Global Market Comments
September 11, 2023
Fiat Lux
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(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE BIG PULL FORWARD)
(AAPL), (UUP), (TSLA), (USO), (BYDDF)
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Somehow, the summer got moved this year.
For here it is September, and the stock market is behaving like it is only July. July was different from normal as well, going straight up almost every day when it is usually asleep. This year, July acted like May, when you’re supposed to sell and go away.
If you’re thoroughly confused by all of this, so am I. The historic cyclicality of the markets, the ebb and flow of share prices according to the calendar, has gone out the window. But then, what isn’t confusing these days?
I went to buy a green drink from Whole Foods on Friday and the counter was closed because of staff shortages. Whole Foods unable to sell a green drink?
I tried to climb the Matterhorn this summer but was told that the guides weren’t taking anyone up because of the extreme heat. The mountain was literally melting, dropping rocks on the heads of climbers. No climbing the Matterhorn in Switzerland? I went to the Dolomites instead where you climb ice-free shear rock faces.
I tried to get into the Pantheon in Rome this summer and was met with a five-hour line. The Sistine Chapel in the Vatican was worse. When I first went there in the 1960’s the place was empty. The fact is that Italy now has more tourists than Italians. Oh, and the pope is from Argentina.
Has the world gone mad?
What has happened is that there has been a great pull forward that took place in financial markets during the first half of the year. I’ve seen this before. When a conclusion becomes obvious, everyone jumps on the bandwagon and brings everything forward.
So from January to July stock markets saw the blatantly obvious future that inflation would fall, interest rates decline, the US dollar weaken, and commodities and precious metals would rise. That’s why the “Magnificent Seven” led.
What happens next?
Now shares have to wait until these predictions actually happen before they can move any further. Markets have moved as far as they can on faith alone. Next, we need facts. This could take weeks or even months.
I knew this was going to happen. That’s why I went pedal to the metal, full speed ahead, damn the torpedoes aggressive during the first half of the year and clocked a 60% profit. I expected that if you didn’t make a profit in the first half of the year, you wouldn’t have any profits in 2023 at all.
And the trade alert drought continues.
There isn’t a day that goes by when I am not asked if America’s $33 trillion national debt will destroy the economy, cause the stock market to crash, and bring the end of Western Civilization. The answer is no, never, not in our lifetimes.
The reason is very simple. Any dollar the government borrows today sees its purchasing power go to zero in 30 years. That’s where the massive Civil War debt went, that's where the WWI debt went, and that’s where the gigantic WWII debt went, some 105% of GDP. Today’s debt will similarly vaporize over time.
Who pays for this cataclysmic decline in value? US government debt holders, who similarly see their purchasing power disappear over time. It turns out that the ultimate avoiders of risk, investors in US government debt, not only don’t get paid for their cowardice, they lose their entire principal as well, at least in terms of purchasing power.
There is a wonderful article in Barron’s this week entitled “Government Debt Needs to Be Repaid, And Other Myths About the Federal Deficit” by Paul Sheard which explains how all this works, which I quote below in its entirety.
“The U.S. national debt currently stands at $32.91 trillion, and 10 months into this fiscal year, the U.S. government has spent $1.6 trillion more than it has collected in revenue. Those intimidating figures animate political battles that can shut down the government and even bring it to the brink of default. But the meaning of this money isn’t as simple as it seems. Five myths in particular deserve straightening out.
The first is that the government has to borrow in order to spend and run deficits. It’s the other way around. The government creates money (injects it into the economy) when it spends and destroys money (withdraws it from the economy) when it taxes. The government taxes variously to correct for negative externalities, to redistribute income, and to modulate aggregate demand; “raising revenue” is just a cover story.
A related myth is that the government needs to repay its debt. “Debt” is a misnomer; government debt is just money (or purchasing power) in another form. A $20 bill is a liability of the Fed, which makes it a liability of the federal government. A $20 bill never has to be repaid; it just is. Fundamentally, Treasuries aren’t much different.
That government debt never needs to be repaid doesn’t mean the government can or should create as much of it as it likes.
Too big a pile of debt because of prior and ongoing budget deficits may be inflationary, as too much money chases insufficient goods and services. That will require some combination of monetary and fiscal tightening. A mountain of debt may indicate a government that is too big and intrusive in the economy for many people’s liking, an issue that can be fought out at the ballot box.
A third myth is that the Fed prints money when it does quantitative easing. The money-printing happens when the government runs a budget deficit; QE just changes the form of that money.
QE is really just a debt refinancing operation of the consolidated government—that is, the government including the Fed—whereby it refinances one form of debt (government bonds or guarantees) into another (reserves). QE changes the composition of the (consolidated) government debt in the hands of the private sector, but it doesn’t directly add one iota of new purchasing power. For every dollar the Fed “pumps into” the economy by doing QE, it “sucks out” a dollar of assets. Conversely, quantitative tightening just returns assets to private sector portfolios, expunging reserves in the process.
Reserves are like banknotes: The Fed can withdraw them, but it never has to repay them as such. It looks like the government has to repay Treasuries, but this is an institutional artifact. In extremis, the Fed could convert all outstanding Treasuries into reserves, and it could maintain monetary control by it, rather than the fiscal authorities, paying interest on reserves.
Japan is the poster child for a miserable-looking fiscal picture. Yet, the Bank of Japan, the pioneer of QE, owns almost half of the stock of outstanding Japanese government securities and, at the same time, since 2016 has managed the 10-year yield, with some leeway, to be “around zero percent.”
It is precisely because the government can create money at will that the modern monetary and fiscal architecture has been designed to put shackles on its ability to do so: The creation of an “independent” central bank within the government, the central bank not allowing the government’s account with it to go into overdraft, the central bank not buying bonds directly from the government, and governments issuing debt securities rather than leaving their deficits in the form of reserves all serve that purpose. But what the government taketh away, it can give back. Faced with the need, it could loosen those shackles.
A fourth, and related, myth is that banks could, if so moved, “lend out” the excess reserves created by QE. Banks can lend these reserves to one another but they cannot turn them into lending to companies and households in the broader economy.
It isn’t just the government that creates money. Banks do, too. A fifth myth is that banks are just financial intermediaries “taking in” deposits and “lending them out.” Not so. Banks create money when they lend. For an individual bank making a new loan, it may not feel like this, because the first thing borrowers do is spend their money. If none of that money flows back into the same bank, its reserves at the central bank will decline by the amount of the loan. It will then probably want to attract deposits to “fund” the loan, but doing so will just top up its lost reserves. Bank lending for the system is entirely self-funding (so long as none of the money created leaks into bank notes).
The U.S. economy currently produces about $27 trillion of goods and services annually, a little more than the amount of federal debt held by the public and the QE-embracing Fed. The money needed to sustain this giant prosperity-generating machine comes from the government running deficits and from banks extending credit, with the Fed’s activities linking the two. Political debates and decisions currently are based on a befuddled grasp of how this monetary system works. The stakes for society are too high for that.”
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%, another new high, some 2.50 times the S&P 500 over the same period.
Some 41 of my 46 trades this year have been profitable.
Beige Book Shows Consumer Spending Slowing, long a pillar of this recovery, as the last of the pandemic bonuses work their way for the system. It’s putting a dent in corporate profits and hints at a shrinking economy, contrary to recent economic data.
The US Dollar (UUP) is Soaring, thanks to “higher interest rates for longer” and a strengthening US economy. Asian currencies are at ten-month lows and central bank intervention is looking. The dollar shorting selling opportunity of the decade is setting up.
China Restricts Sales of iPhones (AAPL), barring sales to government agencies. It’s only a small nick in overall sales, but certainly casts of cloud over doing business in the Middle Kingdom. Some $200 billion, (AAPL)’s market cap has been vaporized.
Weekly Jobless Claims Dive, down 13,000 to 216,000, a seven-month low. It’s the fourth consecutive decline and not what the Fed wanted to hear.
Rate Hikes Will Drag on the Economy for at Least a Decade, as the Fed's $8.24 trillion balance sheet unwinds, according to the San Francisco Fed. The balance sheet was only at $800 million before the 2008 Great Recession.
Saudi Arabia and Russia Engineer Short Squeeze on Oil (USO), taking the price over $90 a barrel this year. Large production cuts announced in June will be maintained until yearend. Will Biden counter with a release from the Strategic Petroleum Reserve, or SPR?
Tesla’s Chinese EV Deliveries Rise 9.3% in August, thanks to aggressive price cuts. There is a two-month wait for the Model Y. Chinese rival BYD (BYD), with its Dynasty and Ocean series of EVs and petrol-electric hybrid models, recorded deliveries of 274,086 passenger vehicles in August, a jump of 57.5% year-on-year. China has the world’s largest car market.
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 11, US Consumer Inflation Expectations are announced.
On Tuesday, September 12 at 8:30 PM EST, NFIB Business Optimism Index is released. Apple announced the new iPhone 15.
On Wednesday, September 13 at 8:30 AM, the Core Inflation Rate for August is published.
On Thursday, September 14 at 8:30 AM, the Weekly Jobless Claims are announced. ARM started trading after its IPO, which was five times oversubscribed. NVIDIA tried but failed to take over the chip maker.
On Friday, September 15 at 2:30 PM, the Producer Price Index for August is published. At 2:00 PM the Baker Hughes Rig Count is printed.
As for me, not just anybody is allowed to fly an aircraft in Hawaii. You have to undergo special training and obtain a license endorsement to cope with the Aloha State’s many aviation challenges.
You must learn how to fly around an erupting volcano, as it can swing your compass by 30 degrees. You must master the fine art of not getting hit by a wave on takeoff since it will bend your wingtips forward. And you’re not allowed to harass pods of migrating humpback whales at a low level, a sight I will never forget.
Traveling interisland can be highly embarrassing when pronouncing reporting points that have 16 vowels. And better make sure your navigation is good. Once a plane ditched interisland and the crew was found six months later off the coast of Australia. Many are never heard from again.
And when landing on the Navy base at Ford Island you were told to do so lightly, as they still hadn’t found all the bombs the Japanese had dropped during their Pearl Harbor attack in 1941.
You are also informed that there is one airfield on the north shore of Molokai you can never land at unless you have the written permission from the Hawaii Department of Public Health. I asked why and was told that it was the last leper colony operating in the United States.
My interest piqued, the next day found me at the Hawaiian state agency with an application in hand. I still carried my UCLA ID which described me as a DNA researcher, which did the trick.
When I read my flight clearance to the controller at Honolulu International Airport, he blanched, asking if I had authorization because he’d never seen one before. I answered that yes, I did, I really was headed to the dreaded Kalaupapa Airport, the Airport of no Return.
Getting into Kalaupapa is no mean feat. You have to follow the north coast of Molokai, a 3,000-foot-high series of vertical cliffs punctuated by spectacular waterfalls. Then you have to cut your engine and dive for the runway in order to land into the wind. You can only do this on clear days, as the airport has no navigational aids. The crosswind is horrific.
If you don’t have a plane it is a 20-mile hike down a slippery trail to get into the leper colony. It wasn’t always so easy.
During the 19th century, Hawaiians were terrified of leprosy, believing it caused the horrifying loss of appendages, like fingers, toes, and noses, leaving bloody open wounds. So, King Kamehameha I exiled lepers to Kalaupapa, the most isolated place in the Pacific.
Sailing ships were too scared to dock. They simply threw their passengers overboard and forced them to swim for it. Once on the beach, they were beaten a clubbed for their possessions. Many starved.
Leprosy was once thought to be a result of sinfulness or infidelity. In 1873, Dr. Gerhard Henrik Armauer Hansen of Norway was the first person to identify the germ that causes leprosy, the Mycobacterium leprae.
Thereafter, it became known as Hanson’s Disease. A multidrug treatment that arrested the disease, but never cured it, did not become available until 1981.
Leprosy doesn’t actually cause appendages to drop off as once feared. Instead, it deadens the nerves, and then rats eat the fingers, toes, and noses of the sufferers when they are sleeping. It can only be contracted through eating or drinking live bacteria.
When I taxied to the modest one-hut airport, I noticed a huge sign warning “Closed by the Department of Health.” As they so rarely get visitors the mayor came out to greet me. I shook his hand but there was nothing there. He was missing three fingers.
He looked at me, smiled, and asked, “How did you know?”
I answered, “I studied it in college.” Even today, most are terrified of shaking hands with lepers.
Not me.
He then proceeded to give me a personal tour of the colony. The first thing you notice is that there are cemeteries everywhere filled with thousands of wooden crosses. Death is the town’s main industry.
There are no jobs. Everyone lives on food stamps. A boat comes once from Oahu a week to resupply the commissary. The government stopped sending new lepers to the colony in 1969 and is just waiting for the existing population to die off before they close it down.
Needless to say, it is one of the most beautiful places on the planet.
The highlight of the day was a stop at Father Damien’s church, the 19th century Belgian catholic missionary who came to care for the lepers. He stayed until the disease claimed him and was later sainted. My late friend Robin Williams made a movie about him, but it was never released to the public.
The mayor invited me to stay for lunch, but I said I would pass. I had to take off from Kalaupapa before the winds shifted.
It was an experience I will never forget.
Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
The Airport of No Return
Father Damien
When Elon Musk personally invited me to tour his Gigafactory in Sparks, Nevada, I thought, “How could I pass on this?” He had read my recent report on Tesla and thought the more I know about Tesla the better.
I couldn’t agree more.
As I approached the remote facility 20 miles east of Reno, I spotted a herd of wild Mustangs on the red volcanic hills above. I thought it was a great metaphor for our rapidly evolving transportation system, from horse to all-electric in 100 years.
There are no signs to the Gigafactory until you approach the main gate. I had to find it with my GPS after inputting longitude and latitude. When you upset the apple cart for the global energy system, you make a lot of enemies. Once in, no cameras are allowed.
What I found inside what much what I saw at the original Fremont, CA factory 15 years ago: an army of robots building machines. The factory is in effect a machine that makes machines….by the millions. Occasionally, a worker would swan past with an oil can in his hand and squirt some lubricant into an important joint, then swan away.
If you want a view of the future, this is it.
Elon does nothing small.
The present factory occupies about 2 million square feet, or about 33 football fields. Some 60% of the world’s lithium-ion batteries come out of this one place right now, which are devoted to Tesla Model 3’s and Powerwalls, of which I own six. Japan’s Panasonic, which has the contract to supply the batteries, occupies a substantial part of the factory space.
When completed, it will occupy 6 million square feet, making it the world’s largest building. The planet’s greatest solar array sits on top, making the entire facility energy neutral when combined with local windmills. The plant is fully automated and runs 24/7. There are still a few of those pesky humans around to perform complex tasks which robots can’t do….yet.
The State of Nevada just granted Tesla a ten-year tax holiday to start the second phase, which will employ another 5,000. Whole cities are being carved out of the virgin desert to accommodate them, so the entire city of Reno is rapidly marching east. Burger Kings, Taco Bells, Subways, and Chinese and Mexican restaurants are popping up in the middle of nowhere.
It's all coming into place to assure that Tesla meets its 1.8 million vehicle target for 2023, up 40% from 2022. The last time someone had a technology lead this great was in 1913 when Henry Ford launched assembly lines that mass-produced Model T’s for the first time. He offered them for $400 each and doubled his workers’ pay to $5 a day to buy them. This gave Ford a 75% share of the US car market for two decades.
Elon Musk will achieve the same.
Which all raises a much larger issue.
The future is happening far faster than anyone realizes.
Tesla is just the tip of the iceberg in an AI/automation trend that is rapidly taking over the world. The net effect will be to double or triple the value of the companies that embrace these trends and wipe out those that don’t. ALL companies are AI plays. This is a large part of my Dow 240,000 in a decade prediction.
Microsoft brought out its office in 1990 and it instantly made ALL companies more valuable as they adopted it. The Dow Average soared by 20 times from $600 to $12,000. The same thing is going on now with AI.
If it worked before it will work again. A 20-fold return from here takes the Dow Average from $34,000 to $680,000, except it will happen much more quickly as technology is hyper-accelerating. Dow 240,000 looks like a chipshot.
If you think this is some kind of George Lucas THX 1138 prediction, think again. These are headlines I saw in the last week.
FedEx (FDX) is firing 86,000 drivers, to be replaced by robots. Uber (UBER) is replacing its 5 million drivers with autonomous drivers to increase reliability and cut costs. Dentists adopting AI to read X-rays are catching the 12% of cavities they miss, increasing fillings and increasing profits.
I often get asked for great AI plays in the market and there are no direct ones. But in five years, companies like Microsoft’s (MSFT) ChatGPT and Alphabet’s (GOOGL) DeepMind Technologies will be spun off and sold at enormous multiples to the public, creating a frenzy.
I’ve seen it all before.
What does doubling or tripling the value of surviving companies do to the economy? It reliquefies the financial system with immense corporate cash flows. All asset classes will rocket in value, including stocks, bonds, commodities, precious metals, energy, and real estate.
While the 2010s had endless quantitative easing and zero interest rates, the 2020s will have AI and robots. Except that this time we won’t have to rely on government handouts to get there.
Suddenly, Dow 240,000 looks cheap.
I just thought you’d like to know.
My big bet-the-ranch long in banks and brokers paid off huge. My 2023 year-to-date performance is now at an incredible +49.57%. The S&P 500 (SPY) is up only a miniscule +8.42% so far in 2023. My trailing one-year return maintains a sky-high +106.31% versus -8.03% for the S&P 500.
That brings my 15-year total return to +646.76%, some 2.73 times the S&P 500 (SPY) over the same period. My average annualized return has blasted up to +48.51%, another new high.
I executed four trades last week. I used the spectacular earnings beat at (JPM) to take profits and rolled that money into Boeing (BA), which had just been trashed. I also took profits on my expiring April bond long (TLT) and rolled it into a May bond long. I will run my remaining expiring April long positions in (TSLA), (BAC), (C), (IBKR), (MS), (and FCX) into the Friday, April 21 expiration.
Inflation Takes a Dive, dropping to a 5.6% YOY rate, the ninth consecutive month of decline. I think we will fall to 3%-4% by yearend, prompting the Fed to lower interest rates. That will spark a new bull market and another leg up for residential real estate. It all more fodder for the bull case. Given what the Fed has been facing, a mild recession would be a huge win.
Fed Minutes Fear Banking Crisis May Lead to a Mild Recession, killing off today’s nascent rally. It will also hobble job growth and lead to sharp declines in interest rates in 2024. Markets now see a 75% probability of a 25-basis point rate hike on May 3.
FedEx Looking to Fire All Drivers, moving to autonomously driven delivery vehicles. It may take 20 years but it’s in the works. (FDX) has already cut 12,000 jobs since June in an effort to maintain profitability and surpass rival (UPS). In 2022, (FDX) took in $93.5 billion in revenues delivering 3 billion packages, 9 for each American. I received more than my share.
PC Sales Drop 29% YOY, in Q1, adding more ammunition to the recession camp. Apple Macs led the charge to the downside with a heart-thumping 40% decline. The news slugged (AAPL). Only 56.9 million PCs we sold during the last quarter. Even with heavy discounting inventories remain high. Amazing, isn’t it?
Tesla Cuts Prices Again, knocking $3,000 off the Model 3 and $5,000 for the Model X. That sets the cat among the pigeons with traditional car companies desperately trying to catch up. Tesla is simply passing on the 50% drop in lithium prices this year. If they flush competitors out of business in the meantime so much the better. Ford has ordered designers to cut the number of parts by 80%, which Tesla did 14 years ago. (F) and (GM) are just too slow to react, even when the writing is on the wall.
$1.5 Trillion in Commercial Real Estate Debt coming due is a Threat to all asset classes. Refi’s are coming due that will double or triple interest rates from the zero-rate era and many won’t qualify. The sector is already being hammered by the “stay-at-home” work trend, with big tech firms virtually vacating whole office building in San Francisco. Regional banks may no longer have the capital to roll over at any prices given recent massive deposit withdrawals. Avoid commercial real estate REITS.
Banks Shares Explode to the Upside. JP Morgan announced blockbuster earnings, taking the stock up a ballistic $11, or 8.6%. Revenues came in at $39.34 billion versus an expected $36.19 billion. Adjusted EPS was $4.32 a share versus an expected $3.41. It is the biggest gap up in share prices on an earnings announcement in 20 years. As a result, we are just short of the maximum profit in our long (JPM), with the shares up an eye-popping 21% from the nearest strike price.
PPI Gives Another Deflation Hint, dropping a shocking 0.5% in March to only a 2.7% YOY rate. That’s a big drop from 4.9% in February. It’s the lowest inflation indicator in two years. Stocks loved the news, jumping $383. Low inflation, and therefore sharp interest rate cuts are coming within reach.
Boeing Goes Back in the Penalty Box, with a recurring bulkhead problem halting 737 MAX production. The stock dumped 8%. Buy (BA) on the dip. They’ll fix it. The company has a massive order backlog of 4,000 planes and will crush it on the earnings. The 737 MAX will shortly be flying again, the company’s largest selling product. With the airline business booming a global aircraft shortage has emerged. The end of the trade wars with China will bring a resurgence of orders there. And Boeing just surpassed Airbus in aircraft deliveries in Q1
Weekly Jobless Claims Jump 11,000 to 239,000, showing that the Fed’s harsh medicine is starting to work. It’s all consistent with a stock market that may start to roll over soon.
Private Sector Payrolls Slow to 145,000, according to ADP, a substantial drop from the previous month. Financials took the big hit with a loss of 51,000 jobs, followed by Business Services at 46,000. Leisure & Hospitality leads again with a 98,000 gain. It is more evidence of the economic slowdown the FED has been attempting to engineer for the past year.
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, April 17 at 7:30 AM EST, the New York State Manufacturing Index is out.
On Tuesday, April 18 at 6:00 AM, the US Building Permits are announced.
On Wednesday, April 19 at 11:00 AM, the Fed Beige Book is printed.
On Thursday, April 20 at 8:30 AM, the Weekly Jobless Claims are announced. Existing Home Sales are out.
On Friday, April 21 at 8:30 AM, the Global Composite Flash PMI is released. We also get the April options expiration at the 4:00 PM stock market close.
As for me, I don’t get invited to help design new nuclear weapons systems very often. So when the order came from Washington to report to Los Alamos, New Mexico, I was on the next plane.
When the Cold War ended in 1992, the United States judiciously stepped in and bought the collapsing Soviet Union’s entire uranium and plutonium supply.
For good measure, my client George Soros provided a $50 million grant to hire every Soviet nuclear engineer. The fear then was that starving scientists would go to work for Libya, North Korea, or Pakistan, which all had active nuclear programs. There ended up here instead.
That provided the fuel to run all US nuclear power plants and warships for 20 years. That fuel has now run out and chances of a resupply from Russia are zero. The Department of Defense attempted to reopen our last plutonium factory in Amarillo, Texas, a legacy of the Johnson administration.
But the facilities were deemed too old and out of date, and it is cheaper to build a new factory from scratch anyway. What better place to do so than Los Alamos, which has the greatest concentration of nuclear expertise in the world.
Before they started, they launched a nationwide search for those who were still alive and had nuclear expertise the last time we made our own plutonium, and they came up with….me?
Los Alamos is a funny sort of place. It sits at 7,320 feet on a mesa on the edge of an ancient volcano so if things go wrong, they won’t blow up the rest of the state. The homes are mid-century modern built when defense budgets were essentially unlimited. As a prime target in a nuclear war, there are said to be miles of secret underground tunnels hacked out of solid rock.
You need to bring a Geiger counter to garage sales because sometimes interesting items are work castaways. A friend almost bought a cool coffee table which turned out to be part of an old cyclotron. And for a town designing the instruments to bring on the possible end of the world, it seems to have an abnormal number of churches. They’re everywhere.
I have hundreds of stories from the old nuclear days passed down from those who worked for J. Robert Oppenheimer and General Leslie Groves, who ran the Manhattan Project in the early 1940s. They were young mathematicians, physicists, and engineers at the time, in their 20’s and 30’s, who later became my university professors. The A-bomb was the most important event of their lives.
Unfortunately, I couldn’t relay this precious unwritten history to anyone without a security clearance. So, it stayed buried with me for a half century, until now. Suddenly, I had an entire room of young scientists who were fair game, and it was fun relaying stories, they hung on my every word. It was like being a Revolutionary War buff and out of the blue you meet someone who knew George Washington.
Some 1,200 engineers will be hired for the first phase of the new plutonium plant, which I got a chance to see. That will create challenges for a town of 13,000 where existing housing shortages already force interns and graduate students to live in tents. It gets cold at night and dropped to 13 degrees F when I was there.
As a reward for my efforts, I was allowed to visit the Trinity site at the White Sands Missile Test Range, the first visitor to do so in many years. This is where the first atomic bomb was exploded on July 16, 1945. The 20-kiloton explosion set off burglar alarms for 200 miles and was double to ten times the expected yield.
Enormous targets hundreds of yards away were thrown about like toys (they are still there). Half the scientists thought the bomb might ignite the atmosphere and destroy the world but they went ahead anyway because so much money had been spent, 3% of the US GDP for four years. Of the original 100-foot tower, only a tiny stump of concrete is left (picture below).
With the other visitors, there was a carnival atmosphere as people worked so hard to get there. My Army escort never left me out of their sight. Some 78 years after the explosion, the background radiation was ten times normal, so I couldn’t stay more than an hour.
Needless to say, that makes uranium plays like Cameco (CCJ), NextGen Energy (NXE), Uranium Energy (UEC), and Energy Fuels (UUUU) great long-term plays, as prices will almost certainly rise and all of which look cheap. US government demand for uranium and yellow cake, its commercial byproduct, is going to be huge. Uranium is also being touted as a carbon-free energy source needed to replace oil.
I know the numbers, but I can’t tell you as they are classified. Otherwise, I’d have to kill you and you might not renew your subscription to Mad Hedge Fund Trader.
Good Luck and Good Trading,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
At Ground Zero in 1945
What’s Left of a Trinity Target 200 Yards Out
Playing With My Geiger Counter
Atomic Bomb No.3 Which was Never Used
What’s Left from the Original Test
Global Market Comments
April 10, 2023
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD,
or MAD HEDGE CLOCKS 46.38% PROFIT IN Q1)
(TSLA), (USO), (WMT), (AAPL), (GLD), (GOLD), (SLV),
(UUP), (TLT), (UBI), (NVDA), (MU), (AMAT), (CCJ)
CLICK HERE to download today's position sheet.
How much pain to take?
That is the question plaguing traders and portfolio managers alike around the world. For the average bear market is only 9.7 months long and we are already 16 months into the present one.
Even the longest postwar bear market was only 2.5 years, or 30 months, the 2000-2002 Dotcom Bust, and we are nowhere near that level of economic hardship. Back then, companies posted losses for several quarters in a row, and many ceased to exist (Webvan, Alta Vista, Pets.com).
That means we only have a few more months of pain to take before another decade-long bull market resumes, or 8 months if the bear stretches to a full two years.
That is unless the new bull was actually born last October, which is entirely possible. Certainly, the stock market thinks so, with its refusal to drop on even the worst of news.
Inflation at 6%? Who cares.
A Fed that hates the stock market? Couldn’t give a damn.
Pathetic earnings growth? Call me when it’s over.
This indifference chalked up the deadest trading week I can remember, putting the Volatility Index (VIX) firmly back into “Do Nothing Land” under 20%.
So investors are cautiously putting cash into stocks on every dip, even minor ones, confident that they will be higher by yearend. If a black swan arrives in the meantime, or a political crisis boils out of control, tough luck if you can’t take a joke.
All of which is focusing a lot more attention on gold (GLD), which moved within 2% of a new all-time high last week. I am always looking for cross-asset class confirmations of current trends and the barbarous relic has certainly been one of those.
I have been bullish on gold since I put out LEAPS on Barrick Gold (GOLD) and silver (SLV) last October. They have since performed spectacularly well. The move into precious metals confirms the following. That the Fed tightening cycle will end imminently. Interest rates will fall, and the US dollar (UUP) will weaken. Everything else flows from there.
You are even seeing this in US Treasury Bond yields, with the ten-year plunging to 3.30%, a one-year low. The (TLT) hit $109 last week. Aren’t bonds supposed to be held back by the looming default by the US government?
I’m starting to wonder if the debt ceiling crisis is this generation’s Y2K. At worst, your toaster may show the wrong year but nothing further. Or maybe the pent-up demand for bonds and high yields is so great that it overwhelms all other considerations?
My 2023 year-to-date performance is now at an incredible +46.38%. The S&P 500 (SPY) is up only a miniscule +7.0% so far in 2023. My trailing one-year return maintains a sky-high +103.2% versus +7.0% for the S&P 500.
That brings my 15-year total return to +643.57%, some 2.71 times the S&P 500 (SPY) over the same period. My average annualized return has blasted up to +48.26%, another new high.
I executed no trades during the holiday-shortened week, content to run my ten profitable positions into the April 21 options expiration. If a strategy ain’t broke, don’t fix it. If I see something I like, I’ll take profits on an existing position and replace it with a new one.
Nonfarm Payroll Report Holds Up, at 236,000 in March, the lowest since December 2020. It shows that high interest rates still have not impacted the jobs market. February was revised up to 326,000. The headline Unemployment Rate dropped back to a 50-year low at 3.5%. Average Hourly Earnings dropped to 4.2% YOY, a two-year low, showing that inflation is in retreat. Leisure & Hospitality led at 74,000 followed by Government at 47,000.
Weekly Jobless Claims Drop, to 228,000, down 18,000 as recession fears rise. High interest rates are finally taking their toll, with a banking crisis thrown in for good measure.
Open Jobs Tighten, The June JOLTS survey of job openings fell to 10.698 million, down from 11.3 million last month and well below expectations of 11 million. Is this the calm before the storm when job openings disappear? This report is highly negative for the US dollar.
Tesla (TSLA) Posts Record EV Deliveries, Deliveries grew 36% from a year ago, below the 50% growth Elon Musk promised for the year on the last earnings call, but Musk has a habit of overpromising. The expansion is still a healthy sign that consumers are spending. Any pullback in Tesla is a gift for shareholders.
Oil (USO) Production Cut Sends Price Soaring, with OPEC+ including Russia has pledged a total of 3.66-million-barrel oil output cut which is nearly 3.7% of global demand. The jump in oil price will only accelerate global inflation and force the Fed into a tougher predicament. The Saudi – US cooperation is at its lowest ebb.
Walmart’s (WMT) Automation Effort Goes Into Overdrive, Walmart said it expects around 65% of its stores to be serviced by automation by 2026. The company said around 55% of packages that it processes through its fulfillment centers will be moved to automated facilities and unit cost average could improve by around 20%. This is the first step to getting rid of human employees. Eventually, the government will need to deliver universal basic income (UBI).
Gold and Miners Threaten New All-Time Highs, suggesting that a collapse in interest rates is imminent. So is an economic recovery and a resurgence of monetary expansion. Russian and China continue to be major buyers to evade sanctions. Keep buying (GLD) and (GOLD) on dips.
Apple (AAPL) Cash Hoard Soars to $165 Billion, as the cash flow king of all time goes from strength to strength. This will be one of the top targets in any tech rebound, which may be imminent. But you’re have to compete with apple to buy the shares, which is a huge buyer of its own stock.
Chip Stocks are On Fire, clocking the best sector of any in Q1. Too far, too fast, say I, but I’ll be in there buying with both hands on any serious dips. This is no future without (NVDA), (MU), and (AMAT) playing a major role.
Stock Dividends Hit New All-Time Highs, at $146.8 billion, up 7% YOY. As interest rates rose, companies had to raise dividends to keep up. The economy is also far stronger those most realize, with many analysts believing we should have entered a recession a long time ago. A high dividend also gives downside protection in bear markets.
Uranium Demand is Surging with the Nuclear Renaissance. And now the US is restarting plutonium production for the first time in 20 years, a uranium derivative. The 20-year supply we bought from the old Soviet Union has run out with a scant chance of renewal. The Los Alamos Labs in New Mexico is seeking to hire 1,200 engineers to build a brand-new factory from scratch. Buy (CCJ) on dips. And buy Los Alamos real estate if you can get a security clearance.
Keep Buying 90-Day T-Bills, now pushing a 5% risk-free yield. The regional banking crisis highlights another reason. If your bank or broker goes under, your cash deposits can be tied up in bankruptcy for three years. If you own US government securities, they can be ordered and transferred out in days to another institution. You can also buy them directly from the US government free of fee. Just thought you’d like to know.
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, April 10 at 7:30 AM EST, the Consumer Inflation Expectations are out.
On Tuesday, April 11 at 6:00 AM, the NFIB Business Optimism Index is announced.
On Wednesday, April 12 at 7:00 AM, the US Core Inflation Rate and Consumer Price Index are printed.
On Thursday, April 13 at 8:30 AM, the Weekly Jobless Claims are announced. The Producer Price Index is also released.
On Friday, April 14 at 8:30 AM, the US Retail Sales are released.
As for me, I covered the Persian Gulf for Morgan Stanley for ten years during the 1980s when medieval sheikdoms still living in the 14th century were suddenly showered with untold wealth. Needless to say, the firm, which we called Morgan Stallion, had a few ideas on what they should do about it.
I was picked as the emissary to the region because I had already been visiting the Middle East for 20 years and had been doing business there for 15 years. My press visa to cover the Iran-Iraq War was still valid.
In addition, I had already developed a reputation for being wild, reckless, and up for anything to enjoy a thrill or make a buck. In addition, with all the wars, terrorist attacks, and revolutions underway, everyone but me was scared to death to go near the place.
In other words, I was perfect for the job.
Being a veteran combat pilot proved particularly useful. I used to fly down on Kuwait Airlines and I still have a nice collection of the cute little Arabic artifacts they used to hand out in first class. Once in Abu Dhabi, I rented a local plane and hopped from one sheikdom to the next drumming up business. Once, I landed on a par five fairway at a private golf course just to give a presentation to a nation’s ruler.
My last stop was always Kuwait, where I turned the plane back in and met the CIA station chief for lunch to fill him in on what I had learned. It was all considered part of the job. When Iraq invaded Kuwait in 1991, I was their first call.
Of course, flying across vast expanses of the Arabian desert is not without its risks. Whenever you fly a single-engine plane you are betting your life on an internal combustion engine, never a great idea. I always carried an extra gallon bottle of water in case of a forced landing. The survival time without water is only three days.
Whenever I refueled, I filtered the 100LL aviation gas through a chamois cloth to keep out water and sand. Still, I was pretty good at desert survival, growing up near Indio California in the Lower Colorado Desert and endlessly digging my grandfather’s pickup truck out of the sand.
Once my boss tried to ban me from a trip to the Middle East because the US Navy had bombed Libya. I assured him that something as minor as that didn’t even move the needle on the risk front, at least in my lifetime.
The problem with the Persian Gulf was that they had all the money in the world and no way to spend it. An extreme Wahabis religion was strictly adhered to, and alcohol was banned. But you could have four wives and I enjoyed some of the best fruit juice in my life.
So my clients came to rely on me for diversions. The Iran-Iraq War was taking place then. I took them up in my plane to 10,000 feet and we watched the aerial war underway 50 miles to the north. The nighttime display of rockets, machine gun fire, and explosions was spectacular.
During one such foray, the wind shifted dramatically as a sandstorm rolled in. Suddenly I was landing in a 50-knot crosswind instead of a 10-knot headwind. A quick referral to the aircraft manual confirmed that the maximum crosswind component for the plane was 27 knots.
Oops!
Then I got a bright idea. I radioed the tower and asked for permission to land on the taxiway at a 90-degree angle to the main runway. After some hesitation, they responded, “If you’re willing to try it”. They knew my only alternative was to ditch at sea with two high-ranking gentlemen who couldn’t swim.
The tower very kindly talked me down with radar vectors and at the last possible second, with the altimeter reading 20 feet, the taxiway popped into view. With such a stiff wind I was able to pancake the plane down in yards, slam it on the runway, and then immediately shut the engine down. I asked for a tow, not wanting to risk the windstorm flipping the plane over.
My passengers thanked me profusely.
When Iraq invaded Kuwait in 1991, I lost most of my friends there. They were either killed, kidnapped and held for ransom, or volunteered as translators for US forces. I never saw them again.
I didn’t return to the Middle East until 2019 when I took two teenage girls to Egypt to introduce them to that part of the world. They wore hijabs, rode camels, and opened their eyes. I even set up some meetings with an educated Arab woman.
I will probably go back someday. I still haven’t seen the ruins at Petra in Jordan, nor ridden the Hijaz Railway, which Lawrence of Arabia blew up in 1918. But I have an open invitation from the king there.
I knew his dad.
Good Luck and Good Trading
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
March 10, 2023
Fiat Lux
Featured Trade:
(THE MAD HEDGE TRADERS & INVESTORS SUMMIT IS ON MARCH 14-16)
(MARCH 8 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPY), (TLT), (UUP), (FXY), (FXB), (FXE), (FXA), (UNG), (BOIL), (AAPL), (TSLA), (WW), (BHP), (NVDA), (RIVN), (FCX)
CLICK HERE to download today's position sheet.
Below please find subscribers’ Q&A for the March 8 Mad Hedge Fund Trader Global Strategy Webinar, broadcast from Incline Village, CA.
Q: Do you think the US dollar will drop this year?
A: Absolutely it will drop; in fact, the drop started in October last year. We’re actually six months into a bear market for the US dollar (UUP), and bull market for the yen (FXY), the British pound (FXB), the euro (FXE), and the Australian dollar (FXA). However, the rate-cutting scenario is on vacation, and when it comes back from that vacation, then we will see very sharply dropping interest rates, soaring bond prices, and a weak dollar. That scenario is certain to happen by year-end, probably by 10 or 20% —quite a lot. If you just want to buy the basket for foreign currencies, you can sell short the Invesco DB US Dollar Index Bullish Fund (UUP).
Q: Can stocks (SPY) and bonds (TLT) go up at the same time?
A: Well, they shouldn’t, and usually they don’t. But this time it’s different now because we’re all beholden to the interest rate decisions of the Fed. All asset classes are moving together like synchronized swimmers, which means that on days when the market believes that Powell is finished raising rates, you get big bull moves in stocks, bonds, commodities, precious metals, and beanie baby collectibles. And on the bad days like yesterday, where Powell really reiterates how tough his stance is on inflation is unchanged, everything falls in unison. It’s really become a liquidity/confidence/inflation on-off type market. We have been playing that like a maestro for the last six months and have made a ton of money. I hope it continues that way. “If it’s working, don’t fix it” is my philosophy on trading, which is constantly changing.
Q: Do small caps underperform or overperform in a rising rates era?
A: They always do poorly because small caps have fewer cash reserves, more leverage, and more exposure to interest rates, as opposed to large caps which, in the tech area, don’t borrow at all. They’re actually net creditors to the system so they make more money when interest rates go up. I imagine the interest income at Apple this year has to be absolutely gigantic. That said, small caps always lead recoveries because of their excess leverage, so that's why people are piling into small caps on dips right now. Going from terrible to just bad often generates the best stock returns.
Q: How long will “steering wheel falling off” news tank Tesla?
A: Well, it was worth a $6 dollar drop today in an otherwise weak market. First of all, if there are any actual problems with Tesla, they fix them immediately for free, and most of the fixes can be done with a software upgrade which they do at midnight the day of the recall. Second, a lot of these stories about Tesla problems are false, planted there by the oil industry, trying to head off their own demise. Third, when you go from making several thousand to several million cars a year, scaling up to mass production always uncovers some sort of manufacturing flaws. Tesla can fix them faster than anyone else. I remember when the first Model S came out 13 years ago, we had a hot day and all the sealants on the windows melted. They said they didn’t know because it doesn’t get that hot in Fremont California where they build the cars. They sent out a truck the next day and installed all new sealants on our windows. So that is part of living with Tesla, which seems bent on taking over the world. And I’m working on a major update on Tesla report. I listened to the whole 3.5-hour investors day, and I'll get that out when I get all the snow shoveled. Full disclosure: Elon Musk personally gave me a free $12,800 Tesla Powerwall three years ago. It’s the red one.
Q: I just bought the United States Natural Gas Fund (UNG) 14/15 2025 LEAP for $0.20 with UNG down 3%.
A: I’m going to share that LEAPS with all the Global Trading Dispatch members tomorrow. So far, only the Mad Hedge Concierge members have seen it. We’ll go into great detail in tomorrow’s letter about why you want to buy natural gas here and how you want to play it.
Q: It seems the Fed won’t be happy unless there’s a recession; am I reading this wrong?
A: I think Powell is striving for perfection—killing off inflation and lowering interest rates without a recession. I actually am hoping for a recession myself, even if it’s just for one quarter because that greatly increases market volatility and makes my bond long look like a stroke of genius. And let’s see if he can pull it off. He’s coming facing so many unprecedented challenges to the economy, like the pandemic, the end of liquidity, and the extreme worker shortage. It’ll be really interesting to see what happens. Multiple PhD theses in economics begging to be addressed in there.
Q: Will artificial intelligence cause another bubble?
A: Absolutely, yes. And if you’ve been in the market long enough, you become a bubble collector like me. Just off the top of my head, 3D printing, cold fusion, bitcoin, portfolio insurance, Nifty 50, eyeballs,—if I spent more time, I could come up with an endless list. And this is how Wall Street makes their money—they create bubbles by manufacturing compelling, irresistible stories that can be sold to the masses. Some of these like cold fusion, I know immediately won’t work for 20 years because of my physics background, and definitely not now. Some of these other ones are just flashes in the pan and never work. You just get used to an endless series of bubbles. AI is new only if you haven’t been watching. The share prices of Google, Amazon, Apple, have already had gigantic moves in the last 20 years, largely because of their use of artificial intelligence. So those are your plays—those and (NVDA), which provides the essential chips for artificial intelligence, and we’re active in all of these, both on the long and short side.
Q: Is climate change a hoax or a bubble?
A: If you think it’s a hoax, will you please come over to Incline Village and get the 12 feet of snow off my damn roof before the house collapses. I already can’t close any doors in the house because the weight of the snow is buckling the house and bending the door frames. If you finish the roof, then you can get to work on my deck which also has about 8 ft of snow and is at risk of collapsing, like many in town already have. This has never happened before. The climate has changed.
Q: How come there’s never mention of demographic shift in other parts of the world when there is in the US?
A: The US is the only country in the world where you can earn enough money to retire early. If you live on the coasts, you can sell your house for cash, move inland and never work again, no matter your age. There is no other country where you can do that. Maybe there will be in the future, but definitely not right now. People who complain about how awful the economy is here forget that this is the best economy in the world and has been so for a very long time. I go with the Warren Buffet outlook on this, which is “Never bet against America.”
Q: How about an Entry point for Freeport McMoRan (FCX)?
A: It’s lower. You don’t want to touch it while the entire commodity sector is selling off in fears of higher interest rates in a recession. Once that’s over it goes to $100.
Q: What is the best way to play Natural Gas?
A: I’ll send an extended report tomorrow, but the short answer is United States Natural Gas Fund (UNG) and ProShares Ultra Bloomberg Natural Gas (BOIL), which is a 2x long day trading NatGas ETF.
Q: Are we entering LEAPS territory for Rivian (RIVN)?
A: Yes, just wait for the current selloff to end and then go to the longest possible expiration. This thing will have a multiple move 2x, 3x, or a 10x out the other side of any recession. The CEO is brilliant and people love the cars.
Q: What happens to housing prices when interest rates on mortgages are at 7%?
A: Well, they should go down 10-20%. What they’re actually doing is going sideways, and they’re still going up in the cheaper neighborhoods because of the structural shortage of 10 million houses in the US. The all-cash buyers are still out there buying. There is tremendous inventory shortage in the housing market now; every broker I know got cleaned out of all their inventory in January when we had a brief 100 basis point dip in rates back then, which has since gone away. I think we go sideways in housing until the end of the year, and then big interest rate cuts will be obvious by then, and the market takes off and we have another 10-year bubble. If you think housing is expensive now, go visit Sydney Australia or Shanghai, China and you’ll see how expensive housing can really get.
Q: How how high would Fed funds have to get to cause a real recession?
A: My guess is 6%. We might actually get there in the second quarter. That might trigger enough of a recession to start unemployment rising just enough to let them cut interest rates. My attitude is: rip the Band-Aid off, raise by 75 basis points on March, and get it over with. But Jay Powell is a very gradualist type of guy, even though he’s brought the sharpest interest rate rise in history.
Q: Should I chase Apple (AAPL) here at $150 a share?
A: In this kind of market, you never chase anything. Only buy Apple at $150 if you think happy days are here again and you think we’re going up forever. To me on the chart it looks like we’re double topping and may actually get a lower low, which you then buy. You may even want to do a LEAPS on Apple if we get down into the $130s or $120s again.
Q: Isn’t it hard for the economy to really tank when seniors and savers are now generating income again for their retirement, giving them more income to spend?
A: Well not only that but workers have had 10-20% pay increases also, and they have more money to spend. It’s really hard to see a severe recession in any kind of scenario, barring another pandemic, and that’s why we’re saying buy the dips—we are in fact in a new bull market that started in October. When you get these market reversals, you often don’t get confirmation on the charts for up to a year, and we’re in one of those periods now. That's why there are still a lot of non-believers in the bull scenario and no confidence.
Q: Would you buy Tesla LEAPS?
A: Yes, under $150 on Tesla shares. And, given its record of volatility, we may actually get there, because this is a $1,000 stock easily in 5 years. I'll send you a report giving you all the details of why. Detroit is basically screwed, someday it’ll just be reduced to building Teslas under license from Tesla and painting them different colors and giving them different names or something like that.
Q: What’s a buy-on-dip?
A: Sorry, but no easy answer here. It’s unique to every stock depending on the historic volatility and ranges of the stock. It’s going to be 1% for a stock, it can be 10% for an option, it could be 20% for a stock like Tesla. It’s vague but it really is unique to every single stock. A good rule of thumb is that after you execute a trade and then throw up on your shoes you’ve just done a great trade.
Q: I see from your pictures that you lost weight? How do you do it?
A: I got COVID last May. I lost 20 pounds in two weeks because I couldn’t eat while I was sleeping 20 hours a day. I just woke up long enough to send out trade alerts. All of a sudden, a 40-year collection of expensive designer pants fit. My kids now call me Captain Fancy Pants. When I go through airport security now and take my belt off they fall down so I’m always careful to wear my best underwear, the ones with the dollar sing all over them.
Q: What’s the best way to play obesity drugs?
A: Unfortunately, There is no pure play on obesity drugs. It will be a $150 billion market that will grow very quickly. I will talk about it at length next week in the summit at the Biotech & Health Care webinar, which you’ll get registration links for tomorrow. Weight loss drugs are small pieces of very large drug companies, so the effect gets diluted by everything else they’re doing. The purest play may be Weight Watchers (WW). If you just need to go to Weight Watchers just to get a shot, that could be really good for them. The stock just doubled in one day on this.
Q: Commodity-based foreign stocks are the best bet on inflation protection; should I get involved?
A: Yes, use the current selloff to get into the whole commodity space (except for maybe food) because not only are they a commodity play, they’re a weak dollar play and that way you get a combined double leverage effect on prices, which I've seen happen many times in my life. So yes, look at foreign-type commodity stocks, and of course, the biggest one out there is Broken Hill Proprietary (BHP), which I always watch very closely. It’s the largest stock in Australia owned by virtually everybody in Australia who has any money, with great volatility, and which has recently just had a selloff.
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, or TECHNOLOGY LETTER, 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
2015 in Ouarzazate Morocco
Call this the Dr. Jekyll and Mr. Hyde market.
On the up days, we see the kindly ministrations of Dr. Jekyll.
On the down days, we suffer from the evil hand of Mr. Hyde.
To say that traders are confused would be an understatement. Many seasoned pros have told me that this is one of the most difficult markets they have ever seen.
Fridays have been particularly treacherous when weekly options expire. Some 56% of all options trading now takes place with expirations of five days or less. Trading before 4:00 PM sees billions of dollars of hot money trying to force closing prices just in or out of the money for key at-the-money strike prices.
What is especially disturbing is that some 80% of the gain in the S&P 500 (SPY) this year has been in just seven names, Meta, (META), Alphabet (GOOGL), Microsoft (MSFT), Apple (AAPL), Amazon (AMZN), Netflix (NFLX) and Tesla (TSLA). Most other stocks went nowhere….or down. That much concentration means that any rallies lack confidence and will fail….for now.
Remember these names because when we finally do get a real upside breakout, they will be the leaders. You can take that to the bank.
Thanks to turmoil in the House of Representatives intent on a national default, bonds have given up 70 of the 120-basis point drop in yields since October. That deprives us of one of our biggest money makers of 2022, our long bond trades.
That means were are also seeing the automatic flip side of the bond trade, a strong US Dollar (UUP), and weak precious metals, (GLD) and (SLV), and emerging markets (EEM).
This too shall end.
If it was excess liquidity that caused stocks to rocket for 13 years, then maybe we should be focusing on what little liquidity is left. That would be the font of government money pouring into infrastructure and alternative energy plays.
Some $370 billion I know available for investment in ESG, would most of it going into the battery industry for the burgeoning electric vehicle industry. Even foreign firms like Finland’s Neste is moving to the US to cash in on federal munificence, converting an old US oil refinery to produce diesel fuel out of animal and vegetable fat (click here for the link).
Probably the best bet here is in California-based Enphase Energy (ENPH), which makes a 40% gross profit margins on microinverters for solar panels and has just seen a 42% dive in its share price. That makes (ENPH) a BUY. Hint: solar stocks always follow the price of oil to which it is tied, which has lately been down.
Some nimble and aggressive trading managed to push me back in the green for February, taking me up +0.93% on the month. That’s a dramatic improvement of +5.48% from a week ago.
You might even call it making a silk purse from a sow’s ear.
My 2023 year-to-date performance is still at the top at +23.28%. The S&P 500 (SPY) is up +4.32% so far in 2023. My trailing one-year return maintains a sky-high +86.58% versus -12.97% for the S&P 500.
That brings my 15-year total return to +620.47%, some 2.78 times the S&P 500 (SPX) over the same period. My average annualized return has recovered to +46.83%, still the highest in the industry.
Last week, I piled on a Tesla (TSLA) March $155-$260 short strangle betting that the stock can stay within a $95 range for 19 trading days. I also added a deep in-the-money long in the bond market for the first time in six weeks. Both positions turned immediately profitable.
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!
Q4 GDP Dips, from 3.9% to 2.7% in the October-December quarter. Consumption took a dive, which is amazing over the holidays. This is nowhere near a recession.
Fed Minutes Show More Hikes to Come, with the emphasis on the plural. That could take the overnight borrowing rate to a 5.40% high. It certainly pees on the parade for the falling interest rates crowd.
The Tail is Wagging the Dog, with short, dated options, often same-day expiration dominating trading every Friday. Billions of dollars are battling around key strike prices attempting to force expirations in or out of the money. No place for the little guy. Better to take Fridays off.
Netflix Slashes Prices in 30 countries, taking the stock down a modest 3%. (NFLX) is still the leader in the sector with 231 million subscribers, followed by Amazon (200 million), Disney Plus (162 million, HBO Max (95 million, Peacock (18 million), and Hulu 47 million). Buy (NFLX) and (AMZN) on dips.
Individual 401k’s Lost 23% in 2022, according to a study from Fidelity. High inflation is shrinking the remaining purchasing power even faster. A rising number of workers are also borrowing against their 401k’s to make ends meet. Such loans can go up to 50% of the principal. Better start making up the losses or you’ll be spending your golden years working at Taco Bell.
Apple to Add Glucose Monitor on its Watches, to aid diabetic clients. Some 38 million Americans have diabetes and given the obesity epidemic that figure is certain to rise. It highlights Big Tech’s move into the low-hanging fruit in health care.
Existing Home Sales Dive 0.7% in January, to a 4 million annualized rate, the weakest since October 2010. That makes 12 consecutive months of falling sales. The Median Home Price sold rose to $359,000. An imminent national debt crisis and spiking interest rates is not a great environment in which to sell your home.
Biden Ukraine Visit Tanks Gas and Oil Prices, cutting Russia’s chances of a win and eventually leading to a flood of oil on the market. Biden’s visit is sending the message to Putin that there’s no chance of a win here. Energy is hitting two-year lows across the board. Only energy stocks are staying high. Energy is getting so cheap it might be worth a trade.
Germany Accelerates Move Towards Alternatives, permanently cutting all ties with Russia energy. Europe’s biggest economy, and the fourth largest in the world, hopes to get 80% of its electricity from solar and wind by 2030. Hydrogen is also entering the picture. Other countries will follow.
On Monday, February 27 at 8:30 AM EST, US Durable Goods are out.
On Tuesday, February 28 at 9:00 AM, the S&P Case Shiller National Home Price Index for December is released.
On Wednesday, March 1 at 10:00 AM, the ISM Manufacturing PMI is printed.
On Thursday, March 2 at 8:30 AM, the Weekly Jobless Claims are announced.
On Friday, March 3 at 8:30 AM, the ISM Non-Manufacturing PMI. At 2:00 the Baker Hughes Oil Rig Count is out.
As for me, I usually get a request to fund some charity about once a day. I ignore them because they usually enrich the fundraisers more than the potential beneficiaries. But one request seemed to hit all my soft spots at once.
Would I be interested in financing the refit of the USS Potomac (AG-25), Franklin Delano Roosevelt’s presidential yacht?
I had just sold my oil and gas business for an outrageous profit and had some free time on my hands so I said, “Hell Yes,” but only if I get to drive. The trick was to raise the necessary $5 million without it costing me any money.
To say that the Potomac had fallen on hard times was an understatement.
When Roosevelt entered the White House in 1932, he inherited the presidential yacht of Herbert Hoover, the USS Sequoia. But the Sequoia was entirely made of wood, which Roosevelt had a lifelong fear of. When he was a young child, he nearly perished when a wooden ship caught fire and sank, he was passed to a lifeboat by a devoted nanny.
Roosevelt settled on the 165-foot USS Electra, launched from the Manitowoc Shipyard in Wisconsin, whose lines he greatly admired. The government had ordered 34 of these cutters to fight rum runners across the Great Lakes during Prohibition. Deliveries began just as the ban on alcohol ended.
Some $60,000 was poured into the ship to bring it up to presidential standards and it was made wheelchair accessible with an elevator, which FDR operated himself with ropes. The ship became the “floating White House,” and numerous political deals were hammered out on its decks. Some noted guests included King George VI of England, Queen Elisabeth, and Winston Churchill.
During WWII Roosevelt hosted his weekly “fireside chats” on the ship’s short-wave radio. The concern was that the Germans would attempt to block transmissions if broadcast came from the White House.
After Roosevelt’s death, the Potamac was decommissioned and sold off by Harry Truman, who favored the much more substantial 243-foot USS Williamsburg. The Potamac became a Dept of Fisheries enforcement boat until 1960 and then was used as a ferry to Puerto Rico until 1962.
An attempt was made to sail it through the Panama Canal to the 1962 World’s Fair in Seattle, but it broke down on the way in Long Beach, CA. In 1964 Elvis Presley bought the Potomac so it could be auctioned off to raise money for St. Jude Children’s Research Hospital. It sold for $65,000. It then disappeared from maritime registration in 1970. At one point there was an attempt to turn it into a floating disco.
In 1980 a US Coast Guard cutter spotted a suspicious radar return 20 miles off the coast of San Francisco. It turned out to be the Potomac loaded to the gunnels with bales of illicit marijuana from Mexico. The Coast Guard seized the ship and towed it to the Treasure Island naval base under the Bay Bridge. By now the 50-year-old ship was leaking badly. The marijuana bales soaked up the seawater and the ship became so heavy it sank at its moorings.
Then a long rescue effort began. Not wanting to get blamed for the sinking of a presidential yacht on its watch the Navy raised the Potomac at its own expense, about $10 million, putting its heavy lift crane to use. It was then sold to the City of Oakland, Ca for a paltry $15,000.
The troubled ship was placed on a barge and floated upriver to Stockton, CA, which had a large but underutilized unionized maritime repair business. The government subsidies started raining down from the skies and a down-to-the-rivets restoration began. Two rebuilt WWII tugboat engines replaced the old, exhausted ones. A nationwide search was launched to recover artifacts from FDR’s time on the ship. The Potomac returned to the seas in 1993.
I came on the scene in 2007 when the ship was due for a second refit. The foundation that now owned the ship needed $5 million. So, I did a deal with National Public Radio for free advertising in exchange for a few hundred dinner cruise tickets. NPR then held a contest to auction off tickets and kept the cash (what was the name of FDR’s dog? Fala!).
I also negotiated landing rights at the Pier One San Francisco Ferry Terminal, which involved negotiating with a half dozen unions, unheard of in San Francisco maritime circles. Every cruise sold out over two years, selling 2,500 tickets. To keep everyone well-lubricated I became the largest Bay Area buyer of wine for those years. I still have a free T-shirt from every winery in Napa Valley.
It turned out to be the most successful fundraiser in the history of NPR and the Potomac. We easily got the $5 million and then some. The ship received a new coat of white paint, new rigging, modern navigation gear, and more period artifacts. I obtained my captain’s license and learned how to command a former coast guard cutter.
It was a win-win-win.
I was trained by a retired US Navy nuclear submarine commander, who was a real expert at navigating a now thin-hulled 73-year-old ship in San Francisco’s crowded bay waters. We were only licensed to cruise up to the Golden Gate bridge and not beyond, as the ship was so old.
The inaugural cruise was the social event of the year in San Francisco with everyone wearing period Depression-era dress. It was attended by FDR’s grandson, James Roosevelt III, a Bay area attorney who was a dead ringer for his grandfather. I mercilessly grilled him for unpublished historical anecdotes. A handful of still-living Roosevelt cabinet members also came, as well as many WWII veterans.
As we approached the Golden Gate Bridge, some poor soul jumped off and the Coast Guard asked us to perform search and rescue until they could get a ship on station. No body was ever found. It certainly made for an eventful first cruise.
Of the original 34 cutters constructed only four remain. The other three make up the Circle Line tour boats that sail around Manhattan several times a day.
Last summer I boarded the Potomac for the first time in 14 years for a pleasant afternoon cruise with some guests from Australia. Some of the older crew recognized me and saluted. In the cabin, I noticed a brass urn oddly out of place. It contained the ashes of the sub-commander who had trained me all those years ago.
Good Luck and Good Trading,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Captain Thomas at the Helm
Global Market Comments
February 14, 2023
Fiat Lux
Featured Trade:
(WHERE THE ECONOMIST “BIG MAC” INDEX FINDS CURRENCY VALUE TODAY),
(UUP), (FXE), (FXY), (CYB)
CLICK HERE to download today's position sheet.
My former employer, The Economist, once the ever-tolerant editor of my flabby, disjointed, and juvenile prose (Thanks to Peter Martin and Marjorie Deane!), has just released its "Big Mac" index of relative international currency valuations.
Although initially launched as a joke five decades ago, I have followed it religiously and found it an amazingly accurate predictor of future economic success.
The index counts the cost of McDonald's (MCD) premium two beef patty sandwiches around the world, ranging from $8.35 in Venezuela to $1.68 in Lebanon, and comes up with a measure of currency under and overvaluation.
What are its conclusions today?
The Venezuelan Bolivar is wildly expensive, with 235 years of annual per capita income needed to buy a single Big Mac in local currency terms if you can find one. There are currently 4 million Bolivars to the US Dollar in this sadly bankrupt country.
The Norwegian Kroner, Swiss franc (FXF), and the US Dollar (UUP) are also dear, with the average cost of an American Big Mac at $5.35. Every year I make a ritual visit to what is often the most expensive McDonald’s in the world at Zermatt Switzerland (see pictures below). There the Big Macs taste slightly acidic.
The cheapest currencies are the South African Rand, the Russian Ruble, and the Lebanese Pound, a Big Mac coming in at $1.68 in Beirut.
I couldn't agree more with many of these conclusions. It's as if the august weekly publication was tapping The Diary of a Mad Hedge Fund Trader for ideas.
I am no longer the frequent consumer of Big Macs that I once was, as my metabolism has slowed to such an extent that in eating one, you might as well tape it to my ass. Better to use it as an economic forecasting tool than a speedy lunch.
The Big Mac is a Steal Here in Turkey
No Bargain Here in Italy Either
And Costs a King’s Ransome Here in Zermatt