Global Market Comments
November 21, 2022
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or SLOWING TO STALL SPEED),
(SPY), (TLT), (SLV), (WPH), (MAT), (NVDA), (MS), (GS)
Global Market Comments
November 21, 2022
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or SLOWING TO STALL SPEED),
(SPY), (TLT), (SLV), (WPH), (MAT), (NVDA), (MS), (GS)
I got a call from my daughter the other day, who is a Computer Science major at the University of California at Santa Cruz. The university was on strike and shut down, so she suddenly had a lot of free time on her hands.
The Teaching Assistants were only getting $12 an hour, which is not enough to live on in the San Francisco Bay Area by a mile. Some one-third were living in their cars, which can get chilly on the Northern California coast in winter.
Fast food workers in California will get $22 an hour from January, thanks to a bill passed in the recent election. The TAs, most of whom are working on master’s degrees and PhD’s in all kinds of advanced esoteric subjects, are simply asking to bring their pay in line with Taco Bell.
The entire UC system is on strike, affecting ten campuses, 17,000 TAs and 200,000 students. I have noticed that the most liberal universities often have the most draconian employment policies. It’s legalized slave labor. I speak from experience as a past victim, as I was once an impoverished work-study student at UCLA earning $1.00 an hour experimenting with highly radioactive chemicals.
What was my tuition for four years at the best public university in the world? Just $3,000, and I didn’t even pay that, as I was on a full scholarship, something about rocket engines I built when I was a kid. Werner Von Braun liked them. The 800 Math SAT score probably helped a tiny bit too.
UCSC is the feeder university for Silicon Valley. Graduates in Computer Science earn $150,000 a year out the door and $200,000 with a Master's degree. PhDs get offered founders’ stock in the hottest Silicon Valley startups.
I hope the TAs get their raise.
My daughter was calling me to apologize for her poor trading performance this year. I thought, “My goodness, did she just lose her entire college fund in some crypto scam?”
“How much did you lose,” I asked.
She answered that she didn’t lose anything and in fact was up 59% this year. She knew my performance was topping 78%, and that some subscribers had made up to 1,000%.
But she missed the October low because she had a midterm and was late on my (TLT) LEAPS because she was on a field trip. She promised to pay closer attention so she could earn the money to pay for her PhD.
My kids never ask me for money. If they need it, they just go into the markets and get it themselves. But then this is a family that discussed implied volatilities, chaos theory, and the merits of the Black Scholes equation over dinner every night. That’s what it’s like to have a hedge fund manager for a dad. Any extra money I have I give away to kids not as lucky as mine.
Then we talked about the most important issue of the day, how to cook the turkey this week. Brine, or no brine, with or without a T-shirt, or deep fat fry? She cautioned me to take it out of the freezer three days early to thaw. I bought my turkey a month ago because I knew prices would rise, and they have done so mightily. In case I get in over my head, I can always call the Butterball Thanksgiving Turkey Emergency Hotline at 844-877-3436.
But that’s just me.
Whenever making money gets too easy, I get nervous.
There’s a 90% chance we saw the bottom in this bear market on October 14. But how we proceed from here is the tricky part. Too much now depends on a single monthly data point, namely the Consumer Price Index, and that is a tough game to play. The next one is out on December 13.
The truth is that even with overnight interest rates at 4.75%-5.00% , the economy is holding up far better than anyone imagined possible. Some sectors, like financials, are positively booming. And while housing is weak, we really have not seen any major price falls that could threaten a financial crisis. Consumers are in good shape with savings near record levels.
There isn’t going to be a hard landing. There isn’t even going to be a soft landing. In fact, we may not have a landing at all, with the economy continuing to motor along, albeit at a slower rate just above stall speed.
Which begs me to repeat that the next new trend in interest rates will be down, and that this will be the principal driver of all your investment decisions going forward. Bonds may make the initial move up, as last week’s trade alerts suggested. But I have no doubt that equities will have a big move in 2023 as well.
Producer Price Index Fades, up only 0.2%, half of what was expected. That’s a big decline from 8.4% to 8.0% YOY. It’s another bell ringing that inflation has topped. Stocks rallied 500 on the news.
Bonds Continue on a Tear, with the (TLT) up a breathtaking eight points from the October low. It could reach $120 in 2023. Keep buying (TLT) calls, call spreads, and LEAPS on dips.
FTX Keeps Getting Worse, as it is looking like it’s a Bernie Madoff X 10, or an Enron X 20. A new CEO has been appointed by the bankruptcy court, John Ray, the former liquidator of Enron and a distant relative of mine. This will spoil investment in most digital coins and tokens for good, which are now worthless, and coins unless they are guaranteed by JP Morgan (JPM) or Goldman Sachs (GS). FTX never had a CFO, and Sam Bankman-Fried is blaming it all on his girlfriend, not exactly what creditors want to hear. In any case, Bitcoin has been replaced by Taylor Swift tickets.
A Massive Silver Shortage is Developing, with demand up 16% in 2023 to 1.21 million ounces. With EV production increasing from 1.5 million to 20 million units a year within the decade, its share of the market will rise from 5% to 75%. Solar panel demand is also rising. Buy (SLV) and (WPM) on dips. My next LEAPS will be for silver on the next dip.
NVIDIA Sales Rise, but profits dip, taking the stock up 3%. Games sales dropped a heartbreaking 50% and crypto took a big hit. The company expects $6 billion in sales in Q4 and is still operating at an incredible 53.6% gross margin. The company is creating a new line of dumbed-down products to comply with China export bans. Keep buying (NVDA) on dips. We caught a 50% move in the past month.
Retail Sales Rise 1.3% in October, causing analysts to raise Q4 GDP forecasts. Rising prices are a major factor. Where is that darn recession?
Who Has the World’s Worst Inflation? Not the US, where price gains have been relatively muted. Venezuela leads with 21,912%, followed by Zimbabwe at 2019%, Lebanon at 1071%, Argentina at 194%, Turkey at 124%. Even Russia is at 25%. Who has the lowest? Japan at 1.0%, but their currency has just collapsed by 40%.
The 60/40 Portfolio is Back, after a 15-year hiatus. JP Morgan Chase says that keeping 60% of your money in stocks and 40% in bonds should deliver a 7.2% annual return. I believe the balanced portfolio return will be much higher, as everything will go up in 2023 and fixed income is now yielding 5% or better. 2022 saw the worst 60/40 return in 100 years.
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 21 at 8:00 AM, the Chicago Fed National Activity Index for October is out.
On Tuesday, November 22 at 8:30 AM, the Richard Fed Manufacturing Index is released.
On Wednesday, November 23 at 8:30 AM, Durable Goods for October is published. At 11:00 AM, the FOMC minutes from the previous meeting are out. Weekly Jobless Claims are announced. New Homes Sales for October are out.
On Thursday, November 24, Markets are closed for Thanksgiving.
On Friday, November 25, stock markets close early at 1:00 PM. At 2:00 the Baker Hughes Oil Rig Count is out.
As for me, I have dated a lot of interesting women in my lifetime, but one who really stands out is Melody Knerr, the daughter of Richard Knerr, the founder of the famed novelty toy company Wham-O (click here). I dated her during my senior year in high school.
At six feet, she was the tallest girl in the school, and at 6’4” I was an obvious choice. After the senior prom and wearing my cheap rented tux, I took her to the Los Angeles opening night of the new musical Hair.
In the second act, the entire cast dropped their clothes onto the stage and stood there stark naked. The audience was stunned, shocked, embarrassed, and even gob-smacked. Fortunately, Melody never revealed the content of the play to her parents, or I would have been lynched.
In a recurring theme of my life, while Melody liked me, her mother liked me even more. That enabled me to learn the inside story of Wham-O, one of the great untold business stories of all time.
Richard Knerr started Wham-O in a South Pasadena garage in 1948. His first product was a slingshot, hence the company name, the sound you make when firing at a target. Business grew slowly, with Knerr trying and discarding several different toys.
Then in 1957, he borrowed an idea from an Australian bamboo exercise hoop, converted it to plastic, and called it the “Hula Hoop.” It instantly became the biggest toy fad of the 20th century, with Wham-O selling an eye-popping 25 million in just four months. By 1959, they had sold a staggering 100 million.
The Hula Hoop was an extremely simple toy to manufacture. You took a yard of cheap plastic tubing and stapled it together with an oak plug, and you were done. The markup was 1,000%. Knerr made tens of millions and bought a mansion in a Los Angeles suburb with a stuffed lion guarding his front door which he had shot in Africa.
The company made the decision to build another 50 million Hula Hoops. Then the bottom absolutely fell out of the Hula Hoop market. Midwestern ministers perceived a sexual connotation in the suggestive undulating motion to use it and decried it the work of the devil. Orders were cancelled en masse.
Whamo-O tried to stop their order for 50 million oak plugs, which were made in England, but to no avail. They had already shipped. So, to cut their losses Whamo-O ordered the entire shipment dumped overboard in the North Atlantic, where they still bob today. The company almost went bankrupt.
Knerr saved the company with another breakout toy, the Frisbee, a runaway success which is still sold today. Even Incline Village, Nevada has a Frisbee golf course. The US Army tested it as a potential flying hand grenade. That was followed by other monster hits like the Super Ball, the Slip N Slide, and the Slinky.
Richard Knerr sold his company to toy giant Mattel (MAT) for $80 million in 1994. He passed away in 2008 at the age of 82.
As for Melody, we lost touch over the years. The last I heard she was working at a dive bar in rural California. Apparently, I was the high point of her life. The last time I saw her I learned the harshest of all lessons, never go back and visit your old high school girlfriend. They never look that good again.
Stay healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Hula Hoop Inventor Chuck Knerr
Global Market Comments
February 25, 2019
Fiat Lux
Featured Trade:
(THE MARKET FOR THE WEEK AHEAD, or THE BEST OF TIMES AND THE WORST OF TIMES),
(SPY), (TLT), (TLT), (VIX), (KHC), (MAT), (MMT), (GLD)
It is truly the best of times and the worst of times. And it's not a stretch to apply Charles Dickens’ line from the Tale of Two Cities to the stock market these days.
On the one hand, stocks have just delivered one of the sharpest rallies in market history, up a staggering 20% in nine weeks. Everyone is swimming in money once again. It is the kind of move that one sees once a generation, and usually presages the beginning of long term bull markets.
On the other hand, the bull market in stocks is nearly ten years old. Some 13 months ago, the market traded at a lofty multiple of 20X, but earnings were growing at an incredible 26% a year. Today, multiples are at a very high 18X, but earnings growth is zero! This only ends in tears.
Furthermore, the low level of interest rates with the ten year US Treasury bond (TLT) at a subterranean 2.65% suggests that we are on the verge of entering a recession. Warning: bonds are always right.
Of course, it is speculation of a ‘beautiful” trade deal with China that has been driving share prices higher on an almost daily basis. Unfortunately, 90% of the deal has already been discounted in the market. We could be setting up the biggest “Sell on the news of all time.”
If instead, we get a delay of 45-90 days while details are hashed out, markets could move sideways for months. That would be death for Volatility Index (VIX) players which have already seen prices collapse this year from $36 to $13. A return visit to the $9 handle is possible. Yes, the short volatility trade is back in size.
Far and away the most important news of the week was that the Fed Pause Lives! Or so the minutes from the January FOMC meeting imply. Lower interest rates for longer offer more benefits than risks. Less heat from the president too.
Perhaps this is response to economic data that has universally turned bad. Durable Goods dove 1.2%, in January in a big surprise. Recession, here we come!
Europe is falling into recession, and they will likely take us with them. February Eurozone Manufacturing PMI fell to 49.2, a three-year low. You obviously haven’t been buying enough Burberry coats, Mercedes, or French wine.
It was a very rough week for some individual stocks.
The Feds subpoenaed Kraft Heinz (KHC), and stock dove 27% over accounting problems. Warren Buffet took a one-day $4 billion hit. What is really in that ketchup anyway besides sugar and red dye number two? Avoid (KHC).
No toys for Mattel (MAT) which saw the worst stock drop in 20 years on the back of poor earnings and worse guidance. Another leading indicator of a weak economy. Barbie isn’t putting out.
It wasn’t all bleak.
Walmart (WMT) delivered online sales up 46% in Q4. Are they the next FANG? Same-store sales jump at the fastest pace in ten years on soaring grocery sales. The Wall family certainly hopes so. Buy (WMT) on dips.
Gold hit a ten-month high, and we are long. The new supercycle for commodities has already started. Get on board before the train leaves the station. Buy (GLD).
February has so far come in at a hot +4.07% for the Mad Hedge Fund Trader. My 2019 year to date return ratcheted up to +13.55%, boosting my trailing one-year return back up to +27.54%.
My nine-year return clawed its way up to +313.69%, another new high. The average annualized return appreciated to +33.89%.
I am now 80% in cash, 10% long gold (GLD), and 10% short bonds (TLT). We have managed to catch every major market trend this year loading the boat with technology stocks at the beginning of January, selling short bonds, and buying gold (GLD). I am trying to avoid stocks until the China situation resolves itself one way or the other.
It’s real estate week on the data front. An additional data delayed by the government shutdown is trickling out.
On Monday, February 25, at 8:30 AM EST, the Chicago Fed National Activity Index is out.
On Tuesday, February 26, 8:30 AM EST, January Housing Starts are published. At 9:00 the latest Case Shiller Corelogic National Home Price Index is published.
On Wednesday, February 27 at 10:00 AM EST, January Pending Home Sales are updated.
Thursday, February 28 at 8:30 AM EST, we get Weekly Jobless Claims. We also get an updated estimate on Q4 GDP. At 10:00 AM Fed governor Jerome Powell speaks.
On Friday, March 1 at 8:30 AM, we get data on January Personal Spending delayed by the government shutdown. The Baker-Hughes Rig Count follows at 1:00 PM.
As for me, I’ll be watching the Academy Awards on Sunday night. As I grew up near Hollywood, have dated movie stars my whole life, and even appeared as an extra in a couple of movies, I have always felt close to this industry.
My first pick for Best Picture is Green Book since I recall traveling through the deep south during this period. It was actually much worse than portrayed by the film. Roma is the favorite, but I thought it was boring. I guess I’m not the politically correct art film type.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
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