Global Market Comments
November 2, 2023
Fiat Lux
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Circulating among the country’s top global strategists this year, visiting their corner offices, camping out in their vacation villas, or cruising on their yachts, I am increasingly hearing about a new investment theme that will lead markets for the next 20 years:
The Second American Industrial Revolution.
It goes something like this.
You remember the first Industrial Revolution, don’t you? I remember it like it was yesterday.
It started in 1775 when a Scottish instrument maker named James Watt invented the modern steam engine. Originally employed for pumping water out of a deep Shropshire coalmine, within 32 years it was powering Robert Fulton’s first commercially successful steamship, the Clermont, up the Hudson River.
The first Industrial Revolution enabled a massive increase in standards of living, kept inflation near zero for a century, and allowed the planet’s population to soar from 1 billion to 7 billion. We are still reaping its immeasurable benefits.
The Second Industrial Revolution is centered on my own neighborhood of San Francisco. It seems like almost every garage in the city is now devoted to a start-up.
The cars have been flushed out onto the streets, making urban parking here a total nightmare. These are turbocharging the rate of technological advancement.
Successes go public rapidly and rake in billions of dollars for the founders overnight. Thirty-year-old billionaires wearing hoodies are becoming commonplace.
However, unlike with past winners, these newly minted titans of industry don’t lock their wealth up in mega mansions, private jets, or the Treasury bond market. They buy a Tesla Plaid for $150,000 with a great sound system and full street-to-street auto-pilot (TSLA), and then reinvest the rest of their windfall in a dozen other startups, seeking to repeat a winning formula.
Many do it.
Thus, the amount of capital available for new ideas is growing by leaps and bounds. As a result, the economy will benefit from the creation of more new technology in the next ten years than it has seen in the past 200.
Computing power is doubling every year. That means your iPhone will have a billion times more computing power in a decade. 3D printing is jumping from the hobby world into large-scale manufacturing. In fact, Elon Musk’s Space X is already making rocket engine parts on such machines.
Drones came out of nowhere and are now popping up everywhere.
It is not just new things that are being invented. Fantastic new ways to analyze and store data, known as “big data” are being created.
Unheard new means of social organization are appearing at breakneck, leading to a sharing economy. Much of the new economy is not about invention, but organization.
The Uber ride-sharing service created $50 billion in market capitalization in only five years and is poised to replace UPS, FedEx, and the US Postal Service with “same hour” intracity deliveries. Now they are offering “Uber Eats” in my neighborhood, which will deliver you anything you want to eat, hot, in ten minutes!
Airbnb is arranging accommodation for 1 million guests a month. They even had 189 German guests staying with Brazilians during the World Cup there. I bet those were interesting living rooms on the final day! (Germany won).
And you are going to spend a lot of Saturday nights at home, alone if you haven’t heard of Match.com, eHarmony.com, or Badoo.com.
“WOW” is becoming the most spoken word in the English language. I hear myself saying I every day.
Biotechnology (IBB), an also-ran for the past half-century, is sprinting to make up for lost time. The field has grown from a dozen scientists in my day 40 years ago, to several hundred thousand today.
The payoff will be the cure for every major disease, like cancer, Parkinson’s, heart disease, AIDS, and diabetes, within ten years. Some of the harder cases, such as arthritis, may take a little longer. Soon, we will be able to manipulate our own DNA, turning genes on and off at will. The weight loss drugs Wegovy and Ozempic promise to eliminate 75% of all self-inflicted illnesses.
The upshot will be the creation of a massive global market for these cures, generating immense profits. American firms will dominate this area, as well.
Energy is the third leg of the innovation powerhouse. Into this basket, you can throw in solar, wind, batteries, biodiesel, and even “new” nuclear (see NuScale (SMR)). The new Tesla Powerwall will be a game changer. Visionary, Elon Musk, is ramping up to make tens of millions of these things.
Use of existing carbon-based fuel sources, such as oil and natural gas, will become vastly more efficient. Fracking is unleashing unlimited new domestic supplies.
Welcome to “Saudi America.”
The government has ordered Detroit to boost vehicle mileage to an average of 55 miles per gallon by 2030. The big firms have all told me they plan to beat that deadline, not litigate it, a complete reversal of philosophy.
Coal will be burned in impoverished emerging markets only, before it disappears completely. Energy costs will drop to a fraction of today’s levels, further boosting corporate profits.
Coal will die, not because of some environmental panacea, but because it is too expensive to rip out of the ground and transport around the world, once you fully account for all its costs.
Years ago, I used to get two pitches for venture capital investments a quarter, if any. Now, I am getting two a day. I can understand only half of them (those that deal with energy and biotech, and some tech).
My friends at Google Venture Capital are getting inundated with 20 a day each! How they keep all of these stories straight is beyond me. I guess that’s why they work for Google (GOOGL).
The rate of change for technology, our economy, and for the financial markets will accelerate to more than exponential. It took 32 years to make the leap from steam engine-powered pumps to ships and was a result of a chance transatlantic trip by Robert Fulton to England, where he stumbled across a huffing and puffing steam engine.
Such a generational change is likely to occur in 32 minutes in today’s hyper-connected world, and much shorter if you work on antivirus software (or write the viruses themselves!). And don’t get me started on AI!
The demographic outlook is about to dramatically improve, flipping from a headwind to a tailwind in 2022. That’s when the population starts producing more big spending Gen Xers and fewer over-saving and underproducing baby boomers. This alone should be at least 1% a year to GDP growth.
China is disappearing as a drag on the US economy. During the nineties and the naughts, they probably sucked 25 million jobs out of the US.
With an “onshoring” trend now in full swing, the jobs ledger has swung in America’s favor. This is one reason that unemployment is steadily falling. Joblessness is becoming China’s problem, not ours.
The consequences for the financial markets will be nothing less than mind-boggling. The short answer is higher for everything. Skyrocketing earnings take equity markets to the moon. Multiples blast off through the top end of historic ranges. The US returns to a steady 5% a year GDP growth, which it clocked in the recent quarter.
What am I bid for the Dow Average (INDU), (SPY), (QQQ) in ten years? Did I hear 240,000, a seven-fold pop from today’s level? Or more?
Don’t think I have been smoking the local agricultural products from California in arriving at these numbers. That is only half the gain that I saw from 1982 to 2000, when the stock average also appreciated 17-fold, from 600 to 10,000.
They’re playing the same movie all over again. Except this time, it’s on triple fast forward.
There will also be commodities (DBA) and real estate booms. Even gold (GLD) gets bid up by emerging central banks bent in increasing their holdings to Western levels as well as falling interest rates.
I tell my kids to save their money, not to fritter it away day trading now because anything they buy in 2020 will increase in value tenfold by 2033. They’ll all look like geniuses like I did during the eighties.
What are my strategist friends doing about this forecast? They are throwing money into US stocks with both bands, especially in technology (XLK), biotech (IBB), and bonds (JNK).
This could go on for decades.
Just thought you’d like to know.
It’s Amazing What You Pick Up on These Things!
Global Market Comments
September 18, 2023
Fiat Lux
Featured Trade:
(I’M TAKING OFF FOR UKRAINE TODAY AND I NEED YOUR HELP)
(MARKET OUTLOOK FOR THE WEEK AHEAD)
(XLK), (TSLA), (GM), (F)
I’m not so worried that the market won’t go up. It really bothers me that stocks are unable to go down.
That means you don’t get a flush out of positions that generates the cash needed to finance the next leg up in the bull market.
Usually, that happens in the fall because historically that’s when farmers are at maximum distress, when they have run out of cash after paying for seed, fertilizer, and labor all year long but have yet to be paid for their harvest.
This was a big deal in 1900 when farming accounted for 50% of the economy. With farming now at 2% it’s not such a big deal, but once cyclicality in the market is established, it lives on forever.
With the Fed, traders, and investors fixated on inflation, you usually get a big reaction in the monthly release of the Consumer Price Index. This time, we got nada, nothing, bupkiss, even though the 0.6% rise in inflation should have triggered a meaningful market selloff.
You know it’s a pretty dead week when the lead news item is about a union that has been going out of business for 40 years. That’s because all the growth in the country during this period has been in nonunion industries, namely in technology (XLK) and at Tesla (TSLA). Notice that nonunion (TSLA) was up 10% this week, the big winner in the strike. Elon Musk has fought unionization tooth and nail for 20 years and is now coming up roses.
As a result, UAW membership plunged from 1.4 million in 1978 to 400,000, a decline of some 71.4%. The union now has more retirees than workers. That’s a lot of dead weight to carry.
One effect of this decline has been a fall in real wages during the same 45 years. What the UAW is attempting in their demands is to make up for the entire 45 years of real wage losses in one shot with a whopping great 40% increase over five years, a 32-hour work week, and better medical benefits.
It isn’t going to work.
When I picked up my first Tesla Model S some 14 years ago, I was given a tour of the factory. I was blown away by what I saw. There were no people!
I literally saw a vast factory floor of machines making machines. Occasionally, someone passed me by on a bicycle on their way to change a tool on a robot or lubricate a joint. EVs have 80% fewer parts than internal combustion vehicles and therefore require 80% fewer workers.
This is what caused me to immediately plunge into Tesla stock at a split-adjusted $2.45 a share and take my readers there as well.
One is reminded of the Luddite movement in England in 1812 when workers destroyed machines to avoid work. It was an effort to protect home spinning wheels which had until then produced the world’s cotton fabric. After an armed rebellion was put down, the machines eventually reduced the cost of cotton cloth 100-fold and launched the Industrial Revolution.
Some 200 years ago, most people could only afford one set of clothes. Now they have dozens, or hundreds if they have daughters (I have three).
Hint to the UAW: Destroying General Motors (GM), Ford (F), and Stellantis (the old Chrysler) isn’t going to get you a better job.
It's not that I am anti-union. After all, my grandfather was in the Teamsters Union during the great depression at the height of union power. It’s just that this strike is particularly stupid, grasping, and overreaching.
If you want to learn more about the Luddite movement, please click here for the history.
When the market does come out of its coma, there is no doubt where the big money is headed.
The Arm Holdings IPO (ARM) was some six times oversubscribed and it rose 25% from its initial $51 pricing on the first day as institutions rushed to top up meager allocations. The word is out. Stay underweight AI chip design companies at your peril….at whatever the price. At $69, (ARM) sports a positively bubblicious price-earnings multiple of 100X.
Sometimes, the greatest trades are those sitting right in front of our noses begging for attention. That would be the Japanese yen, which has been in free fall for three years.
If the Bank of Japan ends its zero-interest rate policy, the last in country the world to have one, the Japanese yen will rocket, and the Nikkei average will crash. With Japan’s inflation rate now at a 40-year high at 3.30% how far away can that be?
It might be setting up the long of the year in the foreign exchange market. You would think that is a certainty after a 33% drop in recent years. Maybe this is why the Nikkei has been in the doldrums since June.
So far in September, we are down unchanged, with no trade alerts issued. Patience is the name of the game here. My 2023 year-to-date performance is still at an eye-popping +60.80%. The S&P 500 (SPY) is up +16.57% so far in 2023. My trailing one-year return reached +83.85% versus +20.47% for the S&P 500.
That brings my 15-year total return to +657.99%. My average annualized return has fallen back to +47.85%, some 2.47 times the S&P 500 over the same period.
Some 41 of my 46 trades this year have been profitable.
Consumer Price Index Rises 0.6% in August, the hottest read in 18 months, but in line with expectations. Energy was the main cause, which is up 40% from its May low. The Core and Inflation Rate was up only 0.3%. Stocks and bonds barely reacted. A huge increase in auto insurance was another factor, no doubt the result of the multiple climate disasters taking place across the country.
Arm Holdings Jumps 25% on First Day of Trading. Masayoshi Sohn is happy because he still owns the remaining 90% of the company. This is where the hot money is going, and it pulled the rest of tech up as well.
EV Sales Soared by 70% in California in August, and the rest of the country is likely to follow. The coming Cybertruck release will add fuel to the fire. EV is going mainstream. China, the US, and Germany lead in global EV sales. California would be fourth if it were broken out as a separate country at 109,069 units in Q2.
US Jobless Claims Fall Again to 220,000, a drop of 5,000. The US economy is reigniting again.
Gold and Bonds are Bottoming, or so says a UK hedge fund. Distress selling off the UK’s selling of gold market the low for both bonds and the yellow metal back in 1999-2002. We could be seeing a repeat today. I think they’re right.
Morgan Stanley Upgrades Tesla, off the back of its massive AI business, which could add $600 billion in value to the company. (MS) had previously been bearish on Tesla, so (TSLA) rose 6%. (Tesla has long been the largest user of AI with a fleet of 5 million AI-driven EVs. Why was (MS) so slow to figure this out? Buy (TSLA) on dips.
Hydrogen is Going Nowhere, and the stocks are a great short, says the Argonaut hedge fund. While electric power is infinitely scalable, hydrogen demands the same inefficient infrastructure as does gasoline. Saudi Arabia has a massive advantage in that it has an unlimited supply of other energy form to convert oil into hydrogen, and solar power.
Apple is Still a Hold, for the long term and a “BUY” on any 10% correction. It is now basically an India play, as that is where future growth lies. China is peaking out. The titanium finish for the new iPhone 15 looks cool. There is a USB-C charging cable in your future to bring it in compliance with EC rules. The camera goes from a 2X to a 5X zoom. The new Special Video is a killer app. There is also a major increase in the use of artificial intelligence.
Space X is Moving into the Cargo Business, shipping goods from New York to Australia in 35 minutes. That’s what is possible for high value-added freight with rockets that can reliably take off and land. The move should take the value of Space X from the present $150 billion to $500 billion. So thinks my friend Ron Baron of the Baron Funds, and early Tesla investor. He also thinks Tesla will soar from $857 billion today to $5 trillion in five years, making it the most valuable company in the world by far. I couldn’t agree more.
Caesars Entertainment Suffers Major Hack, paying a ransom thought to be in the millions of dollars. The crooks threatened to leak the casino’s entire customer list to the dark web, including mine. A serious hack can wipe out a company, as happened to Sony a decade ago. 1234 no longer works as a password. Buy Palo Alto Networks (PANW).
My Ten-Year View
When we come out the other side of the recession, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. The economy decarbonizing and technology hyper accelerating, creating enormous investment opportunities. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The new America will be far more efficient and profitable than the old.
Dow 240,000 here we come!
On Monday, September 18, the NAHB Housing Market Index is out.
On Tuesday, September 19 at 8:30 PM EST, US Building Permits are released.
On Wednesday, September 20 at 2:00 PM EST, the Federal Reserve released its interest rate decision. A press conference follows.
On Thursday, September 21 at 8:30 AM EST, the Weekly Jobless Claims are announced. We also get Existing Homes Sales.
On Friday, September 22 at 6:45 AM the NS&P Global Composite Flash PMI for August is published. At 2:00 PM the Baker Hughes Rig Count is printed.
As for me, having visited and lived in Lake Tahoe for most of my life, I thought I’d pass on a few stories from this historic and beautiful place.
The lake didn’t get its name until 1949 when the Washoe Indian name was bastardized to come up with “Tahoe”. Before that it was called the much less romantic Lake Bigler after the first governor of California.
A young Mark Twain walked here in 1863 from nearby Virginia City where he was writing for the Territorial Enterprise about the silver boom. He described boats as “floating in the air” as the water clarity at 100 feet made them appear to be levitating. Today, clarity is at 50 feet, but it should go back to 100 feet when cars go all-electric.
One of the great engineering feats of the 19th century was the construction of the Transcontinental Railroad. Some 10,000 Chinese workers used black powder to blast a one-mile-long tunnel through solid granite. They tried nitroglycerine for a few months but so many died in accidents they went back to powder.
The Union Pacific moved the line a mile south in the 1950s to make a shorter route. The old tunnel is still there, and you can drive through it at any time if you know the secret entrance. The roof is still covered with soot from woodfired steam engines. At midpoint, you find a shaft to the surface where workers were hung from their ankles with ropes to place charges so they could work on four faces at once.
By the late 19th century, every tree around the lake had been cut down for shoring at the silver mines. Look at photos from the time and the mountains are completely barren. That is except for the southwest corner, which was privately owned by Lucky Baldwin who won the land in a card game. The 300-year-old growth pine trees are still there.
During the 20th century, the entire East Shore was owned by one man, George Whittell Jr., son of one of the original silver barons. A man of eclectic tastes, he owned a Boing 247 private aircraft, a custom mahogany boat powered by two Alison aircraft engines, and kept lions in heated cages.
Thanks to a few well-placed campaign donations, he obtained prison labor from the State of Nevada to build a palatial granite waterfront mansion called Thunderbird, which you can still visit today (click here at https://thunderbirdtahoe.org ). During Prohibition, female “guests” from California crossed the lake and entered the home through a secret tunnel.
When Whittell died in 1969, a Mad Hedge Concierge Client bought the entire East Shore from the estate on behalf of the Fred Harvey Company and then traded it for a huge chunk of land in Arizona. Today the East Shore is a Nevada State Park, including the majestic Sand Harbor, the finest beach in the High Sierras.
When a Hollywood scriptwriter took a Tahoe vacation in the early 1960’s, he so fell in love with the place that he wrote Bonanza, the top TV show of the decade (in front of Hogan’s Heroes). He created the fictional Ponderosa Ranch, which tourists from Europe come to look for in Incline Village today.
In 1943, a Pan Am pilot named Wayne Poulson who had a love of skiing bought Squaw Valley for $35,000. This was back when it took two days to drive from San Francisco. Wayne flew the China Clippers to Asia in the famed Sikorski flying boats, the first commercial planes to cross the Pacific Ocean. He spent time between flights at a ranch house he built right in the middle of the valley.
His wife Sandy bought baskets from the Washoe Indians who still lived on the land to keep them from starving during the Great Depression. The Poulson’s had eight children and today, each has a street named after them at Squaw.
Not much happened until the late forties when a New York Investor group led by Alex Cushing started building lifts. Through some miracle, and with backing from the Rockefeller family, Cushing won the competition to host the 1960 Winter Olympics, beating out the legendary Innsbruck, Austria, and St. Moritz, Switzerland.
He quickly got the State of California to build Interstate 80, which shortened the trip to Tahoe to only three hours. He also got the state to pass a liability limit for ski accidents to only $2,000, something I learned when my kids plowed into someone, and the money really poured in.
Attending the 1960 Olympic opening ceremony is still one of my fondest childhood memories, produced by Walt Disney, who owned the nearby Sugar Bowl ski resort.
While the Cushing group had bought the rights to the mountains, Poulson owned the valley floor, and he made a fortune as a vacation home developer. The inevitable disputes arose and the two quit talking in the 1980’s.
I used to run into a crusty old Cushing at High Camp now and then and I milked him for local history in exchange for stock tips and a few stiff drinks. Cushing died in 2003 at 92 (click here for the obituary at https://www.nytimes.com/2006/08/22/obituaries/22cushing.html )
I first came to Lake Tahoe in the 1950s with my grandfather who had two horses, a mule, and a Winchester. He was one-quarter Cherokee Indian and knew everything there was to know about the outdoors. Although I am only one-sixteenth Cherokee with some Delaware and Sioux mixed in, I got the full Indian dose. Thanks to him I can live off the land when I need to. Even today, we invite the family medicine man to important events, like births, weddings, and funerals.
We camped on the beach at Incline Beach before the town was built and the Weyerhaeuser lumber mill was still operating. We caught our limit of trout every day, ten back in those days, ate some, and put the rest on ice. It was paradise.
During the late 1990’s when I built a home in Squaw Valley I frequently flew with Glen Poulson, who owned a vintage 1947 Cessna 150 tailwheel, looking for untouched high-country lakes to fish. He said his mother was lonely since her husband died in 1995 and asked me to have tea with her and tell her some stories.
Sandy told me that in the seventies she asked her kids to clean out the barn and they tossed hundreds of old Washoe baskets. Today Washoe baskets are very rare, highly sought after by wealthy collectors, and sell for $50,000 to $100,000 at auction. “If I had only known,” she sighed. Sandy passed away in 2006 and the remaining 30-acre ranch was sold for $15 million.
To stay in shape, I used to pack up my skis and boots and snowshoe up the 2,000 feet from the Squaw Valley parking lot to High Camp, then ski down. On the way up I provided first aid to injured skiers and made regular calls to the ski patrol.
After doing this for many winters, I finally got busted when they realized I didn’t have a ski pass. It turns out that when you buy a lift ticket you are agreeing to a liability release which they absolutely had to have. I was banned from the mountain.
Today Squaw Valley is owned by the Colorado-based Altera Mountain Company, which along with Vail Resorts own most of the ski resorts in North America. The concentration has been relentless. Last year Squaw Valley’s name was changed to the Palisades Resort for the sake of political correctness. Last weekend, a gondola connected it with Alpine Meadows next door, creating the largest ski area in the US.
Today there are no Washoe Indians left on the lake. The nearest reservation is 25 miles away in the desert in Gardnerville, NV. They sold or traded away their land for pennies on the current value.
Living at Tahoe has been great, and I get up here whenever I can. I am now one of the few surviving original mountain men and volunteer for North Tahoe Search & Rescue.
On Donner Day, every October 1, I volunteer as a docent to guide visitors up the original trail over Donner Pass. Some 175 years later the oldest trees still bear the scars of being scrapped by passing covered wagon wheels, my own ancestors among them. There is also a wealth of ancient petroglyphs, as the pass was a major meeting place between Indian tribes in ancient times.
The good news is that residents aged 70 or more get free season ski passes at Diamond Peak, where I sponsored the ski team for several years. My will specifies that my ashes be placed in the Middle of Lake Tahoe. At least I’ll be recycled. I’ll be joining my younger brother who was an early Covid-19 victim and whose ashes we placed there in 2020.
Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
The Ponderosa Ranch
The Poulson Ranch
Donner Pass Petroglyphs
An Original Mountain Man
Global Market Comments
June 7, 2022
Fiat Lux
Featured Trade:
(THE SECOND AMERICAN INDUSTRIAL REVOLUTION),
(INDU), (SPY), (QQQ), (GLD), (DBA),
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Global Market Comments
August 9, 2019
Fiat Lux
Featured Trade:
(AUGUST 7 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPY), (XLK), (GLD), (DIS), (TLT),
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Below please find subscribers’ Q&A for the Mad Hedge Fund Trader August 7 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: Are we headed for a worldwide depression with today’s crash and interest rates?
A: No, I think the interest rates are more of an anomaly unique to the bond market. There is a global cash glut all around the world and all that money is pouring into bonds—not for any kind of return, but as a parking place to avoid the next recession. The economic data is actually stronger than usual for pre-recession indicators. US interest rates going to zero is just a matter of coming in line with the rest of the world. Three to six months from now we may get our final bear market and recession indicators.
Q: Do you think the market has more downside?
A: Yes; if the 200-day moving average for the (SPY) doesn’t hold, then you’re really looking at a potential 20% correction, not the 8% correction we have seen so far.
Q: Which sector would you focus on for any dips?
A: Technology (XLK). If they lead the downturn, they’re going to lead the upturn too. It’s the only place where you have consistent earnings growth going out many years. You’re really all looking for an opportunity to go back into Tech, but the answer is a firm not yet.
Q: Would you buy gold (GLD), even up here?
A: Only if you can take some pain. We’re way overdue for a correction on essentially everything—stocks, bonds, gold, commodities—and when we get it, you can get a real snapback on all these prices. The time to enter gold trade was really a month ago before we took off, and I’ve been bullish on gold all year. So, I think you kind of missed the entry point for gold just like you missed the entry point for shorts on the stock market last week. You only want to be selling decent rallies now. You don’t want to be selling into a hole that makes the risk/reward no good.
Q: What can you say about the (FXA) (the Australian dollar)?
A: It’s holding up surprisingly well given the carnage seen in the rest of the financial markets. I want to stand aside until we get some stability, at which point I think (FXA) will pop up back to the $71 level. New Zealand cutting their rates by 50 basis points really came out of the blue and could eventually feed into a weaker Aussie.
Q: Do you think China (FXI) has no reason to make a trade deal until the US elections?
A: Absolutely not; and this puts a spotlight on the administration’s total inexperience in dealing with China. I could have told you on day one: there’s no way they’re going to settle. Pride is a major factor in China. They have long memories of the opium wars and all the abuses they received at the hands of the western powers and are highly sensitive to any kind of foreign abuse. If you want to get the opposite of a settlement, do exactly what Trump is doing. The administration’s policy has no chance of accomplishing anything. He’s willing to take a lot more pain in the stock market until he gets a deal and that’s bad for all of us.
Q: How does the extra 10% tariff affect the market?
A: Think of everything you’re buying for Christmas; the price goes up 10%. That’s the effect, and it completely wipes out any earnings the retail industry might have had. It’s only bad. We are suffering less harm than China in the trade war, but we are suffering, nonetheless.
Q: Do you think volatility will spike soon?
A: It may very well have already spiked. I don’t think we’ll get a spike as high as in past selloffs because there’s a big short volatility industry that has come back. Any moves more than $30, you have short sellers come in there very quickly to hammer things back down. Also (VIX) isn’t necessarily something you want to be buying after the stock market has already dropped 8%. That train has left the station.
Q: Would a weaker dollar benefit the US economy?
A: Yes; it makes our exports cheaper on the global market. However, if the rest of the world is weakening their currencies as well, it will have no effect. Also, the last time this kind of currency war was attempted was in the early 1930s, and the outcome was the Great Depression.
Q: Defensive stocks—the China story is getting uglier?
A: In this kind of market, I’ve never been a big fan of defensive stocks like utilities or healthcare because defensive stocks go down in bear markets, just at a slower rate than growth stocks because they never went up in the first place. The best defensive stock is cash.
Q: If US interest rates are going to zero, how about buying leaps on (TLT)?
A: Multi-year highs is just not leap buying territory. Multiyear lows are where you buy LEAPS, which are Long Term Equity Participation Certificates. They are basically long-dated 1-2-year call options on stocks that are rising over the long term. The better trade—when we get to zero interest rates and it becomes impossible for rates to go any lower—would be to do a reverse leap. If (TLT) goes up to $200, I would do something like a $150-$160 on the put side betting that sometime over the next 2 years, interest rates go back up again and bonds go down. Too late for LEAPS on bonds, too early for LEAPS on equities.
Q: Do you buy out of the money LEAPS?
A: Yes; that is where you get the triple-digit returns. For example, you can buy the Walt Disney (DIS) June 2021 $150-$160 vertical bull call spread today for $3.30. If we close over $160 by then the spread will be worth $10, up 203% from your cost. And you only need a rise of 25% from here to get that return. This is why I love LEAPS, but only at medium term market bottoms.
Q: Is crude oil (USO) going to $25 on a barrel global slowdown fears?
A: I think you need an actual recession to go down to $25; in the current environment, $42 is a nice target. The basic problem is global structural oversupply and falling demand, which is a classically unfortunate combination for prices.
Q: When will interest rates go to zero?
A: Sooner than later, I would say. My original guess was sometime next year but at the rate we’re going, we could be there by the end of the year.
Q: Would you get involved in natural gas (UNG)?
A: Absolutely not; this is the high season for natural gas right now when summer air conditioner use creates peak demand. It certainly has been hot this summer, especially on a global basis, and if you can’t rally natural gas in this environment you never will. There is also a huge contango in (UNG) which most people can’t beat.
Global Market Comments
November 30, 2018
Fiat Lux
Featured Trade:
(NOVEMBER 28 BIWEEKLY STRATEGY WEBINAR Q&A),
(VXX), (VIX), (GE), (ROKU), (AAPL),
(MSFT), (SQ), (XLK), (SPLS), (EWZ), (EEM)
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader November 28 Global Strategy Webinar with my guest and co-host Bill Davis of the Mad Day Trader.
Q: Is it time to get out of semiconductor stocks?
A: The time to get out is before it drops 60%, not afterwards. So, if you have semiconductor stocks, I would look for the next major rally to get out. I think we will get one of those rallies into December/January. We went negative on this sector in June, took all our profits, and didn’t go back in until last week.
Q: Is it time to buy semiconductor stocks?
A: No, that is the group you want to buy at the absolute bottom of the next recession which might be next year sometime. They lead on the downside, and they will lead on the upside as soon as they sniff a recovery in the economy.
Q: I held on to my position in Square (SQ). Should I sell now for a small profit?
A: Yes, in recessions, big companies prosper much more than small companies like Square; that’s why it had such a tremendous selloff; down 55% in six weeks. A small technology stock is not what you want to own in a recession. Big companies slow down, small ones die. At least that’s how conservative investors see it.
Q: What do you make of Fed comments this morning that asset prices are high?
A: I agree with them. They were certainly overpriced with a P/E multiple of 20 that we saw in September; they’re moderately priced now with a P/E multiple of 14.9. I think real estate markets are the overpriced assets that the Fed is talking about though, far more than the stock market, and markets like San Francisco, Seattle, and Vancouver are still way too high.
Q: What are your comments on Apple (AAPL)?
A: There’s an interesting thing going on here; you’ve just had a massive move out of hardware stocks like Apple, which basically makes phones and computers, into software stocks like Microsoft (MSFT), which is growing their cloud business like crazy. You may see this as a long-term industry trend, out of hardware stocks into software stocks. It’s all about the cloud now. The future is in software and that is where Apple is going to with services like the cloud, iTunes, streaming, and advertising, although they are doing it slowly.
Q: Will Trump be able to persuade Fed Chair Powell to stop hiking interest rates?
A: He will not, Powell is one of the few principled people in the government. He’s going to stick to his discipline, only look at the data, and that is going to require him to keep raising interest rates. One of the big black swans for 2019 may be that Trump fires Powell and gets a friendly rent-a-Fed chair in there who lowers interest rates on command. If Trump can hold on for nine months though, even Powell will see the economy’s in trouble and will have to respond accordingly by capping or even lowering interest rates.
Q: Why are you not stopping out of Roku (ROKU)?
A: We haven't yet approached our upper strike price on the December $30-$35 vertical bull call spread. That’s usually where I bail out; I like to give stocks plenty of room to do the right thing. Stocks have to breathe and I pick strike prices to compensate for that. Otherwise, you’d be stopping out of every trade immediately.
Q: Should we close the iPath S&P 500 VIX Short Term Futures ETN (VXX) trade or leave it open?
A: I’m looking for a bit more of a rally in stocks and a drop in the Volatility Index (VIX); then we’ll try to grab whatever additional couple of pennies we can get out of that.
Q: What do you think of Brazil (EWZ)?
A: Avoid emerging markets (EEM) as long as the U.S. is raising interest rates and the dollar is strong. Rising dollar means rising debt for emerging markets and less ability to service that debt, all bad for business.
Q: Morgan Stanley (MS) says “buy emerging markets”; are they nuts?
A: For the short term yes, for the multi-year long term they are a screaming buy. They are at historical lows in terms of valuation and already have a recession priced into them. But jumping in too soon could be painful.
Q: What are your expectations for the yield curve?
A: I expect all levels of the fixed income market to drop in price and rise in yield with the sharpest move in overnight rates. This eventually leads to a very steep inverted yield curve which causes recessions and bear markets.
Q: Thoughts on Master Limited Partnerships?
A: They could be relatively safe now that oil is at $50. There have been big selloffs recently. The yield on these are high and there is going to be big infrastructure building for energy going forward. I would say don’t put all your eggs in one basket and diversify your risk. In the Great Recession, many of these went bankrupt. I would look at the Alerian MLP (AMLP), which has fallen 15% in six weeks.
Q: Should I be rotating out of the Tech (XLK) stocks on rallies into more defensive stocks like Staples (SPLS)?
A: That’s half right. You should be rotating out of Tech stocks and rotating into cash which yields up to 2-3% these days. Nothing does well in a real bear market except cash. Defensive stocks still go down, just at a slower rate.
Q: Is General Electric (GE) good for the long term?
A: Yes, if anyone can turn around GE it’s the current management. That said, it could be a long-term slog—that’s why I had a long-term leap in this thing before it collapsed. It could turn around and still go up but these are throwaway, chapter eleven level type prices that we’re getting now. And now they are going to have to do a turnaround going into a recession.
Q: Do you see GE as good for a long-term trade?
A: Long term and trade don’t belong in the same sentence; but I’d say for a long-term investment at these levels, probably yes. It certainly is a bargain from $30 down to $7.40 in a year.
Q: Is this webinar archived?
A: A: Yes, they are always posted on the website within two hours of recording. Just go to www.madhedgefundtrader.com/, login and then hover your cursor over “MY ACCOUNT” click on “GLOBAL TRADING DISPATCH,” “Mad Hedge Technology Letter” or “Newsletter” depending on your membership then click on the Webinars button. The last ten years of webinars should show up, with the most recent one at the top.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
I have always considered the US military to have one of the world?s greatest research organizations. The frustrating thing is that their ?clients? only consist of the President and a handful of three and four star generals.
So I thought that I would review my notes from a dinner I had with General James E. Cartwright, the former Vice Chairman of the Joint Chiefs of Staff, who is known as ?Hoss? to his close subordinates.
Meeting the tip of the spear in person was fascinating. The four star Marine pilot was the second highest ranking officer in the US armed forces and showed up in his drab green alpha suit, his naval aviator wings matching my own, and spit and polished shoes.
As he spoke, I was ticking off the stock, ETF and futures plays that would best capitalize on the long term trends he was outlining.
The cycle of warfare is now driven by Moore?s Law more than anything else (XLK), (CSCO) and (PANW). Peer nation states, like Russia, are no longer the main concern.
Historically, inertia has limited changes in defense budgets to 5%-10% a year, but in 2010 defense secretary Robert Gates pulled off a 30% realignment, thanks to a major management shakeup. We can only afford to spend on winning current conflicts, not potential future wars. No more exercises in the Fulda Gap.
The war on terrorism will continue for at least 4-8 more years. Afghanistan is a long haul that will depend more on cooperation from neighboring Iran and Pakistan. ?We?re not going to be able to kill our way or buy our way to success in Afghanistan,? said the general.? However, the 30,000-man surge there brought a dramatic improvement on the ground situation.
Iran is a big concern and the strategy there is to interfere with outside suppliers of nuclear technology in order to stretch out their weapons development until a regime change cancels the whole program.
Water (PHO), (CGW) is going to become a big defense issue, as the countries running out the fastest, like Pakistan and the Sahel, happen to be the least politically stable.
Cyber warfare is another weak point, as excellent protection of .mil sites cannot legally be extended to .gov and .com sites.?
We may have to lose a few private institutions in an attack to get congress to change the law and accept the legal concept of ?voluntarism.? General Cartwright said ?Anyone in business will tell you that they?re losing intellectual capital on a daily basis.??
The START negotiations have become complicated by the fact that for demographic reasons, Russia (RSX) will never be able to field a million man army again, so they need more tactical nukes to defend against the Chinese (FXI).? The Russians are trying to cut the cost of defending against the US, so they can spend more on defense against a far larger force from China.
I left the dinner with dozens of ideas percolating through my mind, which I will write about in future letters.
