Global Market Comments
November 13, 2023
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE YEAREND RALLY CONTINUES!)
(TSLA), (F), (MSFT), (NLY), (BRK/B), (TLT), (CCJ), (CRM)
Posts
Last week saw the best week for stocks in two years. As I expected, big tech led the charge and will continue to do so well into next year. Bonds (TLT) stabilized.
It looks like Mad Hedge followers will get to ring the cash register one more time in 2023!
However, we face a couple of speed bumps this coming week. On Tuesday, we get the Consumer Price Index which will tell us if inflation is well and truly dead….or not. On Wednesday, we get the Producer Price Index. And then on Friday, the US government shuts down for lack of funding.
Oops!
There have been some 92 government shutdowns in the last 50 years. Since then, the Dow Average has rocketed by 60 times.
So, I am not worried about the long-term effect on your retirement portfolio. When voters see the gravy train from Washington cut off, not to mention Social Security checks, military pay, and air traffic controller salaries, Congressmen can suddenly become very agreeable.
The short term is another story.
If House recalcitrance triggers a 500 or 1,000-point swan dive in stocks, you want to pile into the big tech leaders I have been begging you to buy for the past three weeks and fill your boots. And while 2023 was a hell of a year to make money in stocks (Mad Hedge has made only 73% so far in 2023, a three-year low), 2024 is looking much, much better.
Think falling inflation, stabilizing wages, fading interest rates, recovering profits, expanding price earnings multiples, and soaring stocks and bonds. The traditional 60/40 portfolio will come back with a vengeance.
I caught up with my old friend Ron Barron the other day, who I talked into buying Tesla shares in 2014. He got in late, at about $100 a share, or 25 times my own original split-adjusted $2.50 cost. But when you’re running big money as Ron, you can’t afford to buy the kind of wild insane risks that buying Tesla in 2010 entailed.
I can.
Ron is now the largest outside shareholder in both Tesla (TSLA) and SpaceX. Tesla is so far ahead of the competition that he expects to hold the shares for the rest of his life. Ford Motors (F) now loses $36,000 for each EV it sells, while Tesla earns a profit of $8,000, down from $15,000 a year ago.
Ford spends $7 billion to build a new factory which generates a miniscule $15 million, or 0.2%. Tesla earns 114% profit on every $7 billion factory it builds.
It's no contest.
During the 1950s, Detroit went all out to earn short-term profits by outsourcing its supply chain. Virtually every one of those third-party companies went bankrupt, irreparably harming their business models. Tesla makes virtually all of its parts in-house, including the Panasonic batteries.
Tesla is learning 100 million miles of data per day from its fleet of 6 million cars. No one else has anything close to this. In 18 months, (TSLA) will have the world’s largest computing ability, which Elon Musk refers to as “Dojo” (karate school in Japanese), which Morgan Stanley estimates will add $500 million to the value of the company.
There are 1.5 billion internal combustion engines in the world that need to be replaced. The present replacement rate is only 80 million cars a year and only 10% of these are EVs. Eventually, 100% will be EVs. Detroit carmakers don’t want to sell EVs because they require no service whereas local dealers make all their money. EVs require no service beyond changing tires every two years,
And while President Biden recently suggested that the UAW targets Tesla for unionization, they don’t have a chance. Tesla workers are by far the highest-paid auto workers in the world with the best benefits. They also own stock, many at my own $2.50 adjusted share cost. Elon was sitting pretty during the recent 46-day UAW nationwide walkout.
Buying Tesla today does not mean you are investing in the achievements of the past, which are formidable. It means that you are buying the new Cybertruck which is rolling out now and offers a new platform with many new technological leaps forward.
More importantly, you are betting on the new $25,000 Model 2 due out in 2025, where Tesla plans to build 5 million a year. Then the EV competition will well and truly be gone.
That makes my $1,000 a share target then $10,000 look extremely modest.
Don’t kid yourself. Tesla can still add to the 35.6% decline it has suffered since July 17. We could go as low as $150, a 50% hickey. This is the most volatile major stock in the market. It always goes down more than you think. But if we do, you want to take a second mortgage out on your home and put it all into Tesla. It’s going up 67 times from there.
I just thought you’d like to know.
So far in November, we are up +7.32%. My 2023 year-to-date performance is still at an eye-popping +73.49%. The S&P 500 (SPY) is up +7.89% so far in 2023. My trailing one-year return reached +74.44% versus +15.78% for the S&P 500.
That brings my 15-year total return to +670.78%. My average annualized return has rocketed to a new all-time high at +51.26%, another new high, some 2.58 times the S&P 500 over the same period.
Some 57 of my 62 trades this year have been profitable.
I went pedal to the metal last week, taking profits on my last three November positions in (TLT), (BRK/B), and (NVDA) that maxed out profits and piling in new December longs in (MSFT), (NLY), (BRK/B), (TLT), (CCJ), (CRM). That’s how you hit new all-time highs every day.
Berkshire Hathaway Knocks it Out of the Park, with a 41% gain in operating earnings from companies like BNSF Railroad, Geico, and Precision Castparts. But Warren Buffet was noted more for what he didn’t own than what he did. He unloaded $5 billion worth of global stocks in Q3, taking his cash position up to a record $157 billion. He can now earn a staggering $8.6 billion in interest in the coming year. He explains that stocks never really got cheap this year and high rates were just too attractive. Keep buying (BRK/B) on dips.
China EV Maker BYD is Building its First European Car Factory, in a clear threat to European car makers. They picked Hungary, one of the lowest-waged countries on the continent. BYD (BYDFF) which I recommended back in 2012 after visiting the factory in China is now the largest EV maker there knocking out 250,000 units this year. Is Tesla worried?
Investors Poured $5 Billion into Bond ETFs in October. Institutional investors were happy with the 5.0% yield last month and if they rose, they would simply buy more. It’s another sign that the bottom for all fixed-income prices is at hand. Buy (TLT), (JNK), and (NLY).
China Lends $1.34 Trillion for Belt and Road Initiative, from 2000 to 2001 to dominate Asian and African infrastructure. Good luck getting it back and good luck foreclosing. In the meantime, China suffered its first-ever deficit in foreign direct investment as the West de-risks from the Middle Kingdom.
Oil Hits a four-month low at $75 a Barrel, down 4% as the shine comes off the energy sector. The Gaza boost is gone. Fears of a global economic slowdown are mounting. China’s exports have fallen for six consecutive months, the world’s largest importer. Biden is back in the oil business, provided a floor bid from the Strategic Petroleum Reserve at $79.
Most 2023 Stock Gains Happened in 8 Days, up some 14% since January 1. If you are a day trader, you most likely missed all of this. This is despite stocks going up 113 days versus 102 down days. Making matters more difficult is that only seven stocks accounted for most of the increase. Talk about a narrow market!
A Soft Landing is Now More Likely, says Bank of America CEO Moynihan. Inflation is falling and could lead to Fed interest rate cuts in H2 2024. Stocks and bonds will love it.
NVIDIA is Designing Dumbed Down Chips for China, to bypass government sanctions. It’s an opportunity to recover some lost market share. Keep buying (NVDA) on dips, up 20% in two weeks. It has an impassable moat.
Weekly Jobless Claims dropped from 3,000 to 217,000. It’s still unusually low. Hiring slowed in October as the economy slowed.
My Ten-Year View
When we come out the other side of the recession, we will be perfectly poised to launch into my new American Golden Age or the next Roaring Twenties. The economy decarbonizing and technology hyper-accelerating, creating enormous investment opportunities. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The new America will be far more efficient and profitable than the old.
Dow 240,000 here we come!
On Monday, November 13, bond markets are closed for Veterans Day. I will be leading the local parade wearing my new Medal from the Ukraine Army.
On Tuesday, November 14 at 2:30 PM EST, the Core Inflation Rate is released.
On Wednesday, November 15 at 8:30 AM, the Producer Price Index is published.
On Thursday, November 16 at 8:30 AM, the Weekly Jobless Claims are announced.
On Friday, November 17 at 2:30 PM the US Building Permits are published. At 2:00 PM the Baker Hughes Rig Count is printed.
As for me, few Americans know that 80% of all US air strikes during the Vietnam War originated in Thailand. At their peak in 1969, more US troops were serving in Thailand than in South Vietnam itself.
I was one of those troops.
When I reported to my handlers at the Ubon Airbase in northern Thailand for my next mission, they had nothing for me. They were waiting for the enemy to make their next move before launching a counteroffensive. They told me to take a week off.
The entertainment options in northern Thailand in those days were somewhat limited. Phuket and the pristine beaches of southern Thailand where people vacation today were then overrun by cutthroat pirates preying on boat people who would kill you for your boots.
Life was cheap in Asia in those days, especially your life. Any trip there would be a one-way ticket.
There were the fleshpots of Bangkok and Chang Mai. But I would likely contract some dreadful disease there. I wasn’t really into drugs, figuring whatever my future was, it required a brain. Besides, some people’s idea of a good time there was throwing a hand grenade into a crowded disco. So, I, ever the history buff, decided to go look for The Bridge Over the River Kwai.
Men of my generation knew the movie well, about a company of British soldiers who were the prisoners of bestial Japanese. At the end of the movie, all the key characters die as the bridge is blown up.
I wasn’t expecting much, maybe some interesting wreckage. I knew that the truth in Hollywood was just a starting point. After that, they did whatever they had to do to make a buck.
The fall of Singapore was one of the great Allied disasters at the beginning of WWII. Japanese on bicycles chased Rolls Royce armored cars and tanks the length of the Thai Peninsula. Two British battleships, the Repulse and the Prince of Wales, were sunk due to the lack of air cover with a great loss of life. When the Japanese arrived at Singapore, the defending heavy guns were useless as they pointed out to sea.
Some 130,000 men surrendered, including those captured in Malaysia. There were also 686 American POWs, the survivors of US Navy ships sunk early in the war. Most were shipped north by train to work as slave labor on the Burma Railway.
The Japanese considered the line strategically essential for their invasion of Burma. By building a 258-mile railway connecting Bangkok and Rangoon they could skip a sea voyage of 2,000 miles in waters increasingly dominated by American submarines.
Some 12,000 Allied troops died of malaria, beriberi, cholera, dysentery, or starvation, along with 90,000 impressed Southeast Asian workers. That earned the line the fitting name: “Death Railway.”
The Burma Railway was one of the greatest engineering accomplishments in human history, ranking alongside the Pyramids of Egypt. It required the construction of 600 bridges and viaducts. It crossed countless rivers and climbed steep mountain ranges. The work was all done in 100-degree temperatures with high humidity in clouds of mosquitoes. And it was all done in 18 months.
One of those captured was my good friend James Clavell, who spent the war at Changi Prison, now the location of Singapore International Airport. Every time I land there, it gives me the creeps.
Clavell wrote up his experiences in the best-selling book and movie King Rat. He followed up with the Taipan series set in 19th-century Hong Kong. We lunched daily at the Foreign Correspondents Club of Japan when he researched another book, Shogun, which became a top TV series for NBC.
So I navigated the Thai railway system to find remote Kanchanaburi Province where the famous bridge was said to be located.
My initial surprise was that the bridge was still standing, not destroyed as it was in the film. It was not a bridge made of wood but concrete and steel trestles. Still, you could see the scars of Allied bombing on the foundations, who tried many times to destroy the bridge from the air.
That day, the Bridge Over the River Kwai was a quiet, tranquil, peaceful place. Farmers wearing traditional conical hats made of palm leaves and bamboo strips called “ngob’s,” crossed to bring topical fruits and vegetables to market. A few water buffalo loped across the narrow tracks. The river Kwai gurgled below.
Once a day, a train drove north towards remote locations near the Burmese border where a bloody rebellion by the indigenous Shan people was underway.
The wars seemed so far away.
The only memorial to the war was a decrepit turn-of-the-century English steam engine badly in need of repair. There were no tourists anywhere.
So I started walking.
After I crossed the bridge, it wasn’t long before I was deep in the jungle. The ghosts of the past were ever present, and I swear I heard voices. I walked a few hundred yards off the line and the detritus of the war was everywhere: abandoned tools, rusted-out helmets, and yes, human bones. I didn’t linger because the snakes here didn’t just bite and poison you, they swallowed you whole.
After the war, the Allies used Japanese prisoners to remove the dead for burial in a nearby cemetery, only identified by their dog tags. Most of the “coolies” or Southeast Asian workers were left where they fell.
Today, only 50 miles of the original Death Railway remain in use. The rest proved impossible to maintain, because of shoddy construction, and the encroaching jungle.
There has been talk over the years of rebuilding the Burma Railway and connecting the rest of Southeast Asia to India and Europe. But with Burma, today known as Myanmar, a pariah state, any progress is unlikely.
Maybe the Chinese will undertake it someday.
Every Christmas vacation, when my family has lots of free time, I sit the kids down to watch The Bridge Over the River Kwai. I just wanted to pass on some of my experiences, teach them a little history, and remember my old friend Clavell.
Good Luck and Good Trading
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Walking the Bridge Over the River Kwai in 1976
Mad Hedge Technology Letter
November 3, 2023
Fiat Lux
Featured Trade:
(THE CATCH UP PLAN)
(GOOGL), (MSFT), (CHATGPT)
The tech industry is quickly morphing into a generative artificial intelligence success story or bust outcome for many involved.
This came pretty much out of nowhere.
December 2022 was the big announcement that ChatGPT went live and everybody in tech has basically been freaking out since then.
Big ideas like the internet and software also had the same type of effect on tech stocks back in the heyday.
What would have Microsoft (MSFT) been without the computer or Windows?
Even more urgent, once perceived growth tech companies like Tesla are starting to cut prices of products because the consumer is tapped out these days.
That means tech corporations can’t sell the current product by adding incremental iterations and passing it off as something “groundbreaking.”
Consumers need something more.
Consumers will spend on the next big thing and generative artificial intelligence still has a long way to go, but stocks participating in generative AI are starting to get those premium multiples that were only reserved for tech royalty.
Everyone is hoping to get in on the action as well as Alphabet.
They are racing to build a new search engine and add artificial intelligence features to its existing products in the face of rapid growth in the field by rivals such as Microsoft Bing.
Google is testing new features called "Magi," with more than 160 people working full-time on the project.
Google's new products will try to predict users' needs, with features such as helping users write software code and display ads in search results, and Google is also exploring mapping technology that allows users to use Google Earth with the help of AI and search music through conversations with chatbots.
Samsung Electronics is reportedly considering replacing Google with Bing, the main search engine on its phones, because of Bing's artificial intelligence capabilities. The Samsung contract is expected to generate $3 billion in annual revenue for Google, a revenue stream that is now in jeopardy. In addition, Google has a $20 billion contract with Apple for a similar default search engine, which is up for renewal this year.
Google’s search engine could be swept into the dustbin of history if they don’t get a move on it pronto.
The ecosystems like Apple and Samsung can easily opt for a better engine if Google falls behind and that is exactly what we are seeing from Samsung.
I would probably say that Google got a little too cocky when they decided to stop developing itself.
They thought that nobody could topple them.
The panoramic views from the ivory tower can look nice from the terrace for a while until somebody builds a bigger ivory tower that obstructs the view.
It’s been quite fascinating to see Google’s sense of urgency lately because it was always assumed they were part of a stable duopoly with Facebook.
Google’s panic indicates that Microsoft’s Bing is a real threat to their revenue stream and at the very minimum, bits and pieces of the new technology will be incorporated into a new version of a search engine that will behave as a supercharged version of the likes we have never seen before.
If Google can catch up then its stock price will go a lot higher from here.
Global Market Comments
October 20, 2023
Fiat Lux
Featured Trade:
(TESTIMONIAL)
(OCTOBER 18 BIWEEKLY STRATEGY WEBINAR Q&A),
(LMT), (MS), (GOOG), (NVDA), (TSLA), (MSFT), (AMZN), (APPL), (META), (FXI), (RIVN), (NFLX)
Below please find subscribers’ Q&A for the October 18 Mad Hedge Fund Trader Global Strategy Webinar, broadcast from London England.
Q: Is Nvidia (NVDA) a buy at the current price?
A: Absolutely, if your view is more than, say, a month. This stock will easily be $1,000 in the next year or two. They have such a huge moat on their business, and the high-end chips that are banned in China are only a tiny fraction of their overall business—they’re still allowed to sell small and medium-sized chips.
Q: Where do you see bond yields peaking out?
A: My pet target is 5.2% on a spike. We may get there in a few weeks or months. The position we have breaks even at 5.15% in 21 trading days. So any kind of rally on that position becomes profitable—even a one-day rally.
Q: Are you hitting Israel next?
A: No, I covered the Middle Eastern wars for 10 years starting with the ‘73 Yom Kippur wars, and I got sick of it. They’re using the same arguments to justify their positions that they were 50 years ago. In fact, the disputes have been going on for hundreds of years. So, I moved on to other more interesting wars like Ukraine. There are plenty of newbies cutting their teeth as war correspondents in Gaza now—I'll leave it to them.
Q: Are the results for all of the newsletters or just for one?
A: Those alerts that I send out personally are the results for the Mad Hedge Global Trading Dispatch. All of the other services (we have six now) have their own trade histories which we don’t publish, as it’s too much of an account job effort to update six independent track records. People know whether they’re making money or not—that's good enough for me. That’s how we’re set up; we’re a staff-light operation so that we can keep the prices low.
Q: What do you expect for Tesla (TSLA) earnings today?
A: I never make same-day earnings calls, but I would expect they’d be good. They would be less than they were in the past because the price wars are cutting into margins, but they’re gaining market shares at everybody else’s expense, which makes (TSLA) a “BUY”. In fact, if you look at the charts, it seems to be moving sideways into an upside breakout.
Q: Is it too late to buy military?
A: No, I’d be buying any of the big military stocks like Lockheed Martin (LMT), because the increase in demand for weapons is not a short-term thing—it is a more or less permanent thing which will go out decades. Also, they all already have massive government contracts to rebuild our own weapons. Most people don't realize that almost every weapons system in the United States is more than 50 years old. The reason is we quit investing in conventional weapons because we all thought the next war would be cyber. Well, Russia got absolutely nowhere on cyber—they made a few weak attempts to shut down Ukraine and couldn't even break into Elon Musk’s Skylink system, which all of Ukraine is running on.
Q: Why is Morgan Stanley (MS) doing so poorly?
A: All the financials are getting hit because of the collapsing bond market. Once the bond market finds a bottom you want to be buying financials with both hands.
Q: When the market recovers, which sector will lead?
A: Technology. The Magnificent Seven will lead. There’s safety in size. Google/Alphabet (GOOG), Nvidia (NVDA), Tesla (TSLA), Microsoft (MSFT), Amazon (AMZN), Apple (APPL), Facebook/Meta (META). They’re already leading now, so if you have those positions, I’d keep them. If you don’t, you should start picking them up.
Q: Is Rivian (RIVN) a buy at this level?
A: Absolutely. Amazon, which owns 25% of the company, just hit 10,000 Rivian delivery vans. I’ve seen them in California, they’re completely silent—very interesting cars. It’s just a question of how quickly they can produce them.
Q: Why is there a market drop today?
A: It’s the bond market. The first thing you look at every day is the bond market—if it's doing crappy, everything sells off.
Q: Do you still suggest 90-day T-bills at this point?
A: We may end up getting a stock buying opportunity into the year-end. Even if we have to wait for a yearend rally, you get paid every day for 90-day T-bills, and you can sell them at any time and get interest up to the day you sell them because they’re discount bonds that appreciate every day to reflect the yield. It’s a great way to park money, and most brokers will let you buy stocks against your 90-day T-bill position. So say you want to go fully invested in stocks—you could do that while selling your 90-day T-bills the same day. Most brokers will let you do that, worst case charging you one day of margin.
Q: Do you think China is using the Hamas attack on Israel to distract the US?
A: No, China wouldn’t want to get involved in this. Iran has its fingerprints all over it. Iran supplied all the missiles used to attack Israel, and if the Israelis turn around and attack Iran by destroying all of their nuclear and missile-making facilities, I would not be surprised one bit. That may be what Biden is really doing over there—trying to convince the Israelis not to escalate the war.
Q: What are the chances of a US default on November 17 (TLT)?
A: So far on all of these government shutdowns, the US Treasury has been able to come up with magic tricks to keep from defaulting; but if the default is long enough, even they will have to stop paying interest to bondholders, which will increase the debt burden of the US government because a lower credit rating will cause it to pay higher interest rates. Why people think this is a great strategy is beyond me.
Q: Gasoline is down and oil is up—what’s going on?
A: That’s usually driven by the crack spread—the availability of gasoline from refineries in the US, so I wouldn’t use that as any kind of indicator.
Q: Do you think China (FXI) is shifting priorities away from economic growth to military strength?
A: No I don’t, they would love to have economic growth if they could, and in fact, their central bank has been stimulating their economy, and it's working; that’s how this morning’s report got back up to 5%. At the end of the day, they just want peace. All this military stuff—they’re just bluffing and posturing, which is really all they’ve ever done, at least since the Korean War. They weren’t even big participants in the Vietnam War, so China doesn’t worry me at all; there are bigger things to worry about. But they definitely have hit a wall in economic growth, and a big part of that is Covid, and a big part of that is a shrinking population—a shortage of workers, and a shortage of workers who can support older parents.
Q: Will there be an oil embargo against Israel? The US and Europe by OPEC countries?
A: No. The Middle Eastern governments know what's really going on here, even though what they may say in public is completely different. The fact is that Hamas started this war, and none of these other countries want Hamas in their countries because they know that the first thing they'll do is overthrow the local government. Effectively, Hamas doesn’t exist anymore either—they've really all been killed, so you just have to give some time for things to cool down out there, and of course, the US is working overtime to keep the situation from escalating, but we can only try—we can’t enforce this thing. One question I've been getting from a lot of people lately is: will the US send troops to Israel or to Gaza? The answer is no—we were in Iraq and Afghanistan for 20 years! We’re in no hurry to get back into a new war, especially a new 20-year war, and that would not be in our own interest. By the way, Israel can amply defend itself; they have the best military in the Middle East by far, largely supported by the United States. For me, the big mystery is how intelligence in Israel missed this attack. They were just completely asleep at the switch, and some day in the future there will be an investigation about this, but don’t expect it from the current government.
Q: Why won’t Egypt and Jordan take the Palestinian refugees?
A: They are both poor countries. Neither of them is oil-rich, and Egypt especially has a horrendous population problem—they are in fact the world's second largest food importer after China. They have 110 million people to feed and not enough production locally to do that, so it isn’t easy to take in 2 million Palestinians. If you don't believe me, go to Cairo—it's just incredibly crowded. With a population of 10 million you can't go anywhere, so where are they going to put 2 million more people? So this is a difficult problem, there's no easy fix depending on what side you’re on.
To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in to www.madhedgefundtrader.com, go to MY ACCOUNT, select your subscription (GLOBAL TRADING DISPATCH, TECHNOLOGY LETTER, or Jacquie's Post), then click on WEBINARS, and all the webinars from the last 12 years are there in all their glory.
Good Luck and Good Trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
2021 Mount Rose Summit Nevada
Mad Hedge Technology Letter
October 9, 2023
Fiat Lux
Featured Trade:
(GLOBAL WAR THREATENS TECH RALLY)
(GOOGL), (MSFT), (LMT), (EV), (CHINA)
Hot wars play a central role in accelerating inflation and the world’s newest kinetic war in the Middle East could prove toxic to the Fed’s quest to quell high inflation.
First, condolences to the atrocities that have occurred in the past 72 hours, the damage to families, society, and communities are hurtful and long-lasting.
Conflict in the Middle East means higher energy prices because a higher risk premium will be attached to the cost of logistics and production.
The Middle East has some of the highest outputs of oil and natural gas in the world with supply from Qatar, Saudi Arabia, and Iran flooding the world with cheap energy.
What does that mean for technology stocks?
I can tell you nothing good.
Physical wars rotate demand to certain goods that will deliver the consumer the best outcomes and in this case food and shelter. Running a supermarket during the lockdowns was a small gold mine. That means there is a high chance that money rotates out of Google and Microsoft and goes into defense and military stocks like Raytheon and Lockheed Martin (LMT).
Unless products are critical to survival, goods like EVs and Tesla’s (TSLA) are placed on the backburner.
Few will have the money to charge their EVs with another wave of price increases coming down the pipeline. I already hear Norwegians complaining about the cost of fueling EVs after cheap Russian energy was shut off to them.
Forget about an iPhone upgrade cycle.
Kids will just have to deal with the iPhone 14 for longer.
High inflation plays a leading role in wars and conflicts. But that doesn’t mean that economic policy doesn’t matter anymore. Less wars result in bigger tailwinds to deflation.
China also owns the rare metals industry and policy might dictate to hold back supply and earmark it for national and military industries instead of selling to foreigners.
Tesla’s might not be able to be produced anymore because they can’t secure the right materials like cobalt from China.
If a full-fledged regional war intensifies, then the US economy is almost guaranteed to lock in 4% as the new CPI low for this inflationary cycle. The next move would be higher.
The US has already pledge financial and military aid to Israel and that bill will be footed by the US taxpayer.
If this war begins to get expensive and the US starts shipping off $200 billion every few months to the Middle East then this fiscal spending will bring forward more inflation.
Ultimately, if a third war in the shape of Taiwan rears its ugly head, we could experience high 20% inflation like we did in the 1970’s, but this time around, we would do it with close to $34 trillion in US federal debt and those onerous debt interest payments.
The technology sector better hope and pray for a quick resolution to the Middle East conflict in order to stave off the threat of destroying the Santa Claus rally in the Nasdaq.
A third concurrent war in Taiwan would mean instant recession, spiking bond yields, $150 per barrel oil, and technology stocks experiencing a wild pullback.
In the meantime, the newest stresses will guarantee the Eurozone plus UK into a deep recession because they aren’t self-sufficient.
It also adds even more stress to the US economy which is the last man standing at this point because US tech earnings are still in the green.
Certain stocks do very well in times of geopolitics, but these multinational globalized companies have a lot to sacrifice if the world goes pear-shaped.
We’ve just seen our last interest rate rise in the economic cycle. Yes, I know that our central bank took no action at their last meeting in September. The market has just done its work for it.
And the markets are no shrinking violet when it comes to taking bold action. The 50 basis points it took bond yields up over the last two weeks is far more than even the most aggressive, economy-wrecking, stock market-destroying Fed was even considering.
And that doesn’t even include the rate hikes no one can see, the deflationary effects of quantitative tightening, or QT. That is the $1 trillion a year the Fed is sucking out of the economy with its massive bond sales.
It really is a miracle that the US economy is growing as fast as it is. After a warm 2.4% growth rate in Q2, Q3 looks to come in at a blistering 4%-5%. That is definitely NOT what recessions are made of.
Where is all this growth coming from?
Some of the credit goes to the pandemic spending, the free handouts we call got to avoid starvation while Covid ravaged the country. You probably don’t know this, but nothing happens fast in Washington. Government spending is an extremely slow and tedious affair.
By the time that contracts are announced, bids awarded, permits obtained, men hired, and the money spent, years have passed. That means money approved by Congress way back in 2020 is just hitting the economy now.
But that is not the only reason. There is also the long-term structural push that is a constant tailwind for investors:
Hyper-accelerating technology.
Yes, I know, there goes John Thomas spouting off about technology again. But it is a really big deal.
I have noticed that the farther away you get from Silicon Valley, the more clueless money managers are about technology. You can pick up more stock tips waiting in line at a Starbucks in Palo Alto than you can read a year’s worth of research on Wall Street.
What this means is that most large money managers, who are based on the east coast are constantly chasing the train that is leaving the station when it comes to tech.
On the west coast, managers not only know about the new tech, but the tech that comes after that and another tech that comes after that, if they are not already insiders in the current hot deal. This is how artificial intelligence stole a march on almost everyone, until a year ago, unless you were on the west coast already working in the industry. Mad Hedge has been using AI for 11 years.
You may be asking, “What does all of this mean for my pocketbook?” a perfectly valid question. It means that there isn’t going to be a recession, just a recession scare. That technology will bail us out again, even though our old BFF, the Fed, has abandoned us completely.
Which brings me to the current level of interest rates. I have also noticed that the farther away you get from New York and Washington, the less people know about bonds. On the west coast mention the word “bond” and they stare at you cluelessly. Indeed, I spent much of this year explaining the magic of the discount 90-day T-bill, which no one had ever heard of before (What! They pay interest daily?).
In fact, most big technology companies have positive cash balances. Look no further than Apple’s $140 billion cash hoard, which is invested in, you guessed it, 90-day T-bills when it isn’t buying its own stock, and is earning a staggering $7.7 billion a year in interest.
The great commonality in the recent stock market correction is easy to see. Any company that borrows a lot of money saw its stock get slaughtered. Technology stocks held up surprisingly well. That sets up your 2024 portfolio.
Put half your money in the Magnificent Seven stocks of Apple (AAPL), Amazon (AMZN), Meta (META), Microsoft (MSFT), Tesla (TSLA), (NVIDIA), and Salesforce (CRM).
Put your other half into heavy borrowers that benefit from FALLING interest rates, including bonds (TLT), junk bonds (JNK), (HYG), Utilities (XLU), precious metals (GOLD), (WPM), copper (FCX), foreign currencies (FXA), (FXE), (FXY), emerging markets (EEM).
As for me, I never do anything by halves. I’m putting all my money into Tesla. If I want to diversify, I’ll buy NVIDIA. Diversification is only for people who don’t know what is going to happen.
I just thought you’d like to know.
So far in October, we are up +2.96%. My 2023 year-to-date performance is still at an eye-popping +63.76%. The S&P 500 (SPY) is up +12.89% so far in 2023. My trailing one-year return reached +76.46% versus +22.57% for the S&P 500.
That brings my 15-year total return to +660.95%. My average annualized return has fallen back to +48.07%, another new high, some 2.64 times the S&P 500 over the same period.
Some 44 of my 49 trades this year have been profitable.
Chaos Reigns Supreme in Washington, with the firing of the first House speaker in history. Will the next budget agreement take place on November 17, or not until we get a new Congress in January 2025? Markets are discounting the worst-case scenario, with government debt in free fall. Definitely NOT good for stocks, which are reaching for a full 10% correction, half of 2023’s gains.
September Nonfarm Payroll Report Rockets, to 336,000, and August was bumped up another 50,000. The economy remains on fire. The headline Unemployment Rate remains steady at an unbelievable 3.8%. And that’s with the UAW strike sucking workers out of the system. This is supposed to by impossible with 5.5% interest rates. Throw out you economics books for this one!
JOLTS Comes in Hot at 9.61 million job openings in August, 700,000 more than the July report. The record labor shortage continues. Will the Friday Nonfarm Payroll Report deliver the same?
ADP Rises 89,000 in September, down sharply from previous months, showing that private job growth is growing slower than expected. August was revised down. It’s part of the trifecta of jobs data for the new month. The mild recession scenario is back on the table, at least stocks think so.
Weekly Jobless Claims Rise to 207,000, still unspeakably strong for this point in the economic cycle. Continuing claims were unchanged at 1.664%.
Traders Pile on to Strong Dollar, headed for new highs, propelled by rising interest rates. There is a heck of a short setting up for next year.
Yen Soars on suspected Bank of Japan intervention in the foreign exchange markets to defend the 150 line against the US dollar. The currency is down 35% in three years and could be the BUY of the century.
Kaiser Goes on Strike with 75,000 health care workers walking out on the west coast. The issue is money. The company has a long history of labor problems. This seems to be the year of the strike.
Oil (USO)Gets Slammed on Recession Fears, down 5% on the day to $85, in a clear demand destruction move and worsening macroeconomic picture. Europe and China are already in recession. It’s the biggest one-day drop in a year. Is the top in?
Tesla Delivers 435,059 Vehicles in September, down 5% from forecast, but the stock rose anyway. The Cybertruck launch is imminent, where the company has 2 million new orders. Keep buying (TSLA) on Dips. Technology is accelerating.
EVs have Captured an Amazing 8% of the New Car Market. They have been helped by a never-ending price war and generous government subsidies. EV sales are now up a miraculous 48% YOY and are projected to account for a stunning 23% of all California sales in Q3. Tesla is the overwhelming leader with a 52% share in a rapidly growing market, distantly followed by Ford (F) at 7% and Jeep at 5%. However, a slowdown may be at hand, with EV inventories running at 97 days, double that of conventional ICE cars. This could create a rare entry point for what will be the leading industry of this decade, if not the century. Buy more Tesla (TSLA) on bigger dips, if we get them.
Apple Upgrades New iPhone 15 to deal with overheating from third-party gaming. It will shut down some of its background activity, including some of the new AI functions, which were stressing the central processor. Third-party apps were adding to the problem, such as Uber and games from (META). This is really cutting-edge technology.
Moderna (MRNA) Bags a Nobel Prize in Chemistry. Katalin Kariko and Drew Weissman’s work helped pioneer the technology that enabled Moderna and the Pfizer Inc.-BioNTech SE partnership to swiftly develop shots. I got four and they saved my life when I caught Covid. I survived but lost 20 pounds in two weeks. It was worth it.
My Ten-Year View
When we come out the other side of the recession, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. The economy decarbonizing and technology hyper-accelerating, creating enormous investment opportunities. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The new America will be far more efficient and profitable than the old.
Dow 240,000 here we come!
On Monday, October 9, there is no data of note released.
On Tuesday, October 10 at 8:30 AM EST, the Consumer Inflation Expectations is released.
On Wednesday, October 11 at 2:30 PM, the Producer Price Index is published.
On Thursday, October 12 at 8:30 AM, the Weekly Jobless Claims are announced. The Consumer Price Index is also released.
On Friday, October 13 at 1:00 PM the September University of Michigan Consumer Expectations is published. At 2:00 PM, the Baker Hughes Rig Count is printed.
As for me, one of the many benefits of being married to a British Airways senior stewardess is that you get to visit some pretty obscure parts of the world. In the 1970s, that meant going first class for free with an open bar, and occasionally time in the cockpit jump seat.
To extend our 1977 honeymoon, Kyoko agreed to an extra round trip for BA from Hong Kong to Colombo in Sri Lanka. That left me on my own for a week in the former British crown colony of Ceylon.
I rented an antiquated left-hand drive stick shift Vauxhall and drove around the island nation counterclockwise. I only drove during the day in army convoys to avoid terrorist attacks from the Tamil Tigers. The scenery included endless verdant tea fields, pristine beaches, and wild elephants and monkeys.
My eventual destination was the 1,500-year-old Sigiriya Rock Fort in the middle of the island which stood 600 feet above the surrounding jungle. I was nearly at the top when I thought I found a shortcut. I jumped over a wall and suddenly found myself up to my armpits in fresh bat shit.
That cut my visit short, and I headed for a nearby river to wash off. But the smell stayed with me for weeks.
Before Kyoko took off for Hong Kong in her Vickers Viscount, she asked me if she should bring anything back. I heard that McDonald’s had just opened a stand there, so I asked her to bring back two Big Macs.
She dutifully showed up in the hotel restaurant the following week with the telltale paper bag in hand. I gave them to the waiter and asked him to heat them up for lunch. He returned shortly with the burgers on plates surrounded by some elaborate garnish and colorful vegetables. It was a real work of art.
Suddenly, every hand in the restaurant shot up. They all wanted to order the same thing, even though the nearest stand was 2,494 miles away.
We continued our round-the-world honeymoon to a beach vacation in the Seychelles where we just missed a coup d’état, a safari in Kenya, apartheid South Africa, London, San Francisco, and finally back to Tokyo. It was the honeymoon of a lifetime.
Kyoko passed away in 2002 from breast cancer at the age of 50, well before her time.
Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Sigiriya Rock Fort
Kyoko
Mad Hedge Technology Letter
September 25, 2023
Fiat Lux
Featured Trade:
(JOSTLING FOR THE FUTURE OF TECH)
(AMZN), (ANTHROPIC), (CRM), (MSFT)
