Global Market Comments
December 16, 2022
Fiat Lux
Featured Trade:
(DECEMBER 14 BIWEEKLY STRATEGY WEBINAR Q&A),
(JPM), (BAC), (C), (WFC), (UNG), (RIVN), (SPY), (TLT), (TBT), (TSLA), (NVDA), (CRM), (FCX)
Posts
Below please find subscribers’ Q&A for the December 14 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Silicon Valley in California.
Q: Is it time to short the S&P 500 (SPY), or go into cash?
A: I vote for cash. Number 1. We’ve just had a tremendous run in the market. The 200-day moving average at $405 is proving to be massive resistance, and you could get a bunch of profit-taking in January on all the positions people bought up in October. They’ve made a ton of money on that, and they may be deferring to profit-taking, hoping for the Santa Clause rally to continue and to take advantage of all that time decay over the holidays—so, high risk. Risk-reward right now is terrible, so I don’t want to do anything. I’m 100% cash, and I’ll stay that way until the New Year unless something exceptional happens in the markets—you never know what might happen. And I watch markets 24/7, vacation or not because it's in my blood.
Q: What about Financials?
A: Wait until the next dip and then go for call spreads which deliver max profits in sideways markets. JP Morgan (JPM), Bank of America (BAC), Citigroup (C) and you might take a look at Wells Fargo (WFC) next time around, but they always seem to be getting into trouble.
Q: What do we do about interest rates here?
A: Look for the 10-year Treasury bond (TLT) yield to drop to about 2.50% in 2023, about the first half of 2023—maybe by June or so. We did just have a round of profit-taking, but we’re adding on dips.
Q: What do you think about the US sending patriot batteries to Ukraine?
A: The problem is the MIM-104 Patriot SAM system is kind of old—about 41 years old—and it’s been outrun by the new technologies developed by the Ukraine war. Also, 1,000 drones at $1,000 each would be cheaper than 1 patriot missile for $4 million. Sending swarms of hundreds of super cheap drone bombs to attack targets has only been developed over the past six months and you only need one to get through to destroy the target for which the patriot would be useless. Patriot is really designed to shoot down incoming Russian intercontinental ballistic missiles with nuclear warheads with one hour of notice and highly predictable trajectories. We used them a lot in the Gulf War in 1991, and we gave many to Israel which used them to great effect when defending big cities. But they were only firing against slow WWII German-style V2 rockets which Saddam Hussein literally copied off of Wikipedia. If you want to see how effective the new drone strategy is, watch competitive drone racing (https://www.youtube.com/watch?v=HNRiMgNnuVE ), or robot wars (http://www.robotwars.tv ), or any of these other online programs where you have drones controlled by humans doing exactly what I’m talking about. Also, 1,000 drones at $1,000 each would be cheaper than 1 patriot missile for $ million.
Q: What’s your Rivian (RIVN) target by the January options expiration?
A: I have no idea, but Elon Musk has had the impact of destroying not only Tesla but the entire EV sector, so Rivian is a great company clearly being dragged down by Tesla. But also, a joint venture to make trucks in Europe was also put on hold with Mercedes. And of course, nobody wants to spend money ahead of a recession. Buy (RIVN) two-year LEAPS.
Q: Why is the US buying Natural Gas (UNG) in Massachusetts from Russia when we have so much already in this country?
A: The US does not have a national natural gas pipeline system, so you can have excesses in Texas where it’s produced meet shortages in Massachusetts where it’s consumed. Somebody found a loophole to get Russian gas into the US using offshore shell companies which I’m sure will be closed instantly once that delivery is made. Suffice it to say that the sanctions on Russia are tightening, are having a deeper effect and forcing them to pull out of Ukraine sooner than we expect. That may be the pivotal black swan of 2023—that Russia gives up on Ukraine, which would be a huge positive for all markets.
Q: When will we be using nuclear fusion?
A: I have been following nuclear fusion for 50 years, ever since I worked at the Nuclear Test Site in Nevada—it’s long been the holy grail for alternative energy. I talked to the teams every once in a while, since they live next door. The positive developments we saw in England last week are a big breakthrough, but you’re looking for at least 30 years until we get functional economic nuclear fusion power plants. So, we only have to stay alive for 30 more years (and keep climate change from killing us all off in the meantime) before we get carbon-free energy in an unlimited supply. Having said that, from the time they developed a functional commercial nuclear powerplant using Uranium in 1957 from the initial use of the atomic bomb in 1945, was only 12 years and that had to be equally as daunting. So, I may be wrong, and there may be other breakthroughs coming our way, but you don’t control 150 million degrees easily—that's what’s necessary with fusion. The amounts of power input required are also staggering, like all the power that San Francisco uses in a day, just to produce marginal bits of electricity. And the deuterium fuel needed (H2, or heavy hydrogen) in large quantities would not exactly be cheap either. But in 30 years every city should get its own min sun to provide unlimited electricity. So there’s your science lecture of the day, from a long-term fusion follower. For a more detailed explanation please click here at https://www.energy.gov/science/doe-explainsnuclear-fusion-reactions
Q: Is Tesla (TSLA) a buy here?
A: Absolutely, for the long term, but I would not be amazed to see $110 print first. Number one, there’s a major short play going on here too building huge amounts of buying power, and Number two, we’re flushing out a lot of long-term profit takers for tax loss selling as we go with the year-end to offset 2022 losses in other stocks. Buying Tesla at 27X earnings multiple, and next year’s 19X multiple when it was at 100X just a year ago is kind of unbelievable. An onslaught of new Tesla positives will hit the market in 2023. The new Cybertruck comes out and there is a two-year waiting list out the gate and deposits in hand for 100,000 vehicles. The company is generating such enormous cash flows that it is like to carry out $10 billion in share buybacks, especially with the price this low. There are no real competitors on the horizon, except for a handful with minimal production at big losses outside of China.
Q: Is the demise of FTX the end of crypto?
A: I would say yes, which is why we stopped producing our Bitcoin newsletter. It could take 30 years for this thing to recover. It’s another Japanese stock market type situation, where it literally takes three decades to recover, and by then new technologies will far surpass it. The confidence in anything crypto has been totally destroyed by the FTX scandal—it’s the final nail in the coffin. And there are better things to do—I’d rather be buying NVIDIA (NVDA) or Tesla (TSLA) than crypto. There are too many great trades after a bear market.
Q: Is Blackrock (BLK) in trouble?
A: Not in a million years, and I’d be buying it on any dip. They’re an incredibly well-run company, buy on dips. They have one gated REIT which thei disclosed well in advance that is drawing all the adverse publicity. In bear markets, traders always believe the worst.
Q: Why would you not sell Nvidia (NVDA)?
A: Well, we dumped all our tech stocks in January, so we did sell there. But I try not to go against long-term trends, and the long-term trends for Nvidia is a double or triple from here since they are the 8-pound gorilla in the high-end chip business.
Q: Why is cybersecurity (PANW), (CRWD) so unloved in this environment?
A: They are over-owned. When everybody owns something, you can have the greatest story in the world and it doesn’t go up because you need new buyers for things to go up, and the Cybersecurity story is pretty well known. That’s why it won’t go down either, people are not selling because they believe in the long-term story of cyber security—and quite correctly so, and I might add at the bottom of the ranges.
Q: Isn’t Warren Buffet’s age a worry regarding Berkshire Hathaway (BRKB)?
A: No, the replacement management team that has been there for 20 years, is generating great results. Warren is basically just the front-end mouthpiece for Berkshire Hathaway, just like I’m the front-end mouthpiece for the Mad Hedge Fund Trader and isn't really involved in day-to-day decisions. That’s how Berkshire was able to step up its technology exposure during the teens. When he goes, the stock might drop 5% from algorithm and uninformed sales, but no more.
Q: What do you think of the iShares 20 Plus Year Treasury Bond ETF (TLT) versus the ProShares UltraShort 20+ Year Treasury (TBT)?
A: Avoid the (TBT) because it’s a 2x—you have extra management fees, and extra dealing costs—it’s better just to buy (TLT) on a 2x margin than it is shorting the (TBT) which is already a 2x. I’m looking for $120-$130 in the (TLT) by mid-2023, which is also a great LEAPS candidate.
Q: Is the market rethinking technology multiples here which are IBIDTA based?
A: It has already rethought the technology multiples because they have collapsed. They have dropped, in Tesla’s case 100X to 19X, which looks like a pretty serious piece of rethinking to me, so yes absolutely. Where is the final level? My theory always has been that when tech falls to a market multiple, which for the S&P 500 right now is 18.5X, that is your final bottom in tech multiples which means they may have more to go down. And what might really happen is you may have a situation where the market multiples start to rise again and get back up to the 20’s, tech falls, and they meet somewhere in the low 20s. That’s your final bottom for tech, and then you buy it to own for the next 10 years.
Q: When do you think the Fed will start lowering rates?
A: It will be a second-half affair. First of all, they have to raise rates by 50 basis points on Wednesday, then raise them again in February by 50 and again in March by 25, and then leave them alone for 3 months. Then we will have a recession, or dramatically lower inflation by then, or both. And then they’ll have room to start cutting, which sets a calendar of about June where they start several 75 basis point CUTS. Remember, markets discount things 6-9 months in advance, which is why we had that $20 rally in the (TLT) that started in February. There’s your calendar. So far, it’s working.
Q: Will you give a buy signal on Tesla (TSLA)?
A: More like a Hail Mary on Tesla, hoping that it’s the bottom. When you get these capitulation selloffs, which is what we’re getting on Tesla, there is absolutely no way of predicting where the final number is, because you’re dealing with human emotions here, which are totally unpredictable and are panicking. I’d rather wait, give the first 10% of the move to the next guy, and then play the new trend from there. But I think Tesla could be one of the top performers of 2023. Especially if you get down to like $110 or so, something unbelievable—you know, get Tesla to market multiple, that means it’s got to drop another $30 essentially, and in this environment, it could do that. It could keep going down every day for the rest of this year because a lot of these big reversals tend to happen at year ends. When you get the last Tesla bull out of there, that’s when it goes up. After that, it’s all short covering.
Q: Do you think it will be 50 or 75 basis points?
A: It’s a coin toss for whether it’s 50 or 75. Knowing Jay Powell as I do, I’d go for 50, but with harsh talk. I think he wants to shock us, wants to kill off this stock market rally, wants to kill off any hope you can get one more price rise through the system before we hit a recession. A 50 basis points would be a real shocker and, by the way, would also give us easily a 1000-point selloff, which we could then use to buy into for the new year.
Q: Could Tesla reach $600?
A: Yes, I think it could. Remember, the fundamental story for Tesla is still on track. They are still growing at a 40% rate, while the rest of Detroit is going nowhere. All of their leads are overwhelming, and the really telling aspect for the future of Tesla is that Apple gave up on its autonomous driving program. Every other car company in the world is going to come to the same decision, except for maybe Google. So yes, the bull case is absolutely there, you just have to wait for the current capitulation to flush out, and then it becomes a buy for years.
Q: Does the adoption of a digital currency impact the economy?
A: No, I think anything digital money is on hold for the foreseeable future as the FTX disaster unfolds.
Q: Do you like Salesforce (CRM)?
A: Yes, long-term. It’s also in a capitulation “catch a falling knife” stage. Wait for that to finish—better to buy it on the way up than on the way down is all I can say.
Q: Will there be any restrictions on copper mining (FCX)?
A: Not that I can think of—we’re looking at an enormous shortage of copper going forward and a future copper shock. Most of this is produced in emerging markets that have no environmental restrictions, which is why it happens there, like Chile. So yes, looking for new copper sources will be one of the big plays of this decade.
Q: Do you think the market will bottom in 2023?
A: Yes, if it hasn’t already.
To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in to www.madhedgefundtrader.com, go to MY ACCOUNT, click on GLOBAL TRADING DISPATCH, then WEBINARS, and all the webinars from the last 12 years are there in all their glory.
Good Luck and Stay Healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Peleliu in 1978 with a Japanese 8 Inch Gun
Global Market Comments
December 13, 2022
Fiat Lux
Featured Trade:
(WHAT EVER HAPPENED TO THE GREAT DEPRESSION DEBT?),
($TNX), (TLT), (TBT)
Global Market Comments
November 3, 2022
Fiat Lux
Featured Trade:
(LONG TERM PORTFOLIO UPDATE)
(BMY), (AMGN), (CRSP), (LLY), (EEM), (BABA),
(GOOGL), (AAPL), (AMZN), (SQ), (TBT), (JNK), (JPM),
(BAC), (MS), (GS), (FXA), (FXC), (SLV)
Global Market Comments
October 24, 2022
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or MY SECRET MARKET INDICATOR),
(SPY), (USO), (TSLA), (TBT), (NFLX), (FXY), (SNAP)
I have access to inside information that is worth far more than any other technical or fundamental data out there.
It is almost always right and has made fortunes for me over the year, the dreams of avarice.
If the SEC knew about it, they would lock me up and throw away the key.
Here it is. But first, let me tell you about the performance it has delivered.
With some of the greatest market volatility in market history, my October month-to-date performance ballooned to +6.55%.
I used last week’s option expiration to take profits on my longs in JP Morgan (JPM), Visa (V), and Tesla (TSLA), and my one short in the S&P 500 (SPY). That leaves me with only one short in the (SPY) and 90% cash.
My 2022 year-to-date performance ballooned to +76.23%, a new high. The Dow Average is down -14.37% 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 +76.50%.
That brings my 14-year total return to +586.79%, some 2.86 times the S&P 500 (SPX) over the same period and a new all-time high. My average annualized return has ratcheted up to +45.72%, easily the highest in the industry.
So here is my unfair advantage:
I get to see what my own customers do, and I’m the only one who sees it.
For my own subscribers are among the most highly trained and disciplined in the market. 50% a year profits are common and every year, I learn of a couple of 1,000% profits (or 10X returns).
And here is what my customers are telling me today.
The end of the bear market is near. In fact, a “Big Turn” across all asset classes may be upon us.
Bonds are about to bottom out and yields peak. The US dollar may be double-topping. Commodities are crawling off a bottom. Price earnings multiples for stocked have just cratered from 21X to a decade low of 16X. Many stocks, like Tesla are trading at the lowest multiples in their lives.
Thus, the demand for LEAPS recommendations that offer tenfold two-year returns on far more modest equity appreciation has been skyrocketing.
I can’t blame them.
A final capitulation in the bond market is fast approaching. The United States Treasury Bond Fund (TLT) has collapsed by $88, from $180 to $92, or some 48.89%, covering the last six points in two days.
Ten-year yields have rocketed from 2.55% to 4.43% since August. The 2X short bond ETF (TBT) has spiked from $14 to $39 in a year. If you don’t cover the bond market on a daily basis, you may not know this.
It just so happens that I do.
It's an old investment nostrum that if you want to know what stocks are going to do, then take a close look at the bond market.
As Winston Churchill once said, “This is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”
If you believe that the last interest rate hike in this cycle is only two months off, and we see interest rate cuts after that, then you need to be buying stocks now. You may be risking 10% of downside if you do, but miss out on 100% of upside if you don’t.
Here's another market old reliable. Markets always move more than you expect.
These may all sound like bold predictions. But then my followers are coming off of the best year for trading and investment in their entire lives. Confidence begets confidence.
If you are searching for global contagion, you don’t have far to look. The Japanese yen has cratered some 24% this year and is down by half from its last peak. That’s because the Bank of Japan, one of my old haunts, remains stubbornly insistent that ten-year JBG yields remain pegged at 0.25% while the US was raising from 0.25% to 4.43%.
You have to wonder what they are smoking in the Land of the Rising Sun. Their goal was to create a massive export boom with an ultra-cheap currency and runaway inflation with all the money printing. So far it hasn’t happened. GDP growth in Japan is stuck at snail-like 1.7%, while inflation remains a lowly 3.00%.
Go to Japan for the sushi, the public baths, and the Kurosawa samurai movies, not for inspiration on economic policy, which has been a disaster for 45 years. It’s tough to prosper against a gail-force demographic headwind.
Foreign exchange markets are easy to trade. You just follow the money and pile into the currency with the best yield advantage. Right now, that happens to be the US dollar (UUP).
Why wasn’t I selling short the Japanese yen (FXY) earlier this year? Because there were far better opportunities selling short US stocks, which I amply took advantage of.
It’s all in my numbers.
UK Government Collapses, with the resignation of prime minister Liz Truss in the shortest government in history. A new conservative leader will be elected next week. Truss took over a sinking ship. Her promised tax cuts delivered a fall in the British pound to a 40-year low. No matter what any future leader does, the UK standard will drop by half in the coming years, thanks to Brexit. THE HEAD OF LETTUCE WON!
30-Year Fixed Rate Mortgage Hits an Eye-popping 7.4%, in a clear Fed effort to shut down the real estate market. If this doesn’t kill the economy, nothing will. But home prices are nowhere near to 50%-70% declines seen in 20098-2011.
Existing Home Sales Plunge 23.8% YOY, in September, in the eighth straight month of sales declines. There are 1.2 million homes for sale, a six-month supply. The median home prices rose to $384,800.
Housing Starts Hit Two-Year Low, as the luxury end takes a hit. Starting families can no longer buy more houses than they can afford.
US Budget Deficit Drops by Half, after the sharpest decline in government spending in history. The red ink shrank from $2.78 trillion to only $1.38 trillion. It’s why I think the bond market may soon be bottoming out, with the (TLT) at $92 and the (TBT) at $38. A trillion here, a trillion there, and sooner or later, it adds up to a lot of money.
Ten-Year US Treasury Yields Hit 20-Year High, at 4.43%. If you’re waiting for rates to peak before buying stocks, it’s not yet. I’m looking for 4.50% before the crying is all over.
Fed Beige Book Says the Economy is Growing Modestly, an improvement from the last one. Travel & tourism is booming, auto sales are sluggish, and retail spending is flat. Manufacturing is steady, thanks to easing supply chain problems. High mortgage rates are a problem. Labor is still tight. It’s a very mixed report.
Tesla Earnings Beat Estimates for the 13th consecutive quarter profitability, taking the shares down 5%. Revenues came in at 24 billion, while units sold hot 340,000. The strong dollar is weakening Chinese and European sales. Tesla is still a decade ahead of the competition and boasts a global footprint. Production could hit 450,000-500,000 in Q4 once Austin and Berlin go to full production. The only competition will come from China. The Cybertruck comes out in 2023 and already has a million orders.
Netflix Earnings Blow Out, taking the stock up 15%, after a massive crackdown on password sharing. Some 30 million views are still watching the streaming channel for free. Some 2.41 new subscribers joined in Q3. The shift to advertising is next. Buy (NFLX) on dips.
SNAP Dives by 25%, thanks to a horrific earnings shortfall. Advertising Demand went from overwhelming to non-existent practically overnight. Small-cap growth is still being punished severely for any disappointments. The company is cutting 20% of its staff. Avoid (SNAP).
Supply Chain Problems are Disappearing, as two years of port congestion ease. A slowing economy is helping. After a year, I finally got my sofa from Vietnam. Overorders are coming back to haunt big retailers.
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, October 24 at 8:30 AM, the S&P Global Flash PMI for September is released.
On Tuesday, October 25 at 7:00 AM, the S & P Case Shiller National Home Price Index for July is out.
On Wednesday, October 26 at 8:30 AM, New Home Sales for September are published.
On Thursday, October 27 at 8:30 AM, Weekly Jobless Claims are announced. US Q3 GDP is also announced.
On Friday, October 28 at 8:30 AM US Personal Income & Spending is printed. At 2:00 the Baker Hughes Oil Rig Count is out.
As for me, back in 2002, I flew to Iceland to do some research on the country’s national DNA sequencing program called deCode, which analyzed the genetic material of everyone in that tiny nation of 250,000. It was the boldest project yet in the field and had already led to several breakthrough discoveries.
Let me start by telling you the downside of visiting Iceland. In the country that has produced three Miss Universes over the last 50 years, suddenly you are the ugliest guy in the country. Because guess what? The men are beautiful as well, the decedents of Vikings who became stranded here after they cut down all the forests on the island for firewood, leaving nothing with which to build long boats. I said they were beautiful, not smart.
Still, just looking is free and highly rewarding.
While I was there, I thought it would be fun to trek across Iceland from North to South in the spirit of Shackleton, Scott, and Amundsen. I went alone because after all, how many people do you know who want to trek across Iceland? Besides, it was only 150 miles, or ten days to cross. A piece of cake really.
Near the trailhead, the scenery could have been a scene from Lord of the Rings, with undulating green hills, craggy rock formations, and miniature Icelandic ponies galloping in herds. It was nature in its most raw and pristine form. It was all breathtaking.
Most of the central part of Iceland is covered by a gigantic glacier over which a rough trail is marked by stakes planted in the snow every hundred meters. The problem arises when fog or blizzards set in, obscuring the next stake, making it too easy to get lost. Then you risk walking into a fumarole, a vent from the volcano under the ice always covered by boiling water. About ten people a year die this way.
My strategy in avoiding this cruel fate was very simple. Walk 50 meters. If I could see the next stake, I proceeded. If I couldn’t, I pitched my tent and waited until the storm passed.
It worked.
Every 10 kilometers stood a stone rescue hut with a propane stove for adventurers caught out in storms. I thought they were for wimps but always camped nearby for the company.
One of the challenges in trekking near the north Pole is getting to sleep. That because the sun never sets and its daylight all night long. The problem was easily solved with the blind fold that came with my Icelandic Air first class seat.
I was 100 miles into my trek, approached my hut for the night and opened the door to say hello to my new friends.
What I saw horrified me.
Inside was an entire German Girl Scout Troop spread out in their sleeping bags all with a particularly virulent case of the flu. In the middle was a girl lying on the floor soaking wet and shivering, who had fallen into a glacier-fed river. She was clearly dying of hypothermia.
I was pissed and instantly went into Marine Corp Captain mode, barking out orders left and right. Fortunately, my German was still pretty good then, so I instructed every girl to get out of their sleeping bags and pile them on top of the freezing scout. I then told them to strip the girl of her wet clothes and reclothe her with dry replacements. They could have their bags back when she got warm. The great thing about Germans is that they are really good at following orders.
Next, I turned the stove burners up high to generate some heat. Then I rifled through backpacks and cooked up what food I could find, force-fed it into the scouts, and emptied my bottle of aspirin. For the adult leader, a woman in her thirties who was practically unconscious, I parted with my emergency supply of Jack Daniels.
By the next morning, the frozen girl was warm, the rest were recovering, and the leader was conscious. They thanked me profusely. I told them I was an American “Adler Scout” (Eagle Scout) and was just doing my job.
One of the girls cautiously moved forward and presented me with a small doll dressed in a traditional German Dirndl which she said was her good luck charm. Since I was her good luck, I should have it. It was the girl who was freezing to death the day before.
Some 20 years later, I look back fondly on that trip and would love to do it again.
Anyone want to go to Iceland?
Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Iceland 2001 with German Girl Scout
Global Market Comments
October 21, 2022
Fiat Lux
Featured Trade:
(OCTOBER 19 BIWEEKLY STRATEGY WEBINAR Q&A),
(BAC), (USO), (SPY), (TSLA), (NFLX), (TBT), (PLTR), (SNOW)
Below please find subscribers’ Q&A for the October 21 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Silicon Valley in California.
Q: Bank of America (BAC) said the US consumer is strong and lending is robust. Does this mean no recession in 2023?
A: It could, because remember that while some sectors are clearly in recession, like real estate and automakers, and have been for a while, others are absolutely booming, like the airline business, and the banking business. There may not be a recession in here, or if there is one, it’s a very slight one. Count on the market to first discount a severe recession which would take the S&P 500 down to $3,000-$3,200 or so; and that’s what markets do, always overly pessimistic at the bottom and overly euphoric at tops. You can make your living off of this.
Q: What do you think about OPEC's behavior (USO) and its influence on the price of oil?
A: Clearly, they’re trying to influence the midterm elections and get an all-republican pro-oil Congress, which will be nicer to OPEC. That’s certainly what they got with the last administration and it’s safe to say that the pro-climate administration of Biden and the Saudis get along like oil and water. But long term, OPEC knows it’s going to zero, and in fact, Saudi Arabia has plans to turn their entire oil supply into hydrogen which can be exported and burned cleanly. I know the team here at UC Berkeley that’s working on that with the Saudi government. Cheap hydrogen also means airships come back, how about that? Hindenburg anyone?
Q: Will draining the Strategic Petroleum Oil Reserve (SPR) backfire, meaning deflation for the US economy and administration?
A: No, the SPR outlived its usefulness maybe 30 years ago—it’s essentially a government subsidy for Texas and Louisiana, and for the oil industry, that has taken on a life of its own. When we started the SPR in 1975, the US got more than half of its oil from the Middle East. Now, it’s almost zero. It goes to China instead. If we are a net energy producer and we have been for over 5 years, why do we even need a petroleum reserve? So no, I think we should shut it down and sell all the oil that’s in there. And it becomes even less relevant as more of the US economy turns over to alternatives.
Q: How do we operate our military with no oil?
A: The pentagon is working on a no-oil future, developing alternative fuels for all kinds of things that you wouldn’t imagine are possible. For example, instead of using diesel, jet fuel, or gasoline for our vehicles, you outfit them with electric batteries, and when the batteries go dead you just air drop new fully charged ones. It’s much better than trying to transport gasoline across the desert in a giant fuel bladder, which can be taken out by a single bullet and is what they do now. Take the pilots out of fighters and they become so light they can operate on battery power. So yes, the pentagon has actually been in the forefront of using every alternative technology they can get their hands on from the early days. Better they get them first before an enemy does.
Q: We will almost always need petroleum; far too many products use it as an ingredient.
A: That is absolutely right. Some will probably never be replaced, like asphalt, feedstock, or plastic. However, those represent less than 10% of the current oil demand. So yes, there always will be an oil industry, it just might be a heck of a lot smaller than it is now. You eliminate cars from the picture, and that’s half of all oil demand in the United States right there. And in most places in the United States, it will be illegal to sell a car that uses gasoline in 12 years. And do you make 30-year investments based on demand for your product dropping by half in 12 years? No, you don’t, which is why the oil companies themselves won’t invest in their own industries anymore. They’re only paying out profits as dividends and buying back shares, which they never used to do.
Q: Do you think the Standard & Poor’s 500 Index (SPX) $3,500 was the bottom?
A: No, we actually did get a little bit lower than that. We will be in a bottoming process over the next several months, but the pattern will be the same. Tiny marginal new bottoms, maybe 100 points lower than the last, and then these gigantic rallies. If we do make bottoms they will only be for seconds, so the way to deal with that is to only put in really low-limit orders to buy stuff, assuming 1,000 points down, and just keep entering the order every day. Eventually, you’ll get one of these throw-away fills when the algorithms panic and a bunch of market orders hit the market. That's the way to deal with that.
Q: I would say that Biden is trying to influence the elections by releasing oil reserves.
A: Absolutely he is, but then so is the oil industry, taking half of the refineries off stream 2 months before the elections, and spiking oil prices. So it’s a battle of the oil price going on here. No love lost between the oil industry and Biden, and US consumers for that matter. I don’t care if gasoline is $7 a barrel because I never buy it; I am all electric. But for a lot of working people, that’s definitely a lot of money.
Q: How concerned are you about the US going to a cashless currency?
A: I’m not worried because I pay my taxes and I don’t break any laws. If you don’t pay taxes and do break laws, like engaging in drug dealing or bribery, you should be extremely worried, as that would be the eventual goal of a cashless economy. That and the fact that the government has to spend $300 million a year printing paper money, which they’d love to get rid of. And of course, it’s cheaper for businesses to use digital currencies. Most countries in Europe don’t use physical currency anymore—it’s credit cards only.
Q: Do you expect Tesla (TSLA) to pop after earnings?
A: I have no idea; it depends on what the report says but suffice it to say that Tesla is historically cheap. It has the lowest PE multiple now than it has in the entire 13-year history of the company. Scale in on the LEAPS with Tesla—that’s what I’d be doing down here.
Q: Could the US debt situation spiral into something that gets out of hand?
A: No, because the purchasing power of debt is now deflating at an 8.4% annual rate, which means that it goes to zero in about 8.57 years. This is how the government always wins when issuing debt. It’s been going on since the French first issued government debt 300 years ago. Who pays for that? Bond investors. Anybody who owns bonds now has seen their purchasing power go up in smoke. That’s why it’s been a one-way zero bid market for two and a half years—they’ve been dumping like crazy.
Q: Should I buy debt here or sell it?
A: We’re actually getting close to a bottom in the junk debt market, which means you’re going to be yielding around 10%. That means the value of your holding doubles in 6 years, and the default rates never reach the high levels predicted by analysts in junk bonds. That has always been the key to junk bonds in the whole 50 years that I've been following this market. My neighbor up in Tahoe, Mike Milliken, made billions off that assumption.
Q: What do you think about Netflix (NFLX)?
A: Well, my advice was to buy it, to a lot of people. They’re clearly changing their business model for the better—they’re going to start picking up ad revenues, they’re cracking down on password sharing, and they delivered a 20% return in stocks. Plus their share price has just dropped down from $700 to $165. Great LEAP candidate here.
Q: What kind of position is best if a recession hits?
A: Cash. Cash is now yielding 4.4%. The best cash alternative is 90-day T-bills issued by the US Treasury. Execution costs almost zero, and liquidity is essentially infinite; but, remember also that bull markets start 6 to 9 months before recessions end. You just have to watch your timing. Which means that if the recession ends in say July, you have to be buying stocks today. Just keep that in mind, ladies and gentleman.
Q: How do you see the futures of semis?
A: Anything you buy here now will triple in three years, but it becomes a question of how much pain you want to take in the meantime. Everyone in the investment management industry thinks the same, and it really is a classic “catch-a-falling-knife” situation— knowing that the payoff down the road is enormous. Virtually all companies are designing new semis into their products at an exponential rate.
Q: Are LEAPS part of the service?
A: Yes, they are. I will send you one tomorrow. But concierge customers get first priority because that’s what they’re paying for.
Q: How far out should we go?
A: On LEAPS, always take the maximum maturity, which is usually 2 years and 4 months. And the reason is that the second year is almost free—they charge you almost nothing for going out to maximum maturity. And if we have a recession that does last longer than people think, that extra year of maturity will be worth its weight in gold. It’ll be the difference between a zero return and a 10x return.
Q: Can we go back into the ProShares UltraShort 20+ Year Treasury (TBT)?
A: No, it would be a horrible idea to buy the (TBT) here after it just moved from $14 to $36. That’s what you buy before it goes from $14 to $36. We’re topping out in all of these short bond plays, so avoid them like the plague.
Q: How much is the Concierge Service?
A: It’s $12,000 a year—and a bargain price at that! Almost everybody ends up covering that on their first trade, and you get an entire portfolio of LEAPS and a dedicated LEAPS website with the service. You also get my personal cell phone number so you can call me while I'm either on the beach in Hawaii or on the ski slopes of Lake Tahoe. If anyone has questions about the concierge service, contact customer support at support@madhedgefundtrader.com.
Q: What are your thoughts on data analytics companies Snowflake (SNOW) and Palantir (PLTR)?
A: Love Snowflake, hate Palantir because the CEO isn’t interested in promoting a share price. With (SNOW), you have Warren Buffet as a major holder, so that’s all you need to know there. (SNOW) also has a 75% fall behind it.
Q: Thoughts on the Ukraine/Russia war?
A: It’ll drag on well into next year, and obviously the Iranian drones are the new factor here. I wouldn’t be surprised if there were suddenly an accident at a certain factory in Iran; that’s what happens when these things play out.
Q: Is Snowflake (SNOW) a buy right now?
A: It’s like all the rest of tech. High volatility, could have lower lows, but long-term gains are at least a triple from here. You know how much risk you can take.
To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in to www.madhedgefundtrader.com, go to MY ACCOUNT, click on GLOBAL TRADING DISPATCH, then WEBINARS, and all the webinars from the last 12 years are there in all their glory.
Good Luck and Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Dungeon in Montreux Castle on Lake Geneva in Switzerland
Global Market Comments
September 29, 2022
Fiat Lux
Featured Trade:
(THE UNITED STATES OF DEBT),
(TLT), (TBT), ($TNX)
With ten-year US Treasury yields hitting 4.00% yesterday, it’s time to pay the piper for the last 15 years of the borrowing rampage of epic proportions.
This is not a new thing.
We are, in fact, becoming the United States of Debt.
That Washington is taking the lead in this frenzy of borrowing is undeniable. The last administration took the national debt from $23 trillion to $28 trillion during four years of prosperity that was entirely borrowed from the future.
The Biden administration will eventually take that figure up to an eye-popping $38 trillion. That will be the final bill for ending the pandemic, putting 25 million people back to work, and bringing the second Great Depression to a close.
The National Debt exceeded US GDP in 2016, taking the debt to GDP ratio to the highest point since WWII.
Treasury Secretary Janet Yellen recently confided to me that, “It’s the kind of thing that should keep you awake at night.”
It gets worse.
According to the Federal Reserve Bank of New York, total personal debt topped $19 trillion by the end of 2020. An overwhelming share of personal consumption is now funded by credit card borrowing.
Some 33% of Americans now have debts in some form a collection, and that figure reaches an astonishing 50% in many southern states (see map below). Call it the Confederate States of Debt.
Corporations have also been visiting the money trough with increasing frequency, taking their debt to $6.1 trillion, up by 39% in five years, and by 85% in a decade.
The debt to capital ratio of the top 1,000 companies has ballooned from 35% to 54% and is now the highest in 20 years.
Another foreboding indicator is that corporate debt is rising faster than sales, with debt rising by a breakneck 8.5% annualized compared to 4.6% for sales over the past decade.
Automobile debt now tops $1 trillion and with lax standards has become the new subprime market.
And remember that other 800-pound gorilla in the room?
Student debt now exceeds $1.6 trillion and is rising, as is the default rate. Provisions in the last tax bill eliminate the deductibility of the interest on student debt, making lives increasingly miserable for young borrowers. And you wonder why the US birth rate is so low.
Of course, you can blame the low interest rates that have prevailed for the past decade. Who doesn’t want to borrow when the inflation adjusted long-term cost of money is FREE?
That explains why Apple (AAPL), with $270 billion in cash reserves held overseas, borrowed last year via ultra-low coupon 30-year bond issues, even though it doesn’t need the money. Many other major corporations have done the same.
And while everything looks fine on paper now, what happens if interest rates ever rise and stay high?
The Feds will be in dire straight very quickly. Raise short term rates to the 6% seen at the peak of the last cycle, and the nation’s debt service rockets from 4% to over 10% of the total budget. That’s when the sushi really hits the fan.
You can expect the same kind of vicious math to strike across the entire spectrum of heavily leveraged borrowers going forward, including big borrowers like cruise line, airlines, you, and me.
We are also witnessing the withdrawal of the Chinese as major Treasury bond buyers, who along with other sovereign buyers historically took as much as 50% of every issue. Threaten a war on your largest lender and it plays hell with you cash flow.
Rising supply against fewer buyers sounds like a recipe for eventually much higher interest rates to me.
Just watch this space for the next Trade Alert regarding when to get back in for the umpteenth time.
