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
