A client asked me today if, after the 5th worst start to a year since 1927, I thought the stock market had bottomed.
My response? One interest rate rise down, 12 to go, or 3.00% if we stick to the quarter-point pace.
And while the first seven rate rises have already been discounted by the futures market, the additional six we will get in 2023 haven’t.
We have just seen the best week for stocks in nearly two years, but don’t get your hopes up. We are in the process of weaning the markets off of 12 years of free money and we aren’t going to get away with a measly 15% correction.
And when I say markets, I don’t just mean stocks, but for bonds, commodities, foreign exchange, precious metals, energy, and real estate as well. No asset has actually had a real price for more than a decade.
So, how does all this end? You can count on several tradable rallies for the rest of the year, like the one we have just had. Big tech earnings are still racing ahead like a bat out of hell. By yearend, tech should be stupid cheap, cheap enough to take the indexes to new highs, even if they are marginal ones at best.
Eventually, the Fed will take rates high enough to assure a recession. That happens when yield curves are completely flat, i.e, when the two, ten, and 30-year yields are the same, which is about two years off.
That could happen sooner if inflation fails to abate and the Fed has to resort to successive half-point hikes to cool a superheated economy. Currently, Jay Powell doesn’t believe that will be necessary because he expects the inflation rate to drop to 4% by the end of 2022 as wage demands fade, supply chain problems sort themselves out, and the Ukraine war stalemates.
News flash: Fed governors have been known to be wrong.
Here’s an interesting tidbit. I renewed my pilot’s medical this week in case I get a midnight call from Washington DC. Don’t worry, I passed with flying colors, thanks to all my nighttime backpacking.
But you know what the flight surgeon told me? Every medical he had done in the last two weeks was for someone headed to Ukraine.
This could be a really interesting war.
The Fed Raises Interest Rates by a quarter point. The futures markets are already discounting seven rate hikes this year, but not the six in 2023. The Fed is so far behind the curve they may have to resort to half-point rises later this year if inflation doesn’t fade. According to that timetable, the yield curve will be completely flat by then, triggering the next recession.
China Crashes, on fears they may get dragged into the Ukraine war by Russia. Delisting threats from the SEC, a slowing economy, flight from growth tech stocks, and a new Covid outbreak aren’t helping either. Some $2.1 trillion in market cap has been lost since these stocks looked so great a year ago. Not a great place to be when a new iron curtain is descending. Right now, the US is the only safe place to be.
Bonds Collapse on happy talks about Russia/Ukraine talks, making my shorts look even better. Ten-year US Treasury yields hit a three-year high at 2.08% yield. It’s a resumption of a steep downtrend in bond prices that started in November. I used the war-induced rally to ramp up positions. But I don’t think we break $130 in the (TLT) for at least another month. Keep selling big rallies in the (TLT).
The Producer Price Index is Up a Hot 10% YOY, and 0.8% in February, largely driven by soaring energy prices. Food prices are up as Ukraine’s wheat, one-third of the world supply, disappears from the marketplace. It makes the Fed rate hike a sure thing.
Russia has $350 Billion of US stock for Sale at Market. That is the amount Russian oligarchs are thought to own in US hedge funds which the Justice Department is in the process of seizing. It’s part of $1 trillion in foreign assets overall, which include the Chelsea soccer team, several tens of billion worth of US real estate, and a $200 billion stake in Uber.
China has to Choose, whether to have Russia or the US as an ally. Will it be the sanctioned $1 trillion economy in free fall, or a booming $25 trillion economy? Certain the costs of going against the US have been made clear. I’ve been arguing vociferously to the Joint Chiefs from the beginning that standing up to Putin gets you a two for: it forces China to back off from aggressive moves towards Taiwan as well. Russia can stand sanction. Chinese would starve, as the bulk of its wealth over the last 30 years came from trade with the US.
Existing Home Sales Plunge by 7.2% to 6.02 million units in February. Soaring mortgage rates and rock bottom inventories are taking their toll. Many homes are gone only a week after listing.
Nickel Futures are Limit Down in London, off by 12%, indicating that the super spike in commodities prices triggered by the Ukraine war may be over. The price fell by $36,915 per metric tonne, well off the $100,000 high from weeks ago when Chinese speculators covered shorts generating massive losses.
Weekly Jobless Claims Come in at 214,000, a two-month low. The economy is recovering slowly and is on the verge of full employment.
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, my March month to date performance catapulted to a blistering 15.23%. My 2022 year-to-date performance ended at a chest beating 29.82%. The Dow Average is down -4.3% so far in 2022. It is the great outperformance on an index since Mad Hedge Fund Trader started 14 years ago.
My five March positions expired at their maximum potential profit with the options expiration on Friday. That leaves me 90% in cash and 10% in a single long bond position which is close to breaking even. Only the next capitulation selloff day I’ll be adding more long positions in technology.
That brings my 13-year total return to 542.38%, some 2.10 times the S&P 500 (SPX) over the same period. My average annualized return has ratcheted up to 44.88%, easily the highest in the industry.
We need to keep an eye on the number of US Coronavirus cases at 80 million and rising quickly and deaths topping 971,000, which you can find here. Growth of the pandemic has virtually stopped, with new cases down 96% in a month.
On Monday, March 21 at 7:30 AM EST, the Chicago Fed National Activity Index is out.
On Tuesday, March 22 at 12:30 PM, API Crude Oil Stocks are released.
On Wednesday, March 23 at 10:00 AM, New Home Sales for February are printed.
On Thursday, March 23 at 7:30 AM, Durable Goods Orders for February are published. Weekly Jobless Claims are out at 8:30.
On Friday, March 25 at 9:00 AM, Pending Home Sales for February are disclosed. At 2:00 PM, the Baker Hughes Oil Rig Count is out.
As for me, after telling you last week why I walked so funny, let me tell you the other reason.
In 1987, to celebrate obtaining my British commercial pilot’s license, I decided to fly a tiny single engine Grumman Tiger from London to Malta and back.
It turned out to be a one-way trip.
Flying over the many French medieval castles was divine. Flying the length of the Italian coast at 500 feet was fabulous, except for the engine failure over the American airbase at Naples.
But I was a US citizen, wore a New York Yankees baseball cap, and seemed an alright guy, so the Air Force fixed me up for free and sent me on my way. Fortunately, I spotted the heavy cable connecting Sicily with the mainland well in advance.
I had trouble finding Malta and was running low on fuel. So I tuned into a local radio station and homed in on that.
It was on the way home that the trouble started.
I stopped by Palermo in Sicily to see where my grandfather came from and to search for the caves where my great grandmother lived during the waning days of WWII. Little did I know that Palermo had the worst wind shear airport in Europe.
My next leg home took me over 200 miles of the Mediterranean to Sardinia.
I got about 50 feet into the air when a 70-knot gust of wind flipped me on my side perpendicular to the runway and aimed me right at an Alitalia passenger jet with 100 passengers awaiting takeoff. I managed to level the plane right before I hit the ground.
I heard the British pilot of the Alitalia jet say on the air “Well, that was interesting.”
Giant fire engines descended upon me, but I was fine, sitting on my cockpit, admiring the tree that had suddenly sprouted through my port wing.
Then the Carabinieri arrested me for endangering the lives of 100 tourists. Two days later the Ente Nazionale per l’Avizione Civile held a hearing and found me innocent, as the wind shear could not be foreseen. I think they really liked my hat, as most probably had distant relatives in New York City.
As for the plane, the wreckage was sent back to England by insurance syndicate Lloyds of London, where it was disassembled. Inside the starboard wing tank, they found a rag which the American mechanics in Naples had left by accident.
If I has continued my flight, the rag would have settled over my fuel intake valve, cut off my gas supply, and I would have crashed into the sea and disappeared forever. Ironically, it would have been close to where French author Antoine de St.-Exupery (The Little Prince) crashed his Lockheed P-38 Lightning in 1944.
In the end, The crash only cost me a disk in my back, which I had removed in London and led to my funny walk.
Sometimes, it is better to be lucky than smart.
Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Antoine de St.-Exupery on the Old 50 Franc Note
