Global Market Comments
April 26, 2021
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE CORRECTION IS OVER)
(PAVE), (NFLX), (AAPL), (AMD), (NVDA), (ROKU), (AAPL), (AMZN), (MSFT), (FB), (GOOGL), (TSLA), (KSU), (CP), (GS), (UNP) (LEN), (KBH), (PHM)
This is a classic example of if it looks like a duck and quacks like a duck, it’s definitely not a duck….it’s a giraffe.
In stock market parlance, that means we have just suffered an eight-month correction which is now over. Look at the charts and a correction is nowhere to be found. The largest pullback we have seen in the past year has been a scant 12% dip right before the presidential election.
If that’s all the pain we have to suffer to be rewarded with an 80% gain, I’ll take that all day long.
Instead, what we have seen has been a series of sector-specific rolling corrections that were masked by the indexes that were steadily grinding up.
During this time, the best quality stocks endured pretty dramatic hits, like Netflix (NFLX) (-21%), Apple (AAPL) (-26%), Advanced Micro Devices (AMD) (-25%), NVIDIA (NVDA) (-28%), and Roku (ROKU) (-40%).
Stocks sold off hard after Q1 earnings. They are doing the same now with Q2 earnings. That ends on Tuesday after the close when the 800-pound gorilla of them all announces on Wednesday, April 28.
After that, we could be in for another leg in the bull market that could take us up by 10% by the summer.
Some 85% of all companies are now beating forecasts handily. But half are seeing shares fall after the announcement. That shows how professional the market is getting. So, if you eliminate the earnings announcement, you eliminate the share falls?
This is all in the face of economic growth predictions of lifetime proportions. Analysts are now looking for 43% earnings growth in Q2, 55% in Q3, and 75% in Q4. These are WWII-type numbers.
And the Fed put is still good at the bank. Jerome Powell is promising no rate rises until 2023 on an almost daily basis.
It all sets up a continuing pattern of sideways “time” corrections like we’ve just seen followed by frenetic legs up to new highs. This could go on for years.
It worked last time.
The coming week should be quite a blockbuster. It is only the fifth time in history that the five largest stocks in the S&P 500 accounting for 25% of the market cap all report in the same week. These are Apple (AAPL), Amazon (AMZN), Microsoft (MSFT), Facebook (FB), and Alphabet (GOOGL).
That’s going to leave a mark! Biden’s rumored proposal that high-end earners will see doubled capital gains taxes knocked 500 points of the Dow in seconds. The new tax would apply to Americans earning a net income of $1 million or more. Never mind that congress would have to approve the move first, as Trump found out to his chagrin. It’s a trial balloon that was shot down immediately. Trump had planned to cut capital gains to a 15% rate and run a bigger deficit.
It would only apply to Americans who own stocks and never sell. Guess why? To avoid taxes, dummy!
US Stock Funds take in a record $157 billion in March. That beats the record $144 billion that came in during February. Warning: these massive cash flows are consistent with short-term market tops. Vanguard and iShares index funds took in far and away the most money. The Global X US Infrastructure Fund (PAVE) was one of the most popular directed funds.
The labor shortage is on, with companies engaging in mass hiring and paying signing bonuses for low-end jobs. I was awoken by workers putting up a fence next door on a Saturday morning. They’re working weekends to pay back the debts they ran up last year to keep eating. If you are planning any jobs this year, buy the materials now. The country will be out of everything in three months, with current quarter GDP topping a historic 10%.
SPACS have crashed, with the average SPAC down 23% since the February top, and some like Virgin Galactic Holdings off by 50%. Don’t touch these things with a ten-foot pole, as 80% will go under or shut down with no investments. It reminds me of five online pet food companies at the Dotcom Bubble top. It's all a symptom of too much cash flooding the financial system.
Takeover battle for Kansas City Southern (KSU) ensues, with Canadian Nation making a sweeter $33.7 billion offer than Canadian Pacific’s (CP) $30 billion bid. It just shows how valuable railroads really are in a booming economy that urgently needs to move a lot of stuff. Good thing I’m long (UNP). Is the Reading Railroad still available? How about the B&O or the Short Line?
Yellen sets Zero Emissions Target for 2035. That sets up one of the biggest investment opportunities of the century. The trick is to find companies that have viable technologies that can make a stand-alone profit that haven’t already gone up ten times, like Tesla (TSLA). Most of the new EV IPOs aren’t going to make it. This will be a major focus of Mad Hedge research going forward. I hope I live that long!
Existing Home Sales down 12.3% YOY, down 3.7% in March, to 6.03 million units. Prices are up 17.02% YOY, the highest on record. Sales of homes over $1 million are up 108%. Inventory is still the issue, down to only 1.07 million units, off 28% in a year. Truly stunning numbers.
New Home Sales up a ballistic 20.7% YOY in March on a signed contracts basis. This is in the face of rising home mortgage interest rates. The flight to the suburbs continues. Homebuilder stocks took off like a scalded chimp. Buy (LEN), (KBH), and (PHM) on dips.
When we come out the other side of pandemic, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 400% to 120,000 or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 120,000 here we come!
My Mad Hedge Global Trading Dispatch profit reached 9.48% gain during the first half of April on the heels of a spectacular 20.60% profit in March.
I used the dip early in the week to add two more positions in Goldman Sachs (GS) and Union Pacific (UNP). I suffered a day of buyer’s remorse on Thursday when Biden floated his capital gains plan and tanked the Dow by 500 points. Then everything took off like a rocket to new highs on Friday.
That leaves me 80% invested and 20% in cash. The markets went up too fast to get the last match of money in the market.
My 2021 year-to-date performance soared to 53.57%. The Dow Average is up 12.3% so far in 2021.
That brings my 11-year total return to 476.12%, some 2.00 times the S&P 500 (SPX) over the same period. My 11-year average annualized return now stands at an unbelievable 42.01%, the highest in the industry.
My trailing one-year return exploded to positively eye-popping 132.09%. I truly have to pinch myself when I see numbers like this. I bet many of you are making the biggest money of your long lives.
We need to keep an eye on the number of US Coronavirus cases at 31.9 million and deaths topping 570,000, which you can find here.
The coming week will be big on the data front, with a couple of historic numbers expected.
On Monday, April 26, at 8:30 AM, US Durable Goods for March are out. Earnings for Tesla (TSLA) and NXP Semiconductors (NXP) are out.
On Tuesday, April 27, at 9:00 AM, we learn the S&P Case Shiller National Home Price Index for February. We also get earnings for Alphabet (GOOGL), Microsoft (MSFT), and Visa (V).
On Wednesday, April 28 at 2:00 PM, The Fed Open Market Committee releases its Interest Rates Decision. The following press conference is more important. Apple (AAPL), Boeing (BA), and QUALCOMM (QCOM) earnings are out.
On Thursday, April 29 at 8:30 AM, the Weekly Jobless Claims are printed. We also obtain the blockbuster US GDP for Q1. Amazon (AMZN), Caterpillar (CAT, and Merck (MRK) release earnings.
On Friday, April 30 at 8:30 AM, we get US Personal Income and Spending for March. Exxon Mobile (XOM) and Chevron (CVX) release earnings. Berkshire Hathaway (BRK/B) announces the next day. At 2:00 PM, we learn the Baker-Hughes Rig Count.
As for me, after telling you last week why I walked so funny, let me tell you the other reason.
In 1987, to celebrate obtaining my British commercial pilot’s license, I decided to fly a tiny single-engine Grumman Tiger from London to Malta and back.
It turned out to be a one-way trip.
Flying over the many French medieval castles was divine. Flying the length of the Italian coast at 500 feet was fabulous, except for the engine failure over the American airbase at Naples.
But I was a US citizen, wore a New York Yankees baseball cap, and seemed an alright guy, so the Air Force fixed me up for free and sent me on my way. Fortunately, I spotted the heavy cable connecting Sicily with the mainland well in advance.
I had trouble finding Malta and was running low on fuel. So I tuned into a local radio station and homed in on that.
It was on the way home that the trouble started.
I stopped by Palermo in Sicily to see where my grandfather came from and to search for the caves where my great-grandmother lived during the waning days of WWII. Little did I know that Palermo was the worst wind shear airport in Europe.
My next leg home took me over 200 miles of the Mediterranean to Sardinia.
I got about 50 feet into the air when a 70-knot gust of wind flipped me on my side perpendicular to the runway and aimed me right at an Alitalia passenger jet with 100 passengers awaiting takeoff. I managed to level the plane right before I hit the ground.
I heard the British pilot say on the air “Well, that was interesting.”
Giant fire engines descended upon me, but I was fine, sitting on my cockpit, admiring the tree that had suddenly sprouted through my port wing.
Then the Carabinieri arrested me for endangering the lives of 100 Italian tourists. Two days later, the Ente Nazionale per l’Avizione Civile held a hearing and found me innocent, as the wind shear could not be foreseen. I think they really liked my hat, as most probably had distant relatives in New York.
As for the plane, the wreckage was sent back to England by insurance syndicate Lloyds of London, where it was disassembled. Inside the starboard wing tank, they found a rag which the American mechanics in Naples had left by accident.
If I had continued my flight, the rag would have settled over my fuel intake vavle, cut off my gas supply, and I would have crashed into the sea and disappeared forever. Ironically, it would have been close to where French author Antoine de St.-Exupery (The Little Prince) crashed in 1945.
In the end, the crash only cost me a disk in my back, which I had removed in London and led to my funny walk.
Sometimes, it is better to be lucky than smart.
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Antoine de St.-Exupery on the Old 50 Franc Note
Want to know the best way to play the coming recovery in oil, commodities, precious metals, and emerging markets?
Buy the railroads. At least if you are early, you still have a functioning, cash flow positive business, unlike the rest of the above.
Since they peaked in early 2015, railroad stocks have been beaten like the proverbial red-headed stepchild, trading with the collapse in oil and coal tick for tick. Lead stock Union Pacific (UNP) has seen its share price crater by 36% since then before recently recovering half of that.
What follows a global synchronized slowdown, led by China and emerging markets? A global synchronized recovery, led by China and emerging markets.
I love railroads because they used to belch smoke and steam and have these incredibly loud, romantic, wailing whistles.
In fact, my first career goal in life (when I was 5) was to become a train engineer. By the time I was old enough to know better, American railroads almost no longer existed.
It turns out that the railroads today are a great proxy for the health of the entire global economy. They are, in effect, our canary in the coalmine.
If oil prices stay low enough for long enough, it will boost demand for everything else that Union Pacific ships, including houses, furniture, cars, and every other sweet spot for their franchise.
Union Pacific (UNP), in effect, has a great internal hedge for its many businesses. When one product line weakens, another strengthens. This has been going on since the 19th century.
The industry is carefully watching the construction of a second Panama Canal across Nicaragua (click here for ?Who the Grand Nicaragua Canal Has Worried?).
If completed by its Chinese promoters within the next decade, it could bring an incremental shift of traffic from the US West Coast to the Gulf Ports.
Even this is a mixed bag, as this will move some business away from strike-plagued ports that are currently causing so much trouble.
When I rode Amtrak?s California Zephyr from Chicago to San Francisco in 2014, I passed countless trains heading west hauling hoppers full of coal for shipment to China.
Last year? I took the same trip. The coal trains were gone. Instead I saw 100 car long tanker trains transporting crude oil from North Dakota south to the Gulf Coast. I thought, ?There?s got to be a trade here.? It turns out I was right.
Take a look at the charts below, and you will see that the shares of virtually the entire railroad industry are breaking out to the upside.
In two short years, the big railroads have completely changed their spots, magically morphing from fading coal plays to emerging oil ones.
You?ve heard of ?fast fashion?? This is ?fast railroading?.
Today the big business is coming from the fracking boom, shipping oil from North Dakota?s Bakken field to destinations south. In fact, the first trainload of Texas tea arrived here in the San Francisco Bay area only a couple of years ago, displacing crude that formerly came from Alaska.
There are a wealth of interesting companies in the railroad sector now. You could almost pick any one.
These include Union Pacific (UNP), CSX Corp (CSX), Norfolk Southern (NSC), Kansas City Southern (KSU) and Canadian Pacific (CP).
Those of a certain age, such as myself, remember railroads as one of the great black holes of American industry. During the sixties, they were constantly on strike, always late, and delivered terrible service.
A friend of mine, taking a passenger train from New Mexico to Los Angeles, found his car abandoned on a siding for 24 hours where he froze and starved until he was discovered.
New airlines and the trucking industry were eating their lunch. They also hemorrhaged money like crazy.
The industry finally hit bottom in 1970, when the then dominant Penn Central Railroad went bankrupt, freight was spun off, and the government-owned Amtrak passenger service was created out of the ashes.
I know all of this because my late uncle was the treasurer of Penn Central.
Fast forward nearly half a century, and what you find is not your father?s railroad.
While no one was looking, they quietly became one of the best run and most efficient industries in America. Unions were tamed, costs slashed, and lines were reorganized and consolidated.
The government provided a major assist with sweeping deregulation. It became tremendously concentrated, with just four companies dominating the country, down from hundreds a century ago, giving you a great oligopoly play.
The quality of management improved dramatically.
Then the business started to catch a few lucky breaks from globalization. The China boom that started in the nineties created enormous demand for shipment inland of manufactured goods from West Coast Ports.
A huge trade also developed moving western coal back out to the Middle Kingdom, which now accounts for 70% of all traffic. The ?fracking? boom is having the same impact on the North/South oil by rail business.
All of this has ushered in a second ?golden age? for the railroad industry. This year, the industry is expected to pour $14 billion into new capital investment.
The US Department of Transportation expects gross revenues to rise by 50% to $27.5 billion by 2040. The net net of all of this is that freight rates are rising right when costs are falling, sending railroad profitability through the roof.
Union Pacific is investing a breathtaking $3.6 billion to build a gigantic transnational freight terminal in Santa Teresa, NM. It is also spending $500 million building a new bridge across the Mississippi River at Canton, Iowa.
Lines everywhere are getting double tracked or upgraded. Mountain tunnels are getting rebored to accommodate double stacked sea containers.
Indeed, the lines have become so efficient, that overnight couriers, like FedEx (FDX) and UPS (UPS), are diverting a growing share of their own traffic.
Their on time record is better than that of competing truckers, who face delays from traffic jams and crumbling roads, and are still hobbled by antiquated regulation.
I have some firsthand knowledge of this expansion. Every October 1st, I volunteer as a docent at the Truckee, California Historical Society on the anniversary of the fateful day in 1846 when the ill-fated Donner Party was snowed in.
There, I guide groups of tourists over the same pass my ancestors crossed during the 1849 gold rush. The scars on enormous ancient pines made by passing wagon wheels are still visible.
During 1866-1869, thousands of Chinese laborers blasted a tunnel through a mile of solid granite to complete the Transcontinental Railroad.
I can guide my guests through that tunnel today with flashlights because Union Pacific (UNP) moved the line to a new tunnel a mile south to improve the grade. The ceiling is still covered with soot from the old wood and coal-fired engines.
While the rebirth of this industry has been impressive, conditions look like they will get better still. Massive international investment in Mexico (low end manufacturing and another energy renaissance) and Canada (natural resources) promise to boost rail traffic with the US.
The rapidly accelerating ?onshoring? trend, whereby American companies relocate manufacturing facilities from overseas back home, creates new rail traffic as well. It turns out that factories that produce the biggest and heaviest products are coming home first, providing all great cargo for railroads.
And who knew?
Railroads are also a ?green? play. As Burlington Northern Railroad owner, Warren Buffett, never tires of pointing out, it requires only one gallon of diesel fuel to move a ton of freight 500 miles. That makes it four time
s more energy efficient than competing trucks.
In fact, many companies are now looking to railroads to reduce their overall carbon footprint. Warren doesn?t need any convincing himself. The $34 billion he invested in the Burlington Northern Railroad six years ago has probably doubled in value since then.
You have probably all figured out by now that I am a serious train nut, beyond the industry?s investment possibilities.
My past letters have chronicled adventures riding the Orient Express from London to Venice and Amtrak from New York to San Francisco.
I even once considered buying my own steam railroad, the fabled ?Skunk? train in Mendocino, California, until I figured out it was a bottomless money pit. Some 50 years of deferred maintenance is not a pretty sight.
It gets worse.
Union Pacific still maintains in running condition some of the largest steam engines every built, for historical and public relations purposes. One, the ?Old 844? once steamed its way over the High Sierras to San Francisco on a nostalgia tour.
The 120-ton behemoth was built during WWII to haul heavy loads of steel, ammunition, and armaments to California ports to fight the war against Japan. The 4-8-4-class engine could pull 26 passenger cars at 100 mph.
When the engine passed, I felt the blast of heat of the boiler singe my face. No wonder people love these things! To watch the video, click here and hit the ?PLAY? arrow in the lower left hand corner.
Please excuse the shaky picture. I shot this with one hand, while using my other hand to keep my over- excited kids from running onto the tracks to touch the laboring beast.
Railroads all look like ripe, ?buy on dips? low-hanging fruit to me.
