Mad Hedge Technology Letter
October 28, 2024
Fiat Lux
Featured Trade:
(THE FUTURE OF TECH STOCKS)
(AI), (NVDA), (XLU), (XLE), (AAPL), (GOOGL), (AMZN), (META), (MSFT)
Posts
Through the vast whole spectrum of public markets, the U.S. stock market, and specifically technology stocks, are dominating versus their peers from other countries.
Heck, even Apple, just one company from a small suburb in California, is valued at a price that is greater than the entire German economy.
Does that speak to how bad the German economy is, or does it speak to the potency of public tech companies in America?
The truth is probably a bit of both.
Then, take a second and try to absorb the fact that Apple hasn’t even integrated AI into its own products yet.
The future is bright for many tech stocks, and the rally will broaden out to non-Magnificent 7 stocks.
More granularly, the US will continue to lead by market cap share as artificial intelligence benefits expand beyond a few large tech names that have dominated the market rally over the past year to companies in various industries.
Revenue production and margin improvement will be the critical levers of expansion.
The first will come from the money pouring into AI benefiting companies outside of Big Tech. This plays out as tech companies buy AI chips from the likes of Nvidia (NVDA), and as they need more power, these AI operators are forced to spend with companies in the Utilities (XLU) and Energy (XLE) sectors.
As AI makes companies more efficient and eliminates the simplest work, eventually cutting down costs, US corporates should get a boost to profit margins.
Global equity markets, including retirement allocations to equities, are basically leveraged to Nvidia.
A non-US tech company will rise over the next decade and unseat the large tech companies currently driving the US market share, like Apple (AAPL), Nvidia, Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOGL), and Meta (META) are almost zero.
When we look at the revenue possibilities and understand that AI will directly cut expenses by creating efficiencies, it’s hard to see tech stocks do anything but go higher in the long term.
Even then, there will be some dips, and they should absolutely be characterized as buying opportunities.
Just look at a 3-month chart of Apple, and each month has presented a dip buying opportunity on August 6th, September 16th, and October 7th.
Apple stock is up 7.5% in the past 3 months.
When everyone complains that tech stocks are too expensive, well, they will get more expensive.
As long as leverage is able to be tapped, institutions will tap it and look for that asymmetric trade to the upside.
Tesla has also proved how hard it is to bet against tech and Elon Musk.
It usually is a terrible idea.
The setup to Tesla’s earnings meant a very low bar, and Musk jumped over it to the tune of a 22% pop in Tesla stock.
Tech is clearly in a secular bull trend, and trying to get artsy to squeeze in a microdip on the short side usually has meant a loss-taking event.
Why even try?
It’s my job to tell readers to bet on tech going to the upside, especially the quality companies that accelerate revenue by harnessing the superpowers of AI.
Global Market Comments
October 28, 2024
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or HERE IS YOUR POST-ELECTION PORTFOLIO
plus THE LAST SILVER BUBBLE)
(NVDA), (META), (CRM), (TLT), (JNK), (CCI), (DHI), (LEN), (PHM),
(GLD), (SLV), (NEM), (FXE), (FXB), (FXA), (TSLA), (JPM), (BAC), (GS)
Remember Y2K?
The world was supposed to end at midnight on December 31, 1999 because computers would be unable to cope with the turnover of the new millennium. I remember making presentations to big hedge funds, predicting that Y2K was a big nothing burger and, worst case, somebody’s toaster wouldn’t work.
I spent that New Year’s Eve with my kids at Disneyland in Orlando, watching one heck of a fireworks display. What happened the next morning? Even the toasters worked.
I think we are setting up for another Y2K outcome, except that this time, it’s the presidential election that has everyone in a tizzy.
The polls are tied at 48%-48% with a margin of error of 4%. In fact, for the last 50 years, the opinion polls have been wrong by an average of 3.4%. One side already has that 3.4% and probably more, plus all seven battleground states, but we won’t know for sure until November 6.
As an investment manager, it is not my job to pick a side or impose my view upon you but to deliver the best possible investment returns for my clients.
And let me tell you how.
Remember the Pandemic? Four years after the event, we now have the luxury of copious hard data. Out of 103,436,829 cases, some 1,203,648 Americans died, or 1.3%. But, the death rate in red states was much higher than in blue states.
For example, California suffered only 101,159 deaths out of a population of 39,128,162 for a death rate of 0.26%. Florida saw 86,850 deaths out of a population of 22,634,867 for a death rate of 0.38%. Deaths in Florida were 68% higher in the Sunshine State than in the Golden State.
Florida, in effect, traded lives for business profits. Florida also had a Typhoid Mary effect in that by staying open for spring breaks and vacations; it increased the death rates in surrounding red states.
Assume that half of those who died were voters and apply this math to the entire country, and Republicans lost 393,059 votes to the pandemic compared to only 268,935 for Democrats. Some 124,125 more Republican voters died than Democrats. Is 124,125 votes enough to decide this election?
Absolutely!
In the 2020 presidential election, Biden won the three battleground states of Georgia by the famous 11,779 votes, Arizona by 10,457 votes, and Nevada by 33,596 votes. That’s 33 electoral college votes right there out of 270 needed.
The opinion polls have missed these numbers by a mile because their algorithms don’t take the pandemic into consideration. They are counting dead voters, while the actual election polls only count live ones. I predict that the opinion polls will be spectacularly wrong….again.
Of course, these are back-of-the-matchbook ballpark calculations. I’ll leave it to some future aspiring PhD candidate to research his thesis with more precise figures. I have better things to do.
So, how do we make money off of all this? I have never seen investors so underweight and cautious going into a major risk event like this election. They have been scared out of the market by the media. Therefore, I expect the stock market to rise by 10% after the election, taking the S&P 500 as high as 6,400.
Let the great chase begin!
Here is your model portfolio for the rest of 2024.
(NVDA), (META), (CRM) – Underweight fund managers will chase this year’s best performers so they can look good at yearend. Similarly, they will dump their worst performers in the energy sector. So will individual investors for tax loss harvesting.
(TLT), (JNK), (CCI) – All interest rate plays make back recent losses as the threat of $10-$15 trillion in new borrowing by a future president, Trump, disappears.
(DHI), (LEN), (PHM) – There is no better interest rate play than new homebuilding. It’s tough to beat a structure shortage of 10 million homes.
(GLD), (SLV), (NEM) – Precious metals also do very well as they have less yield competition from other interest rate plays. These have become the principal savings vehicle for Chinese individuals.
(FXE), (FXB), (FXA) – A falling interest rate advantage for the US dollar means you want to buy all the currencies.
(JPM), (BAC), (GS) – Banks also do exceedingly well in a falling interest rate environment, and brokers and money managers will cash in on exploding stock market volume.
Also, on November 6, your toaster will probably still work. And I will never understand why the Center for Disease Control never accepted my application out of college. So, I went to Vietnam instead.
So far in October, we have gained a breathtaking +5.46%. My 2024 year-to-date performance is at an amazing+50.70%. The S&P 500 (SPY) is up +21.38% so far in 2024. My trailing one-year return reached a nosebleed +66.31. That brings my 16-year total return to +727.33%. My average annualized return has recovered to +52.58%.
I am remaining cautious with a 70% cash, a 20% long, and a 10% short. I maintained two longs in (GLD) and (JPM) that are well in the money. I sold short (TSLA) to take advantage of a massive 29% gain in two days off the back of blockbuster earnings.
Some 63 of my 70 round trips, or 90%, were profitable in 2023. Some 61 of 81 trades have been profitable so far in 2024, and several of those losses were really break evens. Some 16 out of the last 19 trade alerts were profitable. That is a success rate of +75.30%.
Try beating that anywhere.
New Home Sales Jumped 4.1% in September at 738,000 seasonally adjusted units on a signed contract basis. The median home price rose to 426,300. This despite a roller coaster month on interest rates, falling to 6.0% for the 30-year, then jumping back up to 7.0%.
Fusion is going Commercial in San Francisco, with a German company, Focused Energy, making a $65 million investment. The firm will draw heavily from staff from nearby Lawrence Livermore National Labs, which achieved a net energy gain for the first time in 2022. Focused Energy is one of eight companies given grants to accommodate a doubling of power demand by 2050. Commercial fusion will be the next big thing, where three soda cans of heavy hydrogen can power San Francisco for a day.
Money Market Funds See Massive Pre-Election Inflows, as investors see to avoid promised post-election violence. According to LSEG data, investors acquired a net $29.98 billion worth of money market funds during the week, posting their fourth weekly net purchase in five weeks. Personally, I think it is another Y2K moment.
Tesla Earnings Shock to the Upside, with both third-quarter profits and margins topping estimates. Elon Musk said that he expects 20% to 30% vehicle growth next year, sending the company's shares up 11% in post-market trading. The company still sees 2025 production of a cheaper model, maybe the Model 2. The Cybertruck has reached profitability for the first time and is reaching mass production. Tesla will see “slight growth” in deliveries this year. I am using the spike in the share price to take profits on my long to avoid election risk.
Apple iPhone Sales are Lagging, according to a leading analyst, with a drop in 10 million orders expected, down to 84 million units. The stock dropped 4% from an all-time high.
Boeing Reports $6 Billion Loss, a disastrous report from a dying company with awful management. This is going to be a very long-term workout. A strike resolution may market the bottom. Avoid (BAC) like a stalling airplane.
Newmont Mining Dives 7% after missing Wall Street expectations for third-quarter profit on Wednesday. Higher costs and lower production in Nevada took the shine away from a rise in total output. Newmont said that its costs rose due to planned maintenance at the Lihir project in Papua New Guinea — which it acquired following a $17 billion buyout of Newcrest — and higher expenditure for contract services across its portfolio. Buy (NEM) on dips.
McDonald's Kills Two in E.Coli Outbreak, linked to quarter pounders sold in Colorado and Nebraska. The stock dropped 10%. It’s clearly a supply chain problem. Given their vast size, with 45,000 stands in 100 countries, it’s amazing that this doesn’t happen more often. Avoid (MCD).
Bonds Plunge Anticipating a Trump Win, with the (TLT) down $10 from the recent high. If he does win, expect another $10 decline to $82. If Harris wins, expect a $10 rally. This is the best election trade out there.
Nvidia Tops $3.5 Trillion, as the shares hit a new all-time high at $144.45. It looks like it’s on a run to $150, then $160. Earnings are about to double when reported on November 20. Before then, investors will get some insight into demand for Nvidia’s newest Blackwell chips with earnings reports from big technology companies, including Microsoft (MSFT) coming at the end of this month. Buy (NVDA) on dips.
Hedge Funds Pour into Technology Stocks, such as semiconductors and hardware, at the fastest in five months amid the start of the third-quarter earnings season, according to Goldman Sachs on Friday. Outside the U.S., diverging reports from chipmaker Taiwan Semiconductor Manufacturing (TSM) and chipmaking equipment supplier ASML Holding (ASML) in opposite directions while investors await semiconductor companies such as Advanced Micro Devices (AMD) and Nvidia (NVDA) to unveil their earnings as they seek a trend. They are betting on a big post-election move-up.
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 is 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, October 28 at 8:30 AM EST, the Dallas Fed Manufacturing Index is published.
On Tuesday, October 29 at 6:00 AM, the S&P Case Shiller National Home Price Index is out. We also get the US JOLTS Job Openings Report. Alphabet (GOOGL) and (AMD) report.
On Wednesday, October 30 at 11:00 AM, the ADP Employment Change Report is printed. (META) and (MSFT) report.
On Thursday, October 31 at 8:30 AM, the Weekly Jobless Claims are announced. We also get the US Core PCE Price Index. (AMZN) reports.
On Friday, November 1 at 8:30 AM, the October Nonfarm Payroll Report is announced. At 2:00 PM, the Baker Hughes Rig Count is printed.
As for me, with silver on fire once again and at 12-year highs, I thought I’d recall the last time a bubble popped for the white metal. I picked up this story from my late friend Mike Robertson, who ran the Dallas-based Robertson Wealth Management, one of the largest and most successful registered investment advisors in the country.
Mike is the last surviving silver broker to the Hunt Brothers, who in 1979-80 were major players in the run-up in the “poor man’s gold” from $11 to a staggering $50 an ounce in a very short time. At the peak, their aggregate position was thought to exceed 100 million ounces.
Nelson Bunker Hunt and William Herbert Hunt were the sons of the legendary HL Hunt, one of the original East Texas wildcatters and heirs to one of the largest Texas fortunes of the day. Shortly after President Richard Nixon took the US off the gold standard in 1971, the two brothers became deeply concerned about financial viability of the United States government. To protect their assets, they began accumulating silver through coins, bars, the silver refiner, Asarco, and even tea sets, and when it opened, silver contracts on the futures markets.
The brother’s interest in silver was well-known for years, and prices gradually rose. But when inflation soared into double digits, a giant spotlight was thrown upon them, and the race was on. Mike was then a junior broker at the Houston office of Bache & Co., in which the Hunts held a minority stake and handled a large part of their business. The turnover in silver contracts exploded. Mike confesses to waking up some mornings, turning on the radio to hear silver limit up, and then not bothering to go to work because they knew there would be no trades.
The price of silver ran up so high that it became a political problem. Several officials at the CFTC were rumored to be getting killed in their personal silver shorts. Eastman Kodak (EK), whose black and white film made them one of the largest silver consumers in the country, was thought to be borrowing silver from the Treasury to stay in business.
The Carter administration took a dim view of the Hunt Brothers’ activities, especially considering their funding of the ultra-conservative John Birch Society. The Feds viewed it as an attempt to undermine the US government. The proverbial sushi hit the fan.
The CFTC raised margin rates to 100%. The Hunts were accused of market manipulation and ordered to unwind their position. They were subpoenaed by Congress to testify about their motives. After a decade of litigation, Bunker received a lifetime ban from the commodities markets, a $10 million fine, and was forced into a Chapter 11 bankruptcy.
Mike saw commissions worth $14 million in today’s money go unpaid. In the end, he was only left with a Rolex watch, his broker’s license, and a silver Mercedes. He still ardently believes today that the Hunts got a raw deal and that their only crime was to be right about the long-term attractiveness of silver as an inflation hedge. Nelson made one of the greatest asset allocation calls of all time and was punished severely for it. There never was any intention to manipulate markets. As far as he knew, the Hunts never paid more than the $20 handle for silver and that all of the buying that took it up to $50 was nothing more than retail froth.
Through the lens of 20/20 hindsight, Mike views the entire experience as a morality tale, a warning of what happens when you step on the toes of the wrong people.
The white metal’s inflation-fighting qualities are still as true as ever, and it is only a matter of time before prices once again take another run to the upside.
Unfortunately, Mike won’t be participating in the next silver bubble. Suffering from morbid obesity, he died from a heart attack a decade ago.
Silver is Still a Great Inflation Hedge
Good Luck and Good Trading,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
September 26, 2024
Fiat Lux
Featured Trade:
(AN INSIDER’S GUIDE TO THE NEXT DECADE OF TECH INVESTMENT),
(AMZN), (AAPL), (NFLX), (AMD), (INTC), (TSLA), (GOOG), (META)
Last weekend, I had dinner with one of the oldest and best-performing technology managers in Silicon Valley. We met at a small out-of-the-way restaurant in Oakland near Jack London Square so no one would recognize us. It was blessed with a very wide sidewalk out front and plenty of patio tables.
The service was poor and the food indifferent, as are most dining experiences these days. I ordered via a QR code menu and paid with a touchless Square swipe.
I wanted to glean from my friend the names of the best tech stocks to own for the long term right now, the kind you can pick up and forget about for a decade or more, a “lose behind the radiator” portfolio.
To get this information, I had to promise the utmost confidentiality. If I mentioned his name, you would say “Oh my gosh!”
Amazon (AMZN) is now his largest holding, the current leader in cloud computing. Only 5% of the world’s workload is on the cloud presently so we are still in the early innings of a hyper-growth phase there.
By the time you price in all the transportation, labor, and warehousing costs, Amazon breaks even with its online retail business at best. The mistake people make is only focusing on these lowest-of-margin businesses.
It’s everything else that’s so interesting. While its profitability is quite low compared to the other Magnificent Seven stocks, Amazon has the best growth outlook. For a start, third-party products hosted on the Amazon site, most of what Amazon sells, offer hefty 30% margins.
Amazon Web Services (AWS) has grown from a money loser to a huge earner in just four years. It’s a productivity improvement machine for the world’s cloud infrastructure where they pass all cost increases on to the customer, who once in, buys more services.
Apple (AAPL) is his second holding. The company is in transition now justifying a massive increase in earnings multiples, from 9X to 34X over the last several years. The iPhone has become an indispensable device for people around the world, and it is the services sold through the phone that are key.
The iPhone is really not a communications device but a selling device, be it for apps, storage, music, or third-party services. The cream on top is that Apple is at the very beginning of an enormous replacement cycle for its installed base of over one billion phones. Moving from up-front sales to a lifetime subscription model will also give it a he boost.
Half of these are more than four years old and positively geriatric in the tech world. More than half of these are outside the US. 5G will add a turbocharger.
Netflix (NFLX) is another favorite. The world is moving to “over the top” content delivery and Netflix is already spending twice as much on content as any other company in this area. This is why the company won an amazing 21 Emmys this year. This will become a much more profitable company as it grows its subscriber base and amortizes its content costs. Their cash flow is growing by leaps and bounds, which they can use to buy back stock or pay a dividend.
Generally speaking, there is no doubt that the pandemic has pulled forward some future technology demand with the stay-at-home trend. But these companies have delivered normal growth in a hard world. Tech growth will accelerate in 2021 and 2022.
5G will enable better Internet coverage for everyone and will increase the competitiveness of the telecom companies. Factory automation will be another big area for 5G, as it is reliable and secure, and can be integrated with artificial intelligence.
Transportation will benefit greatly. Connected self-driving cars will be a big deal, improving safety and the quality of life.
My friend is not as worried about government-threatened breakups as regulation. There will be more restraints on what these companies can do going forward. Europe, which has no big tech companies if its own, views big American tech companies simply as a source of revenues through fines. Driving companies out of business through cutthroat competition is simply not something Europeans believe in.
Google (GOOG) is probably more subject to antitrust proceedings both in Europe and the US. The founders have both retired to pursue philanthropic activities, so you no longer have the old passion (“don’t be evil”).
Both Google and Meta (META) control 70% of the advertising market between them, which is inherently a slow-growing market, expanding at 5% a year at best. (META)’s growth has slowed dramatically, while it has reversed at (GOOG).
He is a big fan of (AMD), one of his biggest positions, which is undervalued relative to the other chip companies. They out-executed Intel (INTC) over the last five years and should pass it over the next five years.
He has raised value tech stocks from 15% to 30% of his portfolio. Apple used to be one of these. Semiconductor companies today also fall into this category. Samsung with 40% margins in its memory business is a good example. Selling for 10X earnings it is ridiculously cheap. It is just a matter of time before semiconductors get rerated too.
He was an early owner of Tesla (TSLA) back in the nail-biting days when it was constantly running out of cash. Now they have the opposite problem, using their easy access to cash through new share issues as a weapon to fight off the other EV startups. Tesla is doing to Detroit what Apple did to the cell phone companies, redefining the car.
Its stock is overvalued now but will become much more profitable than people realize. They also are starting to extract service revenues from their cars, like Apple has. Tesla will grow revenues by 30%-50% a year for the next two or three years. They should sell several million of the new small SUV Model Y. Most other companies bringing EVs will fall on their faces.
EVs are a big factor in climate change, even in China, the world’s biggest polluter. In Europe, they are legislating gasoline cars out of existence. If you can make money building cars in Fremont, CA, you can make a fortune building them in China.
Tech valuations are high, there is no doubt about it. But interest rates are much lower by comparison. The Fed is forcing people to buy stocks, enabling these companies to evolve even faster.
When rates rise in a year or so tech stocks may have to come down. They have a lot more things going for them than against them. The customers keep coming back for more.
Needless to say, the above stocks should make up your shortlist for LEAPS to buy at the coming market bottom.
Mad Hedge Technology Letter
September 4, 2024
Fiat Lux
Featured Trade:
(FEDS KNOCK THE WIND OUT OF TECH)
(AI), (NVDA), (MSFT), (META)
The U.S. Federal government just took the air out of the tech market rally in the short term.
Good thing the market usually has a short memory.
Mr. Market did not expect the US Justice Department to barge in and subpoena Nvidia (NVDA).
Nvidia is the gem of the tech industry and the leader of the cutting-edge generative artificial intelligence sub-sector.
To take out Nvidia and destroy it, the tech market would be valued at significantly less than it is today.
Not to mention we are just 2 months away from the U.S. election, this sounds and feels like a bold political move behind the scenes.
Why not wait until after the election?
As it stands, the timing is pretty terrible for tech stocks as the amount of catalysts to take us to new highs has disappeared.
The past earnings seasons were nothing stellar and many tech companies sold off on poor forward guidance.
It is no joke that we have been waiting for over 4 years for the recession that still hasn’t come.
However, it seriously looks like we won’t be able to kick the can down the road anymore and the job market is starting to fall apart to the point where we will need rate cuts.
The DOJ believes Nvidia is too dominant and appears to look like a monopoly and the government is inching closer to filing a formal complaint.
Antitrust officials are concerned that Nvidia is making it harder to switch to other suppliers and penalizes buyers that don’t exclusively use its artificial intelligence chips.
Nvidia has drawn regulatory scrutiny since becoming the world’s most valuable chipmaker and a key beneficiary of the AI spending boom. Sales have been more than doubling each quarter.
Regulators also are digging into whether Nvidia gives preferential supply and pricing to customers who use its technology exclusively or buy its complete systems.
Nvidia Chief Executive Officer Jensen Huang said he prioritizes customers who can make use of his products in ready-to-go data centers as soon as he provides them, a policy designed to prevent stockpiling and speed up the broader adoption of AI.
Microsoft (MSFT) and Meta (META) spend more than 40% of their budget on hardware on the chipmaker’s gear. During the peak of shortages of Nvidia’s H100 accelerator, individual components were retailing for as much as $90,000 each.
There also are broader regulatory questions about Nvidia’s practices. Access to AI capabilities has become a key focus for governments around the world, with the technology becoming increasingly vital to economic strength and national security.
If NVDA shares drop to anything close to the $100 level, I do believe that is a great entry point to add to shares.
Much of the bad news has been priced in and at the end of the day, even if NVDA is broken up, it will happen 10 years later.
As for the larger tech story, September could be a weak month for tech stocks and it is a seasonably slow month.
However, the infrastructure build for AI data centers relentlessly continues, and from my channel checks, I see tech firms increasing their purchases of Nvidia AI chips.
This bodes well for the future and explains why sales keep doubling and doubling like it never ends.
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
