Global Market Comments
December 11, 2023
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or POWELL’S VICTORY LAP),
(GS), (KEY), (WBS), (COLB), (PNFP),
(NLY), (BRK/B), (GOOGL), (CAT), (TLT)
Posts
With almost all economic data now universally slowing, Fed Governor Jay Powell is limbering up to take his victory lap. That’s put inflation in full retreat and well on its way to our central bank’s 2% target by summer. Interest rate cuts are just a matter of time.
That sets up a fabulous year in 2024. While this year was mostly a hard slog, next year should be a piece of cake. I can’t wait until it starts!
That puts my 4,800 target for the end of 2023 well within range. People told me I was crazy when I made such an outlandish forecast last January 1, yet here we are.
Investors missed the mark by a mile this year because they thought the Fed's extreme moves in interest rates would trigger a recession.
It didn’t.
Those who bet on falling inflation this year were big winners. That gave the Fed permission to cancel any further rate rises. Economists were too bearish and the technical picture flipped from bearish to bullish in a heartbeat on October 26.
The kinds of moves you are seeing in the stock market, with banks and industrials turning upward, signal that we are not in a bear market, but the start of a new long-term bull one.
Stocks are looking for at least 15% gains in 2024 with earnings consistently surprising to the upside. Domestics will catch fire in the second half. Inflation will fall further than expected, well into the 2% handle, thanks to hyperaccelerating technology crushing prices.
The Fed has won the war on inflation so there is room for 10-year US Treasury bond yields to hit 3.0% next year, taking mortgage interest rates under 5.0%. That will be a shot of adrenaline for the residential real estate market.
A (SPY) target of 5,500 by the end of 2024 is entirely within reason.
It turns out that when ten-year bond yields are between 4.00% and 5.00%, stocks sport a price-earnings multiple of 20X. That allows S&P 500 earnings to hit $2.65 per share in 2025, up from today’s $2.20.
Financials (JPM), industrials (CAT), energy (XOM), and small caps (IWM) will take over market leadership sometime in 2024. The best market risk reward is here. Financials now trading in the dumps have huge multiple expansion potential.
The $240 billion in cash that left equities in 2023 will have to fight their way back in. That’s why we haven’t seen any substantial pullbacks in share prices since October. Once investors got the cash weightings they were happy with, they could never get back into stocks.
Hedge fund equity weightings are at five-year lows. Small caps have very heavy weightings in regional banks, while large banks have great capital spending plays.
Big techs, the meteoric performers of 2023, will likely take a rest sometime in Q1.
Europe and China took the big hits this year, but we didn’t. If they turn around, it will supercharge our economy….and the stock market.
Which brings me to the subject of bank stocks. Banks have had an atrocious 2023, when their shares were either flat or down big, underperforming the S&P 500 by a massive 30%. However, they are looking pretty darn attractive for 2024.
Banks now offer pretty cheap balance sheets relative to next year’s profit outlook, with many still trading at big discounts to book value. A recovering economy means new capital spending jumps, which is great for big banks. Exposure to high-risk office loans which get so much print from the financial media account for less than 5% of their loan books.
Small banks will put the March crisis behind them by recapitalizing or merging. It turns out that only a handful of banks were badly managed (no downside hedge on (TLT) holdings while they were crashing from $166 to $82!!). The survivors will build market share at higher margins.
Economic recovery also means default rates on loans ebb.
Goldman Sachs (GS) is my top pick, after being taken to the woodshed for a very expensive unwind of their poorly thought-out consumer business this year. Key Corp (KEY) is also looking good on a possible 70% earnings growth.
If you are looking for a pure small bank play, you can buy Webster Financial (WBS) based in Stamford, CT, Columbia Banking (COLB) of Tacoma, WA, or Pinnacle Financial (PNFP) from Nashville, TN.
So far in December, we are down -2.85%. We’ve had a heck of a run and the market was bound to bite back sometime. My 2023 year-to-date performance is still at an eye-popping +78.86%. The S&P 500 (SPY) is up +21.05% so far in 2023. My trailing one-year return reached +75.38% versus +24.75% for the S&P 500.
That brings my 15-year total return to +676.05%. My average annualized return has exploded to +52.00%, another new high.
I am 40% invested with 60% in cash, with longs in (NLY), (BRK/B), (GOOGL), and (CAT). Last week, I got stopped out of a long in (XOM), thanks to the oil price dive, and a short in (TLT).
Some 63 of my 70 trades this year have been profitable this year.
Nonfarm Payroll Comes in Soft, in November at 199,000. The headline Unemployment Rate fell to 3.7%, near a 50-year low. Healthcare was the biggest growth industry, adding 77,000. Other big gainers included government (49,000), manufacturing (28,000), and leisure and hospitality (40,000). Average hourly earnings, a key inflation indicator, increased by 0.4% for the month and 4% from a year ago, close to expectations. It was a Goldilocks number for the Fed.
Refi Demand Rockets, as interest rates plunge to four-month lows. The rate for the popular 30-year mortgage fell back toward 7% after hitting 8% earlier this fall. Applications to refinance a home loan index increased 14% from the previous week and were 10% higher than the same week a year ago.
Exploding Sales of EVs Are Ringing the Bell for Oil, leading forecasters to speed up their projections for when global oil use will peak, as public subsidies and improved technology help consumers overcome the sometimes eye-popping sticker prices for battery-powered cars.
Panic Buying Drives Treasury Yields to 4.10%, down nearly a full percentage point in little more than a month on weakening economic data. It’s hard to believe that we drop below 4.10% but anything is possible in this market.
Uber Entered S&P 500, on December 18, taking the stock up 10% on the news. A company needs to fulfill certain criteria to be included in the S&P 500. Firstly, its market capitalization should be at least $14.5 billion. As of Dec 1, 2023, the market capitalization of UBER was $118.02 billion. Additionally, U.S. firms that meet profitability, liquidity, and share-float standards are the ones that can qualify for the S&P 500.
Pending Home Sales Collapse, dropping to the lowest level since the National Association of Realtors began tracking them in 2001. Sales were down 8.5% from October of last year. Tight supply and still-strong demand have kept pressure on home prices, which not only continue to hit new highs but appear to be accelerating in their gains. ales of homes priced above $750,000 have been increasing simply because there is more supply on the high end of the market.
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, December 11, at 8:30 AM EST, the Consumer Inflation Expectations are out, one of the Fed’s favorite inflation reads.
On Tuesday, December 12 at 8:30 AM, the Consumer Price Index will be released. The Federal Reserve Open Market Committee starts a two-day meeting.
On Wednesday, December 13 at 2:00 PM, the Federal Reserve will release its interest rate decision. No change is expected. At 2:30, the Producer Price Index is out.
On Thursday, December 14 at 8:30 AM, the Weekly Jobless Claims are announced. We also get Retail Sales.
On Friday, December 15 at 2:30 PM, the October New York Empire State Manufacturing Index is published. At 2:00 PM, the Baker Hughes Rig Count is printed.
As for me, it was with a heavy heart that I boarded a plane for Los Angeles to attend a funeral for Bob, the former scoutmaster of Boy Scout Troop 108.
The event brought a convocation of ex-scouts from up and down the West Coast and said much about our age.
Bob, 85, called me two weeks ago to tell me his CAT scan had just revealed advanced metastatic lung cancer. I said, “Congratulations Bob, you just made your life span.”
It was our last conversation.
He spent only a week in bed and then was gone. As a samurai warrior might have said, it was a good death. Some thought it was the smoking he quit 20 years ago.
Others speculated that it was his close work with uranium during WWII. I chalked it up to a half-century of breathing the air in Los Angeles.
Bob originally hailed from Bloomfield, New Jersey. After WWII, every East Coast college was jammed with returning vets on the GI bill. So he enrolled in a small, well-regarded engineering school in New Mexico in a remote place called Alamogordo.
His first job after graduation was testing V2 rockets newly captured from the Germans at the White Sands Missile Test Range. He graduated to design ignition systems for atomic bombs. A boom in defense spending during the fifties swept him up to the Greater Los Angeles area.
Scouts I last saw at age 13 or 14 are now 60, while the surviving dads were well into their 80s. Everyone was in great shape, those endless miles lugging heavy packs over High Sierra passes yielding lifetime benefits.
Hybrid cars lined both sides of the street. A tag-along guest called out for a cigarette and a hush came over a crowd numbering over 100.
Some things stuck. It was a real cycle of life weekend. While the elders spoke about blood pressure and golf handicaps, the next generation of scouts played in the backyard or picked lemons off a ripening tree.
Bob was the guy who taught me how to ski, cast rainbow trout in mountain lakes, transmit Morse code, and survive in the wilderness. He used to scrawl schematic diagrams for simple radios and binary computers on a piece of paper, usually built around a single tube or transistor.
I would run off to Radio Shack to buy WWII surplus parts for pennies on the pound and spend long nights attempting to decode impossibly fast Navy ship-to-ship transmissions. He was also the man who pinned an Eagle Scout badge on my uniform in front of beaming parents when I turned 15.
While in the neighborhood, I thought I would drive by the house in which I grew up, once a modest 1,800 square-foot ranch-style home to a happy family of nine. I was horrified to find that it had been torn down, and the majestic maple tree that I planted 40 years ago had been removed.
In its place was a giant, 6,000-square-foot marble and granite monstrosity under construction for a wealthy family from China.
Profits from the enormous China-America trade have been pouring into my hometown from the Middle Kingdom for the last decade, and mine was one of the last houses to go.
When I was class president of the high school here, there were 3,000 white kids and one Chinese. Today, those numbers are reversed. Such is the price of globalization.
I guess you really can’t go home again.
At the family's request, I assisted in liquidating his investment portfolio. Bob had been an avid reader of the Diary of a Mad Hedge Fund Trader since its inception and attended my Los Angeles lunches.
It seems he listened well. There was Apple (AAPL) in all its glory at a cost of $21. I laughed to myself. The master had become the student and the student had become the master.
Like I said, it was a real circle of life weekend.
Good Luck and Good Trading,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Scoutmaster Bob
1965 Scout John Thomas
The Mad Hedge Fund Trader at Age 11 in 1963
Global Market Comments
August 10, 2023
Fiat Lux
Featured Trades:
(WEDNESDAY, SEPTEMBER 6, 2023 SAN DIEGO, CALIFORNIA GLOBAL STRATEGY LUNCHEON)
(HOW TO GAIN AN ADVANTAGE WITH PARALLEL TRADING),
(GM), (F), (TM), (NSANY), (DDAIF), BMW (BMWYY), (VWAPY),
(PALL), (GS), (EZA), (CAT), (CMI), (KMTUY),
(KODK), (SLV), (AAPL)
CLICK HERE to download today's position sheet.
One of the most fascinating things I learned when I first joined the equity trading desk at Morgan Stanley during the early 1980s was how to parallel trade.
A customer order would come in to buy a million shares of General Motors (GM) and what did the in-house proprietary trading book do immediately?
It loaded the boat with the shares of Ford Motors (F).
When I asked about this tactic, I was taken away to a quiet corner of the office and read the riot act.
“This is how you legally front-run a customer,” I was told.
Buy (GM) in front of a customer order, and you will find yourself in Sing Sing shortly.
Ford (F), Toyota (TM), Nissan (NSANY), Daimler Benz (DDAIF), BMW (BMWYY), or Volkswagen (VWAPY), are no problem.
The logic here was very simple.
Perhaps the client completed an exhaustive piece of research concluding that (GM) earnings were about to rise.
Or maybe a client's old boy network picked up some valuable insider information.
(GM) doesn’t do business in isolation. It has tens of thousands of parts suppliers for a start. While whatever is good for (GM) is good for America, it is GREAT for the auto industry.
So through buying (F) on the back of a (GM) might not only match the (GM) share performance, it might even exceed it.
This is known as a Primary Parallel Trade.
This understanding led me on a lifelong quest to understand Cross Asset Class Correlations, which continue to this day.
Whenever you buy one thing, you buy another related thing as well, which might do considerably better.
I eventually made friends with a senior trader at Salomon Brothers while they were attempting to recruit me to run their Japanese desk.
I asked if this kind of legal front running happened on their desk.
“Absolutely,” he responded. But he then took Cross Asset Class Correlations to a whole new level for me.
Not only did Salomon’s buy (F) in that situation, they also bought palladium (PALL).
I was puzzled. Why palladium?
Because palladium is the principal metal used in catalytic converters, which remove toxic emissions from car exhaust, and has been required for every U.S. manufactured car since 1975.
Lots of car sales, which the (GM) buying implied, ALSO meant lots of palladium buying.
And here’s the sweetener.
Palladium trading is relatively illiquid.
So, if you catch a surge in the price of this white metal, you would earn a multiple of what you would make on your boring old parallel (F) trade.
This is known in the trade as a Secondary Parallel Trade.
A few months later, Morgan Stanley sent me to an investment conference to represent the firm.
I was having lunch with a trader at Goldman Sachs (GS) who would later become a famous hedge fund manager and asked him about the (GM)-(F)-(PALL) trade.
He said I would be an IDIOT not to take advantage of such correlations. Then he one-upped me.
You can do a Tertiary Parallel Trade here through buying mining equipment companies such as Caterpillar (CAT), Cummins (CMI), and Komatsu (KMTUY).
Since this guy was one of the smartest traders I ever ran into, I asked him if there was such a thing as a Quaternary Parallel Trade.
He answered “Abso******lutely,” as was his way.
But the first thing he always did when searching for Quaternary Parallel Trades would be to buy the country ETF for the world’s largest supplier of the commodity in question.
In the case of palladium, that would be South Africa (EZA), the world's largest non-sanctioned producer, which together accounts for 74% with Russia of the world’s total production.
Since then, I have discovered hundreds of what I can Parallel Trading Chains, and have been actively making money off of them. So have you, you just haven’t realized it yet.
I could go on and on.
If you ever become puzzled or confused about a trade alert I am sending out (Why on earth is he doing THAT?), there is often a parallel trade in play.
Do this for decades as I have and you learn that some parallel trades break down and die. The cross relationships no longer function.
The best example I can think of is the photography/silver connection. When the photography business was booming, silver prices rose smartly.
Digital photography wiped out this trade, and silver-based film development is still only used by a handful of professionals and hobbyists.
Oh, and Eastman Kodak (KODK) went bankrupt in 2012.
However, it seems that whenever one Parallel Trading Chain disappears, many more replace it.
You could build chains a mile long simply based on how well Apple (AAPL) is doing.
And guess what? There is a new parallel trade in silver developing. For whenever someone builds a solar panel anywhere in the world, they are using a small amount of silver for the wiring. Build several tens of millions of solar panels and that can add up to quite a lot of silver.
What goes around comes around.
Suffice it to say that parallel trading is an incredibly useful trading strategy.
Ignore it at your peril.
Sometimes Markets are Hard to Figure Out
Global Market Comments
July 21, 2023
Fiat Lux
Featured Trades:
(WHAT THE NEXT RECESSION WILL LOOK LIKE),
(FB), (AAPL), (NFLX), (GOOGL), (KSS), (VIX), (MS), (GS),
(TESTIMONIAL)
CLICK HERE to download today's position sheet.
The probability of a recession taking place over the next 12 months is now low ranging as high as 20%. If it reaccelerates, not an impossibility, you can take that up to 100%.
And here’s the scary part. Bear markets front-run recessions by 6-12 months, i.e. now.
We’ll get a better read on the inflation numbers over the coming months. If inflation turns hot again, the Fed will be forced to raise rates to once unimagined levels.
So, it’s time to start asking the question of what the next recession will look like. Are we in for another 2008-2009 meltdown, when friends and relatives lost homes, jobs, and their entire net worth? Or can we look forward to a mild pullback that only economists and data junkies like myself will notice?
I’ll paraphrase one of my favorite Russian authors, Fyodor Dostoevsky, who in Anna Karenina might have said, “All economic expansions are all alike, while recessions are all miserable in their own way.”
Let’s look at some major pillars of the economy. A hallmark of the 2008 recession was the near collapse of the financial system, where the ATMs were probably within a week of shutting down nationally. The government had to step in with the TARP, and mandatory 5% equity ownership in the country’s 20 largest banks.
Back then, banks were leveraged 40:1 in the case of Morgan Stanley (MS) and Goldman Sachs (GS), while Lehman Brothers and Bear Stearns were leveraged 100:1. In that case the most heavily borrowed companies only needed markets to move 1% against them to wipe out their entire capital. That is exactly what happened. (MS) and (GS) came within a hair’s breadth of going the same way.
Thanks to the Dodd Frank financial regulation bill, banks cannot leverage themselves more than 10:1. They have spent a decade rebuilding balance sheets and reserves. They are now among the healthiest in the world, having become low-margin, very low-risk utilities. It is now European and Chinese banks that are going down the tubes.
How about real estate, another major cause of angst in the last recession? The market couldn’t be any more different today. There is a structural shortage of housing, especially at entry level affordable prices. While liar loans and house flipping are starting to make a comeback, they are nowhere near as prevalent as a decade ago. And the mis-rating of mortgage-backed securities from single “C” to triple “A” is now a distant memory. (I still can’t believe no one ever went to jail for that!).
And interest rates? We went into the last recession with a 6% overnight rate and a 7% 30-year fixed rate mortgage. Here we are once again.
The auto industry has been in a mild recession for the past two years, with annual production stalling at 15 million units, versus a 2009 low of 9 million units. In any, case the challenges to the industry are now more structural than cyclical, with new buyers decamping en masse to electric vehicles made on the west coast.
Of far greater concern are industries that are already in recession now. Energy has been flagging since oil prices peaked 18 months ago, despite massive tax subsidies. It is suffering from a structural oversupply and falling demand.
Retailers have been in a Great Depression for five years, squeezed on one side by Amazon and the other by China. A decade into store closings and the US is STILL over-stored. However, many of these shares are already so close to zero that the marginal impact on the major indexes will be small.
Financials and legacy banks are also facing a double squeeze from Fintech innovation and collapsing interest rates. All of those expensive national networks with branches on every street corner will be gone later in the 2020s.
And no matter how bad the coming recession gets technology, now 30% of the S&P 500, will keep powering on. Combined revenues of the “Magnificent Seven” in Q1 are at records. That leaves a mighty big cushion for any slowdown. That’s a lot more than the “eyeballs” and market shares they possessed a decade ago.
So, netting all this out, how bad will the next recession be? Not bad at all. I’m looking at a couple of quarters' small negative numbers, like two back-to-back -0.1%’s. Then we’ll see a recovery and probably another decade of decent US growth.
The stock market, however, is another kettle of fish. While the economy may slow from a 2.2% annual rate to -0.1% or -0.2%, the major indexes could fall much more than that, say 30% to 40%.
Earnings multiples are still at a 19X high compared to a 9X low in 2009. Shares would have to drop 53% just to match the last low. Equity weightings in portfolios are low. Money is pouring out of stock funds into bond ones.
Corporations buying back their own shares have been the principal prop from the market for the past three years. Some large companies, like Kohls (KSS), have retired as much as 50% of their outstanding equity in ten years.
The Next Bear Market is Not Far Off
Global Market Comments
July 12, 2023
Fiat Lux
Featured Trades:
(WHAT THE NEXT RECESSION WILL LOOK LIKE),
(FB), (AAPL), (NFLX), (GOOGL), (KSS), (VIX), (MS), (GS),
(TESTIMONIAL)
CLICK HERE to download today's position sheet.
Global Market Comments
April 13, 2023
Fiat Lux
Featured Trade:
(THE MAD HEDGE SUMMIT VIDEOS ARE UP),
(THE BULL CASE FOR BANKS),
(JPM), (BAC), (C), (WFC), (GS), (MS)
CLICK HERE to download today's position sheet.
Banks have become the call option on a US economic recovery.
When the economic data runs hot, banks rally. When it’s cold, they sell off. So, in recent months bank share prices have been melting up.
If we are falling into a recession, then unloading banks here is the right thing to do. If we’re not, and this is really a fake out, then you are looking at the buying opportunity of the decade for banks.
I fall in the latter camp.
There also is a huge sector rotation issue staring you in the face. Where would you rather put new money, stocks at all-time highs trading at ridiculous multiples, like energy stocks, or a quality sector in the bargain basement?
Big institutions have already decided what to do and are buying every dip in financials.
Banks certainly took it on the nose in 2022. Loan default rates soared, demanding a massive increase in loan loss provisions.
Much more stringent accounting rules also kicked in known as “Current Expected Credit Losses.” That requires banks to write off 100% of their losses immediately, rather than spread them out over a period of years.
So what happens next?
For a start, fall down on your knees and thank that Dodd-Frank, the Obama-era financial regulation bill, was passed.
Banks carped for years that it unnecessarily and unfairly tied their hands by limiting leverage ratios to only 10:1. Morgan Stanley reached 40:1 going into the Great Recession and barely made it out alive, while ill-fated Lehman Brothers reached a suicidal 100:1 and didn’t.
That meant the banks went into the pandemic with the strongest balance sheets in decades. No financial crisis here.
Thanks to government efforts to bring the pandemic hit to the economy to a quick end, generous fees have been raining down on the banks from the numerous loan programs they helped to implement, such as PPP.
And trading profits? You may have noticed that options trading volume is up a monster 100% so far in 2023. That falls straight to the banks’ bottom lines. If you’re wondering why your online trading platform keeps crashing that’s why.
I list below my favorite bank investments using the logic that during depressions you want to buy Rolls Royces, Teslas, and Cadillacs at deep discounts, not Volkswagens, Fiats, or Trabants.
JP Morgan (JPM) – is the crown jewel of the sector, with the best balance sheet and the strongest customers. It has over reserved for losses that are probably never going to happen, stowing away some $25 billion in the last quarter alone.
Morgan Stanley (MS) - Brokerage-oriented ones like Morgan Stanley (MS) and Goldman Sachs (GS) are benefiting the most from the explosion in stock and options trading. Morgan’s focus on asset management has made it the first pick among investors demanding a high multiple. I’ll pick my former employer (MS), where I once accounted for 80% of equity division profits.
Bank of America (BAC) - is another quality play with a fortress balance sheet.
Citigroup (C) – is the leveraged play in the sector with a slightly weaker balance sheet and a more aggressive marketing strategy. It seems like they’re always trying to catch up with (JPM). This is the high volatility play in the sector.
And what about Wells Fargo (WFC) you may ask, the cheapest bank of all? This year, it has shaken off hair suit because of its many regulatory transgressions, before, during, and after the financial crisis so I’ll give it a miss.
Here's My Pick
Global Market Comments
March 29, 2023
Fiat Lux
Featured Trade:
(THE MAD HEDGE TRADERS & INVESTORS SUMMIT VIDEOS ARE UP!)
(Trade Alert - (GS) LEAPS – BUY)
CLICK HERE to download today's position sheet.