Global Market Comments
September 25, 2023
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE SINGULARITY IS HERE!)
(SPY), (TLT), (MSFT), (TSLA), (USO), (AMZN)
Posts
While changing planes at Heathrow airport in London last week, my partners in artificial intelligence graciously came out to join me for lunch over some of the awful food there. I can’t tell you who they are, but if I did you would fall out of your chair.
Whenever someone gets a lead in AI applications these days, mum’s the word. There’s no point in giving the competition a leg up, let alone a commanding lead. What they told me was incredibly exciting, but also terrifying. Suffice it to say that you ain’t seen nothing yet.
2023 is probably the last year when mere humans will be able to identify what’s real and what isn’t. The Turing Test, by which machines become indistinguishable from man, laid out by Dr. Alan Turing in 1950, has been conquered. Dr. Ray Kurzweil got it all wrong. We are not going to have to wait until 2040 for the Singularity to take place, whereby man and machine become one (click here for the link).
It’s happening right now.
It seems that these days. you spend half of your day proving to robots that you’re not a robot. Let me tell you that it’s about to get a lot worse. Lately, I have been irritatingly failing these tests more often because I can’t see the part of a bicycle hiding in a corner of the box next door. It won’t be long before we are working for these robots.
That could be a good thing because robots lack human flaws, like abusing their employees, getting drunk, failing to show up for work, and demanding more pay. What they WILL do is make you work FASTER, as the employees at Amazon (AMZN) found out, where workplace accidents and exhaustion at distribution centers are running rampant. Some workers can only handle six weeks of employment at a time.
It turns out that Elon Musk was the initial founding investor in ChatGBT, pumping in $1 billion in seed capital. When you’re the richest man in the world, you can do that sort of thing.
But Musk had a great falling out in 2021 when management refused to accept his absolute control of their AI in exchange for more money. That led to ChatGPT’s sale to Microsoft (MSFT) for $13 billion, a figure which, in retrospect, seems a pittance given the $1 trillion in value it is expected to create (so buy (MSFT).
By the way, ChatGPT refers to Generalized Preprogrammed Transformers in a homage to the cartoon series. That’s how nerdy these people are.
In any case, a huge conflict of interest had arisen with Tesla’s own AI efforts. One proof of this is that my own monthly insurance rates with Tesla keep going down, now at an unbelievably low $204 a month for a $165,000 vehicle.
It’s not that I’m a better driver. At my age, I’m probably getting worse. It's because the CAR keeps getting smarter, reducing the chance of an accident and therefore the risk to Tesla’s insurance division. By the way, notice how well Tesla shares have been outperforming the market lately.
Insurance industry watch out! You are about to get disrupted.
What is especially scary is that a presidential election will take place next year just when AI is hitting its stride. In 2016, many thought that the Access Hollywood videotape would make Donald Trump unelectable.
Everyone believed the video was real, but while half the voters were outraged, the other half said that’s just Trump being Trump and he got elected. If that video were released today, only half would believe it’s real while the other half would think it’s a deep fake produced by the opposition.
The possibilities boggle the mind, with multiple deep fakes already gaining airtime for next year’s primaries.
There isn’t much to say about stocks these days except that the grand finale for the current correction is fast approaching.
The UAW strike won’t cause the stock market to crash. But add it in with a prolonged government shutdown, sharply rising interest rates, and recessions in our biggest export markets in Europe and China, and suddenly the short-term downside argument becomes a lot more persuasive.
If you DO need convincing, look no further than my Mad Hedge AI Market Timing Index. It decisively broke 50 on Friday and plunged all the way down to 36. Finally, after a tortuous six months of doing nothing, we are starting to see some value in the market.
Whenever I go through periods of issuing no trade alerts for a prolonged period because the risk/reward is terrible, I get a lot of complaints from customers. After all, who wouldn’t want more trade alerts with a 90% success rate? The only way you achieve that success rate is to stay out of markets when they suck, as in now. Lately, I have noticed on down days, I get absolutely no complaints AT ALL.
I will end this dissertation by telling you a funny story. The last time I landed at San Francisco Airport, I grabbed an Uber cab home. As we departed the airport, I noticed a rolled set of plans on the floor forgotten by the previous passenger. I pointed this out to the driver, but he was from China and didn’t speak English.
So I opened up the plans and called the phone numbers listed in the key. First, I tried the University of California at San Francisco, whose name was clearly marked at the top. No luck there. The university is just too big.
Then I tried the printing company in Berkeley that produced the plans. I asked for the customer’s cell phone number, but the printer said they never released confidential client information. After some prodding, I convinced him to call his own customer and tell him I was headed back to the gate where he debarked with the plans (I can be very convincing).
By now, I was 20 minutes away from the airport, so I had ample time to examine what I had chanced on. It turns out I had blueprints of the human brain showing 100 sites where it can be connected directly to the Internet, ranking them by transmission efficiency. The owner was headed to Los Angeles to make a presentation to fellow scientists and some venture capital investors.
Yikes, I thought!
When we pulled up to the gate, there was a man looking like he had come out of central casting for the role of “scientist”, beard, glasses, and all. He was very grateful and then disappeared into the crowd running for his plane. Yes, I know it sounds like the beginning of a science fiction thriller.
I just thought you’d like to know. Yes, it’s just another day in the life for me.
So far in August, we are down -4.70%. My 2023 year-to-date performance is still at an eye-popping +60.80%. The S&P 500 (SPY) is up +17.10% so far in 2023. My trailing one-year return reached +92.45% versus +8.45% for the S&P 500.
That brings my 15-year total return to +657.99%. My average annualized return has fallen back to +48.15%, some 2.50 times the S&P 500 over the same period.
Some 41 of my 46 trades this year have been profitable.
The Most Important Thing That Powell Didn’t Say in Fed press conference is that quantitative tightening, or QT, continues. That drains $1 trillion a year from the financial system through bond sales until 2031 to get the Fed balance sheet down to zero. It is a negative for bonds….and the economy. The market is fixated on the 0.25% he did raise on interest rates.
UAW Strike Expanded on Friday, adding 38 new plants to the work stoppage. It’s death by a thousand cuts. The Big Three may respond with lockouts to drain union funds. Factories in Mexico are looking better every day. Elon Musk is laughing.
Industrial Production Jumps 0.4% in August, in another sign that the US has dodged the recession bullet. It’s one of the strongest numbers of the year. Capacity Utilization also rose to a high 79.7%.
Will a Government Shutdown Finally Drive Stocks Downward? Chaos rules supreme in the House of Representatives where there is a major effort to shut down the US government. Speaker Kevin McCarthy risks getting fired if he allows a spending bill to go through with Democratic support. It’s the result of a devil’s bargain made with his right wing to land the job in January. Will an impeachment inquiry into Biden be enough to placate them?
Cathie Woods’ New Take on Tesla (TSLA). As one of the earliest investors in Tesla, along with myself, it pays to listen to Cathie Woods talk about the stock. The company is headed from a current market valuation of $845 billion to $5 trillion, with two-thirds of the growth coming from its autonomous driving technology, a $15,000 upgrade. AI sold as software-as-a-service has an 80% profit margin compared to only 20%-30% for the EV business. Cathie’s bull case is $2,000 in five to ten years and her bear case is that the stock only reached $1,400. Teslas have a 40% lower accident rate than ICE cars, thanks to AI, so take the human out of the driving formula.
Oil (USO) Hits New 2023 High, with gasoline topping $5.00 a gallon in many states. There is no oil shortage or supply disruptions. This is pure price gouging, with Saudi Arabia and Russia cutting supplies by 5 million barrels/day since June and American oil companies riding on their coattails. The move coincided with a sudden and unexpected improvement in the US economic outlook, increasing demand. Too late to play on the long side here, with prices up 40% from the May lows.
National Debt (TLT) Tops $33 Trillion, or $100,000 per man, woman, and child. Not great news for bonds, as new issuance is swamping the markets. The debt has risen by 50% since 2019. Republicans want Democrats to spend less, while Democrats want Republicans to cut their spending.
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, September 25, the Chicago Fed National Activity Index is out.
On Tuesday, September 26 at 3:00 PM EST, the S&P Case Shiller National Home Price Index is released. We also get New Home Sales.
On Wednesday, September 27 at 2:30 PM, the US Durable Goods is published.
On Thursday, September 28 at 8:30 AM, the Weekly Jobless Claims are announced. We also get the final print for Q2 GDP.
On Friday, September 29 at 2:30 PM, the Personal Income & Spending is published. At 2:00 PM, the Baker Hughes Rig Count is printed.
As for me, this is not my first Russian invasion.
Early in the morning of August 20, 1968, I was dead asleep at my budget hotel off of Prague’s Wenceslas Square when I was suddenly awoken by a burst of machine gun fire. I looked out the window and found the square filled with T-54 Russian tanks, trucks, and troops.
The Soviet Union was not happy with the liberal, pro-western leaning of the Alexander Dubcek government so they invaded Czechoslovakia with 500,000 troops and overthrew the government.
I ran downstairs and joined a protest demonstration that was rapidly forming in front of Radio Prague trying to prevent the Russians from seizing the national broadcast radio station. At one point, I was interviewed by a reporter from the BBC carrying this hulking great tape recorder over his shoulder, as I was the only one who spoke English.
It seemed wise to hightail it out of the country, post haste, as it was just a matter of time before I would be arrested. The US ambassador to Czechoslovakia, Shirley Temple Black (yes, THE Shirley Temple), organized a train to get all of the Americans out of the country.
I heard about it too late and missed the train.
All borders with the west were closed and domestic trains shut down, so the only way to get out of the country was to hitchhike to Hungary where the border was still open.
This proved amazingly easy as I placed a small American flag on my backpack. I was in Bratislava just across the Danube from Austria in no time. I figured worst case, I could always swim it, as I had earned both, the Boy Scout Swimming, and Lifesaving merit badges.
Then I was picked up by a guy driving a 1949 Plymouth who loved Americans because he had a brother living in New York City. He insisted on taking me out to dinner. As we dined, he introduced me to an old Czech custom, drinking an entire bottle of vodka before an important event, like crossing an international border.
Being 16 years old, I was not used to this amount of high-octane 40-proof rocket fuel and I was shortly drunk out of my mind. After that, my memory is somewhat hazy.
My driver, also wildly drunk, raced up to the border and screeched to a halt. I staggered through Czech passport control which duly stamped my passport. I then lurched another 50 yards to Hungary, which amazingly, let me in. Apparently, there is no restriction on entering the country drunk out of your mind. Such is Eastern Europe.
I walked another 100 yards into Hungary and started to feel woozy. So, I stumbled into a wheat field and passed out.
Sometime in the middle of the night, I felt someone kicking me. Two Hungarian border guards had discovered me. They demanded my documents. I said I had no idea what they were talking about. Finally, after their third demand, they loaded their machine guns, pointed them at my forehead, and demanded my documents for the third time.
I said, “Oh, you want my documents!”
I produced my passport, and when they got to the page that showed my age, they both started laughing.
They picked me and my backpack up and dragged me back to the road. While crossing some railroad tracks, they dropped me, and my knee hit a rail. But since I was numb, I didn’t feel a thing.
When we got to the road, I saw an endless stream of Russian army trucks pouring into Czechoslovakia. They flagged down one of them. I was grabbed by two Russian soldiers and hauled into the truck with my pack thrown on top of me. The truck made a U-turn and drove back into Hungary.
I contemplated my surroundings. There were 16 Russian Army soldiers in full battle dress holding AK-47s between their legs and two German Shepherds all looking at me quizzically. Then I suddenly felt the urge to throw up. As I assessed that this was a life-and-death situation, I made every effort to restrain myself.
We drove five miles into the country and stopped at a small church. They carried me out of the truck and dumped me and my pack behind the building. Then they drove off.
The next morning, I woke up with the worst headache of my life. My knee bled throughout the night and hurt like hell. I still have the scar. Even so, in my enfeebled condition, I realized that I just had one close call.
I hitchhiked on to Budapest, then to Romania, where I heard that the beaches were filled with beautiful women. My Italian let me get by passably in the local language.
It all turned out to be true.
Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
September 22, 2023
Fiat Lux
Featured Trade:
(SEPTEMBER 20 BIWEEKLY STRATEGY WEBINAR Q&A),
(AMZN), (SPX), (TLT), (TSLA), (DIS), (LEN), (KBH), (PHM), (USO), (FXA), (UNG), (JPM), (C), (BAC)
Below please find subscribers’ Q&A for the September 20 Mad Hedge Fund Trader Global Strategy Webinar, broadcast from Silicon Valley, CA.
Q: How do we know when interest rates have peaked?
A: Well, that's easy—the Fed announces it and they start cutting interest rates. The first hint of that is they don’t raise interest rates when they have the opportunity to do so. That will be today as it was in July. So we’re at the top now, and they’ll probably go sideways for 6 months or even longer before they start cutting. Markets will start to discount this 6-9 months in advance, or about now.
Q: Year-end target for the S&P 500? What about Amazon (AMZN)?
A: 5,000. For the (SPX). For Amazon, I think we could easily tack on another 20-25%.
Q: Does the Mad Hedge Global Trading Dispatch include tech trade alerts?
A: It does, but only the higher quality, lower risk trades. Pure Tech traders are a much higher-risk bunch of people, and they want more aggressive trade alerts in smaller companies. As for me, with Global Trading Dispatch I try to stick to a 90% success rate, and the only way to do that is to avoid tech when it flatlines and not try to catch any falling knives.
Q: Any hope of recovery for the iShares 20 Plus Year Treasury Bond ETF (TLT)?
A: Yes; as I said, the Fed will start cutting interest rates next year, and markets discount 6-9 months in advance, so that gives us 3 months for our January 2024 $100/$105 call spreads to expire at max profit. So yes, it is entirely possible, if not likely, that we will see those numbers by January.
Q: Can you help me jump the line for a Cybertruck from Tesla (TSLA)?
A: Well, if I was going to help anyone get a Cybertruck, it would be me! And I can't get one. Back in the old days, Tesla people would fall down on their knees crying “thank you!” when you bought one of their cars. Now, I think I’m number 2 million on the waiting list. You’re on your own on that one.
Q: Is Disney (DIS) a good LEAP stock?
A: No, Disney has some major problems with their streaming business, and the parks have maxed out. That is why the stock seems immune to good news—unless you know something I don’t. So go for it if you’re ready for that risk.
Q: What is your fact-finding trip to Ukraine all about?
A: Nothing beats research on the ground for finding out what really happened. Second, Ukraine got a lot of aid from other countries when the war started, but it’s since run out and we know that hospitals and orphanages in Ukraine are in trouble and running out of money. So, nothing beats showing up with US dollar cash in that situation. So that is why I’m going. This’ll be my eighth war. I guess the war correspondent in me never left. I’ll also be escorting American doctors to Ukrainian hospitals who don’t know how to do this. There’s more to life than just making money.
Q: Should I buy the dip in homebuilders like Lennar Homes (LEN), D.R. Horton (DHI), and KB Homes (KBH)?
A: Absolutely, yes—with both hands. Who does better with a falling interest rate cycle than home builders who have to depend on falling mortgage rates for business to boom once again. So yes, any dip in this sector and I would be loading the boat. The next declining interest rate cycle could last 5 or 10 years.
Q: Will the United Auto Workers strikes cause inflation to rocket and feed into higher inflation figures?
A: No, not really. Union membership has declined by 75% over the last 40 years. The UAW itself has declined from 1.6 million members to 400,000, and they really have become too small to affect the general economy. What they will do is accelerate existing trends, like people dumping their ice cars and moving to Tesla and other EV manufacturers. This is sort of like a gift for Tesla, and that's why the stock was up 10% last week. Also, in the long, long run, if they force the car companies to move to Mexico and cut the same deals that Elon Musk got, then it reduces inflation.
Q: Does the recent increase in Chinese ships and warplanes near Taiwan change anything?
A: No, it just shows us how weak the economy in China is. It’s effectively in recession even though they refuse to admit it, and therefore they have to create more distractions. The Chinese have been bluffing on Taiwan for 70 years—why stop now?
Q: What is a good time to buy banks?
A: I would start scaling into (JPM), (BAC), and (C) now. They will be a major beneficiary of an economic recovery next year and falling interest rates; and the prices down here are good. They’re one of the worst performers so far this year—one of the few cheap sectors left in the market.
Q: Should I buy Tesla (TSLA) here?
A: The thing here that I’m telling my professional money managers is: scale in on a one-month basis. Figure out how much you want to buy, and then buy 1/30th of that amount every day for a month. Then, you’ll scale in, you won’t get the absolute bottom but you’ll get some kind of bottom, and when a turnaround happens, then it goes up 50% or 100%. That’s the way to play Tesla. A lot of the professional money managers and investment advisors who follow me have a problem; they’re getting tons of new customers based on their performance this year. So yes, what do you do when you get money after a great run? You can only scale in.
Q: Is oil (USO) topping and going back to 70 a barrel?
A: I think yes. We saw the run from $70 to $95; it looks like it’ll probably hit $100. After that, Saudi Arabia will start bringing supply back on. What they did is create an artificial short squeeze in oil by taking 5 million barrels off the market with Russia—that got prices up. Any higher than that, and high oil starts to adversely affect Saudi Arabia’s foreign investments. So yes, they do back off when we get over 100; they’re very happy with $100/barrel, as is the American oil industry. So, I’m inclined to take profits if you did the oil trade in June.
Q: Would you buy iShares 20 Plus Year Treasury Bond ETF (TLT) now?
A: No, I’ve been holding back because it seems to want to have a capitulation; that’s why it’s not rallying off the 93 level—it’s been bouncing on the bottom. Some piece of bad news, some kind of high inflation, could trigger a capitulation, which would take us down another 5 points—that's where you buy it. Then, all of a sudden something like a 2024 $85/$90 bull call spread is offering you 100% return one year out.
Q: Do you recommend 4-week T-bills?
A: No, I recommend 4-month T-bills. Those expire in January and take advantage of the cash squeeze in the financial system you always get in New Years. Returns on 4-month T-bills are much higher than 3 month, 2 month, or 1 month. I just bought some before this meeting because I’m not going to do a lot of trading this month, and I got a 5.48% yield. For me to do a trade now, it has to have a very low-risk 20% return. That’s what I need to beat T-bills at 5.48%, which have zero risk and a guaranteed return of money. You need the extra 15% return on a 1-month trade to justify the risk that individual stocks have.
Q: Will the Australian dollar (FXA) stay weak as long as China is weak?
A: Yes, and the flip side is also true: Will the Australian dollar be strong when China recovers? Absolutely. I still see 1 to 1 against the US dollar for the long term.
Q: Why is everyone pouring into short-term options?
A: They’re buying lottery tickets. A lot of people are in the markets not to invest, but to gamble. They have gambling addictions quite often, and nothing beats the instant gratification of a same-day win, even though 80% of the same-day options expire worthless. So, enter that market with caution.
Q: After artificial intelligence destroys 90% of jobs, won’t there be nobody left to buy stocks since stocks won’t go up solely on institutional buying?
A: While AI will destroy a lot of jobs, it’s creating even more jobs—that has always been the case with technology from day one. However, you do get mismatches from the time a job is destroyed to when a new one is created. There are also mismatches in skill levels and that can create turmoil in the economy. Look at the United Auto strike, which is hell-bent on stopping technology and automation—stopping any kind of technology they can. Technology in the long term always destroys jobs, but it also creates more jobs, just moving them from old economies into new industries. I’m sure the same thing went on with the hay and leather industries 120 years ago when we moved from horses to internal combustion cars.
Q: If companies go to a four-day workweek, how will that affect stocks?
A: It’ll probably make them go up. When people go to four-day work weeks, productivity goes up and companies get more output for their dollar of labor costs. That’s why it’s happening and why it’s so popular. People who work at home and get to play with their kids on weekends will work for less money—that is a proven fact.
Q: Any thoughts on when we will see the United States Natural Gas Fund (UNG) turn upward?
A: This winter. (UNG) is priced for perfection, sitting around here at the $7 level. The slightest surprise like a cold winter, for example, which we may get (at least in California we will), and then the thing will spike up.
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
2018 On the HMS Victory in Plymouth, England
Global Market Comments
September 20, 2023
Fiat Lux
Featured Trade:
(FRIDAY, OCTOBER 31 MIAMI, FLORIDA GLOBAL STRATEGY LUNCHEON)
(WHY I HAVE BECOME SO BORING),
(SPY), (QQQ), (IWM), (AAPL), (TSLA),
(TACKLING THE INFLATION MYTH),
(AAPL), (GOOG), (FB)
I have recently received a few complaints from readers that I have become boring. I have to confess that they are right.
I am not a person who boredom comes to easily. I’m the guy who climbed the Matterhorn, crossed the Sahara Desert on the back of a camel, and went to surfing school.
And that’s just what I did last year! Oh, and I’m also headed for the world’s hottest combat zone.
However, I do admit that I have become boring on the trading front.
If I get a request for one thing more than any other, it is for recommendations of stocks that will rise by at least ten times over the next ten years.
Readers want to know the names of shares of companies that they can just buy and forget about, and then retire rich as Croesus a decade down the road.
What could be more reasonable?
I happen to have sent out quite a few of these over the years.
Whenever I attend my global strategy luncheons around the world, someone inevitably thanks me for my effort to cajole them into buying Tesla (TSLA) at a split-adjusted $2.50. Nothing seemed more questionable at the time (2010) in the wake of the Great Recession and financial crisis.
At my New York luncheon in June, a guest pressed a one-ounce American Gold Eagle into my hand and said thanks for NVIDIA (NVDA). He bought it at $15 and rode it all the way up to $450.
He then doubled his money by jumping into Apple (AAPL) at $56 (on a split-adjusted basis) and rode the express train to $200, again after my pleading.
Then there was the reader who offered me his mega yacht in the Mediterranean for a week for free because I virtually forced him to buy Moderna (MRNA) just before the pandemic before it rocketed 50X. It was nice cruising the Mediterranean last summer on his advice.
It’s not that I have suddenly become averse to dishing out ten-baggers. I have not grown weary in my old age either, although I confess to finding those erectile dysfunction and baldness ads on TV more fascinating by the month.
No, the real problem is that the stock markets are just not offering anything right now. And here is where I give you some great trading tips.
When stock markets are rising and financial assets are generally in “RISK ON” mode, you want to own single stocks.
Individual shares have “betas”, or a propensity to move, that is far greater than indexes. If an index rises 10%, some of its individual components can move anywhere from 15%-100%.
When stock markets are in correction (down) or consolidation (sideways) mode, as we are now, the higher betas of stocks work against you. They fall faster than the index.
Therefore, in flat and falling markets you want to trade indexes, like the S&P 500 big cap index (SPY), the NASDAQ technology index (QQQ), and the Russell 2000 small cap index (IWM). Better yet, don’t execute any trades at all, especially if you are already up 60% on the year.
Keep your powder dry. A dollar at a market bottom is worth $10 at a market top.
Your mistakes trading these relatively nonvolatile (read boring) instruments earn you less money. The risk/reward for short-term trading right now is terrible.
Therefore, by trading stocks in up markets and indexes only in down markets, you create an inbuilt bias in your portfolio that works in your favor.
A classic example of how this works was to see the market reactions to corporate earnings announcements in July. In these risk-averse times, winners were rewarded modestly, but losers were taken out to the woodshed and beaten senseless.
Look at the recent charts for Apple (AAPL), Tesla (TSLA), and Disney (DIS) and you’ll see what I mean. I bet the owners of these companies wish they had been trading indexes in August, which barely moved. Is 3% the new 10% correction?
These are all fundamentally great companies for the long term. But when people run for cash, they will often sell whatever has the most profit, and all three of these names met that standard. Investors were, in effect, raiding the piggy bank.
Of course, you can try and be clever and go long stocks in rising markets, and then sell them short in falling ones.
My half-century of experience tells me that this is easier said than done.
While many managers will promise you this bit of investing in gymnastics, very few can actually deliver. Most professionals are unable to time markets with this precision, let alone individuals.
Needless to say, don’t try this at home.
What? Me Boring?
Global Market Comments
September 18, 2023
Fiat Lux
Featured Trade:
(I’M TAKING OFF FOR UKRAINE TODAY AND I NEED YOUR HELP)
(MARKET OUTLOOK FOR THE WEEK AHEAD)
(XLK), (TSLA), (GM), (F)
I’m not so worried that the market won’t go up. It really bothers me that stocks are unable to go down.
That means you don’t get a flush out of positions that generates the cash needed to finance the next leg up in the bull market.
Usually, that happens in the fall because historically that’s when farmers are at maximum distress, when they have run out of cash after paying for seed, fertilizer, and labor all year long but have yet to be paid for their harvest.
This was a big deal in 1900 when farming accounted for 50% of the economy. With farming now at 2% it’s not such a big deal, but once cyclicality in the market is established, it lives on forever.
With the Fed, traders, and investors fixated on inflation, you usually get a big reaction in the monthly release of the Consumer Price Index. This time, we got nada, nothing, bupkiss, even though the 0.6% rise in inflation should have triggered a meaningful market selloff.
You know it’s a pretty dead week when the lead news item is about a union that has been going out of business for 40 years. That’s because all the growth in the country during this period has been in nonunion industries, namely in technology (XLK) and at Tesla (TSLA). Notice that nonunion (TSLA) was up 10% this week, the big winner in the strike. Elon Musk has fought unionization tooth and nail for 20 years and is now coming up roses.
As a result, UAW membership plunged from 1.4 million in 1978 to 400,000, a decline of some 71.4%. The union now has more retirees than workers. That’s a lot of dead weight to carry.
One effect of this decline has been a fall in real wages during the same 45 years. What the UAW is attempting in their demands is to make up for the entire 45 years of real wage losses in one shot with a whopping great 40% increase over five years, a 32-hour work week, and better medical benefits.
It isn’t going to work.
When I picked up my first Tesla Model S some 14 years ago, I was given a tour of the factory. I was blown away by what I saw. There were no people!
I literally saw a vast factory floor of machines making machines. Occasionally, someone passed me by on a bicycle on their way to change a tool on a robot or lubricate a joint. EVs have 80% fewer parts than internal combustion vehicles and therefore require 80% fewer workers.
This is what caused me to immediately plunge into Tesla stock at a split-adjusted $2.45 a share and take my readers there as well.
One is reminded of the Luddite movement in England in 1812 when workers destroyed machines to avoid work. It was an effort to protect home spinning wheels which had until then produced the world’s cotton fabric. After an armed rebellion was put down, the machines eventually reduced the cost of cotton cloth 100-fold and launched the Industrial Revolution.
Some 200 years ago, most people could only afford one set of clothes. Now they have dozens, or hundreds if they have daughters (I have three).
Hint to the UAW: Destroying General Motors (GM), Ford (F), and Stellantis (the old Chrysler) isn’t going to get you a better job.
It's not that I am anti-union. After all, my grandfather was in the Teamsters Union during the great depression at the height of union power. It’s just that this strike is particularly stupid, grasping, and overreaching.
If you want to learn more about the Luddite movement, please click here for the history.
When the market does come out of its coma, there is no doubt where the big money is headed.
The Arm Holdings IPO (ARM) was some six times oversubscribed and it rose 25% from its initial $51 pricing on the first day as institutions rushed to top up meager allocations. The word is out. Stay underweight AI chip design companies at your peril….at whatever the price. At $69, (ARM) sports a positively bubblicious price-earnings multiple of 100X.
Sometimes, the greatest trades are those sitting right in front of our noses begging for attention. That would be the Japanese yen, which has been in free fall for three years.
If the Bank of Japan ends its zero-interest rate policy, the last in country the world to have one, the Japanese yen will rocket, and the Nikkei average will crash. With Japan’s inflation rate now at a 40-year high at 3.30% how far away can that be?
It might be setting up the long of the year in the foreign exchange market. You would think that is a certainty after a 33% drop in recent years. Maybe this is why the Nikkei has been in the doldrums since June.
So far in September, we are down unchanged, with no trade alerts issued. Patience is the name of the game here. My 2023 year-to-date performance is still at an eye-popping +60.80%. The S&P 500 (SPY) is up +16.57% so far in 2023. My trailing one-year return reached +83.85% versus +20.47% for the S&P 500.
That brings my 15-year total return to +657.99%. My average annualized return has fallen back to +47.85%, some 2.47 times the S&P 500 over the same period.
Some 41 of my 46 trades this year have been profitable.
Consumer Price Index Rises 0.6% in August, the hottest read in 18 months, but in line with expectations. Energy was the main cause, which is up 40% from its May low. The Core and Inflation Rate was up only 0.3%. Stocks and bonds barely reacted. A huge increase in auto insurance was another factor, no doubt the result of the multiple climate disasters taking place across the country.
Arm Holdings Jumps 25% on First Day of Trading. Masayoshi Sohn is happy because he still owns the remaining 90% of the company. This is where the hot money is going, and it pulled the rest of tech up as well.
EV Sales Soared by 70% in California in August, and the rest of the country is likely to follow. The coming Cybertruck release will add fuel to the fire. EV is going mainstream. China, the US, and Germany lead in global EV sales. California would be fourth if it were broken out as a separate country at 109,069 units in Q2.
US Jobless Claims Fall Again to 220,000, a drop of 5,000. The US economy is reigniting again.
Gold and Bonds are Bottoming, or so says a UK hedge fund. Distress selling off the UK’s selling of gold market the low for both bonds and the yellow metal back in 1999-2002. We could be seeing a repeat today. I think they’re right.
Morgan Stanley Upgrades Tesla, off the back of its massive AI business, which could add $600 billion in value to the company. (MS) had previously been bearish on Tesla, so (TSLA) rose 6%. (Tesla has long been the largest user of AI with a fleet of 5 million AI-driven EVs. Why was (MS) so slow to figure this out? Buy (TSLA) on dips.
Hydrogen is Going Nowhere, and the stocks are a great short, says the Argonaut hedge fund. While electric power is infinitely scalable, hydrogen demands the same inefficient infrastructure as does gasoline. Saudi Arabia has a massive advantage in that it has an unlimited supply of other energy form to convert oil into hydrogen, and solar power.
Apple is Still a Hold, for the long term and a “BUY” on any 10% correction. It is now basically an India play, as that is where future growth lies. China is peaking out. The titanium finish for the new iPhone 15 looks cool. There is a USB-C charging cable in your future to bring it in compliance with EC rules. The camera goes from a 2X to a 5X zoom. The new Special Video is a killer app. There is also a major increase in the use of artificial intelligence.
Space X is Moving into the Cargo Business, shipping goods from New York to Australia in 35 minutes. That’s what is possible for high value-added freight with rockets that can reliably take off and land. The move should take the value of Space X from the present $150 billion to $500 billion. So thinks my friend Ron Baron of the Baron Funds, and early Tesla investor. He also thinks Tesla will soar from $857 billion today to $5 trillion in five years, making it the most valuable company in the world by far. I couldn’t agree more.
Caesars Entertainment Suffers Major Hack, paying a ransom thought to be in the millions of dollars. The crooks threatened to leak the casino’s entire customer list to the dark web, including mine. A serious hack can wipe out a company, as happened to Sony a decade ago. 1234 no longer works as a password. Buy Palo Alto Networks (PANW).
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, September 18, the NAHB Housing Market Index is out.
On Tuesday, September 19 at 8:30 PM EST, US Building Permits are released.
On Wednesday, September 20 at 2:00 PM EST, the Federal Reserve released its interest rate decision. A press conference follows.
On Thursday, September 21 at 8:30 AM EST, the Weekly Jobless Claims are announced. We also get Existing Homes Sales.
On Friday, September 22 at 6:45 AM the NS&P Global Composite Flash PMI for August is published. At 2:00 PM the Baker Hughes Rig Count is printed.
As for me, having visited and lived in Lake Tahoe for most of my life, I thought I’d pass on a few stories from this historic and beautiful place.
The lake didn’t get its name until 1949 when the Washoe Indian name was bastardized to come up with “Tahoe”. Before that it was called the much less romantic Lake Bigler after the first governor of California.
A young Mark Twain walked here in 1863 from nearby Virginia City where he was writing for the Territorial Enterprise about the silver boom. He described boats as “floating in the air” as the water clarity at 100 feet made them appear to be levitating. Today, clarity is at 50 feet, but it should go back to 100 feet when cars go all-electric.
One of the great engineering feats of the 19th century was the construction of the Transcontinental Railroad. Some 10,000 Chinese workers used black powder to blast a one-mile-long tunnel through solid granite. They tried nitroglycerine for a few months but so many died in accidents they went back to powder.
The Union Pacific moved the line a mile south in the 1950s to make a shorter route. The old tunnel is still there, and you can drive through it at any time if you know the secret entrance. The roof is still covered with soot from woodfired steam engines. At midpoint, you find a shaft to the surface where workers were hung from their ankles with ropes to place charges so they could work on four faces at once.
By the late 19th century, every tree around the lake had been cut down for shoring at the silver mines. Look at photos from the time and the mountains are completely barren. That is except for the southwest corner, which was privately owned by Lucky Baldwin who won the land in a card game. The 300-year-old growth pine trees are still there.
During the 20th century, the entire East Shore was owned by one man, George Whittell Jr., son of one of the original silver barons. A man of eclectic tastes, he owned a Boing 247 private aircraft, a custom mahogany boat powered by two Alison aircraft engines, and kept lions in heated cages.
Thanks to a few well-placed campaign donations, he obtained prison labor from the State of Nevada to build a palatial granite waterfront mansion called Thunderbird, which you can still visit today (click here at https://thunderbirdtahoe.org ). During Prohibition, female “guests” from California crossed the lake and entered the home through a secret tunnel.
When Whittell died in 1969, a Mad Hedge Concierge Client bought the entire East Shore from the estate on behalf of the Fred Harvey Company and then traded it for a huge chunk of land in Arizona. Today the East Shore is a Nevada State Park, including the majestic Sand Harbor, the finest beach in the High Sierras.
When a Hollywood scriptwriter took a Tahoe vacation in the early 1960’s, he so fell in love with the place that he wrote Bonanza, the top TV show of the decade (in front of Hogan’s Heroes). He created the fictional Ponderosa Ranch, which tourists from Europe come to look for in Incline Village today.
In 1943, a Pan Am pilot named Wayne Poulson who had a love of skiing bought Squaw Valley for $35,000. This was back when it took two days to drive from San Francisco. Wayne flew the China Clippers to Asia in the famed Sikorski flying boats, the first commercial planes to cross the Pacific Ocean. He spent time between flights at a ranch house he built right in the middle of the valley.
His wife Sandy bought baskets from the Washoe Indians who still lived on the land to keep them from starving during the Great Depression. The Poulson’s had eight children and today, each has a street named after them at Squaw.
Not much happened until the late forties when a New York Investor group led by Alex Cushing started building lifts. Through some miracle, and with backing from the Rockefeller family, Cushing won the competition to host the 1960 Winter Olympics, beating out the legendary Innsbruck, Austria, and St. Moritz, Switzerland.
He quickly got the State of California to build Interstate 80, which shortened the trip to Tahoe to only three hours. He also got the state to pass a liability limit for ski accidents to only $2,000, something I learned when my kids plowed into someone, and the money really poured in.
Attending the 1960 Olympic opening ceremony is still one of my fondest childhood memories, produced by Walt Disney, who owned the nearby Sugar Bowl ski resort.
While the Cushing group had bought the rights to the mountains, Poulson owned the valley floor, and he made a fortune as a vacation home developer. The inevitable disputes arose and the two quit talking in the 1980’s.
I used to run into a crusty old Cushing at High Camp now and then and I milked him for local history in exchange for stock tips and a few stiff drinks. Cushing died in 2003 at 92 (click here for the obituary at https://www.nytimes.com/2006/08/22/obituaries/22cushing.html )
I first came to Lake Tahoe in the 1950s with my grandfather who had two horses, a mule, and a Winchester. He was one-quarter Cherokee Indian and knew everything there was to know about the outdoors. Although I am only one-sixteenth Cherokee with some Delaware and Sioux mixed in, I got the full Indian dose. Thanks to him I can live off the land when I need to. Even today, we invite the family medicine man to important events, like births, weddings, and funerals.
We camped on the beach at Incline Beach before the town was built and the Weyerhaeuser lumber mill was still operating. We caught our limit of trout every day, ten back in those days, ate some, and put the rest on ice. It was paradise.
During the late 1990’s when I built a home in Squaw Valley I frequently flew with Glen Poulson, who owned a vintage 1947 Cessna 150 tailwheel, looking for untouched high-country lakes to fish. He said his mother was lonely since her husband died in 1995 and asked me to have tea with her and tell her some stories.
Sandy told me that in the seventies she asked her kids to clean out the barn and they tossed hundreds of old Washoe baskets. Today Washoe baskets are very rare, highly sought after by wealthy collectors, and sell for $50,000 to $100,000 at auction. “If I had only known,” she sighed. Sandy passed away in 2006 and the remaining 30-acre ranch was sold for $15 million.
To stay in shape, I used to pack up my skis and boots and snowshoe up the 2,000 feet from the Squaw Valley parking lot to High Camp, then ski down. On the way up I provided first aid to injured skiers and made regular calls to the ski patrol.
After doing this for many winters, I finally got busted when they realized I didn’t have a ski pass. It turns out that when you buy a lift ticket you are agreeing to a liability release which they absolutely had to have. I was banned from the mountain.
Today Squaw Valley is owned by the Colorado-based Altera Mountain Company, which along with Vail Resorts own most of the ski resorts in North America. The concentration has been relentless. Last year Squaw Valley’s name was changed to the Palisades Resort for the sake of political correctness. Last weekend, a gondola connected it with Alpine Meadows next door, creating the largest ski area in the US.
Today there are no Washoe Indians left on the lake. The nearest reservation is 25 miles away in the desert in Gardnerville, NV. They sold or traded away their land for pennies on the current value.
Living at Tahoe has been great, and I get up here whenever I can. I am now one of the few surviving original mountain men and volunteer for North Tahoe Search & Rescue.
On Donner Day, every October 1, I volunteer as a docent to guide visitors up the original trail over Donner Pass. Some 175 years later the oldest trees still bear the scars of being scrapped by passing covered wagon wheels, my own ancestors among them. There is also a wealth of ancient petroglyphs, as the pass was a major meeting place between Indian tribes in ancient times.
The good news is that residents aged 70 or more get free season ski passes at Diamond Peak, where I sponsored the ski team for several years. My will specifies that my ashes be placed in the Middle of Lake Tahoe. At least I’ll be recycled. I’ll be joining my younger brother who was an early Covid-19 victim and whose ashes we placed there in 2020.
Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
The Ponderosa Ranch
The Poulson Ranch
Donner Pass Petroglyphs
An Original Mountain Man
Global Market Comments
September 12, 2023
Fiat Lux
Featured Trade:
(THE GREAT AMERICAN ONSHORING TREND IS ACCELERATING),
(GE), (TSLA),
(MURRAY SAYLE: THE PASSING OF A GIANT IN JOURNALISM)
(THE LAST PEARL HARBOR ARIZONA SURVIVOR)
Onshoring, the return of US manufacturing from abroad, is rapidly gathering pace.
It is increasingly playing a crucial part in the unfolding American industrial renaissance. It could well develop into the most important new trend on the global economic scene during the early 21st century. It is also paving the way for a return of the roaring twenties to our home shores.
Of course, it is hard to quantify this assumption with hard data. US government statistics are a deep lagging indicator and are unable to keep up with a rapidly changing, interconnected, fluid world. No doubt, they will tell us this epoch-making sea change is underway in ten years.
However, it is possible to track what a single company is accomplishing. In 1973, General Electric (GE) ran the largest home appliance manufacturing facility in the world. Its Appliance Park in Louisville, Kentucky, employed 23,000 workers packed into six gigantic buildings, each as large as a shopping mall. It was so big, it even earned its own postal zip code (40225).
After that, the offshoring mania kicked in, with the firm motivated by a single factor: hourly wages. You could hire 30 men in China for the cost of one American union worker. The savings were too compelling to pass up, and The Great Hollowing Out of US manufacturing was off to the races.
GE tried to sell the entire operation but was too late. The 2008 financial crisis decimated the market for Midwest industrial facilities. You could only get the scrap metal value, or three cents on the dollar. By 2011 employment at Appliance Park had plunged to 1,863, and the region’s new “Rust Belt” sobriquet was well earned.
Then, almost imperceptibly at first, the trend started to reverse. Decades of 20% a year wage increases took the cost of a skilled Chinese worker from $300 a year to $25,000. The 2011 Japanese tsunami, followed by huge floods in Thailand, caused massive disruptions to the international parts supply network.
A minor strike by the Longshoreman’s Union at the Port of Oakland in California brought the distribution channel to a grinding halt. Business plans that looked great on an Excel spreadsheet turned out to be not so hot in practice.
It gets worse. When Chinese workers walked across the street to collect bigger pay packages, they often took blueprints, business plans, and proprietary software with them. Six months later, a local competitor would show up with a similar, although inferior, product at half the cost. Suddenly, globalization was not all it was cracked up to be.
In the meantime, the American labor force, reading the Chinese characters on the wall, evolved. Unions were disbanded. Antiquated work rules were tossed. The unions that were left agreed to two tier wage structures that had entry level employees coming in at $13.50 an hour, a fraction of the original rate.
Then management got smarter. By removing the assembly line from the marketplace, companies lost touch with customers. Designers lost contact with the manufacturing process, creating products that could only be built expensively, or not at all. Quality plummeted. Innovation suffered. By bringing manufacturing home, firms not only solved these problems, they were able to build better ones for less money.
China turned out to be farther away than people thought. Having middle management jet lagged up to three months a year proved to be very expensive. It takes six weeks to ship an appliance from the Middle Kingdom to the US if the shipping schedules are perfect.
An American plant can truck product to most US stores within two days. That wasn’t a problem when consumer products saw lives that ran into decades. It is a big deal when rapidly accelerating technological improvements require them to be turned over every three years or less, as they are today.
The energy picture is undercutting the arithmetic that used to justify offshoring. Oil prices levitating near $100 a barrel are up 400% in 14 years, elevating the cost of production in Asia and shipments to the US. In the US, the fracking boom has let lose a gusher of cheap oil. It has also freed up a few centuries worth of low carbon burning natural gas, giving American manufacturers a further cost advantage.
Better American management techniques are giving US based factories an edge. I saw this up close at the Tesla (TSLA) factory in Fremont, California, where workers have the ability to improve the assembly process daily and are incented to do so. The place was so clean and quiet, it felt more like a hospital than a factory. It turns out that a drive train with only 11 parts doesn’t require much labor to assemble it, and robots do most of that.
By adopting similar techniques, GE, is building the same number of appliances as it did during the 1960’s peak, about 250,000 a year, with one third of the employees.
Using the new thinking, many companies are finding out that offshoring was a big mistake in the first place, and are bringing production home. Some business analysts estimate that up to a quarter of the companies that offshored lost money doing it.
The fact that GE is onshoring is important. It is considered by many to be the best-run industrial company in the United States, and when it leads, many follow. On the heels of the GE move, Whirlpool has relocated its mixer assembly from China to Ohio, and Otis has brought home elevator making from Mexico.
Even Wham-O has jumped on board, the maker of Frisbees, Slinkies, and Hula Hoops, and a company that is dear to my heart (I dated the founder’s daughter in high school), moving production from the Middle Kingdom back to Southern California.
If I am right, and onshoring speeds up into the next decade, we may get another opportunity to relive the roaring twenties. By then, a shortage of workers will lead to higher wages, greater consumer spending, and rising standards of living. The price of everything will rocket, including your stocks and homes. US GDP growth will surge to 4%-5% a year. Inflation will, at long last, make its long-predicted return.
It will be an economy in which Jay Gatsby will feel right at home.
A Trend Reversal?
