Global Market Comments
January 4, 2023
Fiat Lux
2023 Annual Asset Class Review
A Global Vision
FOR PAID SUBSCRIBERS ONLY
Featured Trades:
(SPX), (QQQ), (IWM) (AAPL), (XLF), (BAC) (JPM), (BAC), (C), (MS), (GS),
(X), (CAT), (DE),(TLT), (TBT), (JNK), (PHB), (HYG), (MUB), (LQD), (FXE), (EUO),
(FXC), (FXA), (YCS), (FXY), (CYB), (DIG), (RIG), (USO), (DUG), (UNG), (USO),
(XLE), (AMLP),(GLD), (DGP), (SLV), (PPTL), (PALL), (ITB), (LEN), (KBH), (PHM)
I am once again writing this report from a first-class sleeping cabin on Amtrak’s legendary California Zephyr.
By day, I have two comfortable seats facing each other next to a panoramic window. At night, they fold into two bunk beds, a single and a double. There is a shower, but only Houdini could navigate it.
I am anything but Houdini, so I foray downstairs to use the larger public hot showers. They are divine.
We are now pulling away from Chicago’s Union Station, leaving its hurried commuters, buskers, panhandlers, and majestic great halls behind. I love this building as a monument to American exceptionalism.
I am headed for Emeryville, California, just across the bay from San Francisco, some 2,121.6 miles away. That gives me only 56 hours to complete this report.
I tip my porter, Raymond, $100 in advance to make sure everything goes well during the long adventure and to keep me up to date with the onboard gossip.
The rolling and pitching of the car is causing my fingers to dance all over the keyboard. Microsoft’s Spellchecker can catch most of the mistakes, but not all of them.
As both broadband and cell phone coverage are unavailable along most of the route, I have to rely on frenzied Internet searches during stops at major stations along the way to Google obscure data points and download the latest charts.
You know those cool maps in the Verizon stores that show the vast coverage of their cell phone networks? They are complete BS.
Who knew that 95% of America is off the grid? That explains so much about our country today.
I have posted many of my better photos from the trip below, although there is only so much you can do from a moving train and an iPhone 14 Pro Max.
Here is the bottom line which I have been warning you about for months. In 2023, we will probably top the 84.63% we made last year, but you are going to have to navigate the reefs, shoals, and hurricanes. Do it and you can laugh all the way to the bank. I will be there to assist you to navigate every step.
The first half of 2023 will be all about trading. After that, I expect markets to go straight up.
And here is my fundamental thesis for 2023. After the Fed kept rates too low for too long, then raised them too much, it will then panic and lower them again too fast to avoid a recession. In other words, a mistake-prone Jay Powell will keep making mistakes. That sounds like a good bet to me.
Let me give you a list of the challenges I see financial markets are facing in the coming year:
The Ten Key Variables for 2023
1) When will the Fed pivot?
2) How much of a toll will the quantitative tightening take?
3) How soon will the Russians give up on Ukraine?
4) When will buyers return to technology stocks from value plays?
5) Will gold replace crypto as the new flight to safety investment?
6) When will the structural commodities boom get a second wind?
7) How fast will the US dollar fall?
8) How quickly will real estate recover?
9) How fast can the Chinese economy bounce back from Covid-19?
10) How far will oil prices keep falling?
The Thumbnail Portfolio
Equities – buy dips
Bonds – sell buy dips
Foreign Currencies – buy dips
Commodities – buy dips
Precious Metals – buy dips
Energy – stand aside
Real Estate – buy dips
1) The Economy – Bouncing Along the Bottom
Whether we get a recession or not, you can count on markets fully discounting one, which it is currently doing with reckless abandon.
Anywhere you look, the data is dire, save for employment, which may be the last shoe to fall. Technology companies seem to be leading us in the right direction with never-ending mass layoffs. Even after relentless cost-cutting though, there are still 1.5 tech job offers per applicant, which is down from last year’s three.
The Fed is currently predicting a weak 0.5% GDP growth rate for 2023, the same feeble rate we saw for 2022. What we might get is two-quarters of negative growth in the first half followed by a sharp snapback in the second half.
Whatever we get, it will be one of the mildest recessions or growth recessions in American economic history. There is no hint of a 2008-style crash. The banking system was shored up too well back then to prevent that. Thank Dodd/Frank.
So far, so good.
2) Equities (SPX), (QQQ), (IWM) (AAPL), (XLF), (BAC) (JPM), (BAC), (C), (MS), (GS), (X), (CAT), (DE)
Since my job is to make your life incredibly easy, I am going to narrow my equity strategy for 2023.
It's all about falling interest rates.
When interest rates are high, as they are now, you only look at trades and investments that can benefit from falling interest rates.
In the first half, that will be value plays like banks, (JPM), (BAC), (C), financials (MS), (GS), homebuilders (KBH), (LEN), (PHM), industrials (X), capital goods (CAT), (DE).
As we come out of any recession in the second half, growth plays will rush to the fore. Big tech will regain leadership and take the group to new all-time highs. That means the volatility and chop we will certainly see in the first half will present a generational opportunity to get into the fastest-growing sectors of the US economy at bargain prices. I’m talking Cadillacs at KIA prices.
A category of its own, Biotech & Healthcare should do well on their own. Not only are they classic defensive plays to hold during a recession, technology and breakthrough new discoveries are hyper-accelerating. My top three picks there are Eli Lily (ELI), Abbvie (ABBV), and Merck (MRK).
Block out time on your calendars because whenever the Volatility Index (VIX) tops $30, I am going pedal to the metal, and full firewall forward (a pilot term), and your inboxes will be flooded with new trade alerts.
There is another equity subclass that we haven’t visited in about a decade, and that would be emerging markets (EEM). After ten years of punishment by a strong dollar, (EEM) has also been forgotten as an investment allocation. We are now in a position where the (EEM) is likely to outperform US markets in 2023, and perhaps for the rest of the decade.
3) Bonds (TLT), (TBT), (JNK), (PHB), (HYG), (MUB), (LQD)
Amtrak needs to fill every seat in the dining car to get everyone fed on time, so you never know who you will share a table with for breakfast, lunch, and dinner.
There was the Vietnam Vet Phantom Jet Pilot who now refused to fly because he was treated so badly at airports. A young couple desperately eloping from Omaha could only afford seats as far as Salt Lake City. After they sat up all night, I paid for their breakfast.
A retired British couple was circumnavigating the entire US in a month on a “See America Pass.” Mennonites are returning home by train because their religion forbade automobiles or airplanes.
The national debt ballooned to an eye-popping $30 trillion in 2021, a gain of an incredible $3 trillion and a post-World War II record. Yet, as long as global central banks are still flooding the money supply with trillions of dollars in liquidity, bonds will not fall in value too dramatically. I’m expecting a slow grind down in prices and up in yields.
The great bond short of 2021 never happened. Even though bonds delivered their worst returns in 19 years, they still remained nearly unchanged. That wasn’t good enough for the many hedge funds, which had to cover massive money-losing shorts into yearend.
Instead, the Great Bond Crash will become a new business. This time, bonds face the gale force headwinds of three promised interest rate hikes. The year-end government bond auctions were a complete disaster.
Fed borrowing continues to balloon out of control. It’s just a matter of time before the last billion dollars in government borrowing breaks the camel’s back.
That makes a bond short a core position in any balanced portfolio. Don’t get lazy. Make sure you only sell a rally lest we get trapped in a range, as we did for most of 2021.
A Visit to the 19th Century
4) Foreign Currencies (FXE), (EUO), (FXC), (FXA), (YCS), (FXY), (CYB)
With a major yield advantage over the rest of the world, the US dollar has been on an absolute tear for the past decade. After all, we have the world’s strongest economy.
That is about to end.
If your primary assumption is that US interest rates will see a sharp decline sometime in 2023, then the outlook for the greenback is terrible.
Currencies are driven by interest rate differentials and the buck is soon going to see the fastest shrinking yield premium in the forex markets.
That shines a great bright light on the foreign currency ETFs. You could do well buying the Australian Dollar (FXA), Euro (FXE), Japanese yen (FXE), and British Pound (FXB). I’d pass on the Chinese yuan (CYB) right now until their Covid shutdowns end.
5) Commodities (FCX), (VALE), (DBA)
Commodities are the high beta play in the financial markets. That’s because the cost of being wrong is so much higher. Get on the losing side of commodities and you will be bled dry by storage costs, interest expenses, contangos, and zero demand.
Commodities have one great attribute. They predict recessions earlier than any other asset class. When they peaked in March of 2022, they were screaming loud and clear that a recession would hit in early 2023. By reversing on a dime on October 14, they also told us that the recovery would begin in July of 2023.
You saw this in every important play in the sector, including Broken Hill (BHP), Peabody Energy (BTU), Freeport McMoRan (TCX), and Alcoa Aluminum (AA). Excuse me for using all the old names.
The heady days of the 2011 commodity bubble top are about to replay. Now that this sector is convinced of a substantially weaker US dollar and lower inflation, it is once more a favorite target of traders.
China will still demand prodigious amounts of imported commodities once its pandemic shutdown ends, but not as much as in the past. Much of the country has seen its infrastructure built out, and it is turning from a heavy industrial to a service-based economy, much like the US. Investors are keeping a sharp eye on India as the next major commodity consumer.
And here’s another big new driver. Each electric vehicle requires 200 pounds of copper and production is expected to rise from 1 million units a year to 25 million by 2030. Annual copper production will have to increase three-fold in a decade to accommodate this increase, no easy task, or prices will have to rise.
The great thing about commodities is that it takes a decade to bring new supply online, unlike stocks and bonds, which can merely be created by an entry in an excel spreadsheet. As a result, they always run far higher than you can imagine.
Accumulate all commodities on dips.
6) Energy (DIG), (RIG), (USO), (DUG), (UNG), (XLE), (AMLP)
Energy was the top-performing sector of 2022. But remember, you will be trading an asset class that is eventually on its way to zero sooner than you think. However, you could have several doublings on the way to zero. This is one of those times.
The real tell here is that energy companies are bailing on their own industry. Instead of reinvesting profits back into their future exploration and development, as they have for the last century, they are paying out more in dividends and share buybacks.
Take the money and run.
There is the additional challenge in that the bulk of US investors, especially environmentally friendly ESG funds, are now banned from investing in legacy carbon-based stocks. That means permanently cheap valuations and share prices for the energy industry.
Energy now counts for only 5% of the S&P 500. Twenty years ago, it boasted a 15% weighting.
The gradual shutdown of the industry makes the supply/demand situation infinitely more volatile.
Unless you are a seasoned, peripatetic, sleep-deprived trader, there are better fish to fry.
And guess who the world’s best oil trader was in 2022? That would be the US government, which drew 400 million barrels from the Strategic Petroleum Reserve in Texas and Louisiana at an average price of $90 and now has the option to buy it back at $70, booking a $4 billion paper profit.
The possibility of a huge government bid at $70 will support oil prices for at least early 2023. Whether the Feds execute or not is another question. I’m advising them to hold off until we hit zero again to earn another $18 billion. Why we even have an SPR is beyond me, since America has been a large net energy producer for many years now. Do you think it has something to do with politics?
To understand better how oil might behave in 2023, I’ll be studying US hay consumption from 1900-1920. That was when the horse population fell from 100 million to 6 million, all replaced by gasoline-powered cars and trucks. The internal combustion engine is about to suffer the same fate.
7) Precious Metals (GLD), (DGP), (SLV), (PPTL), (PALL)
The train has added extra engines at Denver, so now we may begin the long laboring climb up the Eastern slope of the Rocky Mountains.
On a steep curve, we pass along an antiquated freight train of hopper cars filled with large boulders.
The porter tells me this train is welded to the tracks to create a windbreak. Once, a gust howled out of the pass so swiftly that it blew a passenger train over on its side.
In the snow-filled canyons, we saw a family of three moose, a huge herd of elk, and another group of wild mustangs. The engineer informs us that a rare bald eagle is flying along the left side of the train. It’s a good omen for the coming year.
We also see countless abandoned 19th century gold mines and the broken-down wooden trestles leading to huge piles of tailings, relics of previous precious metals booms. So, it is timely here to speak about the future of precious metals.
Fortunately, when a trade isn’t working, I avoid it. That certainly was the case with gold last year.
2022 was a terrible year for precious metals until we got the all-asset class reversal in October. With inflation soaring, stocks volatile, and interest rates soaring, gold had every reason to fall. Instead, it ended up unchanged on the year, thanks to a 15% rally in the last two months.
Bitcoin stole gold’s thunder until a year ago, sucking in all of the speculative interest in the financial system. Jewelry and industrial demand were just not enough to keep gold afloat. That is over now for good and that is why gold is regaining its luster.
Chart formations are starting to look very encouraging with a massive head-and-shoulders bottom in place. So, buy gold on dips if you have a stick of courage on you, which I hope you do.
Higher beta silver (SLV) will be the better bet as it already has been because it plays a major role in the decarbonization of America. There isn’t a solar panel or electric vehicle out there without some silver in them and the growth numbers are positively exponential. Keep buying (SLV), (SLH), and (WPM) on dips.
8) Real Estate (ITB), (LEN), (KBH), (PHM)
The majestic snow-covered Rocky Mountains are behind me. There is now a paucity of scenery, with the endless ocean of sagebrush and salt flats of Northern Nevada outside my window, so there is nothing else to do but write.
My apologies in advance to readers in Wells, Elko, Battle Mountain, and Winnemucca, Nevada.
It is a route long traversed by roving banks of Indians, itinerant fur traders, the Pony Express, my own immigrant forebearers in wagon trains, the Transcontinental Railroad, the Lincoln Highway, and finally US Interstate 80, which was built for the 1960 Winter Olympics at Squaw Valley.
Passing by shantytowns and the forlorn communities of the high desert, I am prompted to comment on the state of the US real estate market.
Those in the grip of a real estate recession take solace. We are in the process of unwinding 2022’s excesses, but no more. There is no doubt a long-term bull market in real estate will continue for another decade, once a two year break is completed.
There is a generational structural shortage of supply with housing which won’t come back into balance until the 2030s. You don’t have a real estate crash when we are short 10 million homes.
The reasons, of course, are demographic. There are only three numbers you need to know in the housing market for the next ten years: there are 80 million baby boomers, 65 million Generation Xers who follow them, and 86 million in the generation after that, the Millennials.
The boomers (between ages 58 and 76) have been unloading dwellings to the Gen Xers (between ages 46 and 57) since prices peaked in 2007. But there are not enough of the latter, and three decades of falling real incomes mean that they only earn a fraction of what their parents made. That’s what caused the financial crisis. That has created a massive shortage of housing, both for ownership and rentals.
There is a happy ending to this story.
Millennials now aged 26-41 are now the dominant buyers in the market. They are transitioning from 30% to 70% of all new buyers of homes. They are also just entering the peak spending years of middle age, which is great for everyone.
The Great Millennial Migration to the suburbs and Middle America has just begun. Thanks to the pandemic and Zoom, many are never returning to the cities. That has prompted massive numbers to move from the coasts to the American heartland.
That’s why Boise, Idaho was the top-performing real estate market, followed by Phoenix, Arizona. Personally, I like Reno, Nevada, where Apple, Google, Amazon, and Tesla are building factories as fast as they can.
As a result, the price of single-family homes should continue to rise during the 2020s, as they did during the 1970s and the 1990s when similar demographic forces were at play.
This will happen in the context of a labor shortfall, soaring wages, and rising standards of living.
Rising rents are accelerating this trend. Renters now pay 35% of their gross income, compared to only 18% for owners, and less, when multiple deductions and tax subsidies are considered. Rents are now rising faster than home prices.
Remember, too, that the US will not have built any new houses in large numbers in 16 years. The 50% of small home builders that went under during the Financial Crisis never came back.
We are still operating at only a half of the 2007 peak rate. Thanks to the Great Recession, the construction of five million new homes has gone missing in action.
There is a new factor at work. We are all now prisoners of the 2.75% 30-year fixed rate mortgages we all obtained over the past five years. If we sell and try to move, a new mortgage will cost double today. If you borrow at a 2.75% 30-year fixed rate, and the long-term inflation rate is 3%, then, over time, you will get your house for free. That’s why nobody is selling, and prices have barely fallen.
This winds down towards the end of 2023 as the Fed realizes its many errors and sharply lowers interest rates. Home prices will explode…. again.
Quite honestly, of all the asset classes mentioned in this report, purchasing your abode is probably the single best investment you can make now after you throw in all the tax breaks. It’s also a great inflation play.
That means the major homebuilders like Lennar (LEN), Pulte Homes (PHM), and KB Homes (KBH) are a buy on the dip.
Recent Reno Real Estate Statistics
9) Postscript
We have pulled into the station at Truckee amid a howling blizzard.
My loyal staff has made the ten-mile trek from my estate at Incline Village to welcome me to California with a couple of hot breakfast burritos and a chilled bottle of Dom Perignon Champagne, which has been resting in a nearby snowbank. I am thankfully spared from taking my last meal with Amtrak.
After that, it was over legendary Donner Pass, and then all downhill from the Sierras, across the Central Valley, and into the Sacramento River Delta.
Well, that’s all for now. We’ve just passed what was left of the Pacific mothball fleet moored near the Benicia Bridge (2,000 ships down to six in 50 years). The pressure increase caused by a 7,200-foot descent from Donner Pass has crushed my plastic water bottle. Nice science experiment!
The Golden Gate Bridge and the soaring spire of Salesforce Tower are just around the next bend across San Francisco Bay.
A storm has blown through, leaving the air crystal clear and the bay as flat as glass. It is time for me to unplug my MacBook Pro and iPhone, pick up my various adapters, and pack up.
We arrive in Emeryville 45 minutes early. With any luck, I can squeeze in a ten-mile night hike up Grizzly Peak and still get home in time to watch the ball drop in New York’s Times Square on TV.
I reach the ridge just in time to catch a spectacular pastel sunset over the Pacific Ocean. The omens are there. It is going to be another good year.
I’ll shoot you a Trade Alert whenever I see a window open at a sweet spot on any of the dozens of trades described above, which should be soon.
Good luck and good trading in 2023!
John Thomas
The Mad Hedge Fund Trader
Global Market Comments
December 5, 2022
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE GOOD MARKET AND THE BAD MARKET)
(TLT), (XOM), (OXY), (TSLA), (SPY), (BABA), (BIDU), (KBH), (PHM), (LEN), (AAPL)
I usually write my Monday strategy letters in the middle of the night in my mind, from 2:00 AM to 3:00 AM, because my feet are too hot, too cold, or because my hip hurts. Then I go back to sleep. If I remember half of it the next morning, then I get a great letter.
I often like to refer to old proven market nostrums and show how true they really are. One of my favorites is the concept of the “good” market and the “bad” market.
The good market is the one for bonds. Vastly more research goes into bonds than stocks because that’s where the respectable, safe, widows and orphan money goes. Global bond markets are also far bigger, worth about $120 trillion. Bond traders usually began their journey at Harvard or Wharton, speak with clipped upper-class accents, and belong to exclusive private clubs that would never let you in for lunch, even with an invitation from a member.
Suffice it to say that the bond market is always right. Their relaxed lifestyle can be explained by the fact that they really only have two variables to look at, Fed policy and the actual supply and demand for money. Working in the bond market is almost like a sinecure, sending you a paycheck every month because you are entitled to it.
The stock market is the complete opposite.
While the bond market was polishing the teacher’s apple at the head of the class, the stock market was smoking cigarettes in the bathroom, endlessly catching detention. The stock market is also smaller, worth about $50 trillion. While bond traders are attending their Rotary meetings, stock traders binge drink and tear up the roads with their new Porsches and Ferraris.
Needless to say, stock traders are always wrong.
That’s because they face a hopeless dilemma. While bond traders have to contemplate only two variables, stock traders have to deal with millions. They have to cope with the hundreds of input variables per company that affect their earnings, and there are over 3,000 companies that trade in the US alone.
To illustrate the point, look at the recent market action.
Both markets have been driven by the same massive liquidity created by the government since 2009. The bond market peaked in August 2020 when it saw the free lunch of ultra-low interest rates soon ending. Stocks didn’t peak until January 2021, some 17 months later. It’s clear that stock traders suffer from a severe learning disorder.
And they’re doing it again.
After a 49% swan dive over two years plus, bonds bottomed on October 14. Stocks may not finally bottom until the spring, six months after bonds. Bonds are now betting that the recession has already begun, we just haven’t seen it in the data yet. Stocks are betting that the recession doesn’t start until 2023, if at all. That’s why it’s been going up.
As for me, I have traded both stocks AND bonds. That’s because before there were stocks, there were bonds as the only thing to trade. As you may recall, stocks were moribund in the 1970s. On top of that, you can add foreign exchange, precious metals, commodities, and volatility. There essentially isn’t anything I haven’t traded.
My performance in December has so far tacked on another robust +3.37%. My 2022 year-to-date performance ballooned to +87.05%, a spectacular new high. The S&P 500 (SPY) is down -13.61% so far in 2022.
It is the greatest outperformance on an index since Mad Hedge Fund Trader started 14 years ago. My trailing one-year return maintains a sky-high +104.88%.
That brings my 14-year total return to +599.61%, some 2.60 times the S&P 500 (SPX) over the same period and a new all-time high. My average annualized return has ratcheted up to +46.12%, easily the highest in the industry.
I took profits in my triple weighting in bonds last week (TLT), booking some serious profits. All my remaining positions are profitable, shorts in (XOM), (OXY), (TSLA), (SPY), and one long in (TSLA), with 50% cash for a 30% net short position. We’ve just had a great run and the time to pay the piper is fast approaching.
With an +87.05% profit in hand this year, I don’t get a lot of complaints. However, I have been getting some lately because my trade alerts can be hard to get into.
Of course, it can be challenging to execute when 6,000 subscribers are trying to get into the same position at the same time. But when the entire world joins in, that raises the difficulty to a whole new level.
That is what happened with my trade alert to BUY the (TLT) on November 18. It was the trade alert around the world and the next day, bonds rocketed by $3.50. I laddered in with more positions with higher strike prices getting to a triple long in the bond market. When your trade alerts have a 95% success rate, that is what happens. It is the price of being right, which is better than the alternative.
When I first entered this trade, I thought the ten-year US Treasury yield would plunge from 4.46% to 2.50% by June 2023, taking the (TLT) from $91 to $120.
With the (TLT) at $108 on Friday and the ten-year yield at 3.50%, we are already halfway there. If I AM right and bond yields drop to 2.50%, the 30-year fixed mortgage rate will also drop below 4.00% and you can forget about any real estate crash. That's why the homebuilders (LEN), (KBH), and (PHM) are up 30%-40% since October.
With the ballistic moves in some Chinese stocks over the last two weeks (Alibaba (BABA) up 58%, Baidu ((BIDU) adding 47%, I have received a surge in inquiries about the prospects of the US going to war with the Middle Kingdom.
I have been asked this question continuously for the last 50 years, by several Presidents of the United States on down, and my answer is always the same.
There is not a chance.
The reason is very simple. The Chinese can’t feed themselves. They have not been able to do so for 100 years. With a population of 1.2 billion, the Chinese will never be able to feed themselves.
That means the Chinese are highly dependent on international trade to finance their food imports. When trade is vibrant, China prospers.
When it doesn’t, they start stacking up the bodies like cordwood for mass cremation, as happened when China suffered its last major famine. I know because I was there in the 1970s, and I’ll never forget that smell. As you quickly learn during a famine, there is no substitute for food.
So, what are the chances of China bombing their food supply? I’d say zero. A disruption of even a few months and people start to go hungry. Will they bluff, bluster, and obfuscate for domestic consumption? Every day of the year and that is what they are doing now.
As for buying Chinese stocks, I think I’ll pass for now. There are just too many great American ones on sale. The Chinese moves above are only taking place after horrific declines, 78% for (BABA), and 81% for (BIDU).
And before I go on to the data points, I want to recall a funny story.
One day in London 40 years ago, one of my junior traders at Morgan Stanley walked in with a big smile on his face. He had just gotten a great deal on a Ferrari Testarossa, which then retailed at $360,000, a lot of money for a 25-year-old East Ender in those days.
I thought to myself, “There are no great deals on Ferraris.”
A few months later, he totaled the Ferrari after a late night of binge drinking and racing on London’s damp streets, breaking the vehicle cleanly in half. The insurance company determined that his car was in fact two different Ferraris with two different VIN numbers that had been welded together. The car had split apart at the welds.
Some clever entrepreneur took the intact front end of a rear-ended car and the pristine back half of a car with destroyed hood and made one whole good Ferrari. Since my trader had only insured one car and not two, the insurance company refused to honor the claim.
All I can say is “Beware of friends bearing false Ferraris.”
Nonfarm Payroll Report Comes in Hot in November at 263,000, socking markets for 500 points. A December rate hike of 75 basis points has been firmly put back on the table. The Headline Unemployment Rate stays at a near-record high 3.7%. Average Hourly Earnings were up an inflationary 0.6%. Wages are up 5.1% YOY. The dollar soared on the prospect of higher rates for longer.
JOLTS Job Openings Report Comes in Weaker at 10.33 million in October, down 353,000 from September. High interest rates are finally taking their toll. There are still 1.7 job openings per applicant.
Key Inflation Read Drops, the Personal Consumption Expenditures Price Index falling 0.2% in October, excluding food and energy. It sets up a weak CPI on December 13, which would be very stock market positive.
Powell Turns Dovish, well, sort of, indicating that smaller interest rate hikes could start in December. The comments were made at a Brookings Institution meeting on Wednesday. Stocks rallied big on the news.
US to Ease Venezuela Sanctions, allowing Chevron to resume pumping there for six months after a three-year hiatus. It’s an out-of-the-blue big negative for oil prices. Venezuelan oil production has plunged from 2.1 million barrels a day to only 679, 000 thanks to gross mismanagement of the economy. But beggars can’t be choosers on the energy front. Good thing I’m running a double short in the sector. It’s the last think OPEC plus wanted to hear.
Don’t Expect a Housing Crash, as the financial system was vastly stronger than it was in 2008. A mild recession is already priced in, and bank balance sheets are rock solid. Buy the homebuilders on the next dips now coming off from horrific earnings, (KBH), (PHM), and (LEN).
Don’t Expect an iPhone 14 for Christmas, as pandemic-driven production shutdowns and Foxconn riots in China crimp supplies. It could be a longer wait if you want the new deep purple color. Avoid (AAPL) for now. I expect another big tech dive in 2023.
China Riots Tank Market, raising the specter of extended supply chain problems, especially for Apple (AAPL). Oil was especially hard hit as China is its largest buyer, hitting a two-year low and giving up all 2022 gains. China seems to be sacrificing its older generation, not giving them priority for vaccinations which don’t work anyway. This isn’t going away in a day. Transition to India will take a decade.
Case Shiller Plunges, the National Home Price Index Taking a 1.2% hit in September to 10.6%. Miami, Tampa, and Charlotte, NC showed the biggest YOY increases. You know the reasons why.
Home Rentals to Stay Sticky at Record Levels, with gains at 25-35% over the past 24 months. Homebuyers frozen out of the market by record-high interest rates are forced to rent at any price.
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. With the economy decarbonizing and technology hyper-accelerating, there will be no reason not to. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The America coming out the other side will be far more efficient and profitable than the old. Dow 240,000 here we come!
On Monday, December 5 at 8:00 AM EST, the ISM Nonmanufacturing PMI for November is out.
On Tuesday, December 6 at 8:30 AM, the Mad Hedge Traders & Investors Summit begins. Click here to register.
On Wednesday, December 7 at 7:30 AM, the Crude Oil Stocks are announced. It’s pearly Harbor Day.
On Thursday, December 8 at 8:30 AM, the Weekly Jobless Claims are announced. We also get the Producer Price Index for November.
On Friday, December 9 at 8:30 AM, the Producer Price Index for November. At 2:00, the Baker Hughes Oil Rig Count is out.
As for me, I am sitting here in front of the fire at my place in the Berkeley Hills and it is freezing cold and pouring rain outside. Heaven knows we need it.
I’m going to San Francisco later today to do some Christmas shopping. It’s not the ideal time but in my hopelessly busy schedule, this was the only day this year allocated for this chore.
For some reason, last night I recalled my days as an Ivy League Princeton professor, which I hadn’t thought about for decades.
When Morgan Stanley was a private partnership, before it went public in 1987, the firm represented the cream of the US establishment. There wasn’t anyone in business, industry, or politics you couldn’t reach through one of the company’s endless contacts. We referred to it as the “golden Rolodex.”
One day in the early 1980s, a managing director asked me a favor. Since he had landed me my job there, I couldn’t exactly say no. He had committed to teaching a graduate night class in International Economics at his alma mater, Princeton University, but a scheduling conflict had prevented him from doing so.
Since I was then the only Asian expert in the firm, could I take it over for him? If I had extra time to kill, I could always spend it in the Faculty Club.
I said “sure.”
So, the following Wednesday found me at Penn Station boarding a train for the leafy suburb about an hour away. On the way down, I passed the locations of several Revolutionary War battles. When we pulled into Princeton, I realized why they called these places “piles”. The gray stone ivy-covered structures looked like they had been there a thousand years.
My students were whip-smart, spoke several Asian languages, and asked a ton of questions. Many came from the elite families who owned and ran Asia. I understood why my boss took the gig.
I turned out to be pretty popular at the faculty Club, with several profs angling for jobs at Morgan Stanley. Rumors of the vast fortunes being made there had leaked out.
Princeton was weak in my field, DNA research. But as the last home of Albert Einstein, it was famously strong in math and physics. Many of the older guys had worked with the famed Berkeley professor, Robert Oppenheimer, on the Manhattan Project.
I was still a mathematician of some note those days, so someone asked me if I’d like to meet John Nash, the inventor of Game Theory, which won him a Nobel Prize in Economics in 1994. Nash’s work on partial differential equations became the basis for modern cryptography. I was then working on a model using Game Theory to predict the future of stock markets. It still works today and is the basis the Mad Hedge Market Timing Algorithm.
Weeks later found me driven to a remote converted farmhouse in the New Jersey countryside. On the way, I was warned that Nash was a bit “odd,” occasionally heard voices speaking to him, and rarely came to the university.
I later learned that his work in cryptography had driven him insane, given all the paranoia of the 1950s. Having worked in that area myself, that was easy to understand. His friends hoped that by arguing against his core theories, he would engage.
When I was introduced to him over a cup of tea, he just sat there passively. I realized that I was going to have to take the initiative so as a stock market participant, I immediately started attacking Game Theory. That woke him up and started the wheels spinning. It hadn’t occurred to him that game theory could be used to forecast stock prices.
His friends were thrilled.
I later went on to meet many Nobel Prize winners, as the Nobel Foundation was an early investor in my hedge fund. Whenever a member of the Swedish royal family comes to California, I get an invitation to lunch for the Golden State’s living Nobel laureates. It turns out that 20% of all the Nobel Prizes awarded since its inception live here. Last time, I sat next to Milton Friedman, and I argued against HIS theories.
The other thing I remembered about my Princeton days is my discovery of the “professor's dilemma.” Sometimes a drop-dead gorgeous grad student would offer to go home with me after class. I was happily married in those days with two kids on the way, so I respectfully declined, despite my low sales resistance.
No away games for me.
Stay healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
The Nobel Prize
Global Market Comments
November 14, 2022
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE TOP FIVE TECHNOLOGY STOCKS OF 2023),
(RIVN), (ROM), (ARKK), (PANW), (CRM), (FXE), (FXY), (FXA), (LEN), (KBH), (DHI), (TLT), (UUP), (META), (TSLA), (BA), (JNK), (HYG), (BRKB), (USO)
The year 2022 has been driven by rising interest rates, a strong dollar, a weak economy, a bear market in stocks.
A massive reversal is about to take place. 2023 will gain the benefit of gale force macroeconomic tailwinds for the right stocks.
So far this year, Mad Hedge earned an astounding 77.20% profit cashing in on this year’s trends. We could earn the same return taking advantage of next year’s trends.
If you want to ride along on my coattails next year, that is fine with me. But it requires you to take a leap of faith.
I refer you to the motto of Britain’s Special Air Service: “Qui audet adipiscitur,” or “Who dares wins.”
For it only makes sense that the worst stocks of 2022 will be the best performers of 2023.
I have no doubt that tech stocks will bottom out sometime in 2023. Those who get in early will build some of the largest fortunes of this century. Those who miss the boat will spend their retirement years working at Taco Bell.
The reasons are very simple.
*Ultra-high interest rates will force a mild recession in early 2023. Then suddenly, inflation will plummet. We know this has already started because the largest element in the inflation calculation is housing costs, which are in free fall.
*The Fed will panic and deliver 2023 the sharpest DECLINE in interest rates in American history.
*Plunging interest rates will bring a crash in the US dollar.
*Foreign currencies like the Euro (FXE), the Japanese Yen (FXY), and the Australian dollar (FXA) will soar.
*And guess who gets the bulk of their earnings from abroad, sometimes up to two-thirds? The technology industry.
Kaching!
If you think I’m out of my mind, just look at the top performers of the historic stock market rally last week.
All the interest rate-sensitive sectors caught on fire. Technology stocks took off like a scalded cat, with Cathie Woods’ Ark Innovation Fund (ARKK) up an astounding 14% in a single day.
Bank shares soared. Homebuilders (LEN), (KBH), (DHI) caught a strong bid for the first time in ages. Junk bonds went bid only. US Treasury Bonds had their best day in 20 years (TLT), while the greenback (UUP) had its worst.
The bottom line here is so clear that I’ll write it on a wall for you. Falling interest rates will be the primary driver of stock prices for 2023 and 2024.
Of course, there is a better way to play this than buying the first technology index you stumble across.
So, let me boil this strategy down to just five names, close your eyes, and buy them.
Rivian (RIVN) – ($34) - Rivian is widely believed to be the next Tesla (TSLA). Some 25% owned by its largest customer, Amazon (AMZN), Rivian produces three types of EVs: the R1T pickup truck, the R1S SUV, and Amazon's EDV (electric delivery van). Its R1 vehicles start at under $70,000 and can travel more than 300 miles on a single charge. To learn more about Rivian, please click here.
To say that Rivian is the hot car of the day would be a vast understatement. New cars are trading for double list on the grey market. Owners complain of getting mobbed with gawkers whenever they hit the beach or the ski slopes. The buzz has led to an outstanding order book of an impressive 98,000, or four years of current production. The obvious cool factor allows enormous pricing power.
And here is the key to buying Rivian at this time. At 25,000, it is right at the mass production point where Tesla shares went ballistic all those years ago. And it already has an 80% decline in the price, in the rear-view mirror.
In 2024, Rivian plans to open its second plant in Georgia. After it fully expands its Illinois plant, it expects its annual production capacity to reach 600,000 vehicles.
Inflation Reduction Act passed this summer greatly accelerated rollout of the entire EV industry, which created a $7,500 per vehicle tax credit on top of state benefits.
Yes, this company offers venture capital-type risks. But it offers venture capital-type returns as well, up 10X-50X from here.
Ark Innovation Fund (ARKK) – ($40) – Cathie Woods’ high-tech fund was the proverbial red-headed stepchild of this bear market. It fell a gut-punching 80% from the 2021 top until last week. Just to get back to its old high, likely over the next five years, it has to rise by 400%. Its largest holdings are a real rollcall of the severely abused, Tesla (TSLA), Roku (ROKU), Exact Sciences (EXAS), Intellia (INTL), and Teladoc Health (TDOC), which Woods actively trades. But they are also a valuable insight into the future, EVs, CRISPR technology, robotic surgery, and molecular diagnostics. To learn more about the Ark Innovation Fund, please click here.
ProShares Ultra Technology ETF (ROM) – ($27) – This is a 2X long technology ETF that gives you an extremely aggressive position across the tech sector. It has 19% of its holdings in Apple (AAPL), 16% in Microsoft (MSFT), 10% in Alphabet (GOOGL) and Google (GOOG), at 3.5% in NVIDIA (NVDA), and 120 other smaller names. (ROM) shares are down a breathtaking 67% just in the past year. To learn more about the (ROM), please click here.
Palo Alto Networks (PANW) - $165 – Hacking is one of the fastest-growing sectors in technology, it is recession-proof and immune to the economic cycle. As a result, spending on the defense against hacking is absolutely exploding. Palo Alto Networks, Inc. is an American multinational cybersecurity company with headquarters in Santa Clara, California. Its core products are a platform that includes advanced firewalls and cloud-based offerings that extend those firewalls to cover other aspects of security. I have already earned a tenfold return over the past decade and expect to make another 10X in the coming years. You won’t find any dips in this stock as too many people are trying to get into it. To learn more about the Palo Alto Networks, please click here.
Salesforce (CRM) - $157 – The baby of tech genius Mark Benioff, this company is the dominant player in customer relationship management. If you want to do any business in the cloud, and almost all big companies do, you are up to your eyeballs in customer relationship management. Salesforce is the largest San Francisco-based cloud-oriented software company with virtually all of the Fortune 500 as its customer list. It provides customer relationship management software and applications focused on sales, customer service, marketing automation, analytics, and application development. Salesforce shares have been the target of a haymaker, down 55% in a year. To learn more about Salesforce, please click here.
You know what? I can do better than this.
I can create customized options LEAPS for you that will deliver a tenfold return on whatever performance these ultra-high beta stocks deliver. If the shares of one of my picks rise by 100%, you will make 1,000%.
This is an investment strategy that will enable you to retire early, real early. Tired of punching a time clock or logging into the next Zoom meeting on time?
Those will become a distant memory if you pursue my Mad Hedge Investment strategy for 2023.
As a result, my November month-to-date performance went off to the races, already achieving a hot +2.20%.
That leaves me with a very rare 100% cash position. With midterm election results out on Wednesday and the next report on the Consumer Price Index on Thursday, that sounds like a prudent place to be.
My 2022 year-to-date performance ballooned to +77.57%, a new high. The Dow Average is down -11.85% so far in 2022.
It is the greatest outperformance on an index since Mad Hedge Fund Trader started 14 years ago. My trailing one-year return maintains a sky-high +75.53%.
That brings my 14-year total return to +590.13%, some 2.86 times the S&P 500 (SPX) over the same period and a new all-time high. My average annualized return has ratcheted up to +49.51%, easily the highest in the industry.
Bonds Clock Best Day in Years, taking the ten-year US Treasury bond fund up $3.64. All low interest rate plays had monster days. Junk bond ETFs (JNK) and (HYG) were up two points. 30-year fixed rate mortgages dropped 60 basis points to 6.60%, the biggest drop in history. Long bonds will be THE big trade of 2023.
US Dollar has Worst Day in 20 Years, driven by plunging interest rates. Big tech, which gets a major share from overseas sales, rocketed. Apple alone was up $12. Cathy Wood’s Ark Innovation Fund (ARKK) was up an incredible 14%. It vindicates my view that tech will turn when interest rates and the dollar fall.
Oil Companies (USO) Book Record $200 Million Profit this year, using the Ukraine War to double your cost of gasoline. If we have a recession next year, or the war ends, energy share prices should be peaking around here. Even if they don’t, the risk-reward here is terrible. It means we will have to pay a much higher price to decarbonize the economy at a later date.
Wells Fargo Gets Hit with $1 Billion Fine for its many regulatory transgressions over the last decade. Looting of customer accounts with bogus fees has been a recurring problem. Use any selloffs to buy (WFC) on dips.
Berkshire Hathaway's 20% Profit Increase YOY and buys back another $1 billion worth of stock. However, they did take a $10 billion loss on stocks in Q3 during the market meltdown. Keep buying (BRKB) stock and LEAPS on dips.
$1.5 trillion in Homeowners Equity Lost Since May, thanks to interest rates at 20-year high and a shrinking money supply. Since July, the median home price has dropped by $11,560. The average borrower has lost $30,000 in equity. It’s not a great time to rent either as prices there are soaring. Residential housing could remain weak for another 12-24 months, compared to the six-year drawdown we had from 2006.
Boeing Orders Rise in October, but deliveries fall. The company is finally out of the penalty box, up 40% since October 1. Don’t buy (BA) up here.
The Red Wave Fails to Show, with control of congress still too close to call. Republican House control has shrunk from an expected 60 seats six months ago to maybe two today. Donald Trump threw the election for his party, picking unelectable extremist candidates and campaigning where he wasn’t wanted. A pro-life Supreme Court brought out millions of women voters across the country. If the Republicans can’t win with inflation at 8.7%, they are toast in 2024 when it drops back down to 2%.
Market Dives 646 Points on Democratic Win, with technology stocks taking the biggest hit. The red wave no-show was a black swan traders were not looking for. Energy was the worst performing sector because they aren’t getting the air cover they paid for with a red wave. The result was much as I expected, which is why I went into November 8 with a rare 100% cash position waiting to buy the next low. It turns out that rights are more important than prices.
Elon Musk Sells More Tesla Shares and Warns of a Twitter Bankruptcy, some $3.9 billion worth, bringing this year’s total to $36 billion. Musk is raising money to head off a bankruptcy of Twitter now that major advertisers are fleeing en masse. This certainly is a distress sale. If Musk was looking to build a real business, re-tweeting fringe conspiracy theories was the worst thing he could have done. Endorsing the Republican party will cost him half of his customers. Is this Musk’s Waterloo, or his Dien Bien Phu?
Facebook to Lay Off 11,000, about 13% of its total employees. Zuckerberg admits the error of pushing the company into the metaverse too far too fast. With the stock down 77%, there are not a lot of happy campers at One Hacker Way. Avoid (META) for now, but it may be a 2023 play when we get closer to a new final product.
FTX Becomes an Epic Bankruptcy, with $9.5 billion missing from its balance sheet, in one of the biggest blowups of the crypto age. Losses are expected to reach $50-$60 billion, with the bankruptcy of 130 affiliated companies. It is also a potential Dept of Justice target. All affiliated tokens and coins have gone to zero. So, placing your money with a fresh-faced kid in the Bahamas wearing baggy shorts and with no financial background was not such a great idea after all. It’s amazing how many serious people were sucked in on this one. At least Sam Bankman-Fried said he was sorry.
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. With the economy decarbonizing and technology hyper-accelerating, there will be no reason not to. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The America coming out the other side will be far more efficient and profitable than the old. Dow 240,000 here we come!
On Monday, November 14 at 8:00 AM, the Consumer Inflation Expectations for October are released.
On Tuesday, November 15 at 8:30 AM, the Producer Price Index for October is released.
On Wednesday, November 16 at 8:30 AM, Retail Sales for October are published.
On Thursday, November 17 at 8:30 AM, Weekly Jobless Claims are announced. Housing Starts and Permits for October are also out.
On Friday, November 18 at 10:00 AM, the Housing Starts for October are printed. At 2:00 the Baker Hughes Oil Rig Count is out.
As for me, I am often told that I am the most interesting man people ever met, sometimes daily. I had the good fortune to know someone far more interesting than myself.
When I was 14, I decided to start earning merit badges if I was ever going to become an Eagle Scout. I decided to start with an easy one, Reading Merit Badge, where you only had to read four books and write one review.
I was directed to Kent Cullers, a high school kid who had been blind since birth. During the late 1940s, the medical community thought it would be a great idea to give newborns pure oxygen. It was months before it was discovered that the procedure caused the clouding of corneas and total blindness. Kent was one of these kids.
It turned out that everyone in the troop already had Reading Merit Badge and that Kent had exhausted our supply of readers. Fresh meat was needed.
So, I rode my bicycle over to Kent’s house and started reading. It was all science fiction. America’s Space Program had ignited a science fiction boom and writers like Isaac Asimov, Jules Verne, Arthur C. Clark, and H.G. Welles were in huge demand. Star Trek came out the following year, in 1966. That was the year I became an Eagle Scout.
It only took a week for me to blow through the first four books. In the end, I read hundreds to Kent. Kent didn’t just listen to me read. He explained the implications of what I was reading (got to watch out for those non-carbon-based life forms).
Having listened to thousands of books on the subject, Kent gave me a first class education and I credit him with moving me towards a career in science. Kent is also the reason why I got an 800 SAT score in math.
When we got tired of reading, we played around with Kent’s radio. His dad was a physicist and had bought him a state-of-the-art high-powered short-wave radio. I always found Kent’s house from the 50-foot-tall radio antenna.
That led to another merit badge, one for Radio, where I had to transmit in Morse Code at five words a minute. Kent could do 50. On the badge below the Morse Code says “BSA.” In those days, when you made a new contact, you traded addresses and sent each other postcards.
Kent had postcards with colorful call signs from more than 100 countries plastered all over his wall. One of our regular correspondents was the president of the Palo Alto High School Radio Club, Steve Wozniak, who later went on to co-found Apple (AAPL) with Steve Jobs.
It was a sad day in 1999 when the US Navy retired Morse Code and replaced it with satellites. However, it is still used as beacon identifiers at US airfields.
Kent’s great ambition was to become an astronomer. I asked how he would become an astronomer when he couldn’t see anything. He responded that Galileo, the inventor of the telescope, was blind in his later years.
I replied, “good point”.
Kent went on to get a PhD in Physics from UC Berkely, no mean accomplishment. He lobbied heavily for the creation of SETI, or the Search for Extra Terrestrial Intelligence, once an arm of NASA. He became its first director in 1985 and worked there for 20 years.
In the 1987 movie Contact written by Carl Sagan and starring Jodie Foster, Kent’s character is played by Matthew McConaughey. The movie was filmed at the Very Large Array in western New Mexico. The algorithms Kent developed there are still in widespread use today.
Out here in the west aliens are a big deal, ever since that weather balloon crashed in Roswell, New Mexico in 1947. In fact, it was a spy balloon meant to overfly and photograph Russia, but it blew back on the US, thus its top secret status.
When people learn I used to work at Area 51, I am constantly asked if I have seen any spaceships. The road there, Nevada State Route 375, is called the Extra Terrestrial Highway. Who says we don’t have a sense of humor in Nevada?
After devoting his entire life to searching, Kent gave me the inside story on searching for aliens. We will never meet them but we will talk to them. That’s because the acceleration needed to get to a high enough speed to reach outer space would tear apart a human body. On the other hand, radio waves travel effortlessly at the speed of light.
Sadly, Kent passed away in 2021 at the age of 72. Kent, ever the optimist, had his body cryogenically frozen in Hawaii where he will remain until the technology evolves to wake him up. Minor planet 35056 Cullers is named in his honor.
There are no movies being made about my life…. yet. But there are a couple of scripts out there under development.
Watch this space.
Stay healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
November 2, 2022
Fiat Lux
Featured Trade:
(WHY THERE WON’T BE A HOUSING CRASH),
(LEN), (PHM), (KBH)
(WHY SENIORS NEVER CHANGE THEIR PASSWORDS)
Lately, my inbox has been flooded with emails from subscribers asking if the housing market is about to crash as a result of the recent bubble and if they should panic and sell their homes.
They have a lot to protect.
Since prices hit rock bottom in 2011 and foreclosures crested, the national real estate market has risen by 100%.
The hottest markets, like those in Seattle, San Francisco, and Reno, are up by more than 200%, and certain neighborhoods of Oakland, CA have shot up by 500%.
Looking at the recent housing statistics, I can understand their concern. In February, the data were the hottest on record across the board:
* Housing prices are still exploding to the upside with S&P Case Shiller Rising 21%, the one-month biggest spike in history
*Your Check is in the Mail, with the passage of the $1.9 trillion rescue package. A big chunk of this went into housing upgrades
* Goldman Sachs is Forecasting a Jobs Boom, that will take the headline Unemployment Rate down to 3.5% by yearend. Employed people buy houses.
*Workforce at home will double post-pandemic, maintaining demand for large homes. One-third of new stay-at-home workers are never going back.
*We are all now mortgage prisoners, trapped by our 2.75% fixed rate mortgages refied last year. Selling your home and rolling into a 7.5% mortgage isn’t that appealing. Selling so far has been minimal, the markets just shut down.
I have a much better indicator of future housing prices than the depressing numbers above. With the way homebuilder stocks like Lennar (LEN), KB Homes (KBH), and Pulte Homes (PHM) are trading since June, I’d say your home will be worth a lot more in a year, and possibly double in another five years. Many of these stocks are up nearly 35% since then, beating the market by far.
What I call “intergenerational arbitrage” will be the principal impetus. The main reason that we have just endured two “lost decades” of economic growth over the last 20 years is that 85 million baby boomers are retiring to be followed by only 65 million “Gen Xers”. When you are losing 20 million consumers, economies don’t grow very fast. For more about millennial investing habits, please click here.
When the majority of the population is in retirement mode, it means that there are fewer buyers of real estate, home appliances, and “RISK ON” assets like equities, and more buyers of assisted living facilities, healthcare, and “RISK OFF” assets like bonds. That’s what got us to a 0.32% yield in the ten-year at the low.
The net result of this is slower economic growth, higher budget deficits, a weak currency, and registered investment advisors who have distilled their practices down to only municipal bond sales.
Fast forward to the other side of the pandemic and the reverse happens. The baby boomers will be out of the economy, worried about whether their diapers get changed on time or if their favorite flavor of Ensure is in stock at the nursing home.
That is when you have 65 million Gen Xers being chased by 85 million of the “Millennial” generation trying to buy their assets!
By then, we will not have built new homes in appreciable numbers for 15 years and a severe scarcity of housing starts. Even before the pandemic, new home construction was taking place at half the 2008 peak. Residential real estate prices will naturally soar. Labor shortages will force wage hikes.
The middle-class standard of living will then reverse a 40-year decline. Annual GDP growth will return from the subdued 2% rate of the past many years to near the torrid 4% seen during the 1990s. It all leads to my “Return of the Roaring Twenties” scenario which you can learn about by clicking here.
It gets better.
It is certain that the current administration will restore tax deductions for state and local real estate taxes (SALT) lost in the 2017 tax bill. The cap on home mortgage interest rate deductions will also rise.
These two events will trigger an immediate 10% increase in the value of your home on an after-tax basis, and more on the coasts.
So, if someone approaches you with a discount offer for your home, I would turn around and run a mile the other way.
You should also pile into the stocks, options, and LEAPS of housing stocks in any future market dip.
Not to Worry
Global Market Comments
October 17, 2022
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or BLUNDER 3.0)
(RIVN), (TSLA), (V), (JPM), (AMAT), (HPE), (DELL), (KBH), (LEN)
There is no doubt whatsoever that the stock market tried to break down last week and failed. At worst, the Dow Average double bottomed at $29,600, the same level it reached on September 28.
And even that low was a mere 800 points lower than the one we set on June 14.
And that’s how it’s going to go.
Incremental new lows, followed by violent “rip your face off” rallies on enormous volume.
Until it ends.
That happens when markets start speculating about coming interest rate cuts sometime in 2023. And remember, you’re buying stocks for not what the economy is doing today, but for how well it will be performing in six to nine months.
You’re buying the future, not the present, or heaven forbid, the past.
That means you should use these throw-up-on-your-shoes days to scale into your favorite long-term companies. When markets inevitably rally, you can either sell for a short-term profit and rewind the video once again or keep it as part of a long-term holding.
It's a nice choice to have. I’ve been doing it all year.
With some of the greatest market volatility in market history, my October month-to-date performance ballooned to +5.00%.
I used last week’s extreme volatility to roll down strike prices for Tesla (TSLA) and JP Morgan (JPM) option spreads to manage my risk. I was still able to hang on to a 40% long position and threw out a new short in the S&P 500 at the end of Thursday.
My 2022 year-to-date performance ballooned to +75.06%, a new high. The Dow Average is down -18.48% so far in 2022. With the coming Friday options expiration, I will be up +76.49%.
It is the greatest outperformance on an index since Mad Hedge Fund Trader started 14 years ago. My trailing one-year return maintains a sky-high +78.54%.
That brings my 14-year total return to +587.62%, some 3.03 times the S&P 500 (SPX) over the same period and a new all-time high. My average annualized return has ratcheted up to +44.23%, easily the highest in the industry.
Remember that old 60/40 equity/bond investment strategy? The idea was that whenever stocks went down, the losses would be offset by the profits from rising bonds.
This year, it delivered the worst performance in 100 years, down 34.4% year-to-date. That is the inevitable end result of a decade of zero interest rates and free money that took everything up.
So what is the best strategy you could probably employ right now? A 60/40 strategy. Even I find myself checking out bond yields these days, where I got my start in life as a trader 50 years ago. Yes, before there were stocks, there were bonds. Junk is now yielding 10%. Remember, that means a holding doubles in value every six years.
The market is clearly in a mood to throw out the babies with the bathwater. I would be remiss not to mention the recent decline of Tesla posing one of its periodic tests of the faithful, now approaching a once unheard-of price earnings multiple of 30X.
Up until September 20, Elon Musk’s creation was almost immune to the bear market.
Then Twitter (TWTR) happened.
Musk agreed to take majority control of a $44 billion company, of which Elon himself is only contributing $16 billion. He sold Tesla shares last July to fund this. But the market wiped $333 billion, or 34.6%, off the market capitalization of the company. It is a wild overreaction to the move.
This has nothing to do with Tesla itself, as the richest man in the world is buying Twitter with his own pocket change. But it is undeniable that it will be a distraction of management time.
And here is all you need to know about Tesla. Tesla is the fastest growing large company in the world. Profit margins are increasing, thanks to the recent collapse of commodity prices. Unit sales will rise by 40% this year. Every time Tesla opens a new factory at a cost of $7 billion, it generates $15 billion of profit per year, forever!
Remember also, that the stock market gets an 800-pound gorilla off its back with the end of the midterm elections on November 8. It makes no difference who wins, a major uncertainty will be gone. That much IS certain.
And what happens when the Fed keeps interest rates too low for long, then raises them too much? It lowers them again too much, igniting a monster bull market in stocks. That’s also what you’re buying down here. That's what you get when you appoint a central bank governor with a political science major rather than PhDs and Nobel Prizes in Economics like the last ones.
Call it blunder 3.0.
Consumer Price Index Rockets Up to 8.6%, up 0.4% on the month and a new 40-year high. Stocks, bonds, crypto, and currencies were crushed and the US Dollar Soared. Look for new lows in stocks. Growth really took it on the nose. Expect another month of volatility until the next CPI report comes out.
Stocks Mount Historic Rally, gaining $1,420 points, or 5% of the intraday low. Stocks were down 500 in the wake of the CPI report, then up $1,420. It was mostly hedge short covering, as most institutions are too slow to react. Still, we now have a low to trade against.
The Fed Minutes are Out, and our central bank is clearly worried about doing too little than too much, when they are doing too much. At least they did six weeks, or 4,000 Dow points ago. The inflation goal is still 2.0%. Interest rates will go higher before they go lower.
Equity Inflows Hit a Record Last Week, the third highest week since 2008. Long term investors are willing to bottom fish here, even if the final bottom isn’t found for months.
Bond Liquidity Issues Haunting the Fed, and bids dry up in an endlessly falling market. The matter has been greatly exacerbated by a Fed that is now selling $95 billion a month as part of its quantitative tightening policy. It’s becoming increasingly difficult to move big blocks of bonds in a zero-bid market. Spreads are widening and size is shrinking. The bad news is that the worst is yet to come.
You Just Got an 8.7% Raise, if you are older than 61 and collecting Social Security. That is the payment increase that kicks in from January. Fortunately, some thoughtful person eons ago tied payments to the CPI, which is now going through the roof. I’m going to Hawaii with my money, even if the increase means that Social Security goes bankrupt by 2034, when I’m 82.
PC Sales Dive 19.5% in Q3, reaching only 68 million units. It’s the steepest decline since PC data collection began 30 years ago. And you wonder why they are selling the chip stocks so aggressively. High inventories are also a big problem. Lenovo was the top seller in the world at 20.2 million units, followed by Hewlett Packard’s (HPE) 17.6 million, and Dell (DELL) at 15.2 million.
Applied Materials Cuts Estimates, in line with everyone else in the industry. The new government export restrictions will cost it $250-$500 million in the current quarter. But how much is already in the price? Buy (AMAT) on dips.
Home Financing Pours into 5/1 ARMS, which can be had for a doable 5.56%. That compares to over 7.0% for the 30-year fixed, the highest since 2006. It will be low enough to keep homebuilders on life support for a couple of years Avoid (LEN) and (KBH).
REITS are Still Getting Slaughtered, with the plunge in the bond market today to multidecade lows. The REIT Index is down 30% this year, while the (SPY) is off only 21%. Real Estate Investment Trusts do best when interest rates are low. Too many investors piled into REITS in a desperate reach for yield. There’s a great trade here someday, but not yet.
My Ten-Year View
When we come out the other side of pandemic and the recession, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With oil in a sharp decline and technology hyper-accelerating, there will be no reason not to. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The America coming out the other side will be far more efficient and profitable than the old. Dow 240,000 here we come!
On Monday, October 17 at 8:30 AM, the New York Empire State Manufacturing Index for September is released.
On Tuesday, October 18 at 7:00 AM, the D for September is out.
On Wednesday, October 19 at 8:30 AM, Housing Starts and Permits for September are published.
On Thursday, October 20 at 8:30 AM, Weekly Jobless Claims are announced. At 10:00 AM, we get Existing Home Sales for September.
On Friday, October 21 at 2:00 PM, the Baker Hughes Oil Rig Count is out.
As for me, it was in 1986 when the call went out at the London office of Morgan Stanley for someone to undertake an unusual task. They needed someone who knew the Middle East well, spoke some Arabic, was comfortable in the desert, and was a good rider.
The higher-ups had obtained an impossible-to-get invitation from the Kuwaiti Royal family to take part in a camel caravan into the Dibdibah Desert. It was the social event of the year.
More importantly, the event was to be attended by the head of the Kuwait Investment Authority, who ran over $100 billion in assets. Kuwait had immense oil revenues, but almost no people, so the bulk of their oil revenues were invested in western stock markets. An investment of goodwill here could pay off big time down the road.
The problem was that the US had just launched air strikes against Libya, destroying the dictator, Muammar Gaddafi’s royal palace, our response to the bombing of a disco in West Berlin frequented by US soldiers. Terrorist attacks were imminently expected throughout Europe.
Of course, I was the only one who volunteered.
My managing director didn’t want me to go, as they couldn’t afford to lose me. I explained that in reviewing the range of risks I had taken in my life, this one didn’t even register. The following week found me in a first-class seat on Kuwait Airways headed for a Middle East in turmoil.
A limo picked me up at the Kuwait Hilton, just across the street from the US embassy, where I occupied the presidential suite. We headed west into the desert.
In an hour, I came across the most amazing sight - a collection of large tents accompanied by about 100 camels. Everyone was wearing traditional Arab dress with a ceremonial dagger. I had been riding horses all my life, camels not so much. So, I asked for the gentlest camel they had.
The camel wranglers gave me a tall female, which was more docile and obedient than the males. Imagine that! Getting on a camel is weird, as you mount them while they are sitting down. My camel had no problem lifting my 180 pounds.
They were beautiful animals, highly groomed, and in the pink of health. Some were worth millions of dollars. A handler asked me if I had ever drunk fresh camel milk, and I answered no, they didn’t offer it at Safeway. He picked up a metal bowl, cleaned it out with his hand, and milked a nearby camel.
He then handed me the bowl with a big smile across his face. There were definitely green flecks of manure floating on the top, but I drank it anyway. I had to lest my host to lose face. At least it was white. It was body temperature warm and much richer than cow’s milk.
The motion of a camel is completely different from a horse. You ride back and forth in a rocking motion. I hoped the trip was short, as this ride had repetitive motion injuries written all over it. I was using muscles I had never used before. Hit your camel with a stick and they take off at 40 miles per hour.
I learned that a camel is a super animal ideally suited for the desert. It can ride 100 miles a day, and 150 miles in emergencies, according to TE Lawrence, who made the epic 600-mile trek to Aquaba in only four weeks in the heat of summer. It can live 15 days without water, converting the fat in its hump.
In ten miles, we reached our destination. The tents went up, clouds of dust rose, the camels were corralled, and the cooking began for an epic feast that night.
It was a sight to behold. Elaborately decorated huge five wide bronze platers were brought overflowing with rice and vegetables, and every part of a sheep you can imagine, none of which was wasted. In the center was a cooked sheep’s head with the top of the skull removed so the brains were easily accessible. We all ate with our right hands.
I learned that I was the first foreigner ever invited to such an event, and the Arabs delighted in feeding me every part of the sheep, the eyes, the brains, the intestines, and gristle. I pretended to love everything, and lied back and thought of England. When they asked how it tasted, I said it was great. I lied.
As the evening progressed, the Johnny Walker Red came out of hiding. Alcohol is illegal in Kuwait, and formal events are marked by copious amounts of elaborate fruit juices. I was told that someone with a royal connection had smuggled in an entire container of whiskey and I could drink all I wanted.
The next morning I was awoken by a bellowing camel and the worst headache in the world. I threw a rock at him to get him to shut up and he sauntered over and peed all over me.
The things I did for Morgan Stanley!
Four years later, Iraq invaded Kuwait. Some of my friends were kidnapped and held for ransom, while others were never heard from again.
The Kuwaiti government said they would pay for the war if we provided the troops, tanks, and planes. So they sold their entire $100 million investment portfolio and gave the money to the US.
Morgan Stanley got the mandate to handle the liquidation, earning the biggest commission in the firm’s history. No doubt, the salesman who got the order was considered a genius, earned a promotion, and was paid a huge bonus.
I spent the year as a Marine Corps captain, flying around assorted American generals and doing the odd special opp. I got shot down and still set off airport metal detectors. No bonus here. But at least I gained insight and an experience into a medieval Bedouin lifestyle that is long gone.
They say success has many fathers. This is a classic example.
You can’t just ride out into the Kuwait desert anymore. It is still filled with mines planted by the Iraqis. There are almost no camels left in the Middle East, long ago replaced by trucks. When I was in Egypt in 2019, I rode a few mangy, pitiful animals held over for the tourists.
When I passed through my London Club last summer, the Naval and Military Club on St. James Square, who’s portrait was right at the front entrance? None other than that of Lawrence of Arabia.
It turns out we were members of the same club in more ways than one.
Stay healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
John Thomas of Arabia
Checking Out the Local Camel Milk
This One Will Do
Traffic in Arabia
