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)
Posts
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
October 17, 2022
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or BLUNDER 3.0)
(RIVN), (TSLA), (V), (JPM), (AMAT), (HPE), (DELL), (KBH), (LEN)
There is no doubt whatsoever that the stock market tried to break down last week and failed. At worst, the Dow Average double bottomed at $29,600, the same level it reached on September 28.
And even that low was a mere 800 points lower than the one we set on June 14.
And that’s how it’s going to go.
Incremental new lows, followed by violent “rip your face off” rallies on enormous volume.
Until it ends.
That happens when markets start speculating about coming interest rate cuts sometime in 2023. And remember, you’re buying stocks for not what the economy is doing today, but for how well it will be performing in six to nine months.
You’re buying the future, not the present, or heaven forbid, the past.
That means you should use these throw-up-on-your-shoes days to scale into your favorite long-term companies. When markets inevitably rally, you can either sell for a short-term profit and rewind the video once again or keep it as part of a long-term holding.
It's a nice choice to have. I’ve been doing it all year.
With some of the greatest market volatility in market history, my October month-to-date performance ballooned to +5.00%.
I used last week’s extreme volatility to roll down strike prices for Tesla (TSLA) and JP Morgan (JPM) option spreads to manage my risk. I was still able to hang on to a 40% long position and threw out a new short in the S&P 500 at the end of Thursday.
My 2022 year-to-date performance ballooned to +75.06%, a new high. The Dow Average is down -18.48% so far in 2022. With the coming Friday options expiration, I will be up +76.49%.
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 +78.54%.
That brings my 14-year total return to +587.62%, some 3.03 times the S&P 500 (SPX) over the same period and a new all-time high. My average annualized return has ratcheted up to +44.23%, easily the highest in the industry.
Remember that old 60/40 equity/bond investment strategy? The idea was that whenever stocks went down, the losses would be offset by the profits from rising bonds.
This year, it delivered the worst performance in 100 years, down 34.4% year-to-date. That is the inevitable end result of a decade of zero interest rates and free money that took everything up.
So what is the best strategy you could probably employ right now? A 60/40 strategy. Even I find myself checking out bond yields these days, where I got my start in life as a trader 50 years ago. Yes, before there were stocks, there were bonds. Junk is now yielding 10%. Remember, that means a holding doubles in value every six years.
The market is clearly in a mood to throw out the babies with the bathwater. I would be remiss not to mention the recent decline of Tesla posing one of its periodic tests of the faithful, now approaching a once unheard-of price earnings multiple of 30X.
Up until September 20, Elon Musk’s creation was almost immune to the bear market.
Then Twitter (TWTR) happened.
Musk agreed to take majority control of a $44 billion company, of which Elon himself is only contributing $16 billion. He sold Tesla shares last July to fund this. But the market wiped $333 billion, or 34.6%, off the market capitalization of the company. It is a wild overreaction to the move.
This has nothing to do with Tesla itself, as the richest man in the world is buying Twitter with his own pocket change. But it is undeniable that it will be a distraction of management time.
And here is all you need to know about Tesla. Tesla is the fastest growing large company in the world. Profit margins are increasing, thanks to the recent collapse of commodity prices. Unit sales will rise by 40% this year. Every time Tesla opens a new factory at a cost of $7 billion, it generates $15 billion of profit per year, forever!
Remember also, that the stock market gets an 800-pound gorilla off its back with the end of the midterm elections on November 8. It makes no difference who wins, a major uncertainty will be gone. That much IS certain.
And what happens when the Fed keeps interest rates too low for long, then raises them too much? It lowers them again too much, igniting a monster bull market in stocks. That’s also what you’re buying down here. That's what you get when you appoint a central bank governor with a political science major rather than PhDs and Nobel Prizes in Economics like the last ones.
Call it blunder 3.0.
Consumer Price Index Rockets Up to 8.6%, up 0.4% on the month and a new 40-year high. Stocks, bonds, crypto, and currencies were crushed and the US Dollar Soared. Look for new lows in stocks. Growth really took it on the nose. Expect another month of volatility until the next CPI report comes out.
Stocks Mount Historic Rally, gaining $1,420 points, or 5% of the intraday low. Stocks were down 500 in the wake of the CPI report, then up $1,420. It was mostly hedge short covering, as most institutions are too slow to react. Still, we now have a low to trade against.
The Fed Minutes are Out, and our central bank is clearly worried about doing too little than too much, when they are doing too much. At least they did six weeks, or 4,000 Dow points ago. The inflation goal is still 2.0%. Interest rates will go higher before they go lower.
Equity Inflows Hit a Record Last Week, the third highest week since 2008. Long term investors are willing to bottom fish here, even if the final bottom isn’t found for months.
Bond Liquidity Issues Haunting the Fed, and bids dry up in an endlessly falling market. The matter has been greatly exacerbated by a Fed that is now selling $95 billion a month as part of its quantitative tightening policy. It’s becoming increasingly difficult to move big blocks of bonds in a zero-bid market. Spreads are widening and size is shrinking. The bad news is that the worst is yet to come.
You Just Got an 8.7% Raise, if you are older than 61 and collecting Social Security. That is the payment increase that kicks in from January. Fortunately, some thoughtful person eons ago tied payments to the CPI, which is now going through the roof. I’m going to Hawaii with my money, even if the increase means that Social Security goes bankrupt by 2034, when I’m 82.
PC Sales Dive 19.5% in Q3, reaching only 68 million units. It’s the steepest decline since PC data collection began 30 years ago. And you wonder why they are selling the chip stocks so aggressively. High inventories are also a big problem. Lenovo was the top seller in the world at 20.2 million units, followed by Hewlett Packard’s (HPE) 17.6 million, and Dell (DELL) at 15.2 million.
Applied Materials Cuts Estimates, in line with everyone else in the industry. The new government export restrictions will cost it $250-$500 million in the current quarter. But how much is already in the price? Buy (AMAT) on dips.
Home Financing Pours into 5/1 ARMS, which can be had for a doable 5.56%. That compares to over 7.0% for the 30-year fixed, the highest since 2006. It will be low enough to keep homebuilders on life support for a couple of years Avoid (LEN) and (KBH).
REITS are Still Getting Slaughtered, with the plunge in the bond market today to multidecade lows. The REIT Index is down 30% this year, while the (SPY) is off only 21%. Real Estate Investment Trusts do best when interest rates are low. Too many investors piled into REITS in a desperate reach for yield. There’s a great trade here someday, but not yet.
My Ten-Year View
When we come out the other side of pandemic and the recession, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With oil in a sharp decline 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 17 at 8:30 AM, the New York Empire State Manufacturing Index for September is released.
On Tuesday, October 18 at 7:00 AM, the D for September is out.
On Wednesday, October 19 at 8:30 AM, Housing Starts and Permits for September are published.
On Thursday, October 20 at 8:30 AM, Weekly Jobless Claims are announced. At 10:00 AM, we get Existing Home Sales for September.
On Friday, October 21 at 2:00 PM, the Baker Hughes Oil Rig Count is out.
As for me, it was in 1986 when the call went out at the London office of Morgan Stanley for someone to undertake an unusual task. They needed someone who knew the Middle East well, spoke some Arabic, was comfortable in the desert, and was a good rider.
The higher-ups had obtained an impossible-to-get invitation from the Kuwaiti Royal family to take part in a camel caravan into the Dibdibah Desert. It was the social event of the year.
More importantly, the event was to be attended by the head of the Kuwait Investment Authority, who ran over $100 billion in assets. Kuwait had immense oil revenues, but almost no people, so the bulk of their oil revenues were invested in western stock markets. An investment of goodwill here could pay off big time down the road.
The problem was that the US had just launched air strikes against Libya, destroying the dictator, Muammar Gaddafi’s royal palace, our response to the bombing of a disco in West Berlin frequented by US soldiers. Terrorist attacks were imminently expected throughout Europe.
Of course, I was the only one who volunteered.
My managing director didn’t want me to go, as they couldn’t afford to lose me. I explained that in reviewing the range of risks I had taken in my life, this one didn’t even register. The following week found me in a first-class seat on Kuwait Airways headed for a Middle East in turmoil.
A limo picked me up at the Kuwait Hilton, just across the street from the US embassy, where I occupied the presidential suite. We headed west into the desert.
In an hour, I came across the most amazing sight - a collection of large tents accompanied by about 100 camels. Everyone was wearing traditional Arab dress with a ceremonial dagger. I had been riding horses all my life, camels not so much. So, I asked for the gentlest camel they had.
The camel wranglers gave me a tall female, which was more docile and obedient than the males. Imagine that! Getting on a camel is weird, as you mount them while they are sitting down. My camel had no problem lifting my 180 pounds.
They were beautiful animals, highly groomed, and in the pink of health. Some were worth millions of dollars. A handler asked me if I had ever drunk fresh camel milk, and I answered no, they didn’t offer it at Safeway. He picked up a metal bowl, cleaned it out with his hand, and milked a nearby camel.
He then handed me the bowl with a big smile across his face. There were definitely green flecks of manure floating on the top, but I drank it anyway. I had to lest my host to lose face. At least it was white. It was body temperature warm and much richer than cow’s milk.
The motion of a camel is completely different from a horse. You ride back and forth in a rocking motion. I hoped the trip was short, as this ride had repetitive motion injuries written all over it. I was using muscles I had never used before. Hit your camel with a stick and they take off at 40 miles per hour.
I learned that a camel is a super animal ideally suited for the desert. It can ride 100 miles a day, and 150 miles in emergencies, according to TE Lawrence, who made the epic 600-mile trek to Aquaba in only four weeks in the heat of summer. It can live 15 days without water, converting the fat in its hump.
In ten miles, we reached our destination. The tents went up, clouds of dust rose, the camels were corralled, and the cooking began for an epic feast that night.
It was a sight to behold. Elaborately decorated huge five wide bronze platers were brought overflowing with rice and vegetables, and every part of a sheep you can imagine, none of which was wasted. In the center was a cooked sheep’s head with the top of the skull removed so the brains were easily accessible. We all ate with our right hands.
I learned that I was the first foreigner ever invited to such an event, and the Arabs delighted in feeding me every part of the sheep, the eyes, the brains, the intestines, and gristle. I pretended to love everything, and lied back and thought of England. When they asked how it tasted, I said it was great. I lied.
As the evening progressed, the Johnny Walker Red came out of hiding. Alcohol is illegal in Kuwait, and formal events are marked by copious amounts of elaborate fruit juices. I was told that someone with a royal connection had smuggled in an entire container of whiskey and I could drink all I wanted.
The next morning I was awoken by a bellowing camel and the worst headache in the world. I threw a rock at him to get him to shut up and he sauntered over and peed all over me.
The things I did for Morgan Stanley!
Four years later, Iraq invaded Kuwait. Some of my friends were kidnapped and held for ransom, while others were never heard from again.
The Kuwaiti government said they would pay for the war if we provided the troops, tanks, and planes. So they sold their entire $100 million investment portfolio and gave the money to the US.
Morgan Stanley got the mandate to handle the liquidation, earning the biggest commission in the firm’s history. No doubt, the salesman who got the order was considered a genius, earned a promotion, and was paid a huge bonus.
I spent the year as a Marine Corps captain, flying around assorted American generals and doing the odd special opp. I got shot down and still set off airport metal detectors. No bonus here. But at least I gained insight and an experience into a medieval Bedouin lifestyle that is long gone.
They say success has many fathers. This is a classic example.
You can’t just ride out into the Kuwait desert anymore. It is still filled with mines planted by the Iraqis. There are almost no camels left in the Middle East, long ago replaced by trucks. When I was in Egypt in 2019, I rode a few mangy, pitiful animals held over for the tourists.
When I passed through my London Club last summer, the Naval and Military Club on St. James Square, who’s portrait was right at the front entrance? None other than that of Lawrence of Arabia.
It turns out we were members of the same club in more ways than one.
Stay healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
John Thomas of Arabia
Checking Out the Local Camel Milk
This One Will Do
Traffic in Arabia
Global Market Comments
October 10, 2022
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or EATING YOUR SEED CORN),
(SPY), (TLT), (PANW), BRKB), (JPM), (MS), (V),
(USO), (MU), (RIVN), (TWTR), (TSLA)
You know that 10% downside risk I talked about? In other words, you may have to eat a handful of your seed corn.
We may have to eat into some of that 10% this week. With the September Consumer Price Index out on Thursday, and the big bank earnings are out Friday, there is more than a little concern about the coming trading week.
That’s why all my remaining positions are structured to handle a 10% correction or more and still expire at their maximum profit point in nine trading days.
Even in the worst-case Armageddon scenario, which we are unlikely to get, the S&P 500 is likely to fall below 3,000, or 627.90 points or 17.25% from here.
That’s what you pay me for and that’s what you are getting.
I shot out of the gate with an impressive +3.25% gain so far in October. My 2022 year-to-date performance ballooned to +72.93%, a new high. The Dow Average is down -19.3% so far in 2022 or a gob-smacking -7,000 points. 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 +81.35%.
That brings my 14-year total return to +585.49%, some 3.03 times the S&P 500 (SPX) over the same period and a new all-time high. My average annualized return has ratcheted up to +45.62%, easily the highest in the industry.
It is the greatest outperformance on an index since Mad Hedge Fund Trader started 14 years ago.
I used last week’s extreme volatility to rearrange positions, adding longs in Morgan Stanley (MS), JP Morgan (JPM), and Visa (V). That takes me to 80% long, 20% short, and 0% cash. I wisely rolled down the strikes on my Tesla position from $230-$240 to $200-$210. I covered one short in the S&P 500 (SPY). All of my options positions expire in only nine trading days.
I know that you’re probably getting boatloads of advice the sell all your stocks now, sell your house, and head for those generous 5% short term interest rates, and 8% in junk. Even I went 100% cash….in December last year. The problem is that these other gurus are giving you advice that is only a year late with perfect 20/20 hindsight.
To bail now, you risk giving up on the 100% gains in years to come. If I’m wrong, you lose 10%, if I’m right, you get a double or more. Sounds like a pretty good bet to me.
People always want to know how I pick market bottoms, something I have been doing since the Dow Average was at a miniscule $753.
The lower the market is, the less aggressive the Fed is going to be
Every single input into the Consumer Price Index is now turning down sharply, especially rents and housing costs, meaning we can expect a blockbuster decline when the next report comes out on October 13
We now have two outsiders doing the Fed’s job for it, the British economy, which is clearly collapsing, and a strong US dollar that is rapidly shrinking the foreign revenues of our multinationals, like big tech.
Capitulation indicators, occasionally spotted here and there, are now coming in volleys, the Volatility Index at $35, the (VIX) curve inversion, the RSI below 30, the ten-year US Treasury yield hit 4.0% and then instantly backed off, the British pound plunged to $1.03, and we saw absolutely massive retail selling in September.
The froth is now out of all tech stocks.
All of this brings forward the last Fed hike in interest rates and the next bull market in stocks. If the last Fed rate hike is two months away on December 14, then the reasons to sell stocks are disappearing like the last sands in an hourglass.
In my mere half century in the market, every time the CPI starts to fall, stock market “V” bottoms and begins classic “rip your face off’ rallies as the shorts panic to cover. It happened in 1970, 1974, 1980, 1990, and 2009. It will happen again in 2022. The market will smell that inflation is done, the Fed is done, and volatility becomes a distant memory.
And I hate to be so obvious, but if you sell in May, what do you do in October? You buy with both hands. Just do it on the right day. That could get you a 10% to 20% move by yearend. The S&P 500 earnings multiple has collapsed by eight points in nine months and that is too far, too fast.
How do midterm years perform? October is the best month of the year followed by November. Of the entire 16-month presidential election cycle, the coming first quarter of 2023 is the best of the entire lot.
Nonfarm Payroll Falls Short at 263.000 in September. The headline unemployment rate matched a 2022 low at 3.5%. The long-term unemployment rate, the U-6 also matched this year’s low at 6.7%. The report keeps the Fed on its current interest raising schedule. Stocks, bonds, and gold sold off 500-points.
JOLTS Drops Sharply, from an expected 11.0 million to only 10.05 million. This is the job openings report from the Department of Labor. It’s one of the sharpest declines in history. The jobs market is finally starting to deteriorate, which is just what the Fed wanted. Factory Orders for August were unchanged.
OPEC+ Cuts Quotas by 2 million, and production by 1 million, in one of the largest reductions in history. It’s an effort to maintain oil prices at current prices in the face of falling demand from a global recession. The Arabs are not your friends. It’s also a slap in the face of the anti-oil posture, pro-climate posture of the Biden administration, which responded with a further release of 10 million barrels from the Strategic Petroleum Reserve. Energy stocks soar across the board. Don’t get caught standing when the music stops playing. Avoid (USO).
Why Did Russia Blow Up Their Own Pipeline? International analysts are puzzled by Putin’s latest hostile move. Is this a prelude to limited nuclear war in Ukraine? My view is that Putin expects to be deposed soon and wants to make it difficult for the next government to resume relations with Europe. Others argue that the true motivation is to enable Nordstream to file a $10 billion insurance claim. Good luck collecting on that one.
Advanced Micro Devices Bombs on weak PC sales and supply chain problems, taking the stock down 5% aftermarket. Profit margins were cut. The news could take the stock down to new lows, which didn’t really participate in this week’s monster rally. The rest of the tech sector sold off in sympathy.
Tesla Breaks Production Records in Q3, manufacturing 365,000 EVs and delivering 365,000, a record high. Sales prices have risen three times this year, while commodity costs have fallen dramatically, widening profit margins. This is the most volatile stock in the market, with one 52% correction so far this year, and another 23% correction in recent weeks. It’s the reason we just saw a “buy the rumor, sell the news” type correction that took us to the bottom of a three-month range.
Another factor is that now that big tech is rallying again, people are rotating out of Tesla, which held up well in Q3. Below here, long term Tesla bulls like my friend Ron Baron, Cathie Wood, and I start adding to big positions. With OPEC+ threatening a million barrel a day production cut, taking crude up 6%, oil alternative Tesla should be rising.
Elon Musk Pays Full Price for Twitter at $54.20 a share, completely caving on pending litigation. Wall Street consensus is that the company is worth $15 a share. It may be years before we learn what’s really going on here, leaving many scratching their heads, including me. Tesla (TSLA) plunged $15 on the news, killing off a nascent rally. The distraction of management time will be huge. Avoid (TWTR).
Rivian Raises 2025 Production Goal, from 20,000 to 25,000, after a better-than-expected 7,363 third quarter. Mass production is reaching the sweet spot for the next Tesla. The company is planning a $5 billion investment in non-union Georgia. Buy (RIVN) on dips, sell short puts and buy LEAPS.
Micron Technology to Invest $100 Billion in New York Plant. It’s all part of a retreat from China and paring war risk in Taiwan. Massive government subsidies from the Chips Act helped. Biden also expanded restrictions on the export of key semiconductor manufacturing equipment, America’s crown jewels. It means more expensive buy safer supplied chips for US industry. Buy (MU) on dips.
Hurricane Ian to Cost Insurers $63 Billion, and deaths, and the federal government may be on the hook for more. The storm double-dipped, cutting a wide swath across Florida and the Carolinas. Some 95% of the costs are carried by foreign insurers through the reinsurance market. There are too many billionaire mansions on the beach which are fully insured. This paves the way for major rate increases by insurance companies, which is why Warren Buffet loves the insurance business. Many thanks to the many foreign Mad Hedge subscribers who expressed sympathy over the storm losses.
My Ten-Year View
When we come out the other side of pandemic and the recession, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With oil in a sharp downtrend 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 10, no data of note is released.
On Tuesday, October 11 at 7:00 AM, the 6:00 AM, the NFIB Business Optimism Index for September is released.
On Wednesday, October 12 at 8:30 AM, Producer Price Index for September is published. At 11:00 AM, the FOMC minutes from the last Fed meeting is released.
On Thursday, October 13 at 8:30 AM, Weekly Jobless Claims are announced. We also get the blockbuster Consumer Price Index.
On Friday, October 14 at 8.30 AM, US Retail Sales for September is disclosed. At 2:00 the Baker Hughes Oil Rig Count is out.
As for me, with the 35th anniversary of the October 19, 1987 crash coming up, when shares dove 22.6% in one day, I thought I’d part with a few memories.
I was in Paris visiting Morgan Stanley’s top banking clients, who then were making a major splash in Japanese equity warrants, my particular area of expertise.
When we walked into our last appointment, I casually asked how the market was doing (Paris is six hours ahead of New York). We were told the Dow Average was down a record 300 points.
Stunned, I immediately asked for a private conference room so I could call the equity trading desk in New York to buy some stock.
A woman answered the phone, and when I said I wanted to buy, she burst into tears and threw the handset down on the floor. Redialing found all Transatlantic lines jammed.
I never bought my stock, nor found out who picked up the phone. I grabbed a taxi to Charles de Gaulle airport and flew my twin Cessna as fast as the turbocharged engines could take me back to London, breaking every known air traffic control rule.
By the time I got back, the Dow had closed down a staggering 512 points, taking the Dow average down to $1,738.74. Then I learned that George Soros asked us to bid on a $250 million blind portfolio of US stocks after the close. He said he had also solicited bids from Goldman Sachs, Merrill Lynch, JP Morgan, and Solomon Brothers, and would call us back if we won.
We bid 10% below the final closing prices for the lot. Ten minutes later he called us back and told us we won the auction. How much did the others bid? He told us that we were the only ones who bid at all!
Then you heard that great sucking sound. Oops!
What has never been disclosed to the public is that after the close, Morgan Stanley received a margin call from the exchange for $100 million, as volatility had gone through the roof, as did every firm on Wall Street.
We ordered JP Morgan to send the money from our account immediately. Then they lost it! After some harsh words at the top, it was found. That’s when I discovered the wonderful world of Fed wire numbers.
The next morning, the Dow continued its plunge, but after an hour managed a U-turn, and launched on a monster rally that lasted for the rest of the year. We made $75 million on that one trade from Soros.
It was the worst investment decision I have seen in the markets in 53 years, executed by its most brilliant player. Go figure. Maybe it was George’s risk control discipline kicking in?
At the end of the month, we then took a $75 million hit on our share of the British Petroleum privatization, because Prime Minister Margaret Thatcher refused to postpone the issue, believing that the banks had already made too much money.
That gave Morgan Stanley’s equity division a break-even P&L for the month of October 1987, the worst in market history. Even now, I refuse to gas up at a BP station on the very rare occasions I am driving an internal combustion engine.
Good Luck and Good Trading,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
October 7, 2022
Fiat Lux
Featured Trade:
(OCTOBER 5 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPY), (TSLA), (PLTR), (UUP), (ROM), (USO), (ARKK), (ROKU)
Below please find subscribers’ Q&A for the October 5 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Silicon Valley in California.
Q: Is the final low in, or could we retest yet again (SPY)?
A: We could retest yet again, but it’s very important to notice that the marginal new lows are very small. The low we had on Friday, the last day of September and Q3, was only 800 points lower than the low we had in June—you had to work 4 months just to get a new low of only 800 points. So I think that's the way it's going to go. If we do get new lows, it’ll be incremental new lows—we’re not crashing to 3,000 or anything like that.
Q: What do you think Tesla (TSLA) will bottom at in the short term?
A: $200 or $210. The Tesla deal is a disaster for Elon Musk. It will amount to a huge diversion of management time; he’s going to be facing regulatory hurdles, and even though he said we’re going ahead for the deal, a lot of people still don’t believe it because the financing for the deal may have vaporized in the massive increase in interest rates that has occurred since February. So, there are still a lot of non-believers in this deal. I’d rather have him making solar panels, electric cars and launching rockets, not getting into the social media morass and taking over a broken company. The shareholders clearly don’t like it either, taking the shares down $30 in two days. By the way, if you look at the charts, you notice that people were front-running the Twitter deal by dumping Tesla stock the day before. So yes, it kind of peed on our Tesla parade for the short term; long term it keeps going up and the bad news is in the price.
Q: How do we get the concierge service?
A: Just contact customer support at support@madhedgefundtrader.com or call (347) 480-1034.
Q: Have you revised Tesla’s (TSLA) price target?
A: No, not the long-term ones, just the short-term ones.
Q: Is it possible that bonds are bottoming here, even if we expect further Fed rate rises?
A: Yes, the Fed only has control of overnight rates, and those are rising. In fact, overnight rates are now higher than 10-year rates, and could go much higher still—that's called inversion of the yield curve. We’re almost certainly getting another 150-basis point rise in overnight rates. 10-year bonds or 20-year bonds could well stay around this level, or maybe just a little bit lower. So yes, the bond short is gone. It worked great for us for 2.5 years, we caught a 43% decline in the TLT, but it’s game over. Time to find other trades, like buying stocks.
Q: Does Elon Musk have to sell more Tesla to buy more Twitter?
A: That is the big question being asked today because he already sold $16 billion worth of stock in Tesla to cover the Twitter purchase this year. With the debt markets having fundamentally changed in the last 6 months, the question is: does he have to raise more equity (i.e. sell more Tesla), or can he bring in other equity investors? Hopefully, if he does have to sell more Tesla, it’s not very much—it’s a $44 billion deal and he’s already put $16 billion into it, so maybe he raises another $6 billion to get up to a 50% control level, which the market can easily handle in a day or two. He’s handled all of his past Tesla share sales fairly easily, and he tends to do these at market tops when demand for the shares is overwhelming. Longer term, the much greater demand for selling Tesla shares will come from the equity raises he will need to do to build another six Tesla factories around the world. That could be anywhere from $400 billion to $800 billion, so that will be the much larger cash call, but those are years off at best.
Q: With so many big techs breaking down, how should we play the (ROM) (ProShares Ultra Technology ETF)?
A: From the long side is how you play it. But you really need these capitulation days, especially if you’re involved in 2X ETFs. There is a spectacular play setting up for the (ROM) because it’ll go from $24 (or whatever the final bottom is) to $100 in the next upcycle, so that is a great leverage play that you really want to get involved in.
Q: If I don’t have time to babysit my portfolio, am I better in LEAPS or physical stocks?
A: Well the LEAPS I’m putting out now have a 2 years 4 months expiration date, so you can literally just buy them and forget about them. On the other hand, if we don’t get an economic recovery in 2 years and 4 months, you’re better off buying stocks outright on 2:1 margin. You make less profit, but if we don’t get a recovery for 3, 4, 5 years, then you have no expiration problem with stocks, as opposed to with LEAPS. Now, there are ways to trade around your LEAPS, like financing the long and by shorting puts and getting in for zero, but that requires smaller positions because you have to maintain the margin for the short put side. So, if you want to play it safe, buy the stocks. You can even handle a lost decade with stocks, especially if their dividend pays. With LEAPS, you need a fairly immediate economic recovery, which we should get, especially if the Fed lowers interest rates next year, which it should.
Q: What is your view on the US dollar (UUP)?
A: The dollar seems close to peaking right around here. It will peak on the last day that the Fed raises interest rates, which could be on December 14th. In fact, they may not even wait until then. Depending on the inflation rate, they could only do a quarter or a half-point rate rise in December, thus giving the market their signal that way. Or not do it at all, and the sudden selloff that we had in the dollar, and the stabilization of bonds we had last week is telling you that’s on the table as a possibility. So, we saw really important moves for long-term trend considerations in the markets since last week.
Q: Time for Palantir (PLTR)?
A: No, because the CEO doesn’t give a damn about his stock, and the stock reacts accordingly. I gave up on Palantir for that reason.
Q: How do you see the Ukraine/Russia situation developing?
A: It drags on for another year, Russia keeps losing and throwing men into the meat grinder until Putin gets removed, which should happen next year at which point oil prices collapse. That may be why he blew up the Nordstream One pipeline, to tie the hands of a future Russian government.
Q: Is it safe to buy 30-day Treasury bills in November going into the next F1C meeting?
A: Yes, because they essentially have no risk—that’s basically a cash type investment. And if your broker goes bust you can just force them to hand over your Treasury bonds and not get tied up in any three-year bankruptcy proceeding. It’s an asset, not cash.
Q: Will it be time to buy LEAPS on the next market selloff?
A: Absolutely, yes.
Q: Do you believe Putin would use nukes?
A: No I don’t, because the radioactive cloud would fall back on him immediately. There are very few people who are both stock market experts and nuclear weapons experts; I happen to be one of those—probably the only one in the world in fact—because of my time spent with the atomic energy commission at the Nuclear Test Site in Nevada. The problem with bombing your next-door neighbor with nukes is that the nuclear fallout comes right back on you the next day. Most of Russia’s nukes don’t even work, they only have a handful that actually does, and if he does use one, I bet it would be a tiny one just to demonstrate that he has a working nuke—like just a one-megaton one as opposed to Hiroshima which was 20 kilotons. Or he could drop it in the Black Sea or do an above-ground test at their old nuclear test site that wouldn’t kill anyone, just to show that he has working nukes. I don’t think he will, because we would react in kind in twice the size.
Q: Time to buy ARK Innovation ETF (ARKK)?
A: You might start with a small starter position, just to get it into your portfolio so you remember to buy it on the next dip. Cathy Woods’s leverage in this fund is tremendous. You really want to own it at a market bottom, but picking the actual bottom is going to be tough. One way to achieve this is to just go out and buy Tesla—that way you don’t have to pay the management fee—or buy the top 5 holdings in ARK directly, which includes Roku (ROKU) among others. So yes, I’m watching it; I prefer buying things on the way up and missing the first 10% than to catch a falling knife, and boy has this thing been a falling knife this year.
Q: Do you like biotech here?
A: Absolutely; please subscribe to the Mad Hedge Biotech Letter for biotech recommendations plus LEAPS on biotech plays by clicking here.
Q: Energy is still the best sector now?
A: Yes, but for how long? You don’t want to be left standing when the music stops playing, and that is imminent in the oil industry. It will be illegal to sell gasoline cars in California after 2035, and gas makes up half the oil use in the US.
Q: Did you know that oil reserves (USO) are the lowest since 1984?
A: Yes, I think you may have read that in my newsletter, and that’s because of Biden’s efforts to reduce US gasoline prices through a million barrel per day release from the strategic petroleum reserves in Texas and Louisiana. If we are a net energy producer, why do we even have reserves? It’s an out-of-date holdover from the Cold War.
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
Tokyo 1975
Mad Hedge Technology Letter
October 5, 2022
Fiat Lux
Featured Trade:
(THE DEAL GOES THROUGH)
(TWTR), (TSLA)
I believe there are still more twists and turns in the Elon Musk chasing after his favorite social media platform saga.
It’s getting a little out of hand now.
It seems like it’s the story that will never burn out, yet it gives us deep insight into the state of the tech industry.
It could be just a giant ploy to buy Twitter (TWTR) shares on the open market by Musk as it traded all the way down to $35 per share in July.
Musk could have feigned problematic to drag the price of shares down and scoop them up on the cheap to bring down the cost basis of the sale.
This could be the reason why Musk has offered to conclude a $44 billion acquisition of Twitter in a dramatic turn of events.
The SpaceX Chief had written to Twitter yesterday offering to close the deal at the original price of $54.20 a share.
Musk had been set for a courtroom duel with Twitter with multiple legal commentators warning he had a slim chance of succeeding in his attempt to scrap the deal.
On the surface, it certainly does appear as if Musk has been pacified and content with pushing the deal through.
However, the caveat, funding must be secured for this to go through and since the interest rate environment has turned from bad to atrocious, the other question that must be asked is whether banks can provide the necessary funding at exorbitant rates.
Musk is already thinking 5 steps ahead tweeting that the acquisition could be an “accelerant” to “creating X, the everything app”, adding the process would be accelerated by up to five years without giving further details.
Musk’s initial argument in reneging on his offer to buy the company was that it had miscounted the number of spam or bot accounts on its platform.
An “everything app” could mean something similar to China’s WeChat.
A super app in which you can do everything from paying the gas bill, to ordering pizza, and even finding a new girlfriend.
No doubt if the deal goes through, Twitter and Tesla will be inextricably linked with services of each on both.
Getting down to the nuts and bolts, Twitter is a great technology asset and one that is highly scarce.
It’s the center of conversation for anyone who is of high visibility.
Although I believe the price Musk is paying is way too high and $25 billion seems more appropriate, Musk is a victim of his own brinkmanship.
I also believe that a sharp recession that we could experience in 2023 was the real reason for securing the deal now and not later.
If Tesla’s stock tanks in 2023, it would be cringe-worthy to sell stock at depressed prices to fund a Twitter deal.
Musk saw a clear path to financing this deal and that is the clincher. It also bodes ill for tech stocks in 2023 if Musk thinks he needs to cash in now before they head lower as the Fed raises rates aggressively.
However, something tells me this deal will still get dragged out.
