Global Market Comments
September 20, 2024
Fiat Lux
Featured Trade:
(THIS WILL BE YOUR BEST PERFORMING ASSET FOR THE NEXT 30 YEARS),
(IYR), (PHM), (LEN), (DHI), (TLT), (HYG), (MUB), (SPY)
Posts
Lately, I have spent my free time strolling the worst slums of Oakland, CA.
No, I’m not trying to score a drug deal, hook up with some ladies of ill repute, or get myself killed.
I was looking for the best-performing investment for the next 30 years.
Yup, I was looking for new homes to buy.
As most of you know, I try to call all of my readers at least once a year and address their individual concerns.
Not only do I pick up some great information about regions, industries, businesses, and companies, but I also learn how to rapidly evolve the Diary of a Mad Hedge Fund Trader service to best suit my voracious, profit-seeking readers.
So when a gentleman asked me the other day to reveal to him the top-performing asset of the next 30 years, I didn’t hesitate: your home equity.
He was shocked.
I then went into the economics of the Oakland trade with him.
West Oakland was built as a working-class neighborhood in the late 1890s. Many structures still possess their original Victorian designs and fittings.
Today, it is a 5-minute BART ride under the Bay to the San Francisco financial district.
A one-three bedroom two bath home I saw was purchased a year ago for $450,000, with a $50,000 down payment and a 6.5% loan on the balance.
The investor quickly poured $50,000 into the property, with new paint, heating, hot water, windows, a kitchen, bathrooms, and flooring.
A year later, he listed it for sale at $650,00, and the agent said there was a bidding war that would probably take the final price up to $700,000.
Excuse me, gentlemen, but that is a 400% return on a 50,000 investment in 12 months.
As Oakland rapidly gentrifies, the next buyer will probably see a doubling in the value of this home in the next five years.
Try doing that in the stock market.
Needless to say, housing stocks like Lennar Homes (LEN), DH Horton (DHI), and Pulte Homes (PHM) need to be at the core of any long-term stock portfolio.
I then proceeded to list off to my amazed subscriber the many reasons why residential housing is just entering a Golden Age that will drive prices up tenfold, if not 100-fold, in the decades to come. After all, over the last 60 years, the value of my Dad’s home in LA went up 100-fold and the equity 1,000-fold.
1) Demographics. This started out as the hard decade for housing when 80 million downsizing baby boomers unloaded their homes for greener pastures at retirement condos and assisted living facilities.
The 65 million Gen Xers who followed were not only far fewer in number, they earned much less, thanks to globalization and hyper-accelerating technology.
All of this conspired to bring us a real estate crash that bottomed out in 2011.
During the 2020s, the demographics math reverses.
That’s when 85 million millennials start chasing the homes owned by 65 million Gen Xers.
And as they age, this group will be earning a lot more disposable income, thanks to a labor shortage.
2) Population Growth
If you think it's crowded now, you haven’t seen anything yet.
Over the next 30 years, the US population is expected to soar from 335 million today to 450 million. California alone will rocket from 38 million to 50 million.
That means housing for 115 million new Americans will have to come from somewhere. It sets up a classic supply/demand squeeze.
That’s why megaprojects like the San Francisco to Los Angeles bullet train, which may seem wasteful and insane today, might be totally viable by the time they are finished.
3) They’re Not Building Them Anymore
Or at least not as much as they used to.
Total housing starts for 2023 were 1.55 million, a 3% decline from the 1.60 million total from 2022. Single-family starts in 2023 totaled 1.01 million, down 10.6% from the previous year. That means they are producing a half of peak levels.
The home building industry has to more than triple production just to meet current demand.
Builders blame regulation, zooming, the availability of buildable land, lack of financing, and labor shortages.
The reality is that the companies that survived the 2008 crash are a much more conservative bunch than they used to be. They are looking for profits, not market share. They are targeting a specific return on capital for their business, probably 20% a year pretax.
It is no accident that new homebuilders like Lennar (LEN), Pulte Homes (PHM), and (DHI) make a fortune when building into rising prices and restricted supply. Their share prices have been on an absolute tear and are at all-time highs. And that is with a 6.1% mortgage rate.
This strategy is creating a structural shortage of 10 million new homes in this decade alone.
4) The Rear View Mirror
The Case Shiller CoreLogic National Home Price Index (see below) has started to rise again after a year of declines. Net out of the many tax breaks that come with ownership, the real annual return is closer to 8%.
That beats 90-day T-bills at 4.75%, tax-free municipal bonds (MUB) at 2.20%, US Treasury bonds (TLT) at 3.70%, S&P 500 (SPY) equities with dividends at 2.2%, and junk (HYG) bonds at 6.0%.
Unless you have a new Internet start-up percolating in your garage, it is going to be very hard to beat your own home’s net return.
5) The Last Leverage Left
A typical down payment on a new home these days is 25%. That gives you leverage of 4:1. So, in a market that is rising by 5.0% a year, your increase in home equity is really 20% a year.
Pay a higher interest rate, and down payments as low as 10% are possible, bringing your annual increase in home equity to an eye-popping 50%.
And if you qualify for an FHA loan up to $633,000, only a 3.5% deposit is required.
There are very few traders who can make this kind of return, even during the most spectacular runaway bull market. And to earn this money in your house, all you have to do is sleep in it at night.
6) The Tax Breaks are Great
The mortgage interest on loans up to $750,000 million is deductible on your Form 1040, Schedule “A” with a $10,000 limitation.
You can duck the capital gains entirely if the profit is less than $500,000, you’re married and lived in the house for two years or more.
Any gains above that are taxed at only a maximum 20% rate. These are the best tax breaks you can get anywhere without being a member of the 1%. Profits can also be deducted on the sale of a house if you buy another one at the equivalent value within 18 months.
7) Job Growth is Good and Getting Better
The monthly Non-Farm Payroll reports are averaging out at about 150,000 a month. As long as we maintain this level or higher, enough entry-level homeowners are entering the market to keep prices rising.
And you know those much-maligned millennials? They are finally starting to have kids, need larger residences, and are turning from renting to buying.
8) There is No Overbuilding Anywhere
You know those forests of cranes that blighted the landscape in 2006? They are nowhere to be seen.
The other signs of excess speculation, liars’ loans, artificially high appraisals, and rapid flipping no longer exist. Much of this is now illegal, thanks to new regulations.
No bubble means no crash. Prices should just continue grinding upwards in a very boring, non-volatile way.
9) Foreign Capital is Pouring In
The problem has become so endemic that the US Treasury is demanding proof of beneficial ownership on sales over $2 million to get behind shell companies and frustrate money laundering and tax evasion.
Remember, they are fleeing negative rates at home.
US real estate has become the world’s largest high-yield asset class.
So, the outlook is a petty rose for individual homeownership in the foreseeable future.
Just don’t forget to sell by 2030.
That is when the next round of trouble begins.
For Sale
Global Market Comments
September 18, 2024
Fiat Lux
Featured Trade:
(TESTIMONIAL)
(HOW TO SPOT A MARKET TOP),
(SPY), (NFLX), (TSLA), (FB), (LEN), (TLT), (BAC)
It’s fall again when my most loyal readers are to be found taking transcontinental railroad journeys, crossing the Atlantic in a first-class suite on the Queen Mary 2, or getting the early jump on the Caribbean beaches.
What better time to spend your trading profits than after all the kids have gone back to school and the summer vacation destination crush has subsided?
It’s an empty nester’s paradise.
Trading in the stock market is reflecting as much, with increasingly narrowing its range since the August 5 flash crash, and trading volumes are subsiding.
Is it really September already?
It’s as if through some weird, Rod Serling-type time flip, August became September, and September morphed into August. That’s why we got a rip-roaring August followed by a sleepy, boring September.
Welcome to the misplaced summer market.
I say all this because the longer the market moves sideways, the more investors get nervous and start bailing on their best-performing stocks.
The perma bears are always out there in force (it sells more newsletters), and with the memories of the 2008 and 2020 crashes still fresh and painful, the fears of a sudden market meltdown are constant and ever-present.
In the minds of many newly gun-shy traders, the next 1,000-point flash crash is only an opening away.
In fact, nothing could be further from the truth.
What we are seeing unfold here is not the PRICE correction that people are used to but a TIME correction, where the averages move sideways for a while, in this case, a few months.
Eventually, the moving averages catch up, and it is off to the races once again.
The reality is that there is a far greater risk of an impending market melt-up than a meltdown. But to understand why, we must delve further into history and then the fundamentals.
For a start, many investors have not believed in this bull market for a nanosecond from the very beginning. They have been pouring their new cash into the generous 5% yielding bond market instead.
Some 95% of active managers are underperforming their benchmark indexes this year, the lowest level since 1997, compared to only 76% in a normal year.
Therefore, this stock market has “CHASE” written all over it.
Too many managers have only three months left to make their years, lest they spend 2025 driving a taxi for Uber and handing out free bottles of water. The rest of 2025 will be one giant “beta” (outperformance) chase.
You can’t blame these guys for being scared. My late mentor, Morgan Stanley’s money management guru Barton Biggs, taught me that bull markets climb a never-ending wall of worry. And what a wall it has been.
Worry has certainly been in abundance this year, with China collapsing, Gaza exploding, Ukraine and now Russia invaded, the contentious presidential elections looming, oil in free fall, and the worst fire season in decades.
When in doubt, Jay Powell is all about easy money until proven otherwise. Until then, think lower rates for longer, especially on the heels of a disappointing weak August Nonfarm Payroll Report.
So, I think we have a nice setup here going into Q4. It could be a Q4 2023 lite-- a gain of 5%-10% in a cloud of dust.
The sector leaders will be the usual suspects: big technology names, health care, and biotech (IBB). Banks like (BAC), (JPM), (KBE) will get a steroid shot from rising interest rates, no matter how gradual.
To add some spice to your portfolio (perhaps at the cost of some sleepless nights), you can dally in some big momentum names, like Tesla (TSLA), Netflix (NFLX), DH Horton (DHI), Lennar Housing (LEN), and Facebook (FB).
Global Market Comments
September 3, 2024
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD or THE HIDDEN AI IN YOUR LIFE),
(SPX), (NVDA), (CSCO), (LEN), (DHI), (KBH), (SMCI), (BRK/B), (META), (AAPL), (GOOGL), (TSLA), (JNK), (HYG), (FXA), (FXE), (FXB), (FXC), (EEM), (IWM)
It's great to be back in California, even just temporarily.
Driving down to visit a Concierge client, the weather is hot and dry, the scenery is spectacular. What were once endless hills of dry grass are now countless miles of vineyards. Boy, has the Golden State changed a lot since 1952.
The vines are heavy with grapes. I stopped by and picked a purple bunch to test out the fruit. The grapes were rich and sweet. It looks like 2024 is going to be a good vintage. No wonder there is a wine glut.
It's going to be a vintage year for Mad Hedge performance as well. We picked up a welcome +3.74% in the testing month of August, +33.61% so far in 2024, and +711.32% since inception.
The harder I work, the luckier I get.
Which raises the most important question of the day: Did September just happen in August? The price action we saw last month is certainly reminiscent of many recent faith-testing Septembers and Octobers.
If that is the case, then it could be off to the races from now. Except this time, it won’t be just a Magnificent Seven rally. It will be an everything rally as the bull broadens out to include all interest rate sectors, which is almost everything.
(SPX) 6,000 by yearend looks like a piece of cake.
The bottom line for all of this is that investors and the markets are still wildly underestimating the impact artificial intelligence will have on our futures, and therefore stock prices. Publishing the Mad Hedge AI Letter three times a week (click here for the link), I can see AI sneaking into every aspect of our lives without our knowledge.
I visited my doctor the other day and they asked for my Medicare card. I didn’t have it because there is no use for this US government ID in Europe from where I just returned. The receptionist said, “Don’t worry, may I have your phone please?” She went into my photos app, searched for “Medicare” and there it appeared instantly. Apple had surreptitiously installed an AI search function on my phone without even telling me.
Try it!
What we are witnessing is the greatest capital spending binge since WWII 83 years ago, when in three short years, the US produced 297,000 aircraft, 193,000 artillery pieces, 86,000 tanks, and two million army trucks. It also double-tracked all east-west rail lines and created from scratch four atomic bombs.
And you want to short that???
The indexes certainly have plenty of room to run. Since the 2020 pandemic bottom, virtually all money has gone into big tech and out of the rest of the market, generating net outflows out of equities and into bonds. What happens when you get net inflows into big tech AND the rest of the market? Markets go up a….lot.
Dow 240,000 here we come.
Now for the challenging chore of sector picking.
Bonds (TLT) are usually the first pick at the beginning of any interest rate-cutting cycle. However, this has been the best telegraphed interest rate cut in history so most of the juice has already been squeezed out of this one. The (TLT) has moved a prolific $18 off the $82 bottom with no interest rate cuts at all. So there might be $5 or $10 of upside left this year, but no more.
Derivative high-yield plays have much more to offer. Those would include junk bonds (JNK), (HYG), BB-rated loans (SLRN), and REITS like the Vornado Realty Trust (VOR), my favorite Crown Castle International (CCI), and Health Properties (DOC).
Utilities usually do well in falling interest rate cycles as they are such big borrowers. In this basket, you can throw NextEra Energy (NEE), Southern Company (SO), and Duke Energy (DUK).
Falling rates also reliably deliver a weak US dollar, so buy every foreign currency play out there (FXA), (FXE), (FXB), (FXC). Also, buy foreign stock markets like the (EEM).
And then there are always big borrowing small caps (IWM), poor performers for the last decade which can always use the life jackets of falling interest rates. Keep in mind that 40% of small caps are regional banks and another 40% are money losers.
And then there are the old reliables. Any of the Magnificent Seven will probably work if you can get them on any selloff like we had on August 5.
So far in August, we are up by +2.67%. My 2024 year-to-date performance is at +33.61%. The S&P 500 (SPY) is up +18.23% so far in 2024. My trailing one-year return reached +52.25. That brings my 16-year total return to +710.24. My average annualized return has recovered to +51.91%.
I executed no trades last week and am maintaining a 100% cash position. I’ll text you next time I see a bargain in any market. Now there are none. I am running one short in Tesla (TSLA).
Some 63 of my 70 round trips, or 90%, were profitable in 2023. Some 49 of 66 trades have been profitable so far in 2024, and several of those losses were really break-even. That is a success rate of +74.24%.
Try beating that anywhere.
NVIDIA Dives on Fabulous Earnings, one of the greatest “Buy the rumor, sell the news” moves of all time. The stock dropped to $25, or 17.85% off its all-time high. Production snags with its much-awaited Blackwell chips are to blame. The company’s quarterly met or beat analysts’ estimates on nearly every measure. But Nvidia investors have grown accustomed to blowout quarters, and the latest numbers didn’t qualify. Buy (NVDA) on this dip.
PCE Rises a Modest 02% in July. That is the so-called core personal consumption expenditures price index, which strips out volatile food and energy items, according to Bureau of Economic Analysis data out Friday. On a three-month annualized basis — a metric economists say paints a more accurate picture of the trajectory of inflation — it advanced 1.7%, the slowest this year
Pending Home Sales Drop 5%, and 8.5% YOY, on a signed contracts basis. Many buyers are waiting until after the presidential election to make a move. Pending home sales fell in all four regions last month. The positive impact of job growth and higher inventory could not overcome affordability challenges and some degree of wait-and-see related to the upcoming U.S. presidential election.
Sales of new U.S. single-family homes rocketed by 10.6%, their highest level in more than a year in July. A drop in mortgage rates boosted demand, offering more evidence that the housing market is recovering. Sales reached a seasonally adjusted annual rate of 739,000 units last month, the highest level since May 2023. It was also the sharpest increase in sales since August 2022. New home sales are counted at the signing of a contract. Buy homebuilders on dips (LEN), (DHI), (KBH).
US GDP Reaccelerates to 3.0% Growth in Q2, up from the previous estimate of 2.8%, according to the Bureau of Economic Analysis. Stronger consumer spending more than offset other categories. Can’t beat the USA.
Weekly Jobless Claims Remain Unchanged at 231,000, down 2,000. After being inflated by weather and seasonal factors in July, initial jobless claims in August are stabilizing at a slightly lower level, another indication that layoffs remain low.
Is Costco (CSCO) the Next Stock Split? Costco, which has risen nearly 40% since the start of 2024, is a potential candidate. Given the company’s share price—over $900 as of Tuesday—and the trend among other retailers with similarly high prices to split.
Hindenburg Research Attacks Super Micro, alleging "accounting manipulation" at the AI server maker, the latest by the short seller whose reports have rocked several high-profile companies. Close ties with chip giant Nvidia have allowed Super Micro, known for its liquid cooling technology for high-power semiconductors, to capitalize on the surge in demand for AI servers.
Though revenue has surged, margins have taken a hit recently due to the rising costs of server production and pricing pressure from rivals including Dell. Avoid (SMCI).
Berkshire Hathaway Tops $1 Trillion Market Cap, a long-time Mad Hedge recommendation. It’s the first nontech company ever to do so, even though (BRK/B) has a major holding in Apple (AAPL). Keep buying the big dips. The stock has rallied this year on strong insurance results and economic optimism. The Omaha, Nebraska-based company joins the ranks of a small group to crack the milestone, dominated by technology giants like Alphabet Inc. (GOOGL), Meta Platforms Inc. (META) and Nvidia Corp. (NVDA).
S&P Case Shiller Hits New All-Time High in June. Prices nationally rose 5.4% in June from the year prior. An index measuring prices in 20 of the nation’s large metropolitan areas gained 6.5% from the year prior. On an unadjusted basis, it was the national index’s fourth consecutive all-time high. Prices in New York, San Diego, and Las Vegas grew the most, with year-over-year gains ranging from 8.5% and 9%, while those in Portland, Ore., Denver, Colo., and Minneapolis grew the least.
Canada Imposes 100% Tariff on Chinese EVs. The problem for Tesla is that they had been supplying the Canadian market from their China factory. The supply can be replaced with US-made cars but at a much higher cost. Tesla sold off $8 on the news. Sell rallies in (TSLA).
Is the US Tipping into Recession? A continued drop in job openings will translate into faster increases in unemployment, an argument in favor of the Fed beginning to cut interest rates to guard the labor market. The next jobs reports could be crucial. Policymakers face the dilemma of two risks: being too slow to ease policy, potentially causing a 'hard landing' with high unemployment ... or cutting rates prematurely, leaving the economy vulnerable to rising inflation
Yield Chasers Post Record Demand for Junk Bonds. That’s helped make 2024 the busiest year for the issuance of new corporate high-yield bonds, with $357 billion sold so far, since the easy money days during the pandemic. Issuance of US leveraged loans, meanwhile, is running at its fastest pace on record. Buy (JNK) and (HYG).
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 600% 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, September 2 we have Labor Day. All US markets will be closed.
On Tuesday, September 3 at 6:00 AM EST, the ISM Manufacturing PMI is released.
On Wednesday, September 4 at 7:30 PM, the JOLTS Job Openings Report is printed.
On Thursday, September 5 at 8:30 AM, the Weekly Jobless Claims are announced. We also get the ADP Employment Report.
On Friday, September 6 at 8:30 AM, the August Nonfarm Payroll Report is released. At 2:00 PM, the Baker Hughes Rig Count is printed.
As for me, having visited and lived in Lake Tahoe for most of my life, I thought I’d pass on a few stories from this historic and beautiful place.
The lake didn’t get its name until 1949 when the Washoe Indian name was bastardized to come up with “Tahoe”. Before that, it was called the much less romantic Lake Bigler after the first governor of California.
A young Mark Twain walked here in 1863 from nearby Virginia City where he was writing for the Territorial Enterprise about the silver boom. He described boats as “floating in the air” as the water clarity at 100 feet made them appear to be levitating. Today, clarity is at 50 feet, but it should go back to 100 feet when cars go all-electric.
One of the great engineering feats of the 19th century was the construction of the Transcontinental Railroad. Some 10,000 Chinese workers used black powder to blast a one-mile-long tunnel through solid granite. They tried nitroglycerine for a few months but so many died in accidents they went back to powder.
The Union Pacific moved the line a mile south in the 1950s to make a shorter route. The old tunnel is still there, and you can drive through it at any time if you know the secret entrance. The roof is still covered with soot from woodfired steam engines. At midpoint, you find a shaft to the surface where workers were hung from their ankles with ropes to place charges so they could work on four faces at once.
By the late 19th century, every tree around the lake had been cut down for shoring at the silver mines. Look at photos from the time and the mountains are completely barren. That is except for the southwest corner, which was privately owned by Lucky Baldwin who won the land in a card game. The 300-year-old growth pine trees are still there.
During the 20th century, the entire East Shore was owned by one man, George Whittell Jr., son of one of the original silver barons. A man of eclectic tastes, he owned a Boing 247 private aircraft, a custom mahogany boat powered by two Alison aircraft engines, and kept lions in heated cages.
Thanks to a few well-placed campaign donations, he obtained prison labor from the State of Nevada to build a palatial granite waterfront mansion called Thunderbird, which you can still visit today (click here ). During Prohibition, female “guests” from California crossed the lake and entered the home through a secret tunnel.
When Whittell died in 1969, a Mad Hedge Concierge Client bought the entire East Shore from the estate on behalf of the Fred Harvey Company and then traded it for a huge chunk of land in Arizona. Today the East Shore is a Nevada State Park, including the majestic Sand Harbor, the finest beach in the High Sierras.
When a Hollywood scriptwriter took a Tahoe vacation in the early 1960s, he so fell in love with the place that he wrote Bonanza, the top TV show of the decade (in front of Hogan’s Heroes). He created the fictional Ponderosa Ranch, which tourists from Europe come to look for in Incline Village today.
In 1943, a Pan Am pilot named Wayne Poulson who had a love of skiing bought Squaw Valley for $35,000. This was back when it took two days to drive from San Francisco. Wayne flew the China Clippers to Asia in the famed Sikorski flying boats, the first commercial planes to cross the Pacific Ocean. He spent time between flights at a ranch house he built right in the middle of the valley.
His wife Sandy bought baskets from the Washoe Indians who still lived on the land to keep them from starving during the Great Depression. The Poulson’s had eight children and today, each has a street named after them at Squaw.
Not much happened until the late forties when a New York Investor group led by Alex Cushing started building lifts. Through some miracle, and with backing from the Rockefeller family, Cushing won the competition to host the 1960 Winter Olympics, beating out the legendary Innsbruck, Austria, and St. Moritz, Switzerland.
He quickly got the State of California to build Interstate 80, which shortened the trip to Tahoe to only three hours. He also got the state to pass a liability limit for ski accidents to only $2,000, something I learned when my kids plowed into someone, and the money really poured in.
Attending the 1960 Olympic opening ceremony is still one of my fondest childhood memories, produced by Walt Disney, who owned the nearby Sugar Bowl ski resort.
While the Cushing group had bought the rights to the mountains, Poulson owned the valley floor, and he made a fortune as a vacation home developer. The inevitable disputes arose and the two quit talking in the 1980’s.
I used to run into a crusty old Cushing at High Camp now and then and I milked him for local history in exchange for stock tips and a few stiff drinks. Cushing died in 2003 at 92 (click here for the obituary)
I first came to Lake Tahoe in the 1950s with my grandfather who had two horses, a mule, and a Winchester. He was one-quarter Cherokee Indian and knew everything there was to know about the outdoors. Although I am only one-sixteenth Cherokee with some Delaware and Sioux mixed in, I got the full Indian dose. Thanks to him I can live off the land when I need to. Even today, we invite the family medicine man to important events, like births, weddings, and funerals.
We camped on the beach at Incline Beach before the town was built and the Weyerhaeuser lumber mill was still operating. We caught our limit of trout every day, ten back in those days, ate some, and put the rest on ice. It was paradise.
During the late 1990’s when I built a home in Squaw Valley I frequently flew with Glen Poulson, who owned a vintage 1947 Cessna 150 tailwheel, looking for untouched high-country lakes to fish. He said his mother had been lonely since her husband died in 1995 and asked me to have tea with her and tell her some stories.
Sandy told me that in the seventies she asked her kids to clean out the barn and they tossed hundreds of old Washoe baskets. Today Washoe baskets are very rare, highly sought after by wealthy collectors, and sell for $50,000 to $100,000 at auction. “If I had only known,” she sighed. Sandy passed away in 2006 and the remaining 30-acre ranch was sold for $15 million.
To stay in shape, I used to pack up my skis and boots and snowshoe up the 2,000 feet from the Squaw Valley parking lot to High Camp, then ski down. On the way up I provided first aid to injured skiers and made regular calls to the ski patrol.
After doing this for many winters, I finally got busted when they realized I didn’t have a ski pass. It turns out that when you buy a lift ticket you are agreeing to a liability release which they absolutely had to have. I was banned from the mountain.
Today Squaw Valley is owned by the Colorado-based Altera Mountain Company, which along with Vail Resorts owns most of the ski resorts in North America. The concentration has been relentless. Last year Squaw Valley’s name was changed to the Palisades Resort for the sake of political correctness. Last weekend, a gondola connected it with Alpine Meadows next door, creating the largest ski area in the US.
Today there are no Washoe Indians left on the lake. The nearest reservation is 25 miles away in the desert in Gardnerville, NV. They sold or traded away their land for pennies on the current value.
Living at Tahoe has been great, and I get up here whenever I can. I am now one of the few surviving original mountain men and volunteer for North Tahoe Search & Rescue.
On Donner Day, every October 1, I volunteer as a docent to guide visitors up the original trail over Donner Pass. Some 175 years later the oldest trees still bear the scars of being scrapped by passing covered wagon wheels, my own ancestors among them. There is also a wealth of ancient petroglyphs, as the pass was a major meeting place between Indian tribes in ancient times.
The good news is that residents aged 70 or more get free season ski passes at Diamond Peak, where I sponsored the ski team for several years. My will specifies that my ashes be placed in the Middle of Lake Tahoe. At least I’ll be recycled. I’ll be joining my younger brother who was an early Covid-19 victim and whose ashes we placed there in 2020.
Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
The Ponderosa Ranch
The Poulson Ranch
At the Reno Airport
Donner Pass Petroglyphs
Global Market Comments
June 3, 2024
Fiat Lux
Featured Trade:
(The Mad June traders & Investors Summit is ON!)
(MARKET OUTLOOK FOR THE WEEK AHEAD, or WELCOME TO THE MALLARD MARKET and ME AND 23 AND ME),
(AAPL), (GOOGL), (AMZN), (TSLA), (MSFT), (META), (AVGO), (LRCX), (SMCI), (NVR), (BKNG), (LLY), (NFLX), (VIX), (COPX), (T), (NVDA), (LEN), (KBH)
There’s nothing like the comfort and self-satisfaction of having a 100% cash position in a falling market. While everyone else is bleeding red ink, I am happily plotting my next trades.
Of course, the rest of the market isn’t really bleeding red ink, just giving up windfall profits. Still, it’s better to trade from a position of strength than weakness. It makes identifying the next winners easier.
Think of this as the “Mallard Market”. On the surface, it seems calm and peaceful, while underwater, it is paddling along like crazy. The damage has been unmistakable. Dell, the faux AI stock (DELL) crashed by 28%, Salesforce (CRM) got creamed for 34%, and ServiceNow (NOW) got taken to the woodshed for 22%.
It all belies a market that is incredibly nervous and fast on the trigger. The tolerance for any bad news is zero. Yet there has been no market crash as I expected. The 5,300 level for the (SPX) seems to possess a gravitational field, powered by $250 earnings per share and a multiple of 51X.
It was NVIDIA that put the writing on the wall by announcing a 10:1 split that has opened the floodgates for similar prosperous and high-priced companies.
There are now 36 stocks with share prices of $500 or more ripe for splits with $7 trillion in market cap, or 16% of the total market. While splits don’t change the value of a company, perceptions are everything, as they prove shareholder-friendly policies. While individual investors are confused by an onslaught of contradictory research recommendations, splits are a great “tell” on what to buy next.
Apple (AAPL), Alphabet (GOOGL), Amazon (AMZN), and Tesla (TSLA) have already carried out splits, some multiple times, to great success. Of the Magnificent Seven, only Microsoft (MSFT) and Meta (META) have yet to split.
In the tech area Broadcom (AVGO), Lam Research (LRCX), Super Micro Computer (SMCI), and Service Now (NOW) have yet to split. In the non-tech area, there are NVR Inc. (NVR), Booking Holdings (BKNG), Eli Lilly (LLY), and Netflix (NFLX). Many of these are well-known Mad Hedge recommended stocks.
History has shown that stocks rise 25% one year after a split compared to 12% for the market as a whole. A stock’s addition to the Dow Average or the S&P 500 (SPY) provides a boost. If both occur, stocks will absolutely explode. Stock splits are also much more attractive than buybacks at these high prices.
So, I’ll be trolling the market for split-happy candidates.
You should too.
Since it may be some time before we capitulate and take a worthwhile run at new highs, I thought I’d update you on the global demographic outlook, which is always a long-term driver of economies and markets.
People are now living longer than ever before. But postponing death is only a part of the demographic story. The other is the decline in births. The combination of the two is creating huge changes in the global economy.
The notion of a “demographic transition” is almost a century old. Human societies used to have roughly stable populations, with high mortality matched by high fertility. Families had eight kids and 3-5 usually died in childhood, barely maintaining population growth.
In England and Wales in the 18th and 19th centuries, death rates suddenly plummeted. But fertility did not. The result was a population explosion. As the benefits of economic growth and advances in medicine and public health spread, most of the world has followed a similar transition, but far faster. As a result, human numbers rose fourfold over the last hundred years, from 2 billion to 8 billion.
In time, fertility followed mortality on a downward path across most of the world. As a result, fertility rates in more than half of all countries and territories in 2021 fell below the replacement level. For the world as a whole, the fertility rate was 2.3 in 2021, barely above the replacement of 2.1, down from 4.7 in 1960.
For high-income countries, the fertility rate was a mere 1.6, down from 3.0 in 1960. In general, poor countries still have higher fertility rates than richer ones, but they have been falling there, too.
What explains this collapse in fertility rates? An important part of the answer is the wonderful surprise that more children survived than expected. So, people started to practice various forms of birth control.
But the desire to have many children also shrank sharply. When husbands realized that smaller families meant high standards of living for themselves, family sizes dropped sharply. Even in ultra-conservative Iran, the fertility rate has collapsed from 6.6 in 1980 to only 1.7 in 2021.
A big reason for this shift was that, for their parents, children have moved from being a valuable productive asset in the 19th century to an expensive luxury today. That was back when 50% of our population worked on farms. Today it’s only 2%.
In the meantime, female participation in the economy rose dramatically in the 20th century, including in highly skilled careers. That raised the “opportunity cost” of producing children, especially for mothers. So, they have children later, or even not at all.
Where public childcare is more generous women are encouraged to combine careers with having children. The absence of such help helps explain the exceptionally low fertility rates in much of East Asia and Southern Europe, where parental support is limited.
This global shift towards very low fertility, with the exception (so far) of sub-Saharan Africa, is among the most important events driving the global economy. One implication is that the population of Africa is forecast to be larger than that of all today’s high-income countries, plus China by 2060, thanks to the elimination of many diseases there.
Why is all this important?
Because rising populations create larger markets, more profits for corporations, and rising share prices. Shrinking populations have the opposite effect, as China is learning about its distress now. One reason the US is growing faster than the rest of the world is that a continuous stream of new immigrants since its foundation has created endless numbers of new workers and customers. Dow 240,000 here we come!
Just thought you’d like to know.
So far in May, we are up +3.74%. My 2024 year-to-date performance is at +18.35%. The S&P 500 (SPY) is up +10.48% so far in 2024. My trailing one-year return reached +35.74%.
That brings my 16-year total return to +694.78%. My average annualized return has recovered to +51.48%.
As the market reaches higher and higher, I continue to pare back risk in my portfolio. I bailed on my last position early in the week, covering a short in Apple for a profit.
Some 63 of my 70 round trips were profitable in 2023. Some 27 of 37 trades have been profitable so far in 2024.
The Fed’s Favorite Inflation Gauge Cools by 0.2% in April, with the PCE, or the Personal Consumer Inflation Expectations Price Index. This one strips out the volatile food and energy components. It gives more credibility to a September rate cut and gave bonds a good day.
NVIDIA Shares Continues to Go Ballistic, creating another $800 billion in market capitalization in three trading days. That is the most in history. That took NASDAQ to a new all-time high at 17,000. At $2.8 trillion (NVDA) could become the largest publicly traded company in the world in another day. Today’s tailwind came from an Elon Musk comment that his new xAI start-up would buy the company's high-end H100 graphics cards. Buy (NVDA) on the next 20% dip.
Pending Home Sales Dive, down 7.7% in April, the worst since the Covid market three years ago. The impact of escalating interest rates throughout April dampened home buying, even with more inventory in the market. But the anticipated rate cuts later this year should lead to better conditions, with improved affordability and more supply. Buy (LEN) and (KBH) on dips.
Money Supply Rises for the First Time in More than a Year. Remember money supply? As measured by M2, it sums up the currency, coins, and savings deposits held by banks, balances in retail money-market funds, and more. Data for April released on Tuesday afternoon showed an increase of 0.6% from a year ago. The Fed balance sheet has shrunk by $1.5 trillion in two years, the fastest decline in history, slowing the economy.
AT&T’s (T) Copper is Worth More Than the Company, and with plans to convert half its copper network to fiber by 2025 could free up billions of tons of the red metal to sell on the market. Copper prices have doubled over the past two years, and they could double again by next year. Worldwide there are 7 trillion tons of copper wire in place. Fiber is cheaper and exponentially more efficient than copper, which is facing huge demands from AI, EVs, and the electrification of the grid. Buy copper (COPX) on dips.
Markets are Underpricing Low Volatility (VIX), not a good thing at all-time highs. Volatility across equity and currency markets is low. The Volatility Index (VIX) at $12.46 compares with an average over five years of $21.5 and over the longer term of $19.9. Markets are heavily discounting good news and a disinflationary environment. It is not only stocks. There is also low volatility across currency markets. The DB index of foreign exchange volatility is at $6.3 versus an average of $7.6 over five years and $9.3 over the longer term. This will end in tears.
S&P Case Shiller Jumps to New All-Time High, with its National Home Price Index. The index rose by 1.29%, the fastest growth since April 2023. All 20 major metro cities were up last month and gained 6.5% YOY. Four cities are currently at all-time highs: San Diego, Los Angeles, Washington, D.C., and New York. Prices in San Diego saw the biggest gain, up 11.4% from February of 2023. Both Chicago and Detroit reported 8.9% annual increases. Portland, Oregon, saw the smallest gain in the index of just 2.2%. Unaffordability is the big story in the market right now. The sunbelt is seeing the most weakness, thanks to a post-pandemic construction boom.
Space X’s Starlink Tops 3 million Subscribers, and is rapidly moving towards a global WiFi network. I set up a dozen of these in Ukraine last October and even the Russians couldn’t hack them. It sets a global 200 Mb standard usable in most countries, even the remote Galapagos Islands in the Pacific. It’s only a VC investment now but could become Elon Musk’s next trillion-dollar company.
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, June 3, the ISM Manufacturing PMI is released.
On Tuesday, June 4 at 7:00 AM, the JOLTS Job Openings Report will be published.
On Wednesday, June 5 at 7:00 AM, the ISM Services PMI is published.
On Thursday, June 6 at 8:30 AM, the Weekly Jobless Claims are announced. We also get the Challenger Job Cuts Report.
On Friday, June 7 at 8:30 AM, the Nonfarm Payroll and headline Unemployment Rate are announced. At 2:00 PM the Baker Hughes Rig Count is printed.
As for me, when Anne Wojcicki founded 23andMe in 2007, I was not surprised. As a DNA sequencing pioneer at UCLA, I had been expecting it for 35 years. It just came 70 years sooner than I expected.
For a mere $99 back then they could analyze your DNA, learn your family history, and be apprised of your genetic medical risks. But there were also risks. Some early customers learned that their father wasn’t their real father, learned of unknown brothers and sisters, that they had over 100 brothers and sisters (gotta love that Berkeley water polo team!), and other dark family secrets.
So, when someone finally gave me a kit as a birthday present, I proceeded with some foreboding. My mother spent 40 years tracing our family back 1,000 years all the way back to the 1086 English Domesday Book (click here)
I thought it would be interesting to learn how much was actually fact and how much fiction. Suffice it to say that while many questions were answered, alarming new ones were raised.
It turns out that I am descended from a man who lived in Africa 275,000 years ago. I have 311 genes that came from a Neanderthal. I am descended from a woman who lived in the Caucuses 30,000 years ago, which became the foundation of the European race.
I am 13.7% French and German, 13.4% British and Irish, and 1.4% North African (the Moors occupied Sicily for 200 years). Oh, and I am 50% less likely to be a vegetarian (I grew up on a cattle ranch).
I am related to King Louis XVI of France, who was beheaded during the French Revolution, thus explaining my love of Bordeaux wines, women wearing vintage Channel dresses, and pate foie gras.
Although both my grandparents were Italian, making me 50% Italian, I learned there is no such thing as pure Italian. I come out only 40.7% Italian. That’s because a DNA test captures not only my Italian roots, plus everyone who has invaded Italy over the past 250,000 years, which is pretty much everyone.
The real question arose over my native American roots. I am one-sixteenth Cherokee Indian according to family lore, so my DNA reading should have come in at 6.25%. Instead, it showed only 3.25% and that launched a prolonged and determined search.
I discovered that my French ancestors in Carondelet, MO, now a suburb of Saint Louis, learned of rich farmland and easy pickings of gold in California and joined a wagon train headed there in 1866. The train was massacred in Kansas. The adults were all killed, and the young children were adopted into the tribe, including my great X 5 Grandfather Alf Carlat and his brother, then aged four and five.
When the Indian Wars ended in the 1880s, all captives were returned. Alf was taken in by a missionary and sent to an eastern seminary to become a minister. He then returned to the Cherokees to convert them to Christianity. By then, Alf was in his late twenties so he married a Cherokee woman, baptized her, and gave her the name of Minto, as was the practice of the day.
After a great effort, my mother found a picture of Alf & Minto Carlat taken shortly after. You can see that Alf is wearing a tie pin with the letter “C” for his last name Carlat. We puzzled over the picture for decades. Was Minto French or Cherokee? You can decide for yourself.
Then 23andMe delivered the answer. Aha! She was both French and Cherokee, descended from a mountain man who roamed the western wilderness in the 1840s. That is what diluted my own Cherokee DNA from 6.50% to 3.25%. And thus, the mystery was solved.
The story has a happy ending. During the 1904 World’s Fair in St. Louis (of Meet Me in St. Louis fame), Alf, then 46, placed an ad in the newspaper looking for anyone missing a brother from the 1866 Kansas massacre. He ran the ad for three months and on the very last day, his brother answered and the two were reunited, both families in tow.
Today, getting your DNA analyzed starts from $119, but with a much larger database, it is far more thorough. To do so, click here.
My DNA Has Gotten Around
It All Started in East Africa
1880 Alf & Minto Carlat, Great X 5 Grandparents
The Long-Lost Brother
Good Luck and Good Trading,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
May 29, 2024
Fiat Lux
Featured Trade:
(WHY THE REAL ESTATE BOOM HAS A DECADE TO RUN),
(DHI), (LEN), (PHM), (ITB)
I received a call from a real estate agent the other day asking if I wanted to sell my San Francisco home. She knew I wasn’t planning on going anywhere. But would $1 million over market tempt me?
Lately, I have been getting a lot of calls from concerned readers worried that we might be going into another 2008-2011 style real estate crash when home prices cratered by 50%-70%.
It’s not going to happen and there are a dozen reasons why. Worst case, I expect a short, shallow pause in the market, followed by a ballistic move to new all-time highs starting now. The latest S&P Case Shiller Data showing a 6.5% rise in home prices confirms my view.
Some sectors are already starting to heat up, while others, like San Diego, Miami, Tampa, and Atlanta never really cooled down.
If you have any doubt, look no further than the superheated bond market which is taking interest rates to new all-time highs. Despite a hefty 30-year fixed rate mortgage rate of 7.00%, prices are still holding up, except for San Francisco and Seattle where they have barely fallen.
You see, there is a method to my Madness.
It is all fresh fuel for a continuation in the bull market for US residential real estate, not just for this year, but for another decade, or more. More high-paying jobs means more big-spending home buyers and AI is creating those high-paying jobs at a record pace.
Although prices seem high now, I am convinced that we are only at the beginning of a long-term secular bull market in housing. If you don’t believe me check out the sky-high prices in Shanghai, Vancouver, and Sydney Australia.
Anything you purchase now is going to make you look like a genius ten years down the road.
The best is yet to come.
The big driver will be demographics, as it always is.
From 2023 onward, 65 million Gen Xers will be joined by 85 million late-blooming Millennials in a bidding war for the same houses. That will create a market of 150 million buyers, unprecedented in the history of the American real estate market.
In the meantime, 80 million baby boomers, net sellers and downsizers of homes for the past decade, will slowly die off and disappear from the scene as a negative influence. Only one-third are still working.
The first boomer, Kathleen Casey-Kirschling, born seconds after midnight on January 1, 1946, became 78 years old this year. A former schoolteacher, she took early retirement at 62.
The real fat on the fire here is that 10 million homes went missing in action this past decade, thanks to the 2008 financial crisis. They were never built.
This is the result of the bankruptcy of several homebuilding companies, and the new-found ultra-conservatism of the survivors, like DR Horton (DHI), Lennar Homes (LEN), and Pulte Group (PHM).
Did I mention that all of this makes this sector a screaming “BUY”?
Talk to any real estate agent and they will complain about the shortage of inventory (except in Chicago, the slowest growing market in the country).
Prices are so high already that flippers have been squeezed out of the market for good. Bottom feeders, like hedge funds buying at the bankruptcy auctions, are a distant memory. Some, like BlackRock (BLK) now own more than 40,000 homes and are the biggest landlords in the county.
Nobody wants to sell because it means giving up ultra-low 2.75% mortgages which they obtained during the salad days and will not see again in their lifetimes. I am one of those happy homeowners. We are prisoners of our own mortgages.
The rising rents that are turning Millennials from renters to buyers may be the first sign of real inflation beyond the increasingly dear health care and higher education that we’re already seeing.
And Millennials are having kids that demand a bigger living space! Who knew?
Have I Got a Fixer-Upper for You!