producers are hurt by high interest rates as well. Some 120 million barrels have gone into storage in the beast nine months and the market is oversupplied by 300,000 barrels a day.
Only OPEC Plus can put in a floor by cutting production, which they are loathed to do as it brings immediate spending cuts. Or the greatest oil trader in history, Joe Biden of Delaware, can cover his short in the Strategic Petroleum which he sold at $90 last year. You may have to wait for a future Republican administration for that to happen.
While markets crashed, investors have been jumping out of windows, the world appeared to be ending, and the rain continuing incessantly, Mad Hedge continued on up tear with March up +5.61%.
My 2023 year-to-date performance is now at an eye-popping +31.37%. The S&P 500 (SPY) is up +2.63% so far in 2023. My trailing one-year return maintains a sky-high +87.76% versus -15.55% for the S&P 500.
That brings my 15-year total return to +628.56%, some 2.87 times the S&P 500 (SPX) over the same period. My average annualized return has recovered to +47.76%, another new high.
At the market lows, I covered shorts in my Tesla and March NVIDIA positions. I religiously adhered to my stop loss discipline, stopping out of my April short in NVIDIA (NVDA) when the melt-up ensued, my only remaining equity short. I also established a new short in (TLT) at the market high, my first since August.
Silicon Valley Bank fails to sell, but the FDIC stepped in to guarantee all deposits. The FDIC took over Signature Bank in New York as well. If they hadn’t, there would be lines snaking out the doors of every small bank in America Monday morning. The cost is being born by steeper deposit insurance premiums for the banking industry, which will no doubt cause some grumbling. There are 100 banks that would leap to buy Silicon Valley Bank to gain a franchise in the world’s fastest growing technology center. They just need a few hours to get a handle on the bank’s loan portfolio, which only the former management really understand. Buy banks and brokers on dips (SCHW).
Is Platinum the Precious Metals Play of 2023? I am told by the insiders who know that platinum (PPLT) could be the big precious metals play of 2023. The white metal has become the principal metal used in the manufacture of catalytic converters for conventional internal combustion cars of which 15 million a year is still made in the US. There is rising demand for hydrogen fuel cells and the green hydrogen movement. The world’s second largest producer of platinum is Russia, whose supplies have been cut off. As a result, there is expected to be a 556,000-ounce shortage this year after two years of surpluses.
Say Goodbye to the 50 Basis Point Rate Hike, at the Fed meeting on March 22 in the wake of a regional banking Crisis. It’s now a quarter point….or nothing at all. In 48 hours, we have gone from “higher rates for longer” to “maybe the next rate rise is the last one.” Tech stocks are buying it after holding up incredibly well. Buy tech and big banks on dips (JPM), (BAC), (C), (SCHW).
Core Inflation Comes in Moderate, up 0.4% and 0.5% without food and energy. That is a 6.0% YOY rate, down from the 2023 high of 8.7%. Stocks extended a 300-point rally on the news. Inflation has been running at a 3.5% annual rate for the past four months, my yearend target.
Mortgage Rates Dive, off the back of a three-day, $8.00 rally in the bond market. Mortgage rates plunged by 50 basis points to 6.50% and may have more to go. Will this kick off the spring residential real estate market?
Gold (GLD) Breaks Out, crossing a key technical level and setting the options market on fire. Some gold minders saw options volume up 400%. Did the regional banking crisis put the top in interest rates, which have been weighing heavily on gold? Or maybe it’s just an old fashioned flight to safety triggered by the financial crisis. It could be presaging a global economic recovery and a coming commodity boom. (GOLD) LEAPS on the way.
Ron Baron Loaded the Boat with Charles Schwab (SCHW) Shares on Friday, as all the smart money did, including Mad Hedge. My old friend was also an early investor in Tesla (TSLA) and is now one of the largest outside shareholders. When someone offers you a dollar for 40 cents, you take it!
Swiss National Bank Steps in to Bail Out Credit Suisse, taking pressure off US market. I knew they would come in as I was a director of UBS for a year, The Swiss take care of their own. More importantly, the rolling global bank crisis has put the fear of God into the Fed, meaning that the 25 basis point hike next week may be the last for a decade. Buy “RISK ON”, especially banks.
Europe Raises Interest Rates by 50 Basis Points, catching up with the US. It’s an overreaction given the fragility of the banking system. The markets didn’t like the move. Europe has inflation at 2% higher than the US so they really had no choice
Weekly Jobless Claims Drop to 192,000, a surprising fall. The worker shortage continues unabated. It’s the biggest decline since July. If the Fed were looking for a reason to continue quantitative tightening this is it.
First Republic Bank is for Sale, the next bailout target. The mere fact that it is based in California is the problem, which many investors now apparently believe is about to break off of the North American Continent and fall into the Pacific Ocean. You never see a bank with $70 billion in cash and equivalents get in trouble. Morgan Stanley (MS) and JP Morgan are thought to be in the bidding. A group of banks deposited $30 billion into (FRC) to firewall the rest of the banking system.
My Ten-Year View
When we come out the other side of the recession, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. The economy decarbonizing and technology hyper accelerating, creating enormous investment opportunities. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The new America will be far more efficient and profitable than the old.
Dow 240,000 here we come!
On Monday, March 20, there are no data points of note.
On Tuesday, March 21 at 7:00 AM, the Existing Home Sales are announced.
On Wednesday, March 22 at 7:00 AM, the Federal Reserve Open Market Committee announces its interest rate decision. A hike of 25 basis points is in the market. The published statement and following press conference will be the most important of the year, indicating whether they recognize the seriousness of the regional banking crisis and are now leaning hawkish or dovish.
On Thursday, March 23 at 8:30 AM, the Weekly Jobless Claims are announced.
On Friday, March 17 at 8:30 AM, the Durable Goods are released.
As for me, I recall my last trip around the world in 2018. I took the trip because I feared climate change would soon make visits to the equator impossible because of intolerable temperatures and the breakdown of civilization. As it turned out, the global pandemic came six months later, making such travel out of the question for two years.
I beat Phileas Fogg by 55 days, who needed 88 days to complete his trip around the world to settle a gentleman’s bet. But then, he had to rely on elephants, sailing ships, and steam engines to complete his epic voyage, or at least, the one imagined by Jules Verne.
I actually took a much longer route, using a mix of Boeings and Airbuses to fly 80 hours over 40,000 miles on 18 flights through 12 countries in only 33 days. Incredibly, our baggage made it all the way, rather than see its contents sold on the black markets of Manila, New Delhi, or Cairo.
It was a trip around the world for the ages, made even more challenging by dragging my 13 and 15-year-old girls along with me. I have always considered my most valuable asset to be the trips I took to Europe, Africa, and Asia in 1968. The comparisons I can make today some 55 years later are nothing less than awe-inspiring. I wanted to give the same gift to them.
It began with a 12 ½ hour flight from San Francisco to Auckland, New Zealand. Straight out of the airport, I rented a left-hand drive Land Rover and drove three hours to high in the steam-covered mountains of Rarotonga where we were dinner guests of a Māori tribe. To earn my dinner of pork and vegetables cooked underground, I had to dance the haka, a Māori war dance.
The Haka
Of course, with kids in tow, a natural stop was the Hobbit Village of Hobbiton 1½ hours outside of Auckland. I figured the owners of the idyllic sheep farm were earning at least $25 million a year showing tourists the movie set.
In all, I put 1,000 miles on the car in four days, even crossing New Zealand’s highest mountain range on a dirt road. The thick forests were so primeval my daughter expected to see a dinosaur around every curve. We reached our southernmost point at Mt. Ruapehu, a volcano used as the inspiration for Mt. Doom in Peter Jackson’s Lord of the Rings.
The Real Mount Doom
The focus of the Australia leg were ten strategy lectures which I presented around the country. I was mobbed at every stop, with turnouts double what I expected. The Mad Hedge Fund Trader and the Mad Hedge Technology Letter picked up 100 new subscribers in the Land Down Under in five days.
Maybe it was something I said?
My kids’ only requirements were to feed real kangaroos and koala bears, which we duly accomplished on a freezing cold morning outside Melbourne. We also managed to squeeze in a tour of the incredible Sydney Opera House in between lectures, dashing here and there in Uber cabs.
I hosted five Mad Hedge Global Strategy Luncheons for existing customers in five days. The highlight was in Perth, where eight professional traders and I enjoyed a raucous, drunken meal. They had all done well off my advice, so I was popular, to say the least. Someone picked up the tab without me even noticing.
After that, it was a brief ten-hour flight to Manila in the Philippines, with a brief changeover in Hong Kong, where massive protest demonstrations were underway. Ever the history buff, I booked myself into General Douglas MacArthur’s suite at the historic Manila Hotel. The last time I was here, I interviewed President Ferdinand Marcos and his lovely wife Imelda. After a lunch with my enthusiastic Philippine staff and I was on my way to the airport.
I took Malaysian Airlines to New Delhi, India, which has lost two planes over the last five years and where the crew was definitely on edge. I asked why a second plane was lost somewhere over the South Indian Ocean and the universal response was that the pilot had gone insane. Security was so tight that they confiscated a bottle of Jamieson Irish Whiskey that I had just bought in duty free.
India turned out to be a dystopian nightmare. If climate change continues, this is your preview. With temperatures up to 120 degrees in 100% humidity, people were dying of heat stroke by the hundreds. Elephants had to be hosed down to keep them alive. It was so hot you couldn’t stray from the air conditioning for more than an hour. The national radio warned us to stay indoors.
In Old Delhi, the kids were besieged by child beggars pawing them for food and there were mountains of trash everywhere. In the Taj Mahal, my older daughter passed out and we had to dump our remaining drinking water on her to cool her down and bring her back to life. We spent the rest of the day sightseeing indoors at the most heavily air-conditioned shops.
If global temperatures rise by just a few more degrees, you’re going to lose a billion people in India very soon.
On the way to Abu Dhabi, we flew directly over the tanker war at the Straits of Hormuz, one of my old flight paths during my Morgan Stanley days. It was too dusty to see any action there. We got a much better view of Sinai and the Red Sea, which, I told the kids, Moses parted 5,000 years ago (they’ve seen Charlton Heston in The Ten Commandments many times).
The Red Sea
Upon landing at Cairo, Egypt’s ever-vigilant military intelligence service immediately picked me up. Apparently, I was still in their system dating back to my coverage of Henry Kissinger’s shuttle diplomacy for The Economist in 1976. That was all a long time ago. Having two kids with me meant I was not there to cause trouble, so they were very friendly. They even gave us a free ride to the downtown Nile Hilton.
After India, Cairo, and the Sahara Desert were downright pleasant, a dry and comfortable 100 degrees. We did the standard circuit, the pyramids, and the Sphynx followed by a camel ride into the desert.
If you are the least bit claustrophobic, don’t even think about crawling into the center of the Great Pyramid on your hands and knees as we did. I was sore for two days. We spent the evening on a Nile dinner cruise, looking for alligators, entertained by an unusually talented belly dancer.
The next stage involved a one-day race to Greece, where we circled the Acropolis in all its glory, and then argued with a Greek taxi driver on how to get back to the airport. We ended up taking an efficient airport train, a remnant of the 2000 Athens Olympics. If impoverished and bankrupt Athens has such great airport train, why doesn’t New York or San Francisco?
It was a quick hop across the Adriatic to Venice Italy, where we caught an always exciting speed boat from the Marco Polo to our Airbnb near St. Mark’s Square. We ran through the ancient cathedral and the Palace of the Doges, admiring the massive canvases, the medieval weaponry, and of course, the dungeon.
One of the high points of the trip was a performance of Vivaldi’s Four Seasons in the very church it was composed for. A ferocious thunderstorm hit, flooding the plaza outside and causing the lead violinist’s string to break, halting the concert (rapid humidity change I guess).
When we got home with soggy feet, the Carabinieri had cordoned off our block with police tape because a big chunk of our 400-year-old roof had fallen into the street. It taxed my Italian to the max to get into our apartment that night. The Airbnb host asked me not to mention this in my review (I didn’t).
The next day brought a circuitous trip to Budapest via Brussels. Budapest was a charm, a former capital of the Austria-Hungarian Empire and the architecture to prove it. The last time I was here 55 years ago, the Russian Army was running the place and it was grim, oppressive, and dirty.
Today, it is a thriving hot spot for Europe’s young, with bars and night clubs everywhere. Dinners dropped from $150 in Venice to $30. We topped the night with a Danube dinner cruise with a folk dancing troupe. I’m telling you, you can live there like a king for $1,000 a month.
Visiting the Golden Age in Budapest
The next morning, we drew closer to our final destination of Switzerland. A four-hour train ride brought us to my summer chalet in Zermatt and some much-needed rest. At the end of a long valley and lacking any cars, Zermatt is one of those places where you can just give the kids 50 Swiss francs and tell them to get lost. I spent mornings hiking up from the valley floor and afternoons getting caught up on the markets and my writing.
There’s nothing like recharging my batteries in the clean mountain air of the Alps. The forecast was rain every day for two weeks, but it never showed. As a result, I ended up hiking ten miles a day to the point where my legs were made of lead by the end.
The only downer was watching helicopters pick up the bodies of two climbers who fell near the top of the Matterhorn. As temperatures rise rapidly, the ice holding the mountain together is melting, leading to a rising tide of fatal accidents.
I caught my last flight home from Milan. Anything for one more great dinner in Italy, which I enjoyed in the Galleria. At the train station, I chatted with a troop of Italian Boy Scouts in blue uniforms headed for the Italian Alps. The city was packed with Chinese tour groups, and there was a one-month wait to buy tickets for Leonardo DaVinci’s The Last Supper. Another Airbnb made sure I stayed up all night listening to the city’s yellow trolleys trundle by.
Finally, an 11-hour flight brought me back to the City by the Bay. Thanks to two sleeping pills of indeterminate origin I went to sleep over England and woke up over Oregon, preparing for a landing. It seems that somewhere along the way I proposed marriage to the Arab woman sitting next to me, but I have no memory of that whatsoever. At least that’s what the head flight attendant thought.
I am now planning this summer trip. After the Queen Mary and the Orient Express should I climb the Matterhorn again? Or should I summit Mount Kilimanjaro in Africa first? No transatlantic trip should ever be wasted. And I have to get home in time to join a 50-mile hike with the Boy Scouts in New Mexico and then cart two kids off to college.
What a great problem to have.
Good Luck and Good Trading,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Call this the Dr. Jekyll and Mr. Hyde market.
On the up days, we see the kindly ministrations of Dr. Jekyll.
On the down days, we suffer from the evil hand of Mr. Hyde.
To say that traders are confused would be an understatement. Many seasoned pros have told me that this is one of the most difficult markets they have ever seen.
Fridays have been particularly treacherous when weekly options expire. Some 56% of all options trading now takes place with expirations of five days or less. Trading before 4:00 PM sees billions of dollars of hot money trying to force closing prices just in or out of the money for key at-the-money strike prices.
What is especially disturbing is that some 80% of the gain in the S&P 500 (SPY) this year has been in just seven names, Meta, (META), Alphabet (GOOGL), Microsoft (MSFT), Apple (AAPL), Amazon (AMZN), Netflix (NFLX) and Tesla (TSLA). Most other stocks went nowhere….or down. That much concentration means that any rallies lack confidence and will fail….for now.
Remember these names because when we finally do get a real upside breakout, they will be the leaders. You can take that to the bank.
Thanks to turmoil in the House of Representatives intent on a national default, bonds have given up 70 of the 120-basis point drop in yields since October. That deprives us of one of our biggest money makers of 2022, our long bond trades.
That means were are also seeing the automatic flip side of the bond trade, a strong US Dollar (UUP), and weak precious metals, (GLD) and (SLV), and emerging markets (EEM).
This too shall end.
If it was excess liquidity that caused stocks to rocket for 13 years, then maybe we should be focusing on what little liquidity is left. That would be the font of government money pouring into infrastructure and alternative energy plays.
Some $370 billion I know available for investment in ESG, would most of it going into the battery industry for the burgeoning electric vehicle industry. Even foreign firms like Finland’s Neste is moving to the US to cash in on federal munificence, converting an old US oil refinery to produce diesel fuel out of animal and vegetable fat (click here for the link).
Probably the best bet here is in California-based Enphase Energy (ENPH), which makes a 40% gross profit margins on microinverters for solar panels and has just seen a 42% dive in its share price. That makes (ENPH) a BUY. Hint: solar stocks always follow the price of oil to which it is tied, which has lately been down.
Some nimble and aggressive trading managed to push me back in the green for February, taking me up +0.93% on the month. That’s a dramatic improvement of +5.48% from a week ago.
You might even call it making a silk purse from a sow’s ear.
My 2023 year-to-date performance is still at the top at +23.28%. The S&P 500 (SPY) is up +4.32% so far in 2023. My trailing one-year return maintains a sky-high +86.58% versus -12.97% for the S&P 500.
That brings my 15-year total return to +620.47%, some 2.78 times the S&P 500 (SPX) over the same period. My average annualized return has recovered to +46.83%, still the highest in the industry.
Last week, I piled on a Tesla (TSLA) March $155-$260 short strangle betting that the stock can stay within a $95 range for 19 trading days. I also added a deep in-the-money long in the bond market for the first time in six weeks. Both positions turned immediately profitable.
My Ten-Year View
When we come out the other side of the recession, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. The economy decarbonizing and technology hyper accelerating, creating enormous investment opportunities. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The new America will be far more efficient and profitable than the old.
Dow 240,000 here we come!
Q4 GDP Dips, from 3.9% to 2.7% in the October-December quarter. Consumption took a dive, which is amazing over the holidays. This is nowhere near a recession.
Fed Minutes Show More Hikes to Come, with the emphasis on the plural. That could take the overnight borrowing rate to a 5.40% high. It certainly pees on the parade for the falling interest rates crowd.
The Tail is Wagging the Dog, with short, dated options, often same-day expiration dominating trading every Friday. Billions of dollars are battling around key strike prices attempting to force expirations in or out of the money. No place for the little guy. Better to take Fridays off.
Netflix Slashes Prices in 30 countries, taking the stock down a modest 3%. (NFLX) is still the leader in the sector with 231 million subscribers, followed by Amazon (200 million), Disney Plus (162 million, HBO Max (95 million, Peacock (18 million), and Hulu 47 million). Buy (NFLX) and (AMZN) on dips.
Individual 401k’s Lost 23% in 2022, according to a study from Fidelity. High inflation is shrinking the remaining purchasing power even faster. A rising number of workers are also borrowing against their 401k’s to make ends meet. Such loans can go up to 50% of the principal. Better start making up the losses or you’ll be spending your golden years working at Taco Bell.
Apple to Add Glucose Monitor on its Watches, to aid diabetic clients. Some 38 million Americans have diabetes and given the obesity epidemic that figure is certain to rise. It highlights Big Tech’s move into the low-hanging fruit in health care.
Existing Home Sales Dive 0.7% in January, to a 4 million annualized rate, the weakest since October 2010. That makes 12 consecutive months of falling sales. The Median Home Price sold rose to $359,000. An imminent national debt crisis and spiking interest rates is not a great environment in which to sell your home.
Biden Ukraine Visit Tanks Gas and Oil Prices, cutting Russia’s chances of a win and eventually leading to a flood of oil on the market. Biden’s visit is sending the message to Putin that there’s no chance of a win here. Energy is hitting two-year lows across the board. Only energy stocks are staying high. Energy is getting so cheap it might be worth a trade.
Germany Accelerates Move Towards Alternatives, permanently cutting all ties with Russia energy. Europe’s biggest economy, and the fourth largest in the world, hopes to get 80% of its electricity from solar and wind by 2030. Hydrogen is also entering the picture. Other countries will follow.
On Monday, February 27 at 8:30 AM EST, US Durable Goods are out.
On Tuesday, February 28 at 9:00 AM, the S&P Case Shiller National Home Price Index for December is released.
On Wednesday, March 1 at 10:00 AM, the ISM Manufacturing PMI is printed.
On Thursday, March 2 at 8:30 AM, the Weekly Jobless Claims are announced.
On Friday, March 3 at 8:30 AM, the ISM Non-Manufacturing PMI. At 2:00 the Baker Hughes Oil Rig Count is out.
As for me, I usually get a request to fund some charity about once a day. I ignore them because they usually enrich the fundraisers more than the potential beneficiaries. But one request seemed to hit all my soft spots at once.
Would I be interested in financing the refit of the USS Potomac (AG-25), Franklin Delano Roosevelt’s presidential yacht?
I had just sold my oil and gas business for an outrageous profit and had some free time on my hands so I said, “Hell Yes,” but only if I get to drive. The trick was to raise the necessary $5 million without it costing me any money.
To say that the Potomac had fallen on hard times was an understatement.
When Roosevelt entered the White House in 1932, he inherited the presidential yacht of Herbert Hoover, the USS Sequoia. But the Sequoia was entirely made of wood, which Roosevelt had a lifelong fear of. When he was a young child, he nearly perished when a wooden ship caught fire and sank, he was passed to a lifeboat by a devoted nanny.
Roosevelt settled on the 165-foot USS Electra, launched from the Manitowoc Shipyard in Wisconsin, whose lines he greatly admired. The government had ordered 34 of these cutters to fight rum runners across the Great Lakes during Prohibition. Deliveries began just as the ban on alcohol ended.
Some $60,000 was poured into the ship to bring it up to presidential standards and it was made wheelchair accessible with an elevator, which FDR operated himself with ropes. The ship became the “floating White House,” and numerous political deals were hammered out on its decks. Some noted guests included King George VI of England, Queen Elisabeth, and Winston Churchill.
During WWII Roosevelt hosted his weekly “fireside chats” on the ship’s short-wave radio. The concern was that the Germans would attempt to block transmissions if broadcast came from the White House.
After Roosevelt’s death, the Potamac was decommissioned and sold off by Harry Truman, who favored the much more substantial 243-foot USS Williamsburg. The Potamac became a Dept of Fisheries enforcement boat until 1960 and then was used as a ferry to Puerto Rico until 1962.
An attempt was made to sail it through the Panama Canal to the 1962 World’s Fair in Seattle, but it broke down on the way in Long Beach, CA. In 1964 Elvis Presley bought the Potomac so it could be auctioned off to raise money for St. Jude Children’s Research Hospital. It sold for $65,000. It then disappeared from maritime registration in 1970. At one point there was an attempt to turn it into a floating disco.
In 1980 a US Coast Guard cutter spotted a suspicious radar return 20 miles off the coast of San Francisco. It turned out to be the Potomac loaded to the gunnels with bales of illicit marijuana from Mexico. The Coast Guard seized the ship and towed it to the Treasure Island naval base under the Bay Bridge. By now the 50-year-old ship was leaking badly. The marijuana bales soaked up the seawater and the ship became so heavy it sank at its moorings.
Then a long rescue effort began. Not wanting to get blamed for the sinking of a presidential yacht on its watch the Navy raised the Potomac at its own expense, about $10 million, putting its heavy lift crane to use. It was then sold to the City of Oakland, Ca for a paltry $15,000.
The troubled ship was placed on a barge and floated upriver to Stockton, CA, which had a large but underutilized unionized maritime repair business. The government subsidies started raining down from the skies and a down-to-the-rivets restoration began. Two rebuilt WWII tugboat engines replaced the old, exhausted ones. A nationwide search was launched to recover artifacts from FDR’s time on the ship. The Potomac returned to the seas in 1993.
I came on the scene in 2007 when the ship was due for a second refit. The foundation that now owned the ship needed $5 million. So, I did a deal with National Public Radio for free advertising in exchange for a few hundred dinner cruise tickets. NPR then held a contest to auction off tickets and kept the cash (what was the name of FDR’s dog? Fala!).
I also negotiated landing rights at the Pier One San Francisco Ferry Terminal, which involved negotiating with a half dozen unions, unheard of in San Francisco maritime circles. Every cruise sold out over two years, selling 2,500 tickets. To keep everyone well-lubricated I became the largest Bay Area buyer of wine for those years. I still have a free T-shirt from every winery in Napa Valley.
It turned out to be the most successful fundraiser in the history of NPR and the Potomac. We easily got the $5 million and then some. The ship received a new coat of white paint, new rigging, modern navigation gear, and more period artifacts. I obtained my captain’s license and learned how to command a former coast guard cutter.
It was a win-win-win.
I was trained by a retired US Navy nuclear submarine commander, who was a real expert at navigating a now thin-hulled 73-year-old ship in San Francisco’s crowded bay waters. We were only licensed to cruise up to the Golden Gate bridge and not beyond, as the ship was so old.
The inaugural cruise was the social event of the year in San Francisco with everyone wearing period Depression-era dress. It was attended by FDR’s grandson, James Roosevelt III, a Bay area attorney who was a dead ringer for his grandfather. I mercilessly grilled him for unpublished historical anecdotes. A handful of still-living Roosevelt cabinet members also came, as well as many WWII veterans.
As we approached the Golden Gate Bridge, some poor soul jumped off and the Coast Guard asked us to perform search and rescue until they could get a ship on station. No body was ever found. It certainly made for an eventful first cruise.
Of the original 34 cutters constructed only four remain. The other three make up the Circle Line tour boats that sail around Manhattan several times a day.
Last summer I boarded the Potomac for the first time in 14 years for a pleasant afternoon cruise with some guests from Australia. Some of the older crew recognized me and saluted. In the cabin, I noticed a brass urn oddly out of place. It contained the ashes of the sub-commander who had trained me all those years ago.
Good Luck and Good Trading,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Captain Thomas at the Helm
Global Market Comments
January 23, 2023
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or WHERE IS THE BEAR MARKET?),
(GOLD), (GLD), (WPM), (SLV), (BRK/B), (TSLA), (OXY)
CLICK HERE to download today's position sheet.
The Pivot has started.
Not by the Fed, which is not expected to begin lowering interest rates by the summer or fall.
It's the stock market that has pirouetted, from bear to bull last October. The higher stocks rise in this miraculous, coming-from-nowhere rally, the more credibility this rally gains.
If a new bull market has well and truly begun, then there are an awful lot of portfolios out there that have the wrong stocks. Repositioning this late in the game could take the indexes to new all-time highs by yearend.
Some portfolio managers are whistling past the graveyard right now.
The Fed pivot may also take place ahead of schedule. The marketplace has shaved the February 1 interest rate hike from 50 basis points to only 25, which explains stocks’ recent virility.
My trading performance certainly shows the possibilities, which so far has tacked on a robust +20.65%. My 2023 year-to-date performance is the same at +20.65%, a spectacular new high. The S&P 500 (SPY) is up +1.86% so far in 2023.
It is the greatest outperformance on an index since Mad Hedge Fund Trader started 15 years ago. My trailing one-year return maintains a sky high +107.27%.
That brings my 15-year total return to +617.84%, some 2.8 times the S&P 500 (SPX) over the same period and a new all-time high. My average annualized return has ratcheted up to +47.22%, easily the highest in the industry.
Last week, I rode into the Friday options expiration with my 5X weighting in bonds, as well as additional longs in (TSLA), (GOLD), (WPM), and (BRK/B). Both my remaining positions are profitable, including longs in (TSLA) and (OXY) with 80% cash for a 20% net long position.
Stocks are not the only asset class on a tear because of an earlier than expected Fed easing.
Precious metals have been going virtually straight up. For the first time since the US went off the gold standard 50 years ago, gold (GLD) outperformed the S&P 500 in Q4, and silver (SLV) did even better.
Not only does gold benefit from falling inflation and interest rates, the end of the Fed’s quantitative tightening (QT) will provide a further steroid shot as well.
Sanctions against Russia and China have sent central bank purchases of the barbarous relic to new all-time highs. And you might speculate that the possible Russian use of nuclear weapons is also driving your gold northward, but you would be wrong. You may find this shocking, but Ukraine has their own nukes and if Russia attacked, Moscow would be radioactive that week.
The bottom line here is that the yellow metal could well remain strong all year and be a top performer.
Bonds continued their on again, off again rally. The prospects of falling interest rates pushes them up and then fears of a summer default push them back down again, some $2.50 for the (TLT) last week.
One thing is certain. If the Treasury is pushed into default the Fed definitely WILL NOT be raising interest rates. They won’t need to crush the economy. The House of Representatives will be doing their job for them.
The least appreciated piece of news last week was the report that China’s population fell for the first time in 50 years, thanks to a massive famine. I remember it like it was yesterday as I was there. Believe me, there are no substitutes for food. It took me a king’s ransom and some banned western books just for me to procure a single egg.
This will affect us all as there will be a sudden shortage of customers in the global economy in about 20 years. You may think that 20 years is a long time off, but the best run companies will start planning and investing for this now.
If you don’t think a shrinking population is bad for business, just ask Japan, where they’re not making Japanese anymore. Japan has suffered the worst performing stock market for the last 32 years and is still showing a negative return.
That was a nice bail!
Remember, demographics is destiny. Check out the population pyramid charts below.
The Fed May Retreat to 25 Basis Point, in their February 1 rate hike, according to a Reuters poll. It might explain why stocks have been so hot in January.
Treasury Secretary Warns of Coming US Bond Default, saying the government runs out of money by June. Bonds plunged $2.00 on the news. The House of Representatives need to raise the debt ceiling before then, or the Treasury will cease paying interest on the $31.4 trillion national debt. This is for money already spent by administrations going back to the 1980’s. Rising interest rates have already taken America’s debt service from 5% to 10% of the total budget.
This Year Won’t Be as Bad as Last, or so hope the bulls that have been piling into stocks since January 3. The weakness in tech stocks actually understates the ballistic moves in value, metals, and financial stocks, which Mad Hedge is long. Things are better than they appear. That’s what six months of deflation will do.
China Reopening Accelerates and may well head off a global recession. Letting everyone get covid and achieving heard immunity turned out to be the key. It’s demolished the entire January selloff scenario.
Wholesale Prices Drop 0.5% in December versus an expected 0.1% in another big step toward the unwind of inflation. The energy sub index fell by 7.9%. I am looking like a 4% inflation rate by yearend.
Builder Sentiment Rose 4 Points in December according to the National Association of Homebuilders. It’s the first positive data point for housing in ages. Could this be the beginning of the big turn?
Mortgage Rates Plunge to 6.04% for the 30-year fixed, sparking a 28% gain week to week. A massive rally in the bond market is the big incentive, taking ten-year Treasury bonds to 6.37%, a new five month low. Inventory remains low. Mortgage rates could easily shed another 100 basis points by summer just on falling to the traditional premium over Treasuries, which is why housing stocks like (LEN), PHM), and (KBH) have been on fire.
Business Inventories up 0.4%, right in line with expectations. Retail Sales are falling, as is Consumer Spending. Department store sales were down 6.5%, once unimaginable to see during the Christmas season.
Netflix Blows it Away with 6.7 million new subscribers., taking the stock up 7%, and 125% from the May low. It’s proof that the FANG’s are not dead yet and that the predicted Q4 earnings shortfall may be overstated. CEO Reed Hastings semi-retires. Don’t touch (NFLX) as this train has left the station. There are better fish to fry.
My Ten-Year View
When we come out the other side of the recession, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. The economy decarbonizing and technology hyper-accelerating, creating enormous investment opportunities. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The new America will be far more efficient and profitable than the old. Dow 240,000 here we come!
On Monday, January 23 nothing of note is announced. Baker Hughes (BKR) reports earnings from the oil patch.
On Tuesday, January 24 at 8:45 AM EST, the S&P Global PMIs for December is out. Johnson & Johnson (JNJ) and Microsoft (MSFT) report earnings.
On Wednesday, January 25 at 7:30 AM, the Crude Oil Stocks are announced. Tesla (TSLA) and Boeing (BA) report earnings.
On Thursday, January 26 at 8:30 AM, the Weekly Jobless Claims are announced. Retail Sales for November are printed. We also get US Q4 GDP. Visa (V) and Intel (INTC) report earnings.
On Friday, January 27 at 5:30 AM, the Personal Income & Spending for December is disclosed. American Express (AXP) and Chevron (CVX) report earnings. At 2:00, the Baker Hughes Oil Rig Count is out.
As for me, I didn’t know what to expect when I landed on the remote South Pacific Island of Yap in 1979, one of the Caroline Islands, but I was more than pleasantly surprised.
Barely out of the Stone Age, Yap lies some 3,000 miles west of Hawaii. It was famed for the ancient lichen covered stone money that dotted the island which had no actual intrinsic value.
The value was in the effort that went into transporting them. With some cylindrical pieces larger than cars, geologists later discovered that they had been transported some 280 miles by outrigger canoe from the point of origin sometime in the distant past. Since Yap had no written language, there are no records about them, only folktales.
I often use the stone money of Yap as an example of the arbitrariness of fiat money. Who’s to say which is more valuable; a 500-pound piece of rock or a freshly printed $100 Benjamin from the US Treasury?
You decide.
The natives were a gentle and friendly people. They wore grass skirts purely for the benefit of Western visitors. They preferred to walk around as nature made them.
There was no hotel on the island at the time, so I was invited to stay with a local chief (picture below).
One of my hosts asked if I was interested in seeing a Japanese zero fighter. Yap wasn’t invaded by the US during WWII because it was bypassed by MacArthur on his way to the Philippines. The Japanese troops were repatriated after their war, but most of their equipment was left behind. It was still there.
So it was with some anticipation that I was led to a former Japanese airfield that had been abandoned for 35 years. There, still in perfect formation, was a squadron of zeroes. The jungle had reclaimed the field and several planes had trees growing up through their wings.
The natives had long ago stripped them of anything of value, the machine guns, nameplates, and Japanese language instruments. But the airframes were still there exposed to the elements and too fragile to move.
During my stay, I came across an American Peace Corp volunteer desperate for contact with home. A Jewish woman in her thirties, she had been sent there from New York City to teach English and seemed to have been forgotten by the agency.
I volunteered for the Peace Corps. myself out of college, but it turned out they had no need of biochemists in Fiji, so I was interested in learning about her experience. She confided in me that she had tried wearing a grass skirt to blend in but got ants on the second day. We ended up spending a lot of time together and I got a first-class tour of the island.
Suffice it to say that she was thrilled to run into a red-blooded American male. I wish I had taken a picture of her, but the nearest color film processing was back in Honolulu, and I had to be judicious in my use of film.
The highlight of the trip was a tribal stick dance put on in my honor around an evening bonfire among much yelping and whooping. It was actually a war dance performed with real war clubs and their furiousness was impressive.
I had the fleeting thought that I might be on the menu. Cannibalism had been practiced here earlier in the century. During the war when starvation was rampant, several of the least popular Japanese soldiers went missing, their bodies never found. When men come screaming at you with a club in the night, your imagination runs wild.
Alas, I could only spend a week on this idyllic island. I was on a tight schedule courtesy of Air Micronesia, and deadlines beckoned. Besides, there was only one plane a week off the island.
It was on to the next adventure.
A Few New Friends
Large Denomination Stone Money
My Accommodation
A Neglected Japanese Zero
China
Japan
US
Global Market Comments
January 17, 2023
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or GOING AGAINST THE CONSENSUS),
(TLT), (MUB), (JNK), (HYG), (GLD), (SLV), (GOLD), (WPM), (FCX), (BHP), (EEM), (MS), (GS), (JPM), (BAC), (C), (BRK/B), (SPY), (QQQ), (IWM), (VIX)
Going against the market consensus has been working pretty well lately.
When the world prayed for a Santa Claus rally, I piled on the shorts. When traders expected a New Year January crash, I filled my boots with longs.
That’s how you earn an eye-popping 19.83% profit in a mere nine trading says, or 2.20% a day.
The other day, someone asked me how it is possible to get mind-blowing results like these. It’s very simple. Get insanely aggressive when everyone else is terrified, which I did on January 3. I also knew that with the Volatility Index (VIX) falling to $18, pickings would quickly get extremely thin. It was make money now, or never.
To quote my favorite market strategist, Yankees manager Yogi Berra, “No one goes to that restaurant anymore because it’s too crowded.”
My performance in January has so far tacked on a welcome +19.83%. Therefore, my 2023 year-to-date performance is also +19.83%, a spectacular new high. The S&P 500 (SPY) is up +3.78% so far in 2023.
It is the greatest outperformance on an index since Mad Hedge Fund Trader started 15 years ago. My trailing one-year return maintains a sky-high +103.30%.
That brings my 15-year total return to +617.03%, some 2.73 times the S&P 500 (SPX) over the same period and a new all-time high. My average annualized return has ratcheted up to +47.17%, easily the highest in the industry.
I took profits in my February bonds last week (TLT), taking advantage of a $5 pop in the market. All my remaining positions are profitable, including longs in (GOLD), (WPM), (TSLA), (BRK/B), and (TLT), with 30% in cash for a 10% net long position.
Since my New Year forecasts have worked out so well, I will repeat the high points just in case you were out playing golf or bailing out from a flood when they were published.
Buy Falling Interest Rate Plays, as I expect the yield on the ten-year US Treasury yield to fall from 3.50% to 2.50% by yearend. That means Hoovering up any kind of bond, like (TLT), (MUB), (JNK), and (HYG). Falling interest rates also shine a great spotlight on precious metals like (GLD), (SLV), (GOLD), and (WPM).
The US Dollar Will Continue to Fall. Commodities love this scenario, including (FCX), (BHP), and emerging markets (EEM).
Inflation Will Decline All Year and should go below 4% by the end of 2023. In fact, we have had real deflation for the past six months. Financials do well here, like (MS), (GS), (JPM), (BAC), (C), and (BRK/B).
Which creates another headache for you, if not an opportunity. We may have a situation where the main indexes, (SPY), (QQQ), and (IWM) go nowhere, while individual stocks and sectors skyrocket. That creates a chance to outperform benchmarks…and everyone else.
There has been a lot of discussion among traders lately about the collapse of the Volatility Index ($VIX) to $18, a two-year low and what it means.
They are distressed because a ($VIX) this low greatly shrinks the availability of low risk/high return trading opportunities. A ($VIX) this low is basically shouting at you to “STAY AWAY!”
Does it mean that an explosion of volatility is following? Or are markets going to be exceptionally boring for the next six months?
Beats me. I’ll wait for the market to tell me, as I always do.
Current Positions
Risk On
(TSLA) 1/$75-$80 call spread 10.00%
(GOLD) 1/$15.50-$16.50 call spread. 10.00%
(WPM) 1/$$36-$39 call spread. 10.00%
(BRKB) 1/$290-$300 call spread 10.00%
Risk Off
(TLT) 1/$96-$99 call spread - 10.00%
(TLT) 1/$95-$98 call spread -20.00%
Total Net Position 10.00%
Total Aggregate Position 70.00%
Consumer Price Index Falls 0.1% in December, continuing a trend that started in June. Stocks popped and bonds rallied. YOY inflation has fallen to 6.5%. “RISK ON” continues. Now we have to wait another month to get a new inflation number. The economy has now seen de facto deflation for six months. Gas prices led the decline, now 9.4%. We might get away with only a 0.25% interest rate hike at the February 1 Fed meeting.
Bond Default Risk Rises, as well as a government shutdown, as radicals gain control of the House. This is the group that lost the most seats in the November election. Bonds are the only asset class not performing today, and paper with summer maturities is trading at deep discounts. It certainly casts a shadow over my 50% long bond position. However, I don’t expect it to last more than a month and my longest bond maturity is in February.
The US Consumer is in Good Shape, according to JP Morgan’s Jamie Diamond. Spending is now 10% greater than pre covid, and balance sheets are healthy. No sign of an impending deep recession here.
Boeing Deliveries Soar from 340 to 480 in 2022, and 479 new orders. A sudden aircraft shortage couldn’t have happened to a nicer bunch of people. The 737 MAX has shaken off all its design problems after two crashes four years ago. Cost-cutting here can be fatal. Europe’s Airbus is still tops, with 663 deliveries last year. Don’t chase the stock up here, up 79% from the October lows, but buy (BA) on dips.
Small Business Optimism Hits Six-Month Low to from 91.9 to 89.8, adding to the onslaught of negative sentiment indicators, so says the National Federation of Independent Business (NFIB).
Copper Prices Set to Soar Further with the post-Covid reopening of China, according to research firm Alliance Bernstein. After a three-year shutdown, there is massive pent-up demand. Copper prices are at seven-month highs. Keep buying (FCX) on dips.
Australian Metals Exports Soar, as the new supercycle in commodities gains steam. Shipments topped $9 billion in November, 20% higher than the most optimistic forecasts. Keep buying copper (FCX), aluminium (AA), iron ore (BHP), gold (GLD) and silver (SLV) on dips.
My Ten-Year View
When we come out the other side of the recession, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. The economy decarbonizing and technology hyper-accelerating, creating enormous investment opportunities. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The new America will be far more efficient and profitable than the old. Dow 240,000 here we come!
On Monday, January 16, markets are closed for Martin Luther King Day.
On Tuesday, January 17 at 8:30 AM EST, the New York Empire State Manufacturing Index is out
On Wednesday, January 18 at 11:00 AM, the Producer Price Index is announced, giving us another inflation read.
On Thursday, January 19 at 8:30 AM, the Weekly Jobless Claims are announced. US Housing Starts and Building Permits are printed.
On Friday, January 20 at 7:00 AM, the Existing Home Sales are disclosed. At 2:00, the Baker Hughes Oil Rig Count is out.
As for me, the University of Southern California has a student jobs board that is positively legendary. It is where the actor John Wayne picked up a gig working as a stagehand for John Ford which eventually made him a movie star.
As a beneficiary of a federal work/study program in 1970, I was entitled to pick any job I wanted for the princely sum of $1.00 an hour, then the minimum wage. I noticed that the Biology Department was looking for a lab assistant to identify and sort Arctic plankton.
I thought, “What the heck is Arctic plankton?” I decided to apply to find out.
I was hired by a Japanese woman professor whose name I long ago forgot. She had figured out that Russians were far ahead of the US in Arctic plankton research, thus creating a “plankton gap.” “Gaps” were a big deal during the Cold War, so that made her a layup to obtain a generous grant from the Defense Department to close the “plankton gap.”
It turns out that I was the only one who applied for the job, as postwar anti-Japanese sentiment then was still high on the West Coast. I was given my own lab bench and a microscope and told to get to work.
It turns out that there is a vast ecosystem of plankton under 20 feet of ice in the Arctic consisting of thousands of animal and plant varieties. The whole system is powered by sunlight that filters through the ice. The thinner the ice, such as at the edge of the Arctic ice sheet, the more plankton. In no time, I became adept at identifying copepods, euphasia, and calanus hyperboreaus, which all feed on diatoms.
We discovered that there was enough plankton in the Arctic to feed the entire human race if a food shortage ever arose, then a major concern. There was plenty of plant material and protein there. Just add a little flavoring and you had an endless food supply.
The high point of the job came when my professor traveled to the North Pole, the first woman ever to do so. She was a guest of the US Navy, which was overseeing the collection hole in the ice. We were thinking the hole might be a foot wide. When she got there, she discovered it was in fact 50 feet wide. I thought this might be to keep it from freezing over but thought nothing of it.
My freshman year passed. The following year, the USC jobs board delivered up a far more interesting job, picking up dead bodies for the Los Angeles Counter Coroner, Thomas Noguchi, the “Coroner to the Stars.” This was not long after Charles Manson was locked up, and his bodies were everywhere. The pay was better too, and I got to know the LA freeway system like the back of my hand.
It wasn’t until years later when I had obtained a high-security clearance from the Defense Department that I learned of the true military interest in plankton by both the US and the Soviet Union.
It turns out that the hole was not really for collecting plankton. Plankton was just the cover. It was there so a US submarine could surface, fire nuclear missiles at the Soviet Union, then submarine again under the protection of the ice.
So, not only have you been reading the work of a stock market wizard these many years, you have also been in touch with one of the world’s leading experts on Artic plankton.
Live and learn.
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1981 On Peleliu Island in the South Pacific
Global Market Comments
January 13, 2023
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