Global Market Comments
December 12, 2022
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or HOW MARKETS WORK),
(SPY), (TLT), (TSLA), (GLD), (XOM), (OXY), (FXI), (JPM)
Posts
Last week, I spoke about the “smart” market and the “dumb” market.
Looking across asset class behavior over the last couple of years, it’s become evident, there is another major driver.
Liquidity.
Hedge fund legend George Soros was an early investor in my hedge fund because he was looking for a pure Japan play. But I learned a lot more from him than he from me.
No shocker here: it’s all about the money.
Follow the flow of funds and you will always know where to invest. If you see a sustainable flow of money into equities, you want to own stocks. The same is true with bonds.
There is a corollary to this truism.
The simpler an idea, the more people will buy it. One can think of many one or two-word easy-to-understand investment themes that eventually led to bubbles: the Nifty Fifty, the Dotcom Boom, Fintech, Crypto Currencies, and oil companies.
Spot the new trend, get in early, and you make a fortune (like me and Soros). Join in the middle, and you do OK. Join the party at the end and it always ends in tears, as those who joined crypto a year ago learned at great expense.
If I could pass on a third Soros lesson to you, it would be this. Anything worth doing is worth doing big. This is why you have seen me frequently with a triple position in the bond market, or the double short I put on with oil companies two weeks ago, clearly just ahead of a meltdown.
Which brings me back to liquidity.
There are only two kinds of markets: liquidity in and liquidity out. Liquidity was obviously pouring into markets from 2009. This is why everything went up, including both stocks and bonds. That liquidity ended on January 4, 2022. Since then, liquidity has been pouring out at a torrential rate and everything has been going down.
So, what happened on October 14, 2022?
The hot money, hedge funds, and you and I started betting that a new liquidity in cycle will begin in 2023 and continue for five, or even ten years. This is why we have made so much money in the past two months.
Notice that liquidity out cycles are very short when compared with liquidity in cycles, one to two years versus five to ten years. That’s because populations expand creating more customers, technology advances creating more products and services, and economies get bigger.
When I first started investing in stocks, the U.S. population was only 189 million, the GDP was $637 billion, and if you wanted a computer, you had to buy an IBM 7090 for $3 million. Notice the difference with these figures today: $25 trillion for GDP, a population of 335 million, and $99 for a low-end Acer laptop, which has exponentially more computer power than the old IBM 7090.
What did the stock market do during this time? The Dow Average rocketed by 54 times, or 5,400%. And you wonder why I am so long term bullish on stocks. The people who are arguing that we will have a decade of stock market returns are out of their minds.
Which reminds me of an anecdote from my Morgan Stanley days, in my ancient, almost primordial past. In September 1982, I met with the Head of Investments at JP Morgan Bank (JPM), Mr. Carl Van Horn. I went there to convince him that we were on the eve of a major long term bull market and that he should be buying stocks, preferably from Morgan Stanley.
Every few minutes he said, “Excuse me” and left the room to return shortly. Years later, he confided in me that whenever he left, he placed an order to buy $100 million worth of stock for the bank’s many funds every time I made a point. That very day proved to be the end of a decade-long bear market and the beginning of an 18-year bull market that delivered a 20-fold increase in share prices.
But there is a simpler explanation. Liquidity in markets are a heck of a lot more fun than liquidity out ones, where your primary challenge is how to spend your newfound wealth.
I vote for the simpler explanation.
Yes, this is how markets work.
My performance in December has so far tacked on another robust +4.85%. My 2022 year-to-date performance ballooned to +88.53%, a spectacular new high. The S&P 500 (SPY) is down -17.0% so far in 2022.
It is the greatest outperformance on an index since Mad Hedge Fund Trader started 14 years ago. My trailing one-year return maintains a sky-high +92.92%.
That brings my 14-year total return to +601.09%, some 2.73 times the S&P 500 (SPX) over the same period and a new all-time high. My average annualized return has ratcheted up to +46.23%, easily the highest in the industry.
I took profits in my oil shorts in (XOM), (OXY), (SPY), and (TSLA). I am keeping one long in (TSLA), with 90% cash for a 10% long position.
Producer Prices Come in High, up 0.3% in November, driven by rising prices for services. It sets up an exciting CPI for Tuesday morning.
Emerging Markets Saw Massive Inflows in November, some $37.4 billion, the most since June 2021. Chinese technology stocks were two big beneficiaries, down 80%-90% from their highs. This could be one of the big 2023 performers if the US dollar and interest rates continue to fall. Buy (EEM) on dips.
Oil is in Free Fall, with 57 fully loaded Russian tankers about to hit the market. Nobody wants it ahead of a recession. All mad hedge short plays in energy are coming home. When will the US start refilling the Strategic Petroleum Reserve?
Turkey Blocks Russian Oil at the Straights of Bosporus, checking insurance papers, which are often turning out to be bogus. Insurance Russian tankers are now illegal in western countries. Many of these tankers are ancient, recently diverted from the scrapyard and in desperate need of liability insurance. Oil spills are expensive to clean up. Just ask any Californian.
Tesla Cuts Production in China, some 20% at its Shanghai Gigafactory for its Model Y SUV, or so the rumor goes. The short sellers are back! These are the kind of rumors you always hear at market bottoms.
US Unemployment to Peak at 5.5% in Q3 of 2023, according to a survey from the University of Chicago Business School. A tiny handful expects a higher 7.0% rate. Some 85% of economists polled expect a recession next year. After that, the Fed will take interest rates down dramatically to bring unemployment back down. No room for a soft landing here.
Home Mortgage Demand Plunges in another indicator of a sick housing market, which is 20% of the US economy. New applications are down a stunning 86% YOY despite a dive in the 30-year rate to 6.41%, but nobody is selling. Refis are now nonexistent.
Gold Continues on a Tear, hitting new multi-month highs. With interest rates certain to plummet in 2023 as the Fed reacts to a recession, Gold could be one of the big trades for next year. Buy (GLD), (GDX), and (GOLD) on dips.
Services PMI Hits New Low for 2022 at a recessionary 46.2. Nothing but ashes in this Christmas stocking. It didn’t help bonds, which sold off two points yesterday.
Demand Collapse Hits China (FXI), with US manufacturing there down 40% and many factories closing early for the New Year. Container traffic from the Middle Kingdom is down 21% over the past three months, astounding ahead of Christmas.
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, December 12 at 8:00 AM, the Consumer Inflation Expectations for November is published.
On Tuesday, December 13 at 8:30 AM EST, the Core Inflation Rate for November is out
On Wednesday, December 14 at 11:00 AM EST, the Federal Reserve Interest rates decision is announced. The Press Conference follows at 11:30.
On Thursday, December 15 at 8:30 AM EST, the Weekly Jobless Claims are announced. Retail Sales for November are printed.
On Friday, December 16 at 8:30 AM EST, the S&P Global Composite Flash PMI for December is disclosed. At 2:00 PM, the Baker Hughes Oil Rig Count is out.
As for me, in 1978, the former Continental Airlines was looking to promote its Air Micronesia subsidiary, so they hired me to write a series of magazine articles about their incredibly distant, remote, and unknown destinations.
This was the only place in the world where jet engines landed on packed coral runways, which had the effect of reducing engines lives by half. Many had not been visited by Westerners since they were invaded, first by the Japanese, then by the Americans, during WWII.
That’s what brought me to Tarawa Atoll in the Gilbert Islands, and island group some 2,500 miles southwest of Hawaii in the middle of the Pacific Ocean. Tarawa is legendary in the US Marine Corps because it is the location of one of the worst military disasters in American history.
In 1942, the US began a two-pronged strategy to defeat Japan. One assault started at Guadalcanal, expanded to New Guinea and Bougainville, and moved on to Peleliu and the Philippines.
The second began at Tarawa, and carried on to Guam, Saipan, and Iwo Jima. Both attacks converged on Okinawa, the climactic battle of the war. It was crucial that the invasion of Tarawa succeed, the first step in the Mid-Pacific campaign.
US intelligence managed to find an Australian planter who had purchased coconuts from the Japanese on Tarawa before the war. He warned of treacherous tides and coral reefs that extended 600 yards out to sea.
The Navy completely ignored his advice and in November 1943 sent in the Second Marine Division at low tide. Their landing craft quickly became hung up on the reefs and the men had to wade ashore 600 yards in shoulder-high water facing withering machine gun fire. Heavy guns from our battleships saved the day but casualties were heavy.
The Marines lost 1,000 men over three days, while 4,800 Japanese who vowed to keep it at all costs, fought to the last man.
Some 35 years later, it was with a sense of foreboding that I was the only passenger to debark from the plane. I headed for the landing beaches.
The entire island seemed to be deserted, only inhabited by ghosts, which I proceeded to inspect alone. The rusted remains of the destroyed Marine landing craft were still there with their twin V-12 engines, black and white name plates from “General Motors Detroit Michigan” still plainly legible.
Particularly impressive was the 8-inch Vickers canon the Japanese had purchased from England, broken in half by direct hits from US Navy fire. Other artillery bore Russian markings, prizes from the 1905 Russo-Japanese War transported from China.
There were no war graves, but if you kicked at the sand human bones quickly came to the surface, most likely Japanese. There was a skull fragment here, some finger bones there, it was all very chilling. The bigger Japanese bunkers were simply bulldozed shut by the Marines. The Japanese are still in there. I was later told that if you go over the area with a metal detector it goes wild.
I spend a day picking up the odd shell casings and other war relics. Then I gave thanks that I was born in my generation. This was one tough fight.
For all the history buffs out there, one Marine named Eddie Albert fought in the battle who, before the war, played “The Tin Man” in the Wizard of Oz. Tarawa proved an expensive learning experience for the Marine Corps, which later made many opposed landings in the Pacific far more efficiently and with far fewer casualties. And they paid much attention to the tides and reefs, developing Underwater Demolition Teams, which later evolved into the Navy Seals.
The true cost of Tarawa was kept secret for many years, lest it speak ill of our war planners, and was only disclosed just before my trip. That is unless you were there. Tarawa veterans were still in the Marine Corps when I got involved during the Vietnam War and I heard all the stories.
As much as the public loved my articles, Continental Airlines didn’t make it and was taken over by United Airlines (UAL) in 2008 as part of the Great Recession airline consolidation.
Tarawa is still visited today by volunteer civilian searchers looking for soldiers missing in action. Using modern DNA technology, they are able to match up a few MIAs with surviving family members every year. I did the same in Guadalcanal.
As much as I love walking in the footsteps of history, sometimes the emotional price is high, especially if you knew people who were there.
Stay healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Tarawa November 1943
Broken Japanese Cannon
Armstrong 8-Inch Cannon 1900
US Landing Craft on the Killer Reef
How to Get to Tarawa
Roving Foreign Correspondent on Tarawa in 1978
Second Marine Division WWII Patch
Global Market Comments
December 6, 2022
Fiat Lux
Featured Trade:
(THE MAD HEDGE TRADERS & INVESTORS SUMMIT STARTS TODAY)
(HOW TO HANDLE THE FRIDAY, DECEMBER 16 OPTIONS EXPIRATION),
(SPY), (TSLA)
Global Market Comments
December 5, 2022
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE GOOD MARKET AND THE BAD MARKET)
(TLT), (XOM), (OXY), (TSLA), (SPY), (BABA), (BIDU), (KBH), (PHM), (LEN), (AAPL)
I usually write my Monday strategy letters in the middle of the night in my mind, from 2:00 AM to 3:00 AM, because my feet are too hot, too cold, or because my hip hurts. Then I go back to sleep. If I remember half of it the next morning, then I get a great letter.
I often like to refer to old proven market nostrums and show how true they really are. One of my favorites is the concept of the “good” market and the “bad” market.
The good market is the one for bonds. Vastly more research goes into bonds than stocks because that’s where the respectable, safe, widows and orphan money goes. Global bond markets are also far bigger, worth about $120 trillion. Bond traders usually began their journey at Harvard or Wharton, speak with clipped upper-class accents, and belong to exclusive private clubs that would never let you in for lunch, even with an invitation from a member.
Suffice it to say that the bond market is always right. Their relaxed lifestyle can be explained by the fact that they really only have two variables to look at, Fed policy and the actual supply and demand for money. Working in the bond market is almost like a sinecure, sending you a paycheck every month because you are entitled to it.
The stock market is the complete opposite.
While the bond market was polishing the teacher’s apple at the head of the class, the stock market was smoking cigarettes in the bathroom, endlessly catching detention. The stock market is also smaller, worth about $50 trillion. While bond traders are attending their Rotary meetings, stock traders binge drink and tear up the roads with their new Porsches and Ferraris.
Needless to say, stock traders are always wrong.
That’s because they face a hopeless dilemma. While bond traders have to contemplate only two variables, stock traders have to deal with millions. They have to cope with the hundreds of input variables per company that affect their earnings, and there are over 3,000 companies that trade in the US alone.
To illustrate the point, look at the recent market action.
Both markets have been driven by the same massive liquidity created by the government since 2009. The bond market peaked in August 2020 when it saw the free lunch of ultra-low interest rates soon ending. Stocks didn’t peak until January 2021, some 17 months later. It’s clear that stock traders suffer from a severe learning disorder.
And they’re doing it again.
After a 49% swan dive over two years plus, bonds bottomed on October 14. Stocks may not finally bottom until the spring, six months after bonds. Bonds are now betting that the recession has already begun, we just haven’t seen it in the data yet. Stocks are betting that the recession doesn’t start until 2023, if at all. That’s why it’s been going up.
As for me, I have traded both stocks AND bonds. That’s because before there were stocks, there were bonds as the only thing to trade. As you may recall, stocks were moribund in the 1970s. On top of that, you can add foreign exchange, precious metals, commodities, and volatility. There essentially isn’t anything I haven’t traded.
My performance in December has so far tacked on another robust +3.37%. My 2022 year-to-date performance ballooned to +87.05%, a spectacular new high. The S&P 500 (SPY) is down -13.61% so far in 2022.
It is the greatest outperformance on an index since Mad Hedge Fund Trader started 14 years ago. My trailing one-year return maintains a sky-high +104.88%.
That brings my 14-year total return to +599.61%, some 2.60 times the S&P 500 (SPX) over the same period and a new all-time high. My average annualized return has ratcheted up to +46.12%, easily the highest in the industry.
I took profits in my triple weighting in bonds last week (TLT), booking some serious profits. All my remaining positions are profitable, shorts in (XOM), (OXY), (TSLA), (SPY), and one long in (TSLA), with 50% cash for a 30% net short position. We’ve just had a great run and the time to pay the piper is fast approaching.
With an +87.05% profit in hand this year, I don’t get a lot of complaints. However, I have been getting some lately because my trade alerts can be hard to get into.
Of course, it can be challenging to execute when 6,000 subscribers are trying to get into the same position at the same time. But when the entire world joins in, that raises the difficulty to a whole new level.
That is what happened with my trade alert to BUY the (TLT) on November 18. It was the trade alert around the world and the next day, bonds rocketed by $3.50. I laddered in with more positions with higher strike prices getting to a triple long in the bond market. When your trade alerts have a 95% success rate, that is what happens. It is the price of being right, which is better than the alternative.
When I first entered this trade, I thought the ten-year US Treasury yield would plunge from 4.46% to 2.50% by June 2023, taking the (TLT) from $91 to $120.
With the (TLT) at $108 on Friday and the ten-year yield at 3.50%, we are already halfway there. If I AM right and bond yields drop to 2.50%, the 30-year fixed mortgage rate will also drop below 4.00% and you can forget about any real estate crash. That's why the homebuilders (LEN), (KBH), and (PHM) are up 30%-40% since October.
With the ballistic moves in some Chinese stocks over the last two weeks (Alibaba (BABA) up 58%, Baidu ((BIDU) adding 47%, I have received a surge in inquiries about the prospects of the US going to war with the Middle Kingdom.
I have been asked this question continuously for the last 50 years, by several Presidents of the United States on down, and my answer is always the same.
There is not a chance.
The reason is very simple. The Chinese can’t feed themselves. They have not been able to do so for 100 years. With a population of 1.2 billion, the Chinese will never be able to feed themselves.
That means the Chinese are highly dependent on international trade to finance their food imports. When trade is vibrant, China prospers.
When it doesn’t, they start stacking up the bodies like cordwood for mass cremation, as happened when China suffered its last major famine. I know because I was there in the 1970s, and I’ll never forget that smell. As you quickly learn during a famine, there is no substitute for food.
So, what are the chances of China bombing their food supply? I’d say zero. A disruption of even a few months and people start to go hungry. Will they bluff, bluster, and obfuscate for domestic consumption? Every day of the year and that is what they are doing now.
As for buying Chinese stocks, I think I’ll pass for now. There are just too many great American ones on sale. The Chinese moves above are only taking place after horrific declines, 78% for (BABA), and 81% for (BIDU).
And before I go on to the data points, I want to recall a funny story.
One day in London 40 years ago, one of my junior traders at Morgan Stanley walked in with a big smile on his face. He had just gotten a great deal on a Ferrari Testarossa, which then retailed at $360,000, a lot of money for a 25-year-old East Ender in those days.
I thought to myself, “There are no great deals on Ferraris.”
A few months later, he totaled the Ferrari after a late night of binge drinking and racing on London’s damp streets, breaking the vehicle cleanly in half. The insurance company determined that his car was in fact two different Ferraris with two different VIN numbers that had been welded together. The car had split apart at the welds.
Some clever entrepreneur took the intact front end of a rear-ended car and the pristine back half of a car with destroyed hood and made one whole good Ferrari. Since my trader had only insured one car and not two, the insurance company refused to honor the claim.
All I can say is “Beware of friends bearing false Ferraris.”
Nonfarm Payroll Report Comes in Hot in November at 263,000, socking markets for 500 points. A December rate hike of 75 basis points has been firmly put back on the table. The Headline Unemployment Rate stays at a near-record high 3.7%. Average Hourly Earnings were up an inflationary 0.6%. Wages are up 5.1% YOY. The dollar soared on the prospect of higher rates for longer.
JOLTS Job Openings Report Comes in Weaker at 10.33 million in October, down 353,000 from September. High interest rates are finally taking their toll. There are still 1.7 job openings per applicant.
Key Inflation Read Drops, the Personal Consumption Expenditures Price Index falling 0.2% in October, excluding food and energy. It sets up a weak CPI on December 13, which would be very stock market positive.
Powell Turns Dovish, well, sort of, indicating that smaller interest rate hikes could start in December. The comments were made at a Brookings Institution meeting on Wednesday. Stocks rallied big on the news.
US to Ease Venezuela Sanctions, allowing Chevron to resume pumping there for six months after a three-year hiatus. It’s an out-of-the-blue big negative for oil prices. Venezuelan oil production has plunged from 2.1 million barrels a day to only 679, 000 thanks to gross mismanagement of the economy. But beggars can’t be choosers on the energy front. Good thing I’m running a double short in the sector. It’s the last think OPEC plus wanted to hear.
Don’t Expect a Housing Crash, as the financial system was vastly stronger than it was in 2008. A mild recession is already priced in, and bank balance sheets are rock solid. Buy the homebuilders on the next dips now coming off from horrific earnings, (KBH), (PHM), and (LEN).
Don’t Expect an iPhone 14 for Christmas, as pandemic-driven production shutdowns and Foxconn riots in China crimp supplies. It could be a longer wait if you want the new deep purple color. Avoid (AAPL) for now. I expect another big tech dive in 2023.
China Riots Tank Market, raising the specter of extended supply chain problems, especially for Apple (AAPL). Oil was especially hard hit as China is its largest buyer, hitting a two-year low and giving up all 2022 gains. China seems to be sacrificing its older generation, not giving them priority for vaccinations which don’t work anyway. This isn’t going away in a day. Transition to India will take a decade.
Case Shiller Plunges, the National Home Price Index Taking a 1.2% hit in September to 10.6%. Miami, Tampa, and Charlotte, NC showed the biggest YOY increases. You know the reasons why.
Home Rentals to Stay Sticky at Record Levels, with gains at 25-35% over the past 24 months. Homebuyers frozen out of the market by record-high interest rates are forced to rent at any price.
My Ten-Year View
When we come out the other side of the recession, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With the economy decarbonizing and technology hyper-accelerating, there will be no reason not to. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The America coming out the other side will be far more efficient and profitable than the old. Dow 240,000 here we come!
On Monday, December 5 at 8:00 AM EST, the ISM Nonmanufacturing PMI for November is out.
On Tuesday, December 6 at 8:30 AM, the Mad Hedge Traders & Investors Summit begins. Click here to register.
On Wednesday, December 7 at 7:30 AM, the Crude Oil Stocks are announced. It’s pearly Harbor Day.
On Thursday, December 8 at 8:30 AM, the Weekly Jobless Claims are announced. We also get the Producer Price Index for November.
On Friday, December 9 at 8:30 AM, the Producer Price Index for November. At 2:00, the Baker Hughes Oil Rig Count is out.
As for me, I am sitting here in front of the fire at my place in the Berkeley Hills and it is freezing cold and pouring rain outside. Heaven knows we need it.
I’m going to San Francisco later today to do some Christmas shopping. It’s not the ideal time but in my hopelessly busy schedule, this was the only day this year allocated for this chore.
For some reason, last night I recalled my days as an Ivy League Princeton professor, which I hadn’t thought about for decades.
When Morgan Stanley was a private partnership, before it went public in 1987, the firm represented the cream of the US establishment. There wasn’t anyone in business, industry, or politics you couldn’t reach through one of the company’s endless contacts. We referred to it as the “golden Rolodex.”
One day in the early 1980s, a managing director asked me a favor. Since he had landed me my job there, I couldn’t exactly say no. He had committed to teaching a graduate night class in International Economics at his alma mater, Princeton University, but a scheduling conflict had prevented him from doing so.
Since I was then the only Asian expert in the firm, could I take it over for him? If I had extra time to kill, I could always spend it in the Faculty Club.
I said “sure.”
So, the following Wednesday found me at Penn Station boarding a train for the leafy suburb about an hour away. On the way down, I passed the locations of several Revolutionary War battles. When we pulled into Princeton, I realized why they called these places “piles”. The gray stone ivy-covered structures looked like they had been there a thousand years.
My students were whip-smart, spoke several Asian languages, and asked a ton of questions. Many came from the elite families who owned and ran Asia. I understood why my boss took the gig.
I turned out to be pretty popular at the faculty Club, with several profs angling for jobs at Morgan Stanley. Rumors of the vast fortunes being made there had leaked out.
Princeton was weak in my field, DNA research. But as the last home of Albert Einstein, it was famously strong in math and physics. Many of the older guys had worked with the famed Berkeley professor, Robert Oppenheimer, on the Manhattan Project.
I was still a mathematician of some note those days, so someone asked me if I’d like to meet John Nash, the inventor of Game Theory, which won him a Nobel Prize in Economics in 1994. Nash’s work on partial differential equations became the basis for modern cryptography. I was then working on a model using Game Theory to predict the future of stock markets. It still works today and is the basis the Mad Hedge Market Timing Algorithm.
Weeks later found me driven to a remote converted farmhouse in the New Jersey countryside. On the way, I was warned that Nash was a bit “odd,” occasionally heard voices speaking to him, and rarely came to the university.
I later learned that his work in cryptography had driven him insane, given all the paranoia of the 1950s. Having worked in that area myself, that was easy to understand. His friends hoped that by arguing against his core theories, he would engage.
When I was introduced to him over a cup of tea, he just sat there passively. I realized that I was going to have to take the initiative so as a stock market participant, I immediately started attacking Game Theory. That woke him up and started the wheels spinning. It hadn’t occurred to him that game theory could be used to forecast stock prices.
His friends were thrilled.
I later went on to meet many Nobel Prize winners, as the Nobel Foundation was an early investor in my hedge fund. Whenever a member of the Swedish royal family comes to California, I get an invitation to lunch for the Golden State’s living Nobel laureates. It turns out that 20% of all the Nobel Prizes awarded since its inception live here. Last time, I sat next to Milton Friedman, and I argued against HIS theories.
The other thing I remembered about my Princeton days is my discovery of the “professor's dilemma.” Sometimes a drop-dead gorgeous grad student would offer to go home with me after class. I was happily married in those days with two kids on the way, so I respectfully declined, despite my low sales resistance.
No away games for me.
Stay healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
The Nobel Prize
Global Market Comments
November 28, 2022
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or LOOKING FOR BIG FOOT),
(NVDA), (VIX), (TLT), (TSLA), (XOM),
(OXY), (TSLA), (SPY), (MA), (V), (AXP)
On October 14, investors finally achieved the portfolios they long desired, not only individuals but institutional ones as well. They got rid of stocks and bonds that had been hobbling them all year and built their cash positions to decade highs.
What happened the next day?
Stocks and bonds went straight up for six weeks. Cash became trash.
For October 14 was the day that the stock market discounted the worst-case economic scenario for 2023, no matter how bad it may get. And it probably won’t get very bad. That’s barring a black swan-type event, like a brand-new global pandemic.
If you think your job can be frustrating, how about mine? If you run with the dumb crowd, the uninformed crowd, the loser crowd, you get your just desserts.
Fortunately, I saw these moves coming a mile off and loaded the boat. I’ve actually made more money on the parabolic move in bonds than some of the enormous moves in stocks. NVIDIA (NVDA) up 50%?
My performance in November has so far tacked on another robust +7.05%. My 2022 year-to-date performance ballooned to +82.42%, a spectacular new high. The S&P 500 (SPY) is down -16.85% so far in 2022.
It is the greatest outperformance on an index since Mad Hedge Fund Trader started 14 years ago. My trailing one-year return maintains a sky-high +94.61%.
That brings my 14-year total return to +594.98%, some 2.60 times the S&P 500 (SPX) over the same period and a new all-time high. My average annualized return has ratcheted up to +45.76%, easily the highest in the industry.
I am going into the month-end surge with a fairly aggressive 40% long, (TLT), (TSLA), 40% short (XOM), (OXY), (TSLA), (SPY), with 20% crash for a totally market-neutral position. We’ve just had a heck of a run, and prices could well stall not far from here for the short term. The post-election rally happened, as predicted in this space.
Like Big Foot, the Yeti, and the Loch Ness Monster, the Fed pivot may soon actually make an appearance. I’m talking months, not years. That’s when our August central bank flips from the most severe tightening of interest rates in history, to a neutral, or one can only pray, an easing stance. This is what the 15% rally in stocks over the last six weeks has been all about.
And here is another old-time worn market nostrum. If investors sense that something is going to happen, they discount it fast, very fast.
Of course, there will be several false starts, denied rumors, and false flags, as there always are. After all, this is my 11th bear market. These will create sudden panic attacks, market selloffs, and Volatility Index (VIX) runs to $30 which are the license to print money for the Mad Hedge Fund Trader. Wait for the market to tell you when to trade. Ignoring it can prove expensive.
As we say here in the west, go off the reservation and you can get a lot of arrows stuck in your back.
How is this even remotely possible with the money supply only at $21.4 trillion, down 2% YOY? That’s a buzz cut from the +30% rate from a year ago.
The answer is that the money is out there, just hiding in different unrecognizable forms. Much of the $4 trillion in pandemic stimulus payments have yet to be spent. Inflation has added $2 trillion in new corporate profits through higher sales prices. Similarly, there is also another $1.5 trillion in pay increases bubbling through the system, also inspired by inflation.
You see this is booming credit card spending, much to the joy of Master Card (MA), Visa (V), and American Express (AXP) and their share price surges we have recently seen.
As I keep telling my Concierge customers on the phone, there is no playbook anymore. All the old ones have been rendered useless by the pandemic. To succeed and make windfall profits like me, you basically have to make it up as you go along.
The Fed Favors the Slowing of Rate Hikes, making a December increase of only 50 basis points a sure thing, according to minutes released on Wednesday for the prior meeting. Housing especially is taking a big hit. All interest rate plays, like bonds, rallied strongly.
Equities See Monster Inflows, some $23 billion in 35 weeks according to the Bank of America (BAC) flow of funds survey. There have been huge cash flows out of Europe looking for a stronger dollar, fleeing WWIII, and collapsing home currencies. The big chase is on. Time to go short? I am. It could be a big bull trap.
Leading Economic Indicators Dive, off 0.8% in October, double the decline expected and the weakest since the pandemic low in April 2020. There has only been one positive number in this data series in 2022. You have to go back to the financial crisis to find numbers this bad.
S&P Global Manufacturing PMI Takes a Hit in November, down to 47.6 from an estimate of 50. Services fell from 48 to 46.1. It’s another coincident recession indicator.
Existing Home Sales Plunge 5.9% in October to an annualized rate of 4.43 million units. It is the slowest sales pace in 11 years. It's not as bad as expected but is still down a horrific 28.4% YOY. Inventory fell to just 1.22 million units, only a 3.3-month supply, supporting prices in a major way. In fact, prices are still rising, up 6.6% annually to $379,100. Housing accounts for about 20% of the US economy, so here is your recession threat right here.
New Home Sales Come in Hot at 632,000, a real shocker with the 30-year fixed at 7.4%. Low-ball seller financing incentives must be a factor where they buy down rates to lower levels. Free upgrades, like those cherry wood cabinets, bonus rooms, and marble kitchen counters, also help. Prices are still up 15% YOY and inventories rose to a once unbelievable 8.9 months.
OPEC Plus Considering a 500,000 Barrels a Day Increase at their coming December meeting, which Saudi Arabia vehemently denied. The comments came out just as West Texas intermediate was barreling in on a new nine-month low. Saudi Arabia can talk all they want, but it’s tough to beat a coming recession, which every other hard asset class and commodity is now confirming.
Disney Axes Chairman, dumping Bob Chapek and bringing back Bob Iger from retirement. Losing $1.5 billion on the Disney Plus streaming service and losing its special tax status from the State of Florida has its costs. (DIS) is also not a stock to buy if we are going into recession. Avoid (DIS), despite the 10% move today. Let’s first see if Iger can cut costs.
My Ten-Year View
When we come out the other side of the recession, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With the economy decarbonizing and technology hyper accelerating, there will be no reason not to. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The America coming out the other side will be far more efficient and profitable than the old. Dow 240,000 here we come!
On Monday, November 28 at 8:00 AM EST, the Dallas Fed Manufacturing Index for November is out.
On Tuesday, November 29 at 8:30 AM, the S&P Case Shiller National Home Price Index is released.
On Wednesday, November 30 at 8:30 AM, the ADP Private Employment Report for November is published. We also get a number on Q3 US GDP.
On Thursday, December 1 at 8:30 AM, the Weekly Jobless Claims are announced. US Personal Income and Spending for October is also out.
On Friday, December 2 at 8:30 AM, the Nonfarm Payroll Report for November is disclosed. At 2:00, the Baker Hughes Oil Rig Count is out.
As for me, by the 1980s, my mother was getting on in years. Fluent in Russian, she managed the CIA’s academic journal library from Silicon Valley, putting everything on microfilm.
That meant managing a team that translated over 1,000 monthly publications on topics as obscure as Artic plankton, deep space phenomenon, and advanced mathematics. She often called me to ascertain the value of some of her findings.
But her arthritis was getting to her, and all those trips to Washington DC were wearing her out. So I offered Mom a job. Write the Thomas family history, no matter how long it took. She worked on it for the rest of her life.
Dad’s side of the family was easy. He was traced to a small village called Monreale above the Sicilian port city of Palermo famed for its Byzantine church. Employing a local priest, she traced birth and death certificates going all the way back to an orphanage in 1820. It is likely he was a direct illegitimate descendant of Lord Nelson of Trafalgar.
Grandpa fled to the United States when his brother joined the Mafia in 1915. The most interesting thing she learned was that his first job in New York was working for Orville Wright at Wright Aero Engines (click here). That explains my family’s century-long fascination with aviation.
Grandpa became a tailer gunner on a biplane in WWI. My dad was a tail gunner on a B-17 flying out of Guadalcanal in WWII. As for me, you’ve all heard of plenty of my own flying stories, and there are many more to come.
My Mom’s side of the family was an entirely different story.
Her ancestors first arrived to found Boston, Massachusetts in 1630 during the second Pilgrim wave on a ship called the Pied Cow, steered by a Captain Ashley (click here).
I am a direct descendant of two of the Pilgrims executed for witchcraft in the Salem Witch Trials of 1692, Sarah Good and Sarah Osborne, where children’s dreams were accepted as evidence (click here). They were later acquitted.
When the Revolutionary War broke out in 1776, the original Captain John Thomas, who I am named after, served as George Washington’s quartermaster at Valley Forge responsible for supplying food to the Continental Army during the winter.
By the time Mom completed her research, she discovered 17 ancestors who fought in the War for Independence and she became the West Coast head of the Daughters of the American Revolution. It seems the government still owes us money from that event.
Fast forward to 1820 with the sailing of the whaling ship Essex from Nantucket, Massachusetts, the basis for Herman Melville’s 1851 novel Moby Dick. Our ancestor, a young sailor named Owen Coffin signed on for the two-year voyage, and his name “Coffin” appears in Moby Dick seven times.
In the South Pacific 2,000 miles west of South America, they harpooned a gigantic sperm whale. Enraged, the whale turned around and rammed the ship, sinking it. The men escaped to whaleboats. And here is where they made the fatal navigational errors that are taught in many survival courses today.
Captain Pollard could easily have just ridden the westward currents where they would have ended up in the Marquesas’ Islands in a few weeks. But these islands were known to be inhabited by cannibals, which the crew greatly feared. They also might have landed in the Pitcairn islands, where the mutineers from Captain Bligh’s HMS Bounty still lived. So the boats rowed east, exhausting the men.
At day 88, the men were starving and on the edge of death, so they drew lots to see who should live. Owen Coffin drew the black lot and was immediately shot and devoured. The next day, the men were rescued by the HMS Indian within sight of the coast of Chile, and returned to Nantucket by the USS Constellation.
Another Thomas ancestor, Lawson Thomas, was on the second whaleboat that was never seen again and presumed lost at sea. For more details about this incredible story, please click here.
When Captain Pollard died in 1870, the neighbors discovered a vast cache of stockpiled food in the attic. He had never recovered from his extended starvation.
Mom eventually traced the family to a French weaver 1,000 years ago. Our name is mentioned in England’s Domesday Book, a listing of all the land ownership in the country published in 1086 (click here). Mom died in 2018 at the age of 88, a very well-educated person.
There are many more stories to tell about my family’s storied past, and I will in future chapters. This week, being Thanksgiving, I thought it appropriate to mention our Pilgrim connection.
I have learned over the years that most Americans have history-making swashbuckling ancestors, but few bother to look.
I did.
Stay healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Happy Thanksgiving from the Thomas Family
USS Essex
Global Market Comments
November 21, 2022
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or SLOWING TO STALL SPEED),
(SPY), (TLT), (SLV), (WPH), (MAT), (NVDA), (MS), (GS)
I got a call from my daughter the other day, who is a Computer Science major at the University of California at Santa Cruz. The university was on strike and shut down, so she suddenly had a lot of free time on her hands.
The Teaching Assistants were only getting $12 an hour, which is not enough to live on in the San Francisco Bay Area by a mile. Some one-third were living in their cars, which can get chilly on the Northern California coast in winter.
Fast food workers in California will get $22 an hour from January, thanks to a bill passed in the recent election. The TAs, most of whom are working on master’s degrees and PhD’s in all kinds of advanced esoteric subjects, are simply asking to bring their pay in line with Taco Bell.
The entire UC system is on strike, affecting ten campuses, 17,000 TAs and 200,000 students. I have noticed that the most liberal universities often have the most draconian employment policies. It’s legalized slave labor. I speak from experience as a past victim, as I was once an impoverished work-study student at UCLA earning $1.00 an hour experimenting with highly radioactive chemicals.
What was my tuition for four years at the best public university in the world? Just $3,000, and I didn’t even pay that, as I was on a full scholarship, something about rocket engines I built when I was a kid. Werner Von Braun liked them. The 800 Math SAT score probably helped a tiny bit too.
UCSC is the feeder university for Silicon Valley. Graduates in Computer Science earn $150,000 a year out the door and $200,000 with a Master's degree. PhDs get offered founders’ stock in the hottest Silicon Valley startups.
I hope the TAs get their raise.
My daughter was calling me to apologize for her poor trading performance this year. I thought, “My goodness, did she just lose her entire college fund in some crypto scam?”
“How much did you lose,” I asked.
She answered that she didn’t lose anything and in fact was up 59% this year. She knew my performance was topping 78%, and that some subscribers had made up to 1,000%.
But she missed the October low because she had a midterm and was late on my (TLT) LEAPS because she was on a field trip. She promised to pay closer attention so she could earn the money to pay for her PhD.
My kids never ask me for money. If they need it, they just go into the markets and get it themselves. But then this is a family that discussed implied volatilities, chaos theory, and the merits of the Black Scholes equation over dinner every night. That’s what it’s like to have a hedge fund manager for a dad. Any extra money I have I give away to kids not as lucky as mine.
Then we talked about the most important issue of the day, how to cook the turkey this week. Brine, or no brine, with or without a T-shirt, or deep fat fry? She cautioned me to take it out of the freezer three days early to thaw. I bought my turkey a month ago because I knew prices would rise, and they have done so mightily. In case I get in over my head, I can always call the Butterball Thanksgiving Turkey Emergency Hotline at 844-877-3436.
But that’s just me.
Whenever making money gets too easy, I get nervous.
There’s a 90% chance we saw the bottom in this bear market on October 14. But how we proceed from here is the tricky part. Too much now depends on a single monthly data point, namely the Consumer Price Index, and that is a tough game to play. The next one is out on December 13.
The truth is that even with overnight interest rates at 4.75%-5.00% , the economy is holding up far better than anyone imagined possible. Some sectors, like financials, are positively booming. And while housing is weak, we really have not seen any major price falls that could threaten a financial crisis. Consumers are in good shape with savings near record levels.
There isn’t going to be a hard landing. There isn’t even going to be a soft landing. In fact, we may not have a landing at all, with the economy continuing to motor along, albeit at a slower rate just above stall speed.
Which begs me to repeat that the next new trend in interest rates will be down, and that this will be the principal driver of all your investment decisions going forward. Bonds may make the initial move up, as last week’s trade alerts suggested. But I have no doubt that equities will have a big move in 2023 as well.
Producer Price Index Fades, up only 0.2%, half of what was expected. That’s a big decline from 8.4% to 8.0% YOY. It’s another bell ringing that inflation has topped. Stocks rallied 500 on the news.
Bonds Continue on a Tear, with the (TLT) up a breathtaking eight points from the October low. It could reach $120 in 2023. Keep buying (TLT) calls, call spreads, and LEAPS on dips.
FTX Keeps Getting Worse, as it is looking like it’s a Bernie Madoff X 10, or an Enron X 20. A new CEO has been appointed by the bankruptcy court, John Ray, the former liquidator of Enron and a distant relative of mine. This will spoil investment in most digital coins and tokens for good, which are now worthless, and coins unless they are guaranteed by JP Morgan (JPM) or Goldman Sachs (GS). FTX never had a CFO, and Sam Bankman-Fried is blaming it all on his girlfriend, not exactly what creditors want to hear. In any case, Bitcoin has been replaced by Taylor Swift tickets.
A Massive Silver Shortage is Developing, with demand up 16% in 2023 to 1.21 million ounces. With EV production increasing from 1.5 million to 20 million units a year within the decade, its share of the market will rise from 5% to 75%. Solar panel demand is also rising. Buy (SLV) and (WPM) on dips. My next LEAPS will be for silver on the next dip.
NVIDIA Sales Rise, but profits dip, taking the stock up 3%. Games sales dropped a heartbreaking 50% and crypto took a big hit. The company expects $6 billion in sales in Q4 and is still operating at an incredible 53.6% gross margin. The company is creating a new line of dumbed-down products to comply with China export bans. Keep buying (NVDA) on dips. We caught a 50% move in the past month.
Retail Sales Rise 1.3% in October, causing analysts to raise Q4 GDP forecasts. Rising prices are a major factor. Where is that darn recession?
Who Has the World’s Worst Inflation? Not the US, where price gains have been relatively muted. Venezuela leads with 21,912%, followed by Zimbabwe at 2019%, Lebanon at 1071%, Argentina at 194%, Turkey at 124%. Even Russia is at 25%. Who has the lowest? Japan at 1.0%, but their currency has just collapsed by 40%.
The 60/40 Portfolio is Back, after a 15-year hiatus. JP Morgan Chase says that keeping 60% of your money in stocks and 40% in bonds should deliver a 7.2% annual return. I believe the balanced portfolio return will be much higher, as everything will go up in 2023 and fixed income is now yielding 5% or better. 2022 saw the worst 60/40 return in 100 years.
My Ten-Year View
When we come out the other side of the recession, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With the economy decarbonizing and technology hyper-accelerating, there will be no reason not to. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The America coming out the other side will be far more efficient and profitable than the old. Dow 240,000 here we come!
On Monday, November 21 at 8:00 AM, the Chicago Fed National Activity Index for October is out.
On Tuesday, November 22 at 8:30 AM, the Richard Fed Manufacturing Index is released.
On Wednesday, November 23 at 8:30 AM, Durable Goods for October is published. At 11:00 AM, the FOMC minutes from the previous meeting are out. Weekly Jobless Claims are announced. New Homes Sales for October are out.
On Thursday, November 24, Markets are closed for Thanksgiving.
On Friday, November 25, stock markets close early at 1:00 PM. At 2:00 the Baker Hughes Oil Rig Count is out.
As for me, I have dated a lot of interesting women in my lifetime, but one who really stands out is Melody Knerr, the daughter of Richard Knerr, the founder of the famed novelty toy company Wham-O (click here). I dated her during my senior year in high school.
At six feet, she was the tallest girl in the school, and at 6’4” I was an obvious choice. After the senior prom and wearing my cheap rented tux, I took her to the Los Angeles opening night of the new musical Hair.
In the second act, the entire cast dropped their clothes onto the stage and stood there stark naked. The audience was stunned, shocked, embarrassed, and even gob-smacked. Fortunately, Melody never revealed the content of the play to her parents, or I would have been lynched.
In a recurring theme of my life, while Melody liked me, her mother liked me even more. That enabled me to learn the inside story of Wham-O, one of the great untold business stories of all time.
Richard Knerr started Wham-O in a South Pasadena garage in 1948. His first product was a slingshot, hence the company name, the sound you make when firing at a target. Business grew slowly, with Knerr trying and discarding several different toys.
Then in 1957, he borrowed an idea from an Australian bamboo exercise hoop, converted it to plastic, and called it the “Hula Hoop.” It instantly became the biggest toy fad of the 20th century, with Wham-O selling an eye-popping 25 million in just four months. By 1959, they had sold a staggering 100 million.
The Hula Hoop was an extremely simple toy to manufacture. You took a yard of cheap plastic tubing and stapled it together with an oak plug, and you were done. The markup was 1,000%. Knerr made tens of millions and bought a mansion in a Los Angeles suburb with a stuffed lion guarding his front door which he had shot in Africa.
The company made the decision to build another 50 million Hula Hoops. Then the bottom absolutely fell out of the Hula Hoop market. Midwestern ministers perceived a sexual connotation in the suggestive undulating motion to use it and decried it the work of the devil. Orders were cancelled en masse.
Whamo-O tried to stop their order for 50 million oak plugs, which were made in England, but to no avail. They had already shipped. So, to cut their losses Whamo-O ordered the entire shipment dumped overboard in the North Atlantic, where they still bob today. The company almost went bankrupt.
Knerr saved the company with another breakout toy, the Frisbee, a runaway success which is still sold today. Even Incline Village, Nevada has a Frisbee golf course. The US Army tested it as a potential flying hand grenade. That was followed by other monster hits like the Super Ball, the Slip N Slide, and the Slinky.
Richard Knerr sold his company to toy giant Mattel (MAT) for $80 million in 1994. He passed away in 2008 at the age of 82.
As for Melody, we lost touch over the years. The last I heard she was working at a dive bar in rural California. Apparently, I was the high point of her life. The last time I saw her I learned the harshest of all lessons, never go back and visit your old high school girlfriend. They never look that good again.
Stay healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Hula Hoop Inventor Chuck Knerr
Global Market Comments
November 9, 2022
Fiat Lux
Featured Trade:
(TESTIMONIAL),
(THE DEATH OF PASSIVE INVESTING),
(SPY), (SPX), (QQQ), (META), (UUP), (GLD), (INDU)