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
Global Market Comments
April 16, 2024
Fiat Lux
Featured Trade:
(MAY 3, 2024 QUITO, ECUADOR STRATEGY LUNCHEON)
(BIDDING FOR THE STARS)
(SPX), (INDU)
(TESTIMONIAL)
Global Market Comments
March 8, 2024
Fiat Lux
Featured Trade:
(MARCH 6 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPX), (QQQ), (PANW), (SNOW), (NVDA), (GLD), (GOLD), (NEM), (BA), (AMZN), (TLT), (AAPL), (COIN)
Below please find subscribers’ Q&A for the March 6 Mad Hedge Fund Trader Global Strategy Webinar, broadcast from Silicon Valley, CA.
Q: With your projections of the Dow going to $240,000 in 10 years, would it be wise to invest in the Dow?
A: The Dow is just an indicator that everybody understands and is familiar with what the media uses. What I tell people to do is if you are not an aggressive person, put half your money in the S&P 500 (SPX), which is getting most of the gains, and half in the technology (QQQ), which is getting all of the gains. If you're an aggressive person, say in your twenties, thirties, or forties, then you put all of your money in the Invesco QQQ NASDAQ Trust (QQQ) because you'll live long enough to survive the inevitable downturns.
Q: What should we do now with Palo Alto Networks (PANW)?
A: Keep it. It’s a fantastic long-term company. This is a rare opportunity to get in on the long side, as this is a company that I think could double over the next 3 to 5 years. Hacking is never going out of style and now they have AI. The selloff was caused by a major platform upgrade which may cause profits to dip for a quarter. That’s now in the price.
Q: With the successful launch of Bitcoin, should we allocate 5% or 10% of our portfolio to Bitcoin?
A: Only if you can handle a 90% decline at any time without warning because that's exactly what it did in 2021. Calling it a store of value is a fantasy. You also still have big theft issues with Bitcoin. You don't have theft issues if you have all your money at Morgan Stanley, Goldman Sachs, Merrill Lynch, and so on, so there is a security issue (with Bitcoin). The only way to bypass the security issues is to have a hot wallet, and the only way to have a hot wallet is to be a computer programmer yourself or have a degree in computer science—so it's not for most people. If you can navigate all of that, then maybe; but again, nobody knows when the next 90% decline is going to come. By the way, if I can find stocks with Mad Hedge Fund Trader that go up faster than Bitcoin, I'd much rather own the stocks, because at least I know what they make.
Q: Is Snowflake (SNOW) a buy here at $155?
A: Absolutely. Another great cybersecurity database company. But if we drop to $155, we're going to stop out of the front month call spread and try to buy it back lower down.
Q: Do you think it's wise to sell the semiconductor stocks now and buy them back lower down, and pay the taxes?
A: Probably not. They are really the most volatile sector in the market. If you sell now, it's unlikely you'll be able to pick up the next bottom and get back in, and you have to pay the taxes. So it's probably better just to keep a core long-term position in the semis, especially Nvidia (NVDA); and if it drops 200 points, just buy more. That's what I'm doing. I'm keeping all of my Nvidia LEAPS. All my call spreads and short put positions are about to expire at max profit, and I even have a little bit of stock that I'm keeping. So I think Nvidia goes to $1,000 at one point and now, the forecast of $1,400 is out there. So as Nvidia goes, so goes the entire rest of the semiconductor industry.
Q: You're only 30% invested. Are you looking for a pullback, or are you just waiting for new opportunities to appear?
A: Yes and Yes. I'm waiting for a fantastic company to come up with conservative guidance, which these days means an immediate 20 to 25% sell-off. That is your entry point for these good companies. That's how we got into Palo Alto Networks (PANW), and that's how we got into Snowflake (SNOW). In an extremely overbought market, those are your only opportunities until the market generally sells off or until the domestic plays finally start to take off, and we got the first hints of that last week.
Q: What is your view on junior gold mining stocks?
A: They are a buy here, absolutely, but you get enough volatility in the majors that you don't need to bother with the minors—that's always been my view. Because minors go out of business, they close mines, they don't find gold. A lot of minors have stocks go up on the possibility of gold being found, whereas the majors like Barrick Gold (GOLD) and Newmont Mining (NEM) actually have the gold, and it's just an industrial process of mining it. You know the minors, the juniors, are extremely speculative and high-risk, and that's why most of them are listed in Canada. They can't get a US listing. So that's enough of a tell for me to stay away.
Q: I just realized I have the wrong expiration date on my Amazon (AMZN) spread. Should I exit immediately?
A: What I would do is exit what you have and then wait for another down day on Amazon, and then put it back on. That's the way to deal with that one. The answer to all mistakes is to exit immediately. That's an automatic rule at Morgan Stanley; if you don't do that, you get fired. Or come up with a new set of logic as to why you own this position, which has been done by more than a few traders, I imagine.
Q: Would you be willing to be a Boeing 737 Max passenger right now or ever?
A: Yes! If you don't fly Boeings (BA), your life is suddenly very narrow and limited because you’re stuck on the ground. Boeing is the biggest-selling airplane in the world, and most fleets are made of Boeings. However, I'm a pilot, so if anything goes wrong I can run up front and take control, or at least tell the pilot what to do. I also have 25 parachute jumps, if they're handing those out in first class. So remember, every airplane without engines is a glider and I can land a glider anywhere. The company has major problems to sort out until it becomes a “BUY”.
Q: I cannot get into the (TLT) trade to save my life. Is the (TLT) April $89-$92 vertical bull call debit spread pushing the risk limits?
A: Yes. I would walk away from the trade and wait for a better entry point rather than chase. The whole fixed-income space has flipped from the bid side to the offered side, meaning we've gone from net sellers to net buyers. All asset classes have done that; you're seeing that in gold, silver, and even uranium. All the REITs are having a fantastic week. All interest rate plays are now being bid, and it's hard to buy stuff when things are being bid.
Q: What's it like being 6’4” and living in Japan?
A: Well, I did knock myself out a couple of times, banging myself on the door. You get used to bowing a lot, but bowing is a part of the culture in Japan. If you're watching the new Hulu miniseries, Shogun, you would know that. Once I was working for Sony and I was late for work, so I was running up the stairs, and they had a steel lintel to their door, and I just ran bang into that and knocked myself out. The Sony people thought, “Oh my gosh, we just killed a foreigner!” So yes, it was hard. The only clothes I could buy in Japan for ten years were belts and ties. I had to fly to Hong Kong and had everything else custom-made in those days.
Q: What's your opinion of Masters of the Air?
A: I absolutely love it. It's heartbreaking to watch. I knew a lot of guys who were there, and I was one of the last people trained on how to fly a Boeing B-17 Flying Fortress. Anybody who watched Masters of the Air with me gets to watch it with someone who is one of the last living people who rated on a B-17 as a pilot.
Q: Are we in a liquidity bubble right now?
A: Yes, we are, and boy, I love every minute of it. But we're not in the year 2000 in a liquidity bubble, we're in 1995 just getting started. And the profits from AI are just getting started which is what's creating this endless liquidity that people are seeing now.
Q: What should I buy the dip in Tesla (TSLA)?
A: There's no downside target for Tesla right now. We just have to wait for the meltdown in demand to finish, and who knows where that is. But with BYD entering the market, Tesla is definitely going to get more competition in emerging markets—that's where BYD is selling the cars now. I also understand they're selling them in Australia.
Q: How much longer can tech stocks keep rising?
A: 5 to 10 more years, but we are way overdue for some kind of pullback.
Q: What are your thoughts on Apple's (APPL) weakness?
A: Apple has become that great backward-looking company. It could drop to $160 or even $140, then we’ll be taking a serious look at some call spreads and LEAPS. You just wait. In four months when they announce their next batch of new products suddenly, they’ll become an AI company and recover the $200 level in no time.
Q: Should I dive into Coinbase (COIN)?
A: Absolutely not on pain of death! It's made its move. You're better off buying Nvidia (NVDA) at that kind of inclination because at least you know what they make.
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 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
Thank You NVIDIA!
Global Market Comments
January 3, 2024
Fiat Lux
2024 Annual Asset Class Review
A Global Vision
FOR PAID SUBSCRIBERS ONLY
Featured Trades:
(SPX), (QQQ), (IWM) (AAPL), (XLF), (BAC) (JPM), (BAC), (C), (MS), (GS),
(X), (CAT), (DE),(TLT), (TBT), (JNK), (PHB), (HYG), (MUB), (LQD), (FXE), (EUO),
(FXC), (FXA), (YCS), (FXY), (CYB), (DIG), (RIG), (USO), (DUG), (UNG), (USO),
(XLE), (AMLP),(GLD), (DGP), (SLV), (PPTL), (PALL), (ITB), (LEN), (KBH), (PHM)
I am once again writing this report from a first-class sleeping cabin on Amtrak’s legendary California Zephyr.
By day, I have a comfortable seat next to a panoramic window. At night, they fold into two bunk beds, a single and a double. There is a shower, but only Houdini can navigate it.
I am anything but Houdini, so I foray downstairs to use the larger public hot showers. They are divine.
We are now pulling away from Chicago’s Union Station, leaving its hurried commuters, buskers, panhandlers, and majestic great halls behind. I love this building as a monument to American exceptionalism.
I am headed for Emeryville, California, just across the bay from San Francisco, some 2,121.6 miles away. That gives me only 56 hours to complete this report.
I tip my porter, Raymond, $100 in advance to ensure everything goes well during the long adventure and keep me up to date with the onboard gossip.
The rolling and pitching of the car is causing my fingers to dance all over the keyboard. Microsoft’s Spellchecker can catch most of the mistakes, but not all of them.
Chicago’s Union Station
As both broadband and cell phone coverage are unavailable along most of the route, I have to rely on frenzied Internet searches during stops at major stations along the way, like Omaha, Salt Lake City, and Reno, to Google obscure data points and download the latest charts.
You know those cool maps in the Verizon stores that show the vast coverage of their cell phone networks? They are complete BS.
Who knew that 95% of America is off the grid? That explains so much about our country today.
I have posted many of my better photos from the trip below, although there is only so much you can do from a moving train and an iPhone 15 Pro.
Here is the bottom line which I have been warning you about for months. In 2024 we will probably top the 70.44% we made last year, but you are going to have to navigate the reefs, shoals, hurricanes, and the odd banking crisis. Do it and you can laugh all the way to the bank. I will be there to assist you in navigating every step.
The first half of 2024 will be all about trading, making bets on when the Fed starts cutting interest rates. Technology will continue their meteoric melt-up. In the second half, I expect the cuts to actually take place and markets to go straight up. Domestic industrials, commodities, financials, energy foreign markets, and currencies will lead.
And here is my fundamental thesis for 2024. After the Fed kept rates too low for too long and then raised them too much, it will then panic and lower them again too fast to avoid a recession. In other words, a mistake-prone Jay Powell will keep making mistakes. That sounds like a good bet to me.
Keep in mind that the Mad Hedge AI Market Timing Index is at the absolute top end of its historic range the three-month likelihood of you making money on a trade is essentially zero. But adhere to the recommendations I make in this report today and you should be up about 30% in a year.
Let me give you a list of the challenges I see financial markets facing in the coming year:
The Ten Key Variables for 2024
1) When will the Fed pivot?
2) When will quantitative tightening end?
3) How soon will the Russians give up on Ukraine?
4) When will the rotation from technology to domestic value plays happen?
5)How much of falling interest rates will translate into higher gold prices?
6) When will the structural commodities boom get a second wind?
7) How fast will the US dollar fall?
8) How quickly will lower interest rates feed into a hotter real estate market?
9) How fast can the Chinese economy bounce back from Covid-19?
10) When does the next bull market in energy begin?
All the answers are below:
Somewhere in Iowa
The Thumbnail Portfolio
Equities – buy dips
Bonds – buy dips
Foreign Currencies – buy dips
Commodities – buy dips
Precious Metals – buy dips
Energy – buy dips
Real Estate – buy dips
1) The Economy – From Hot to Cool to Hot Again
2023 was a terrible year for economists who largely got it wrong. Many will be driving Uber cabs from January.
The economy is clearly slowing now from the red-hot 5.2% GDP growth rate we saw in Q3 to a much more modest 2.0% rate in Q4. We’ll get the first read on the end of January.
Any more than that and the Fed will panic and bring interest rate cuts dramatically forward to head off a recession. That is clearly what technology stocks were discounting with a melt-up of Biblical proportions, some 19% in the last two months, or $65 in the (QQQ)’s.
Anywhere you look, the data is softening, save for employment, which is holding up incredibly well at a 3.7% headline Unemployment Rate. The labor shortage may be the result of more workers dying from COVID-19 than we understand. Far more are working from home not showing up in the data. And many young people have just disappeared off the grid (they’re in the vans you see on the freeways).
The big picture view of what’s going on here is that after 15 years of turmoil caused by the 2008 financial crisis, pandemic, ultra-low interest rates, and excessive stimulus, we may finally be returning to normal. That means long-term average growth and inflation rates of 3.0% each.
I can’t wait.
2) Equities (SPX), (QQQ), (IWM) (AAPL), (XLF), (BAC) (JPM), (C), (MS), (GS), (X), (CAT), (DE)
As I travel around the world speaking with investors, I notice that they all have one thing in common. They underestimate the impact of technology, the rate at which it is accelerating, its deflationary impact on the economy, and the positive influence they have on all stocks, not just tech ones. And the farther I get away from Silicon Valley the poorer the understanding.
Since my job is to make your life incredibly easy, I am going to simplify my equity strategy for 2024.
It's all about falling interest rates.
You should pay attention. In my January 4, 2023 Annual Asset Class Review (click here), I predicted the S&P 500 would hit $4,800 by year-end end. Here we are at $4,752.
I didn’t nail the market move because I am omniscient, possess a crystal ball, or know a secret Yaqui Indian chant. I have spent the last 30 years living in Silicon Valley and have a front-row seat to the hyper-accelerating technology here.
Since the time of the Roman Empire advancing technology has been highly deflationary (can I get you a deal on a chariot!). Now is no different, which meant that the Federal Reserve would have to stop raising interest rates in the first half of the year.
The predictions of a decade-long battle with rising prices like we saw in the seventies and eighties proved so much bunk, alarmism, and clickbait. In fact, the last 25 basis point rate rise took place on July 26, taking up from an overnight rate of 5.25% to 5.5%. That rendered the hard landing forecasts for the economy nonsense.
When interest rates are as high as they are now, you only look at trades and investments that can benefit from falling interest rates. All stocks actually benefit from cheaper money, but some much more than others.
In the first half, that will be technology plays like Apple (AAPL), (Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOGL), Meta (META), and NVIDIA (NVDA). Much of this move was pulled forward into the end of 2023 so this sector may flatline for a while.
In the second half, value plays will take the leadership like banks, (JPM), (BAC), (C), financials (MS), (GS), homebuilders (KBH), (LEN), (PHM), industrials (X), capital goods (CAT), (DE), and commodities (FCX). Everything is going to new all-time highs. My Dow average of 120,000 by the end of the decade is only one more triple away and is now looking very conservative.
That means we now have at hand a generational opportunity to get into the fastest-growing sectors of the US economy at bargain prices. I’m talking Cadillacs at KIA prices. Corporate profits powered by accelerating technology, artificial intelligence, and capital spending will rise by large multiples. Every contemporary earnings forecast will come up short and have to be upgraded. 2024 will be a year of never-ending upgrades.
After crossing a long, hot desert small-cap stocks can finally see water. That’s because they are the most leveraged, undercapitalized, and at the mercy of interest rates and the economic cycle. They always deliver the most heart-rending declines going into recessions. Guess what happens now with the economy headed for a soft landing? They lead to the upside, with some forecasts for the Russell 2000 going as high as a ballistic 50%.
Another category of its own, Biotech & Health Care which is now despised, should do well on its own as technology and breakthroughs are bringing new discoveries. Artificial intelligence is discovering new drugs at an incredible pace and then telling you how to cheaply manufacture them. My top three picks there are Eli Lily (ELI), Abbvie (ABBV), and Merck (MRK).
There is another equity subclass that we haven’t visited in about a decade, and that would be emerging markets (EEM). After ten years of punishment from a strong dollar, (EEM) has been forgotten as an investment allocation. We are now in a position where the (EEM) is likely to outperform US markets in 2024, and perhaps for the rest of the decade. The drivers here are falling interest rates, a cheaper dollar, a reigniting global economy, and a new commodity boom.
Block out time on your calendars, because whenever the Volatility Index (VIX) tops $20, up from the current $12, I am going pedal to the metal, and full firewall forward (a pilot term), and your inboxes will be flooded with new trade alerts.
What is my yearend prediction for the S&P 500 for 2024. We should reach $5,500, a gain of 14.58%. You heard it here first.
3) Bonds (TLT), (TBT), (JNK), (PHB), (HYG), (MUB), (LQD)
Amtrak needs to fill every seat in the dining car to get everyone fed on time, so you never know who you will share a table with for breakfast, lunch, and dinner.
There was the Vietnam Vet Phantom Jet Pilot who now refused to fly because he was treated so badly at airports. A young couple desperately eloping from Omaha could only afford seats as far as Salt Lake City. After they sat up all night, I paid for their breakfast.
A retired British couple was circumnavigating the entire US in a month on a “See America Pass.” Mennonites returning home by train because their religion forbade automobiles or airplanes.
The old bond trade is dead.
Long live the new bond trade!
After selling short bonds (TLT) from $180 all the way down to $82, I flipped to the long side on October 17. The next week, bonds saw their biggest rally in history, making instant millionaires out of several of my followers. The (TLT) has since rocketed from $82 to an eye-popping $100, a 22% gain.
In a heartbeat, we went from super bear to hyper bull.
I am looking for the Fed to cut interest rates by 1.00% in 2024 but won’t begin until the second half of the year. All of the first half bond gains were pulled forward into 2023 so I am looking for long periods of narrow trading ranges. By June, economic weakness will be so obvious that a dramatic Fed rate-cutting policy will ensue.
In addition, the Fed will end its quantitative tightening program by June, which is currently sucking $90 billion a month out of the economy. That’s a lot of bond-selling that suddenly ends.
I’m looking for $120 in the (TLT) sometime in 2024, with a possible stretch to $130. Use every five-point dip to load up on shares in the (TLT) ETF, calls, call spreads, and one-year LEAPS. This trade is going to work fast. It is the low-hanging fruit of 2024.
We are never going back to the 0.32% yields, and $165 prices we saw in the last bond peak. But you can still make a lot of money in a run-up from $82 to $120, as many happy bondholders are now discovering.
It isn’t just bonds that are going up. The entire interest rate space is doing well including junk bonds (JNK), municipal bonds (MUB), REITS (NLY), preferred stock, and convertible bonds.
A Visit to the 19th Century
4) Foreign Currencies (FXE), (EUO), (FXC), (FXA), (YCS), (FXY), (CYB)
With a major yield advantage over the rest of the world for the last decade, the US dollar has been on an absolute tear. After all, the world’s strongest economy begets the world’s strongest currency.
That is about to end.
If your primary assumption is that US interest rates will see a sharp decline sometime in 2024, then the outlook for the greenback is terrible.
Currencies are driven by interest rate differentials and the buck is soon going to see the fastest shrinking yield premium in the forex markets.
That shines a great bright light on the foreign currency ETFs. You could do well buying the Australian Dollar (FXA), Euro (FXE), Japanese yen (FXE), and British Pound (FXB). I’d pass on the Chinese yuan (CYB) right now until their Covid shutdowns end.
Look at the 50-year chart of the US dollar index below and you’ll see that a 13-year uptrend in the buck is rolling over and will lead to a 5-10-year down move. Draw your weapons.
5) Commodities (FCX), (VALE), (DBA)
Commodities are the high beta players in the financial markets. That’s because the cost of being wrong is so much higher. Get on the losing side of commodities and you will be bled dry by storage costs, interest expenses, contangos, and zero demand.
Commodities have one great attribute. They predict recessions and recoveries earlier than any other asset class. When they peaked in March of 2022, they were screaming loud and clear that a recession would hit in early 2023. By reversing on a dime on November 13, 2023, they also told us that a rip-roaring recovery would begin in 2024.
You saw this in every important play in the sector, including Broken Hill (BHP), Peabody Energy (BTU), and Freeport McMoRan (FCX). And who but me noticed that Alcoa Aluminum (AA) was up an incredible 50% in December? Maybe you can’t teach an old dog new tricks, but the old tricks work pretty darn well!
The heady days of the 2011 commodity bubble top are about to replay. Now that this sector is convinced of a substantially weaker US dollar and lower inflation, it is once more a favorite target of traders.
China will finally rejoin the global economy as a growth engine in 2024 but at only half its previous growth rate. It will be replaced by India, which is turning into the new China and is now the most populous country in the world.
And here’s another big new driver. Each electric vehicle requires 200 pounds of copper and production is expected to rise from 2 million units a year to 20 million by 2030. Annual copper production will have to increase three-fold in a decade to accommodate this increase, no easy task or prices will have to rise.
The great thing about commodities is that it takes a decade to bring new supply online, unlike stocks and bonds, which can merely be created by an entry in an Excel spreadsheet. As a result, they always run far higher than you can imagine.
Accumulate all commodities on dips.
6) Energy (DIG), (RIG), (USO), (DUG), (UNG), (USO), (XLE), (AMLP)
Energy was the top-performing sector of 2023 until it wasn’t.
We got a nice boost to $90 a barrel from the Gaza War. But that faded rapidly as there was never an actual supply disruption, just the threats of one. Saudi production has been cut back so far, some 5 million barrels a day, that it risks budget shortfalls if it reduces any more. In the meantime, US fracking production has taken off like a rocket.
In the meantime, Joe Biden is sitting on the bid in an effort to refill the Strategic Petroleum Reserves that was drawn down from 723 to 350 million barrels during the last price spike.
The trade here is to buy any energy plays when Texas tea approaches $70 and take profits at $95. Your first picks should be ExxonMobile (XOM), Occidental Petroleum (OXY) where Warren Buffet has a 27% stake, Diamondback Energy (FANG), and Devon Energy (DVN).
The really big energy play for 2024 will be in natural gas (UNG), which was slaughtered in 2023. The problem here was not a shortage of demand because China would take all we could deliver. It was in our ability to deliver, hobbled by the lack of gasification facilities needed to export. One even blew up.
In 2024 several new export facilities came online and the damaged one was repaired. That should send prices soaring. Natural gas prices now at a throw-away $2.00 per MM BTU could make it to $8.00 in the next 12 months. That takes the (UNG) from $5.00 to $15.00 (because of the contango).
Buy (UNG) LEAPS (Long Term Equity Anticipation Securities) right now.
Remember, you will be trading an asset class that is eventually on its way to zero sooner than you think. However, you could have several doublings on the way to zero. This is one of those times. And you also have a huge 35% contango headwind working against you all the time.
They call this commodity the “widow maker” for a good reason.
The real tell here is that energy companies are bailing on their own industry. Instead of reinvesting profits back into their future exploration and development, as they have for the last century, they are paying out more in dividends and share buybacks.
Take the money and run. Trade, don’t marry this asset class.
There is the additional challenge in that the bulk of US investors, especially environmentally friendly ESG funds, are now banned from investing in legacy carbon-based stocks. That means permanently cheap valuations and share prices for the energy industry.
Energy now counts for only 5% of the S&P 500. Twenty years ago, it boasted a 15% weighting.
The gradual shutdown of the industry makes the supply/demand situation infinitely more volatile.
To understand better how oil might behave in 2024, I’ll be studying US hay consumption from 1900-1920. That was when the horse population fell from 100 million to 6 million, all replaced by gasoline-powered cars and trucks.
The internal combustion engine is about to suffer the same fate.
7) Precious Metals (GLD), (DGP), (SLV), (PPTL), (PALL)
The train has added extra engines at Denver, so now we may begin the long laboring climb up the Eastern slope of the Rocky Mountains.
On a steep curve, we pass along an antiquated freight train of hopper cars filled with large boulders.
The porter tells me this train is welded to the tracks to create a windbreak. Once, a gust howled out of the pass so swiftly, that it blew a passenger train over on its side.
In the snow-filled canyons, we saw a family of three moose, a huge herd of elk, and another group of wild mustangs. The engineer informs us that a rare bald eagle is flying along the left side of the train. It’s a good omen for the coming year.
We also see countless abandoned 19th-century gold mines and broken-down wooden trestles leading to huge piles of tailings, and relics of previous precious metals booms. So, it is timely here to speak about the future of precious metals.
Here it’s important to look at the long view on gold. The barbarous relic tends to have good and bad decades. During the 2000’s the price of the yellow metal rose tenfold, from $200 to $2,000. The 2010s were very boring when gold was unchanged. Gold is doing well this decade, already up 40%, and a double or triple is in the cards.
2023 should have been a terrible year for precious metals. With inflation soaring, stocks volatile, and interest rates soaring, gold had every reason to collapse. Instead, it was up on the year, thanks to a heroic $325, 17.8%% rally in the last two months.
The reason is falling interest rates, which reduce the opportunity costs of owning gold. The yellow metal doesn’t pay a dividend, costs money to store and insure, and delivery is an expensive pain in the butt.
Chart formations are looking very encouraging with a massive upside breakout in place. So, buy gold on dips if you have a stick of courage on you, which you must if you read this newsletter.
Of course, the best investors never buy gold during a bull market. They Hoover up gold miners, which rise four times faster, like Barrack Gold (GOLD), Newmont Mining (NEM), and the basket play Van Eck Vectors Gold Miners ETF (GDX).
Higher beta silver (SLV) will be the better bet, as it already has been because it plays a major role in the decarbonization of America. There isn’t a solar panel or electric vehicle out there without some silver in them and the growth numbers are positively exponential. Keep buying (SLV), (SLH), and (WPM) on dips.
8) Real Estate (ITB), (LEN), (KBH), (PHM)
The majestic snow-covered Rocky Mountains are behind me. There is now a paucity of scenery, with the endless ocean of sagebrush and salt flats of Northern Nevada outside my window, so there is nothing else to do but write.
My apologies in advance to readers in Wells, Elko, Battle Mountain, and Winnemucca, Nevada.
It is a route long traversed by roving bands of Indians, itinerant fur traders, the Pony Express, my own immigrant forebearers in wagon trains, the Transcontinental Railroad, the Lincoln Highway, and finally US Interstate 80, which was built for the 1960 Winter Olympics at Squaw Valley.
Passing by shantytowns and the forlorn communities of the high desert, I am prompted to comment on the state of the US real estate market.
Those tormented by the shrinking number of real estate transactions over the past two years take solace. The past excesses have been unwound and we are now on the launching pad for another decade-long bull market.
There is a generational structural shortage of supply with housing which won’t come back into balance until the 2030’s. You don’t have a real estate crash when we are short 10 million homes.
The reasons, of course, are demographic. There are only three numbers you need to know in the housing market for the next ten years: there are 80 million baby boomers, 65 million Generation Xers who follow them, and 86 million in the generation after that, the Millennials.
The 76 million baby boomers (between ages 62 and 79) have been unloading dwellings to the 72 million Gen Xers (between age 41 and 56) since prices peaked in 2007. But there are not enough of the latter, and three decades of falling real incomes mean that they only earn a fraction of what their parents made. That’s what caused the financial crisis. That has created the present shortage of housing, both for ownership and rentals.
There is a happy ending to this story.
The 72 million Millennials now aged 25-40 are now the dominant buyers in the market. They are transitioning from 30% to 70% of all new buyers of homes. They are also just entering the peak spending years of middle age, which is great for everyone. Hot on their heels are 68 million Gen Z, which are now 12 to 27 years old.
The Great Millennial Migration to the suburbs and Middle America has just begun. Thanks to the pandemic and Zoom, many are never returning to the cities. That has prompted massive numbers to move from the coasts to the American heartland.
That’s why Boise, Idaho was the top-performing real estate market in 2023, followed by Phoenix, Arizona. Personally, I like Reno, Nevada, where Apple, Google, Amazon, and Tesla are building factories as fast as they can, just a four-hour drive from Silicon Valley.
As a result, the price of single-family homes should continue to rise during the 2020s, as they did during the 1970s and the 1990s when identical demographic forces were at play.
This will happen in the context of a labor shortfall, rising wages, and improving standards of living.
Increasing rents are accelerating this trend. Renters now pay 35% of their gross income, compared to only 18% for owners, and less, when multiple deductions and tax subsidies are considered. Rents are now rising faster than home prices.
Remember, too, that the US will not have built any new houses in large numbers in 17 years. The 50% of small home builders that went under during the Financial Crisis never came back.
We are still operating at only half of the 2007 peak rate. Thanks to the Great Recession, the construction of five million new homes has gone missing in action.
There is a new factor at work. We are all now prisoners of the 2.75% 30-year fixed-rate mortgages we all obtained over the past five years. If we sell and try to move, a new mortgage will cost double today. If you borrow at a 2.75% 30-year fixed rate, and the long-term inflation rate is 3%, then, over time, you will get your house for free. That’s why nobody is selling, and prices have barely fallen.
This winds down in 2024 as the Fed realizes its many errors and sharply lowers interest rates. Home prices will explode…. again.
Quite honestly, of all the asset classes mentioned in this report, purchasing your abode is probably the single best investment you can make now after you throw in all the tax breaks. It’s also a great inflation play.
That means the major homebuilders like Lennar (LEN), Pulte Homes (PHM), and KB Homes (KBH) are a buy on the dip. But don’t forget to sell your home by the 2030s when the next demographic headwind resumes. That’s when you should unload your home to a Millennial or Gen Xer and move into a cheap rental.
A second-hand RV would be better.
9) Postscript
We have pulled into the station at Truckee amid a howling blizzard.
My loyal staff have made the ten-mile trek from my estate at Incline Village to welcome me to California with a couple of hot breakfast burritos and a chilled bottle of Dom Perignon Champagne, which has been resting in a nearby snowbank. I am thankfully spared from taking my last meal with Amtrak.
After that, it was over legendary Donner Pass, and then all downhill from the Sierras, across the Central Valley, and into the Sacramento River Delta.
Well, that’s all for now. We’ve just passed what was left of the Pacific mothball fleet moored near the Benicia Bridge (2,000 ships down to six in 50 years). The pressure increase caused by a 7,200-foot descent from Donner Pass has crushed my plastic water bottle. Nice science experiment!
The Golden Gate Bridge and the soaring spire of Salesforce Tower are just coming into view across San Francisco Bay.
A storm has blown through, leaving the air crystal clear and the bay as flat as glass. It is time for me to unplug my MacBook Pro and iPhone 15 Pro, pick up my various adapters, and pack up.
We arrive in Emeryville 45 minutes early. With any luck, I can squeeze in a ten-mile night hike up Grizzly Peak and still get home in time to watch the ball drop in New York’s Times Square on TV.
I reach the ridge just in time to catch a spectacular pastel sunset over the Pacific Ocean. The omens are there. It is going to be another good year.
I’ll shoot you a Trade Alert whenever I see a window open at a sweet spot on any of the dozens of trades described above, which should be soon.
Good luck and good trading in 2024!
John Thomas
The Mad Hedge Fund Trader
Global Market Comments
September 22, 2023
Fiat Lux
Featured Trade:
(SEPTEMBER 20 BIWEEKLY STRATEGY WEBINAR Q&A),
(AMZN), (SPX), (TLT), (TSLA), (DIS), (LEN), (KBH), (PHM), (USO), (FXA), (UNG), (JPM), (C), (BAC)
Below please find subscribers’ Q&A for the September 20 Mad Hedge Fund Trader Global Strategy Webinar, broadcast from Silicon Valley, CA.
Q: How do we know when interest rates have peaked?
A: Well, that's easy—the Fed announces it and they start cutting interest rates. The first hint of that is they don’t raise interest rates when they have the opportunity to do so. That will be today as it was in July. So we’re at the top now, and they’ll probably go sideways for 6 months or even longer before they start cutting. Markets will start to discount this 6-9 months in advance, or about now.
Q: Year-end target for the S&P 500? What about Amazon (AMZN)?
A: 5,000. For the (SPX). For Amazon, I think we could easily tack on another 20-25%.
Q: Does the Mad Hedge Global Trading Dispatch include tech trade alerts?
A: It does, but only the higher quality, lower risk trades. Pure Tech traders are a much higher-risk bunch of people, and they want more aggressive trade alerts in smaller companies. As for me, with Global Trading Dispatch I try to stick to a 90% success rate, and the only way to do that is to avoid tech when it flatlines and not try to catch any falling knives.
Q: Any hope of recovery for the iShares 20 Plus Year Treasury Bond ETF (TLT)?
A: Yes; as I said, the Fed will start cutting interest rates next year, and markets discount 6-9 months in advance, so that gives us 3 months for our January 2024 $100/$105 call spreads to expire at max profit. So yes, it is entirely possible, if not likely, that we will see those numbers by January.
Q: Can you help me jump the line for a Cybertruck from Tesla (TSLA)?
A: Well, if I was going to help anyone get a Cybertruck, it would be me! And I can't get one. Back in the old days, Tesla people would fall down on their knees crying “thank you!” when you bought one of their cars. Now, I think I’m number 2 million on the waiting list. You’re on your own on that one.
Q: Is Disney (DIS) a good LEAP stock?
A: No, Disney has some major problems with their streaming business, and the parks have maxed out. That is why the stock seems immune to good news—unless you know something I don’t. So go for it if you’re ready for that risk.
Q: What is your fact-finding trip to Ukraine all about?
A: Nothing beats research on the ground for finding out what really happened. Second, Ukraine got a lot of aid from other countries when the war started, but it’s since run out and we know that hospitals and orphanages in Ukraine are in trouble and running out of money. So, nothing beats showing up with US dollar cash in that situation. So that is why I’m going. This’ll be my eighth war. I guess the war correspondent in me never left. I’ll also be escorting American doctors to Ukrainian hospitals who don’t know how to do this. There’s more to life than just making money.
Q: Should I buy the dip in homebuilders like Lennar Homes (LEN), D.R. Horton (DHI), and KB Homes (KBH)?
A: Absolutely, yes—with both hands. Who does better with a falling interest rate cycle than home builders who have to depend on falling mortgage rates for business to boom once again. So yes, any dip in this sector and I would be loading the boat. The next declining interest rate cycle could last 5 or 10 years.
Q: Will the United Auto Workers strikes cause inflation to rocket and feed into higher inflation figures?
A: No, not really. Union membership has declined by 75% over the last 40 years. The UAW itself has declined from 1.6 million members to 400,000, and they really have become too small to affect the general economy. What they will do is accelerate existing trends, like people dumping their ice cars and moving to Tesla and other EV manufacturers. This is sort of like a gift for Tesla, and that's why the stock was up 10% last week. Also, in the long, long run, if they force the car companies to move to Mexico and cut the same deals that Elon Musk got, then it reduces inflation.
Q: Does the recent increase in Chinese ships and warplanes near Taiwan change anything?
A: No, it just shows us how weak the economy in China is. It’s effectively in recession even though they refuse to admit it, and therefore they have to create more distractions. The Chinese have been bluffing on Taiwan for 70 years—why stop now?
Q: What is a good time to buy banks?
A: I would start scaling into (JPM), (BAC), and (C) now. They will be a major beneficiary of an economic recovery next year and falling interest rates; and the prices down here are good. They’re one of the worst performers so far this year—one of the few cheap sectors left in the market.
Q: Should I buy Tesla (TSLA) here?
A: The thing here that I’m telling my professional money managers is: scale in on a one-month basis. Figure out how much you want to buy, and then buy 1/30th of that amount every day for a month. Then, you’ll scale in, you won’t get the absolute bottom but you’ll get some kind of bottom, and when a turnaround happens, then it goes up 50% or 100%. That’s the way to play Tesla. A lot of the professional money managers and investment advisors who follow me have a problem; they’re getting tons of new customers based on their performance this year. So yes, what do you do when you get money after a great run? You can only scale in.
Q: Is oil (USO) topping and going back to 70 a barrel?
A: I think yes. We saw the run from $70 to $95; it looks like it’ll probably hit $100. After that, Saudi Arabia will start bringing supply back on. What they did is create an artificial short squeeze in oil by taking 5 million barrels off the market with Russia—that got prices up. Any higher than that, and high oil starts to adversely affect Saudi Arabia’s foreign investments. So yes, they do back off when we get over 100; they’re very happy with $100/barrel, as is the American oil industry. So, I’m inclined to take profits if you did the oil trade in June.
Q: Would you buy iShares 20 Plus Year Treasury Bond ETF (TLT) now?
A: No, I’ve been holding back because it seems to want to have a capitulation; that’s why it’s not rallying off the 93 level—it’s been bouncing on the bottom. Some piece of bad news, some kind of high inflation, could trigger a capitulation, which would take us down another 5 points—that's where you buy it. Then, all of a sudden something like a 2024 $85/$90 bull call spread is offering you 100% return one year out.
Q: Do you recommend 4-week T-bills?
A: No, I recommend 4-month T-bills. Those expire in January and take advantage of the cash squeeze in the financial system you always get in New Years. Returns on 4-month T-bills are much higher than 3 month, 2 month, or 1 month. I just bought some before this meeting because I’m not going to do a lot of trading this month, and I got a 5.48% yield. For me to do a trade now, it has to have a very low-risk 20% return. That’s what I need to beat T-bills at 5.48%, which have zero risk and a guaranteed return of money. You need the extra 15% return on a 1-month trade to justify the risk that individual stocks have.
Q: Will the Australian dollar (FXA) stay weak as long as China is weak?
A: Yes, and the flip side is also true: Will the Australian dollar be strong when China recovers? Absolutely. I still see 1 to 1 against the US dollar for the long term.
Q: Why is everyone pouring into short-term options?
A: They’re buying lottery tickets. A lot of people are in the markets not to invest, but to gamble. They have gambling addictions quite often, and nothing beats the instant gratification of a same-day win, even though 80% of the same-day options expire worthless. So, enter that market with caution.
Q: After artificial intelligence destroys 90% of jobs, won’t there be nobody left to buy stocks since stocks won’t go up solely on institutional buying?
A: While AI will destroy a lot of jobs, it’s creating even more jobs—that has always been the case with technology from day one. However, you do get mismatches from the time a job is destroyed to when a new one is created. There are also mismatches in skill levels and that can create turmoil in the economy. Look at the United Auto strike, which is hell-bent on stopping technology and automation—stopping any kind of technology they can. Technology in the long term always destroys jobs, but it also creates more jobs, just moving them from old economies into new industries. I’m sure the same thing went on with the hay and leather industries 120 years ago when we moved from horses to internal combustion cars.
Q: If companies go to a four-day workweek, how will that affect stocks?
A: It’ll probably make them go up. When people go to four-day work weeks, productivity goes up and companies get more output for their dollar of labor costs. That’s why it’s happening and why it’s so popular. People who work at home and get to play with their kids on weekends will work for less money—that is a proven fact.
Q: Any thoughts on when we will see the United States Natural Gas Fund (UNG) turn upward?
A: This winter. (UNG) is priced for perfection, sitting around here at the $7 level. The slightest surprise like a cold winter, for example, which we may get (at least in California we will), and then the thing will spike up.
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The Diary of a Mad Hedge Fund Trader
2018 On the HMS Victory in Plymouth, England
Global Market Comments
January 27, 2023
Fiat Lux
Featured Trade:
(JANUARY 25 BIWEEKLY STRATEGY WEBINAR Q&A),
(RIVN), ($VIX), (SPX), (UUP), (NVDA), (TLT), (LLY), (AAPL), (RTX), (LMT), (USO), (OXY), (TSLA), (UNG), (MSFT)
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