“Cash is king.”
That is the sage piece of advice I learned from my father about what to do during stock market corrections. Pop wasn’t a professional investor, but he had been through enough bear markets to know the value of a dollar at a market bottom.
This week will go down in history of the week of the “Zuck Shock”, when “Meta,” the newly renamed Facebook (FB), ran up a $250 billion loss in market capitalization, the largest in history.
It turns out that China’s Tik Tok has been eating their lunch for quite some time now. Apple’s new IOS privacy settings cost them another $10 billion.
What was the worst trade of 2021? CEO Mark Zuckerberg buying back $33 billion worth of his own stock in the second half of 2021 at the highs.
It gets worse.
If you think (FB) is a bargain down here, off 40% from its recent peak and at a discount to S&P 500 earnings multiples, think again.
(FB) is one of the largest holdings of the hedge fund community. Horrible January performance is about to be followed by even worse February numbers. That means any rally in (FB) will be slammed by enormous selling.
It couldn’t happen to a nicer guy.
But (FB) is not going away. With 3.6 billion users, how could they? But they are not returning as the wellspring of new fortunes anytime soon either.
Of course, the other big development of the week was the breakout by ten-year US Treasury bond yields to new two-year highs at 1.93%. Some forecasts now see 1.75% in rate rises by the end of the year.
If you are not already triple short the bond market, then you haven’t been reading this letter. We’ll know more when the next inflation data comes out on Thursday, February 10. The blockbuster January Nonfarm Payroll Report suggests they will be horrible. We currently have the hottest economy in 50 years.
And the good times are only just getting started. The Fed has delayed rate rises for so long that they risk much higher highs in interest rates in the future and a possible recession. That puts a half-point rise squarely on the table in March. The mere threat of that will keep rates high and stocks low until then.
So, how low is low? The (SPY) 50-day moving average at $460 may be a top for the short term. The recent low at $420 may be the bottom. We could be stuck in this range for a while.
Quite honestly, we haven’t been punished enough for our excesses of a year ago, when SPACs, crypto, and cannabis stocks ruled supreme. Liquidity was so great that markets were creating whole new asset classes out of thin air just to absorb it.
So, until interest rates stabilize, I’ll be selling every tech rally with both hands until it eventually costs me money. You should too.
The Nonfarm Payroll Report Comes in Hot, at 467,000 when many were expecting negative numbers due to omicron. The Headline Unemployment Rate rose to 4.0%. Manufacturing was up 13,000. Average hourly earnings were up a whopping 0.7% in January and 5.7% YOY. The U-6 “discouraged worker” unemployment rate fell to 7.1%. The numbers crashed to the bond market to a new multi-year low at a 1.93% yield, dragging stocks down with them. It definitely puts a Fed half-point hike on the table for March. It makes you wonder how hot employment would be without omicron.
The Bond Vigilantes are Back, as the monetary tightening goes global, but this time, with a German Accent. Ten-year bund yields hit a three-year high and two-year yields a five-year high, Britain has already raised rates twice, and the ECB’s Christine Lagarde has turned from dove to hawk. European rates rising faster than ours is knocking the stuffing out of the US dollar. JGB yields hit a six-year high.
Weekly Jobless Claims Fall to 238,000, down 23,000 on the week. Continuing claims drop 44,000 to 1.628 million. The light at the end of the tunnel for omicron?
US National Debt Tops $30 Trillion, the end result of 20 years of deficit spending. Clinton was the last president to run a surplus, when closing of the US Treasury bond market was discussed for lack of supply. $6 trillion for tax cuts for the wealthy, $6 trillion for Covid relief, and $4 trillion for the war in Iraq, it adds up. Without the pandemic, we were on schedule to hit $30 trillion by 2025. If interest rates ever go up, the US will really be in trouble.
Alphabet Announces 20:1 Share Split, which will take the price down from $3,000 to $150. The goal is to make the shares available to the masses. The earnings were great too. The company bought back $13.5 billion worth of its own stock as well. Taking profits on my call spread right here.
Facebook Crashes 25% on Huge Earnings Miss, in Q4. Total revenues came in at $32.8 billion and operating income at $15.9 billion. The newly renamed Meta says falling ad rates and volume are to blame. It couldn’t happen to a nicer guy. Apple’s new privacy settings delivered another dent.
PayPal Crashes 20% on horrific earnings. “Buy now, pay later” turned out to be “Buy now, pay never,” with a crushing 7% default rate. Supply chain problems, covid, reduced travel all conspired to kill off this company. The shares are off 60% from the summer high. This was my biggest loss of 2021.
Snapchat Snaps, soaring 60% on spectacular earnings, the first to ever show a profit. Avoid (SNAP) as it's too superheated. This is becoming a single stock picker’s market in the extreme.
Borrowers Stampede to Get the Last of the Low Interest Rate loans, with mortgage applications up 18% in a week. The 30-year fixed rate soared to 3.78%. Eventually, borrowers are going to have to switch to 5-year adjustables to afford a home purchase, taking on the interest rate risk.
My Ten-Year View
When we come out the other side of pandemic, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 240,000 here we come!
With near-record volatility continuing, my February month-to-date performance rocketed to a blistering 4.25% in only four days. My 2022 year-to-date performance ended at 18.84%. The Dow Average is down -3.34% so far in 2022. It is the great outperformance on an index since Mad Hedge Fund Trader started 14 years ago.
With 28 trade alerts issued so far in 2022, there was too much going on to describe here. Check your inboxes.
That brings my 13-year total return to 531.40%, some 2.00 times the S&P 500 (SPX) over the same period. My average annualized return has ratcheted up to 43.68% easily the highest in the industry.
We need to keep an eye on the number of US Coronavirus cases at 76 million and rising quickly and deaths topping 902,000, which you can find here.
On Monday, February 7 at 1:00 PM EST, the total Vehicle Sales for January are out. Amgen (AMGN) reports.
On Tuesday, February 8 at 8:30 AM, the US Balance of Trade for December is released. Pfizer (PFE) reports.
On Wednesday, February 9 at 7:00 AM, the Wholesale Inventories for December are printed. Disney (DIS) reports.
On Thursday, February 10 at 8:30 AM, the Weekly Jobless Claims are disclosed. The big number of the week is US Core Inflation. Twitter (TWTR) reports.
On Friday, February 11 at 7:00 AM, the University of Michigan Consumer Sentiment for February is released.
At 2:00 PM, the Baker Hughes Oil Rig Count is out.
As for me, to say that I was an unusual hire for Morgan Stanley back in 1983 was an understatement, a firm known as being conservative, white-shoed, and a paragon of the establishment. They normally would not have touched me with a ten-foot pole, except that I spoke Japanese.
Of 1,000 employees, there were only three from California. The other two were drop-dead gorgeous Stanford grads, daughters of the president of the Philippines, hired to guarantee the firm’s leadership of the country’s biannual bond issue.
When the book Liar’s Poker was published, many in the company thought I wrote it under the pen name of Michael Lewis. Today, the real Michael lives a few blocks away from me and I kid him about it whenever I bump into him at Whole Foods.
At one Monday morning meeting, the call went out, “Does anyone have a connection with the Teamsters Union? I raised my hand, mentioning that my grandfather was a Teamster while working for Standard Oil of California during the Great Depression (it was said at the time that there was never a Great Depression at Standard Oil. It was true).
It turned out that I was virtually the only person at Morgan Stanley that didn’t have an Ivy League degree or an MBA.
My boss informed me, “You’re on the team.”
At the time, the US Justice Department had seized the Teamsters Pension Fund because the Mafia had been running it for years, siphoning off money at every opportunity. I made the pitch to the Justice Department, a more conservative bunch of straight arrows you never saw, all wearing dark suits and white business shirts.
It was crucial that we won the deal as Barton Biggs was just starting up the firm’s now immensely profitable asset management division, and a big mandate like the Teamsters would give us instant credibility in the investment community.
We won the deal!
Once the papers were signed, the entire Teamsters portfolio was dumped in my lap and I was ordered to fly to Las Vegas to investigate. It didn’t hurt that I was Italian. It was thought that the Teamsters might welcome me.
The airport was still a tiny, cramped affair, but offered slot machines. Steve Wynn was building The Mirage Hotel on the strip. Howard Hughes was still holed up in the penthouse of the Desert Inn. Tom Jones, Frank Sinatra, Siegfried & Roy, Wayne Newton, and Liberace had star billing.
It turned out that the Teamsters Pension Fund owned every seedy whorehouse, illegal casino, crooked bookie, and drug dealer in town. If you wanted someone to disappear, they could arrange that too.
I returned to New York and wrote up my report. I asked Barton to sign off on it and he said, “No thanks, you own this one.”
So it was with a heavy heart that I released a firmwide memo stating that employees of Morgan Stanley were no longer allowed to patronize the “Kit Kat Lounge”, the “Bunny Farm”, the “Mustang Ranch” and 200 other illicit businesses in Nevada.
I never lived down that memo.
I actually knew about some of these places a decade earlier because they were popular with the all-male staff of the Nuclear Test Site where I had once worked an hour north of town as a researcher and mathematician.
Then later in the early 2000s, I had to drive my son from Lake Tahoe to the University of Arizona and we drove right past the entrance to the Nuclear Test Site. The “Kit Kat Lounge”, the “Bunny Farm” were long gone, but the Site access had improved from a dusty, potholed dirt road to a four-lane superhighway.
That’s defense spending for you.
Even today, 40 years later, my old Morgan Stanley friends kid me if I know where to have a good time in Vegas, and I laugh.
But when I ride the subway in New York, I still get on at the front of the train, just to be extra careful. Accidents happen.
Stay Healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
