Mad Hedge Technology Letter
May 15, 2024
Fiat Lux
Featured Trade:
(MEME MAYHEM)
(GME), (AMC), (NVDA), (SMCI)
Posts
GameStop (GME) and AMC (AMC) shares taking off like a bandit from a bank heist is highly advantageous for tech stocks.
Everyone who owns tech stocks maybe doesn’t know that but won’t complain when their shares go up.
This aggressive price action clearly signals to the rest of the stock market that monetary policy is way too loose.
Yes, and I am saying that at Fed Fund rate sitting at 5% today.
It’s a tough job to reign in the inflationary genie after it’s out of the bottle, and the liquidity sloshing around that overflows into a high inflation backdrop means that prices trend up.
That also goes for tech stocks.
Much of that liquidity has found its way into growth tech stocks like Nvidia (NVDA) and Super Micro Computers (SMCI).
It’s also found its way into marginal tech companies like Gamestop and meme movie cinema stock AMC.
Capital wouldn’t be allocated this poorly into mediocre stocks if there was a tighter cap on liquidity which there isn’t.
It was only just the other week in which the US Central Bank slowed the pace of asset run off to their balance sheet which equated to yet another injection of quantitative easing for tech stocks.
What does that mean?
In the short-term, tech stocks are off to the races.
This is a side effect to the easy money policies resulting in 100% moves in AMC and GME.
It’s almost laughable but that is the world we live in.
The moves higher in both stocks, which have since been followed by several trading halts and subsequent paring of gains Tuesday, came after the reemergence of Keith Gill, also known as "Roaring Kitty," whose bull case on GameStop ignited the meme stock rally back in 2021.
Every bull market has its share of excess and mini bubbles, but this only becomes dangerous when it becomes widespread.
Even if interest in ‘meme’ stocks rebounds following a renewed surge in GameStop’s share price, it doesn’t mean that we are at the end of the tech sector’s Bull Run.
It does mean we are very late in the tech cycle, but honestly speaking, we have been late cycle since 2019.
It’s so late that tech companies now have to issue dividends to keep investors onboard.
They used not have to do that because they were growing so fast.
Sometimes tech stocks don’t sell themselves and this is a period when that is so.
The almost 5 year late cycle action has meant that tech stocks are a good bet in the short-run and the underpinnings to this rally has been fortified due to AI mania that has engulfed many of the best and brightest of tech.
Stocks like GME and AMC shouldn’t be experiencing 100% gains in days in this part of the late cycle, not because I don’t like these companies, but because their business models don’t support such price action.
Gamestop sells video games at the mall.
AMC has a failing movie theatre business.
My take from it is that the tech Bull Run is alive and well in the short-term and there is definitely enough capital to stage a summer tech rally.
Hold on to your hat cowboy!
Global Market Comments
May 13, 2024
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE GREAT AMERICAN GOLDEN AGE HAS ONLY JUST BEGUN and SWIMMING WITH THE SHARKS)
(AAPL), (NVDA), (META), (GLD), (GOLD), (SLV), (WPM), (MSFT), (NVDA), (TLT), (FCX), (FXI), (BRK/B)
The Bull Market has Five More Years to Run, with S&P 500 growing earnings at 10% a year for the foreseeable future. Last year brought in $222 per share, 2024 will see $250, 2025 $270, and $300 for 2026. The Great American Golden Age has only just begun.
Profit margins will expand to all-time record highs. Falling interest rates and a weak dollar will boost exports to a recovering Europe and Japan. Inflation should hit the Fed’s 2% in 2025 as AI chatbots replace workers at a breakneck rate, cutting costs dramatically as they already have at some firms. The future is happening fast. Buy everything on dips, even bonds.
The stock market couldn’t even manage a 10% correction in April. We got a measly 6.10% instead. It’s all about the economy, stupid. Leftover massive Covid spending and the $280 billion CHIPS Act have created a tidal wave of cash surging through the system with much of it ending up in stocks.
The top eight tech companies (the Magnificent Seven plus Netflix (NFLX)) accounting for 30% of the entire market cap are only getting stronger. The (SPY) has a current price-earnings multiple of 20X with the Big 8 and 17X without them going forward. It’s not cheap but better than a poke in the eye with a sharp stick.
Boring old high-yielding utilities will become a big play as the electric power grid has to triple in size to accommodate the voracious appetites of EV’s and AI. And as we have already seen in California and much of the country, utilities have no reservations about raising prices.
We are back to normal with interest rates, returning to pre-financial crisis levels. Certainly, a stock market at all-time highs is happy with rates. The real concern here is that the Fed DOES cut rates too fast to bail out the loan-dependent half of the economy and the US Treasury as well. That could trigger a melt-up in stocks that would make the last six months pale in comparison and make my own $6,000 target for the (SPX) look ridiculously conservative.
There is also a major generational change in demographics underway. Previous retiring generations, having experienced the Great Depression, hoarded savings and were a drag on the economy. The Baby Boomers are spending like there is no tomorrow because after going through COVID-19, there might not BE a tomorrow. The Boomers have thus turned into the greatest job creators of all time through their spending.
I’ve seen them everywhere in recent weeks in Florida, Cuba, Ecuador, the Galapagos Islands, Panama, and of course, San Francisco where a Big Mac Happy Meal costs $11. What they don’t spend is being passed on to Gen Xers and Millennials, creating a $75 trillion wealth transfer, the largest in history. A lot of this is going into stocks as well. Wonder where all that “meme stock” money is coming from?
And from the “Department of I Told You So”, notice that precious metals were on an absolute tear last week, with gold (GLD) up 4.78% and silver posting a gob-smacking 7.40%. The new demand that I was aware of but had no hard data on finally became public. Solar Panels are Driving Global Silver Demand in an unprecedented fashion. Global investment in solar PV manufacturing more than doubled last year to around $80 billion.
Miners are expanding their operations and ramping up production as prices for the precious metal climb to decade highs, sending gross revenues to the moon. Demand for silver from the makers of solar PV panels, particularly those in China, is forecast to increase by almost 170% by 2030, to roughly 273 million ounces—or about one-fifth of total silver demand.
That’s a lot of silver. Buy (SLV) and (WPM) on dips.
So far in May, we are up +4.14%. My 2024 year-to-date performance is at +18.75%, a new all-time high. The S&P 500 (SPY) is up +10.48% so far in 2024. My trailing one-year return reached +35.79% versus +30.58% for the S&P 500.
That brings my 16-year total return to +695.38%. My average annualized return has recovered to +51.83%.
I stopped out of short positions for small losses in (AAPL) and (NVDA) last week. I took profits on my long in (META). I am running my longs in (GLD) and (SLV) and my shorts in (MSFT) and (NVDA) into the Friday, May 17 options expiration. The only new position I added last week was a short in the (TLT).
Some 63 of my 70 round trips were profitable in 2023. Some 27 of 37 trades have been profitable so far in 2024.
Weekly Jobless Claims Hit a Nine Month High at 233,000, the bitter fruit of persistently high interest rates. New York City public school workers such as bus drivers are allowed to apply for benefits during winter and spring breaks, which tend to boost weekly claims numbers. Claims also picked up in California, Indiana, and Illinois.
Underwater Home Mortgages are Soaring, with the South taking the biggest hit. Roughly one in 37 homes are now considered seriously underwater in the US and that share is much higher across a swath of southern states. Nationally, 2.7% of homes carried loan balances at least 25% more than their market value in the first few months of the year. That’s up from 2.6% in the previous quarter. It’s another cost of high rates.
Online Retail Spending Up 7%, during the January-April period YOY. Cheaper items are seeing the fastest growth. Consumer discretionary spending has been in focus over the past several months, as sticky inflation has forced shoppers in various categories to trade down to more affordable products. It’s another sign of a modest slow, 1.6% growing economy.
Morgan Stanley (MS) Pushes Back Rate Cut Expectations to September. I couldn’t agree more. You see this in the $4 rally in bonds since last week. Sell short (TLT) for the very short term.
TikTok Sues the US Government, claiming its first amendment rights have been violated in a ban imposed on Congress. They will probably win. The national security threat posed by millions of dancing teenagers has never been showed. It’s just another talking point for technology-ignorant politicians egged on by Facebook (META) and other competitors. No one ever said the people in Silicon Valley were nice.
Social Security Trust Fund to Go Broke by 2035, according to US Treasury estimates. I knew they wouldn’t pay me after 55 years of contributions. Medicare is in less bad shape, not running out until 2036, a five-year extension. Retirees, the baby boomers, and exceeding new contributors, the Gen Xers. Expect your taxes to go up to fill the gap.
Berkshire Hathaway Delivers Blockbuster Earnings in Q1, thanks to a $9 billion pop in (AAPL) stock last year. Buffet just cut his massive position by 13% and will cut more. Total 2023 profits came in at a mind-numbing $93 billion. The company — whose divisions include insurance, the BNSF railroad, an expansive power utility, Brooks running shoes, Dairy Queen and See’s delivered a sharp swing from its $22 billion loss in 2022 because of the bear market. Its vast insurance operations that include Geico car insurance and reinsurance reported $5.3 billion in after-tax earnings for 2023, thanks to steep premium increases which we have all felt. Sell (AAPL), buy (BRK/B).
Bond Investors are Making a Killing, with the US Treasury paying out $900 billion in interest in 2023. That’s double the annual cost of the past decade. Remember those coupons? That’s another reason for the Fed to cut rates soon, to lessen this backbreaking burden on the government. After being held hostage by zero-rate policies for almost two decades, US Treasuries are finally reverting to their traditional role in the economy. Bonds are becoming respectable again after a long winter. Buy (TLT) on dips.
China Home Sales Plunge by 47%, as the real estate crisis deepened, indicating that a recovery may be far off. But when it does bounce back, expect all commodities to hit record highs. Buy (FCX) on dips.
Biden Piles on the Foreign Tariffs, announcing new China tariffs aimed at the EV Industry that is currently decimating Europe. Europe is in danger of giving away its edge in cars to the Chinese and a proactive response would ensure American car manufacturers can stand up to the low-priced onslaught.
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, May 13, at 10:30 AM EST, the Consumer Inflation Expectations are announced.
On Tuesday, May 14 at 8:30 AM EST, Producer Price Index for April is released.
On Wednesday, May 15 at 8:30 AM EST, the Consumer Price Index is published
On Thursday, May 16 at 8:30 AM EST, the Weekly Jobless Claims are announced.
On Friday, May 17 at 8:30 AM the Monthly Options Expiration takes place at the close.
At 2:00 PM the Baker Hughes Rig Count is printed.
As for me, I will never forget the words from my underwater guide: “Stay where you are and the current will bring the sharks to you.”
Is that something we want, I queried in my fractured Spanish. “Don’t worry”, he answered, “The sharks are vegetarians.” Yes, but did anyone tell the sharks that they were vegetarians?
Sure enough, two six-foot-long hammerhead sharks hungrily swam by me within feet in the green murk, not even pausing to give me the time of day. They swam so close that one almost slapped me in the Face with his tailfin. I guess I wasn’t on the menu that day, not even as a special.
Fortunately, I brought a GoPro underwater video with me and filmed the whole thing. Otherwise, you wouldn’t believe me for a second (click here for the link.)
Such was the high point of my week in the Galapagos Islands last week, a remote archipelago of 13 volcanic islands some 600 miles west of Ecuador, 2 degrees South Latitude in the Pacific Ocean. Sitting in my beachfront house in San Cristobal, I worked all morning, knocking out some eight trade alerts on the week, and explored every afternoon.
It was bliss.
You scientists out there will already know the Galapagos Islands as the place where Charles Darwin landed in 1835 on the HMS Beagle and collected the data that led to the Theory of Evolution and the concept of the Survival of the Fittest. (It was all about black Finches, now known as Darwin’s finches, of which I saw hundreds).
Darwin was at first widely ridiculed, as are the creators of all new revolutionary advances. Critics highlighted his close relationship with monkeys. Now it’s required reading for all high school students. While I was there a reproduction of the Beagle sailed in from Holland to celebrate the 200th anniversary of Darwin’s discoveries….11 years early.
The Galapagos Islands are not an easy place to get to. It was a four-hour flight from Miami to Quito in Ecuador, the worlds third highest airport at 9,500 feet. A lot of transients get altitude sickness. Then an hour's flight to Guayaquil on the coast where the Ecuadorian drug trade is run and another hour to San Cristobal. When I tried to visit here in the 1970’s there was only one ship a week and no planes.
Galapagos connected to the outside world just last year when Space X’s Starlink service initiated a 200mb/sec service. With that, I can trade stocks as if I were in downtown Manhattan. This is true for virtually every remote location in the world now, the consequences of which we have yet to imagine. I set up a Starlink in Ukraine last October while under fire and the Russians never were able to jam it.
The Ecuadorian government has gone through great lengths to keep the Galapagos Islands a pristine eco-tourism destination and they have largely succeeded. I counted only one Cessna G5 jet at the airport. Incoming luggage is X-Rayed for foreign fruit and sniffed for drugs by German Shepherds. Residents are limited to a tiny southwestern sliver of San Cristobal island and the rest is a national park.
A friend charitably turned down a $20 million offer from the Four Seasons international hotel chain for his 120 acres of land there. There are not a lot of places in the world left where you can walk out of your front door to a deserted beach unscarred by footprints. Yet, it offers Ecuadorian prices, about one-third of those found in the US.
I think you should visit there.
HMS Beagle, kind of
55 Years of Trading and Finally my Own Beach!
Let the Current Bring the Sharks to You
Chillin with the Crew
My New Office
The View from Home
My New Neighbors
Good Luck and Good Trading,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
May 7, 2024
Fiat Lux
Featured Trade:
(A NOTE ON OPTIONS CALLED AWAY),
(GLD), (SLV), (NVDA), (AAPL), (MSFT)
Occasionally, I get a call from Concierge members asking what to do when their short positions options were assigned or called away. The answer was very simple: fall down on your knees and thank your lucky stars. You have just made the maximum possible profit for your position instantly.
We have the good fortune to have FOUR spreads that are deep in the money going into the May 17 option expiration in 8 days. They include:
Risk On
(GLD) 5/$200-$205 call spread 10.00%
(SLV) 5/$21-$23 call spread 10.00%
Risk Off
(NVDA) 5/$980-$990 put spread -10.00%
(MSFT) 5/$430-$440 put spread -10.00%
Total Net Position 0.00%
Total Aggregate Position 40.00%
In the run-up to every options expiration, which is the third Friday of every month, there is a possibility that any short options positions you have may get assigned or called away.
Most of you have short-option positions, although you may not realize it. For when you buy an in-the-money vertical option debit spread, it contains two elements: a long option and a short option.
The short options can get “assigned,” or “called away” at any time, as it is owned by a third party, the one you initially sold the put option to when you initiated the position.
You have to be careful here because the inexperienced can blow their newfound windfall if they take the wrong action, so here’s how to handle it correctly.
Let’s say you get an email from your broker telling you that your call options have been assigned away. I’ll use the example of the in-the-money SPDR Gold Shares SPDR (GLD) May $200-$205 vertical BULL CALL debit spread, which you bought at $4.55 or best.
For what the broker had done in effect is allow you to get out of your call spread position at the maximum profit point 8 trading days before the May 17 expiration date. In other words, what you bought for $4.55 on April 30 is now $5.00!
All have to do is call your broker and instruct them to exercise your long position in your (GLD) May 200 calls to close out your short position in the (GLD) May $205 calls.
This is a perfectly hedged position, with both options having the same expiration date, and the same number of contracts in the same stock, so there is no risk. The name, number of shares, and number of contracts are all identical, so you have no net exposure at all.
Calls are a right to buy shares at a fixed price before a fixed date, and one option contract is exercisable into 100 shares.
To say it another way, you bought the (GLD) at $200 and sold it at $205, paid $4.55 for the right to do so for 13 days, so your profit is $0.45 cents, or ($0.45 X 100 shares X 25 contracts) = $1,125. Not bad for a 13-day defined limited-risk play.
Sounds like a good trade to me.
Callaways most often happen in the run-up to a dividend payout. If you can collect a full monthly or quarterly dividend the day before the stock registration dates by calling away someone’s short option position, why not? If fact, a whole industry of this kind of strategies has arisen in recent years in response to the enormous growth of the options market.
(GLD) and most tech stocks don’t pay dividends so callaways are rare.
Weird stuff like this happens in the run-up to options expirations like we have coming.
A call owner may need to buy a long (GLD) position after the close, and exercising his long May 205 call is the only way to execute it.
Adequate shares may not be available in the market, or maybe a limit order didn’t get done by the market close.
There are thousands of algorithms out there that may arrive at some twisted logic that the calls need to be exercised.
Many require a rebalancing of hedges at the close every day which can be achieved through option exercises.
And yes, options even get exercised by accident. There are still a few humans left in this market to make mistakes.
And here’s another possible outcome in this process.
Your broker will call you to notify you of an option called away, and then give you the wrong advice on what to do about it. They’ll tell you to take delivery of your long stock and then post an additional margin to cover the risk.
Or they will tell you to sell your remaining long option position at whatever price you can get, wiping out most, if not all of your great profit. This generates the maximum commission for your broker.
Either that, or you can just sell your shares on the following Monday and take on a ton of risk over the weekend. This generates a oodles of commission for the brokers but impoverishes you.
There may not even be an evil motive behind the bad advice. Brokers are not investing a lot in training staff these days. It doesn’t pay. In fact, I think I’m the last one they did train 50 years ago.
Avarice could have been an explanation here but I think stupidity and poor training and low wages are much more likely.
Brokers have so many legal ways to steal money that they don’t need to resort to the illegal kind.
This exercise process is now fully automated at most brokers but it never hurts to follow up with a phone call if you get an exercise notice. Mistakes do happen.
Some may also send you a link to a video of what to do about all this.
If any of you are the slightest bit worried or confused by all of this, come out of your position RIGHT NOW at a small profit! You should never be worried or confused about any position tying up YOUR money.
Professionals do these things all day long and exercises become second nature, just another cost of doing business.
If you do this long enough, eventually you get hit. I bet you don’t.
Calling All Options!
Below please find subscribers’ Q&A for the May 1 Mad Hedge Fund Trader Global Strategy Webinar, broadcast from Silicon Valley.
Q: I see the Bank of Japan bought $35 billion in the foreign exchange on the market. What's going on?
A: First of all, they didn’t buy dollars, they sold dollars and bought yen. Well, It's really very easy. Interest rates are the primary driver of foreign exchange rates. Japan has had the lowest interest rates in the world for 40 years, and the US has had the highest for the last two years. So it’s an easy hedge fund trade—short the Yen, and use the proceeds there to buy US dollar assets—you pick up an automatic spread of 4.7%. You then multiply that 10 times, that becomes 47%, and goes into the trillions of dollars in size. And of course, every hedge fund in the world is doing this trade. So that is a massive amount of Yen selling. They sold some of of their massive dollar reserves in an attempt to head off the collapse of the Japanese yen which hit some Y160, a 40-year low. So that's what's going on there.
Q: What's your updated view on TLT, and what's your yearend view?
A: I think we kind of chop sideways as long as there's indecision on interest rates, and then maybe 3 points of downside max; and then after that, we start another twenty-point rally. So we're all waiting for the bottom of this move on the (TLT), and then we're going to go pedal to the metal, so that's an easy one.
Q: Would you stay away from DJT?
A: Absolutely. This is the most manipulated stock in the market and the largest short interest in the market. More people would short it if they could get the stock, which now costs 550% a year to borrow and has a SPAC set up. I never touch SPACs because 95% of those turn out to be failures. So go express your support for the former president in other ways would be my advice.
Q: My son-in-law works in AI and says Apple (APPL) will be a better player than Tesla (TSLA).
A: No it won't. First of all, Tesla is 15 years ahead of everybody on AI; they actually started a major AI effort in 2014, and they have the data of all the miles driven by 6 million cars all over the world, and nobody can replicate it; so that gives them a huge head start. Tesla also has Elon Musk running it, who would beat the pants on aggressiveness and competitiveness off Tim Cook all day long, so I would vote for Elon Musk on this one. But the next big AI surprise is probably going to come from Apple. That's going to happen in June when they have their developer's conference. I've already had several kids and relatives invited to attend that conference, so I’ll have a really good read on what's happening.
Q: Where do you see inflation for the rest of the year?
A: Tiny up to sideways and then down more—we may hit the 2% target by the end of the year. The key here is you have to let AI kick in and start generating profits instead of promises, as employees start being replaced with AI.
Q: Would you return to Havana?
A: I would. I had a great time, and now I have the knowledge of experience of having gone there. I was actually looking at Airbnb condos on the beach in Havana which you can get for $70 a month. You can't beat the prices in Cuba; they're like a 10th of anywhere in the world. You can buy a two-bedroom condo in Havana for $30,000. Compare that to New York—it would probably cost you $3 million, and would certainly cost you that much in San Francisco.
Q: What is a substantial dip?
A: I always get this question. It's different for each stock. It could be 5% for a boring one like Apple (AAPL), or 20% for a really wild one like Nvidia (NVDA). You can see both of them are acting like that right now, so it's different according to the volatility of the individual stock. There's no fixed answer.
Q: Are there expatriates living in Cuba?
A: There are, incredibly; some of them are working in the tourist industry, some in the computer industry. Would you consider it safe? Probably, yes, as long as you don't engage in politics. That would be a really big mistake. It's even dangerous for Cubans to have a political opinion. Best to just shut up and do what the government says; that's what totalitarian regimes are like. I've been in a lot of them, and by the way, that may be what it's like in the United States in another year, so we'll have to wait and see. I felt relatively safe in Cuba. I wasn't followed by the secret police, which I always used to be. Maybe I'm just not as valuable as I used to be!
Q: Do you have a ballpark timeline for Freeport-McMoRan (FCX) to reach under?
A: Time is always difficult to call because there are just so many variables and black swans out there, but I easily could see a spike in (FCX) going up to $100 sometime in 2025 when the global economy starts to recover; and if you're doing LEAPs on any depth here, I would go out to end of 2025 just to be safe. If Chinese ever starts new home contraction again that becomes a chip shot.
Q: The Feds are moving marijuana stocks from a schedule 3 to a schedule 1. Are there any plays here?
A: Well, I've never been a big fan of pot stocks. The barriers to entry are very low from anybody to come in as a competitor. At the end of the day, it's a brand play, much like Coca-Cola (KO), and they still have huge competition from the black market, because the black market doesn't have to pay the 30-40% in sales taxes. And it's a fairly poorly managed business—guess why? Everybody is stoned all the time. So I'm going pass on marijuana, there's too many better fish to fry. Leave it to the potheads.
Q: Why has Nvidia (NVDA) gone flat?
A: Trees don't grow to the sky. Nvidia was up 140% in 6 months, and you have to give time for the earnings to catch up with the stock. The earnings are growing at 40% a year, so they'll catch up pretty quickly. I'm thinking we could have a shot at $1,400 in Nvidia by the end of the year.
Q: McDonald's (MCD) just had a big sell-off on weak earnings, is it a buy-down here?
A: No. McDonald's has the highest exposure to sub $50,000/year earners of any of the fast food companies; they're the ones most affected by McDonald's high prices. Their margins are being crushed, and automation can't happen fast enough. And then there's the Ozempic effect: weight loss drugs are killing appetites, and eventually we'll have a hundred million people on weight loss drugs. And my bet is a lot of those are McDonald's customers, so avoid Mickey D.
Q: What about the silver trade?
A: Silver is actually starting to outperform gold on the upside as it has historically done, so you might go along with a pair of trades owning both gold (GLD) and silver (SLV). Gold just sold off at 5% and silver sold off at 10%, so maybe the old volatility of silver is returning. I'd look to buy Wheaton Precious Metals (WPM) LEAPs down here.
Q: Do you think Starbucks (SBUX) is in the same boat as McDonald's (MCD)?
A: After the similar earnings sell off, I'd say yes. Starbucks doesn't do well in recessions or economic slowdowns. It’s an easy product to economize on. And they don't do well with the sub $50,000/year crowd either. Plus, I think Starbucks in particular is being weighed down by weak China sales.
Q: What's your outlook on energy?
A: Buy the dip. We're all looking for economic recoveries worldwide next year—oil does really well in that situation. We just have to work off the current overbought situation that was given to us by the Gaza War.
Q: Why are the miners not keeping up with gold and silver?
A: The answer is inflation. Inflation in the mining industry is double or triple what it is in a regular economy because you have so many companies chasing so few production resources. For example, those giant tires that go on these huge Caterpillar trucks—those are $200,000 a tire, and there's a two-year waiting list to get one. So as more people try to mine, the cost of mining goes up. That feeds into the earnings of the mining companies. Also, miners are subject to the whims of the stock market, which the metals aren't. So that's why I've been recommending the metals first and then miners second.
Q: With the new Amazon (AMZN) earnings, will they someday pay out a dividend?
A: They just delivered their first substantial profit in the company's history that I'm sure is by design, and if they're willing to increase benefits to shareholders, can dividends and stock buybacks be far behind? If that happens, you can expect Amazon stock to double from here. So absolutely, yes.
Q: Is housing about to crash because of high-interest rates?
A: Absolutely not. It's about to take off like a rocket as interest rates fall. You'll never get a crash in housing as long as we have a shortage of 10 million houses. Housing shortages don't get crashes. We had a housing oversupply in 2007 and 2008, and that's what caused that housing crash; but half of the home builders went under then and they never came back, creating the current shortage. In the meantime, people are using 5/1 ARM loans to get lower interest rates and praying that rates fall by the time the first adjustment comes along. Then they'll move into much lower 30-year rate mortgages right around the 5% level. That is the plan of a lot of home buyers these days.
Q: How are technology companies going to cope with the margin squeeze?
A: They will fire people. They have fired 300,000 people in the Bay Area in the last 2 years, and as a result, the stocks have skyrocketed. The prime example is META (META), which fired 20% of the staff and saw the stock double. Once that happened, everybody else jumped on the bandwagon and started laying off people like crazy. It was actually Elon Musk that started the whole cost-cutting trend in Silicon Valley, so you have to thank him for that.
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 Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
April 29, 2024
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or DIGESTION TIME)
(NVDA), (FCX), (META), (MSFT), (TLT), (TSLA), (AAPL), (VISA), (FCX), (COPX), (GOOGL),
(A TRIP TO CUBA)
Before you even ask, I’ll give you the answer you’ve all been waiting for: It’s too late to sell and too early to buy.
Stocks may still have some digesting to do having soared by 27% in six months. Nobody wants to look like an idiot by buying a market top. As I have learned over the decades, investors fear looking stupid more than they fear losing money, especially if they are professionals.
Everyone knows the market is eventually going higher so they are not selling in any meaningful way unless they are short-term, algos, or day traders.
This means we may have a whole lot of nothing going on in the coming weeks or months.
That leaves us time to examine the most interesting trends going on in the markets right now, especially the new bull market in commodities. Believe it or not, we are still unwinding the long-term effects of Covid 19 and commodities have only recently come to the fore.
Remember Covid?
Since October, copper prices have risen by 22%, oil by 23%, gold by 34%, and uranium by a gobsmacking 83%. What’s causing this sudden new interest? It’s not a recovering Chinese economy, that’s for sure. Investors have been waiting for a bounce back in the Middle Kingdom seemingly forever. But China remains hobbled by the bitter fruit of a 40-year one-child policy and an ineffective government. History tells us that the United States does not make a great enemy.
So what’s driving the new demand? Remember Covid? Believe it or not, we are still unwinding the long-term effects of Covid 19 and commodities have only recently started to play catch up.
Commodities are unique in that they have such a long lead time to add new supply. It can take 5-10 years, to map out new sites, get government approvals, deliver heavy equipment, and mine, process, refine, and ship the final product.
In the meantime, enormous new demand has arisen. There have been 10 million EVs manufactured in recent years and each one needs 200 pounds of copper. AI means the electric power grid has to double in size quickly. Commodity markets are unable to meet the supply. Therefore, prices can only go up.
That enabled Freeport McMoRan (FCX), the world’s largest copper producer, to handily beat its earnings expectations, helped by higher production and easing costs. The mining giant said its quarterly production of copper rose to 1.1 billion pounds from 965 million pounds a year earlier, helped by a 49% jump in output from its Indonesia operations. (FCX) said it was working with the Indonesian government, which has put a ban on raw material exports, to obtain approvals to continue shipping copper concentrates and anode slimes. Its current license is set to expire in May. Buy (FCX) and (COPX) on dips.
Corporate raiders have taken notice.
Activist Elliot is taking a Run at Mining Giant Anglo American, accumulating a $1 billion stake. BHP, the largest iron ore miner, is also making a takeover bid here on the coattails of which Elliot is trying to ride. It just highlights the global interest in mining shares.
Anglo American plc is a British multinational mining company that is the world's largest producer of platinum, with around 40% of world output, as well as being a major producer of diamonds, copper, nickel, iron ore, polyhalite, and steelmaking coal. On a side note, copper hit a two-year high above $10,000 per metric tonne in the London Market last week.
Needless to say, the commodity boom could continue for another decade.
So far in April, we are up +4.24%. My 2024 year-to-date performance is at +13.61%. The S&P 500 (SPY) is up +6.50% so far in 2024. My trailing one-year return reached +32.40% versus +23.14% for the S&P 500.
That brings my 16-year total return to +690.24%. My average annualized return has recovered to +51.77%.
Some 63 of my 70 round trips were profitable in 2023. Some 25 of 33 trades have been profitable so far in 2024.
Tesla Delivers Worst Earnings in 12 Years, with a 9% revenue drop, but the stock rallies big as the disappointment was well telegraphed. Revenue declined from $23.33 billion a year earlier and from $25.17 billion in the fourth quarter. Net income dropped 55% to $1.13 billion, or 34 cents a share, from $2.51 billion, or 73 cents a share, a year ago. The drop in sales was even steeper than the company’s last decline in 2020, which was due to disrupted production during the Covid-19 pandemic. Tesla’s automotive revenue declined 13% year over year to $17.38 billion in the first three months of 2024. I’ll watch (TSLA) from the sidelines from now.
Personal Consumption Expenditures (PCE) Comes in Warm for March, up 2.8% YOY, the same as for February. Service prices led. But the numbers were not as hot as feared so both bonds and stocks rose.
Big Tech Crashes, with all of the Magnificent Seven breaking 50-day moving averages. (NVDA) alone gave up 10% on Friday. The next stop is the 200-day moving averages, which are far, far away. If those hold this is just a correction. If they don’t the bear market is back.
Biggest Treasury Bill Auction in History is a Huge Success, at $69 billion for a two-year paper with a 4.898% yield. That is almost a risk-free government-guaranteed 10% yield in two years. Another $70 billion of five-year notes go on sale today. Half of this is going to foreign investors and central banks. Faith in America and the US dollar remains strong. Who else’s bonds would you rather buy? Passage of the Ukraine aid bill was probably a help. Wait for (TLT) to bottom.
Visa Pops on Earnings Beat, continuing as the powerhouse that it has been for years. Reported at $4.7 billion, showing a 10% increase year-over-year, slightly above the estimate of $4.943 billion. Visa is a call option on the growth of the Internet. Buy (V) on dips.
Apple China Sales Dive, by 19% as Chinese switch to cheaper Huawei phones for nationalism reasons. It’s also another sign of a slow Chinese economy. China remains one of the company’s biggest markets, but business there has grown harder after Beijing escalated a ban on foreign devices in state-backed firms and government agencies. Avoid (AAPL) until the turnaround.
Alphabet Earnings Beat Delivers Monster 10% Move, recovering a $2 trillion market cap. It also announced its first-ever dividend and a $70 billion share back, the second largest after Apple. Buy (GOOGL) on dips.
March New Home Sales Jump, by 8.1% when only 1.1% is expected, to 693,000. The median price of a home sold fell to $430,700 as builders pulled back on incentives like those cherry cabinets. It’s an uphill slog with those 7.0% mortgage rates.
CDC Birth Data Fall to Lowest Level Since the Great Depression, 1.1 births per 1,000 people. That is well below the Great Depression levels. Only 3,664,292 new Americans were born in 2021. It means there will be a shortage of consumers in 20 years so be out of stock by then. The good news is that Covid deaths have fallen from 4,000 per day to only 19 a day since January 2020.
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, April 29, at 10:30 AM EST, the Dallas Fed Manufacturing Index is announced.
On Tuesday, April 30 at 9:00 AM, S&P Case Shiller National Home Price Index is released.
On Wednesday, May 1 at 2:00 PM, the ADP Private Employment Change report will be published
On Thursday, May 2 at 8:30 AM, the Weekly Jobless Claims are announced.
On Friday, May 3 at 8:30 AM, the April Nonfarm Payroll Report is announced. At 2:00 PM, the Baker Hughes Rig Count is printed.
As for me, I have wanted to visit Cuba for decades. But relations with the US have run hot and cold over the years and whenever I had the time and money to go, the was a chill on, sometimes an extreme one.
So when I arrived in Key West and learned they were offering Cuba tour packages, I jumped at the chance. Unfortunately, you need to book three months in advance so that option was out.
Then I thought, “Why not fly there myself?” After payment of some hefty fees, commissions, and some outright bribes, I scored a Cuban visa and an aging Britten-Norman Islander twin built in the UK some 40 years ago. It was perhaps the smallest twin I have ever flown, with two minuscule 270 horsepower engines.
Although it was only 90 miles to Cuba, I had to load up with full tanks. Cuban aviation fuel is often contaminated with sludge or water and is unsafe to use. Losing both engines over shark-infested waters doesn’t fit in with my retirement plan. So I needed enough 100LL avgas to make the round drip, which meant skipping breakfast to stay within my weight limitations.
It was a clear and balmy morning when I received my clearance for takeoff, the sky dotted with fluffy white cumulus clouds. Of course, I had to skirt the Bermuda Triangle to get there, but no worries.
Amazingly Cuban air traffic control spoke English. Soon, the green hills of Cuba appeared on the horizon, and I received the words I will never forget: “N686KW you are cleared for landing in Havana.” I haven’t felt like that since I last landed in Moscow.
Much to my surprise, I found other US aircraft there as I was parked near jets from Southwest and American Airlines. I was greeted by an immigration officer who escorted me into the country, putting my Spanish skills to the test.
I had some concerns that I might be arrested in case Russia put me on a wanted list due to my recent work in Ukraine. But my fears proved unwarranted. You see, you get paranoid in your old age. A private car, a French Citroen van, a driver, and a government guide were waiting for me outside the airport.
Suddenly, I found myself in a strange new world. A darkly tanned people wore tired polyester clothes. Everyone was rail thin and the only obese people I saw were foreign tourists. There was an incredible variety of vehicles on the road, including ancient cars from Russia, China, Poland, and Japan. Apparently, Chevrolet had a great year in Cuba in 1956 because no American cars have entered the country since then and they are everywhere.
We headed straight for Earnest Hemingway’s Cuban home, known as Finca Vigia, or “Lookout Farm” built in 1886 on a hilltop overlooking Havana. The building was falling apart and showed large cracks, but going inside I was transported in time back to 1960, when Hemingway left the property ahead of the Cuban Revolution.
Finca Vigia has been untouched since. The walls are covered with an assortment of hunting trophies from Africa, including springboks, cape buffalo, lions, and leopards. They were collections of African spears and gun cases. Mounted on the walls were paintings of bullfights in Spain, cartoons about Hemingway, and family photos.
Magazine racks were stuffed with the 1960 issues of Life, Look, and The Saturday Evening Post. The National Geographic issues looked positively prehistoric. And there were thousands of books. Anyone who read his books would recognize all of this.
Hem, as his friends called him, bought the property in 1940 for $8,000, living there with wife three for five years, the famed war correspondent Martha Gellhorn, and wife four, Time magazine reporter Mary Welsch, who became his widow.
After passing on a Che Guevara T-shirt in the gift shop, I enjoyed a glass of freshly squeezed sugar cane juice. Then I headed into Havana, escorted by my guide, Eliar. The trip turned into a Hemingway bar crawl. I visited the well-known La Floridita, which made Hem’s favorite Daiquiri, La Bodegita, which mixed the best mojito and had lunch at his favorite roof terrace restaurant.
Cuba has long been one of the worst-managed countries in the world, second only to North Korea, and I learned why after grilling my guide all day about economic conditions. It’s 11.2 million people earn a per capita of $11,255, with 71% living below the poverty line. The real figure is a third of that as there are now 300 pesos to the US dollar, not the fictitious 120 that the government pretends.
When the Soviet Union collapsed in 1992, generous subsidies ended and Cuba quickly lost 33% of its GDP. With some of the richest farmland in the world, it imports 80% of its food and is currently suffering a food crisis. Even the bottled water I drank came from Panama.
Oil accounts for 100% of its energy supply which mostly comes from Russia and is paid for with raw sugar. Cuba’s largest exports are tobacco, nickel, and zinc most of which are exported to China. China also provided $11 billion in loans which Cuba promptly defaulted on.
The country would have been much better off if only Fidel Castro had accepted an offer from the Washington Senators to play US major league baseball in the early 1950s. Cuba is officially one of the last communist countries in the world, with Russia and China abandoning it years ago. After reforms in the 1990s, what they now practice is an odd mixture of communism and capitalism, with the government and the private sector competing side by side.
With thousands fleeing the country every year the real estate market has collapsed. You can buy a two-bedroom apartment in Havana for $30,000. Flying over the countryside at low altitude you fund vast expanses of agricultural land undeveloped for want of machinery and parts. There is unused labor everywhere. Cuba should be one of the richest countries in the world with all those beaches. The tourism possibilities are enormous. But with a 60-year trade and investment ban from the US, nothing can happen.
American credit cards and cell phones don’t work, so I brought in $200 in ones. You can’t bring back to the US the country’s only two worthy exports, rum and cigars. But there are buskers everywhere and by the end of the trip, I ended up giving it all away in tips. I did OK with the food, but only ate overcooked meals in high-end restaurants. Salads were out of the question but drink all the local beer and rum you can.
I ended my trip with a tour of the enormous Revolution Square where Fidel Castro used to give four-hour speeches to one million. One area the government did not skimp on spending was on the massive ministry buildings that surround the square. It seems the image of a strong government, especially the police, is essential in a workers’ socialist paradise.
Then it was back to the airport where surprisingly I obtained immediate clearance for takeoff. No passport stamps, as the government wanted to leave no evidence of my visit in an American passport. I returned to Key West just in time to catch a magnificent sunset over the Gulf of Mexico. US customs recognized my face and waved me right through.
Damn! Should have picked up some of those $5 bottles of rum.
It's all just another day in the life of John Thomas.
At Hemingway’s Cuban Home
A Look Back into 1960
Where Hem Wrote “Old Man and the Sea”, Standing
Hemingway’s Office
I passed on Che
Meeting an Old Friend for a Round at Floridita
Mixing it up with the Locals
One of Cuba’s Only Exports
Looks Like Chevy had a Great Year in 1956
Good Luck and Good Trading,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
April 25, 2024
Fiat Lux
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