When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more
Global Market Comments
November 21, 2022
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or SLOWING TO STALL SPEED),
(SPY), (TLT), (SLV), (WPH), (MAT), (NVDA), (MS), (GS)
I got a call from my daughter the other day, who is a Computer Science major at the University of California at Santa Cruz. The university was on strike and shut down, so she suddenly had a lot of free time on her hands.
The Teaching Assistants were only getting $12 an hour, which is not enough to live on in the San Francisco Bay Area by a mile. Some one-third were living in their cars, which can get chilly on the Northern California coast in winter.
Fast food workers in California will get $22 an hour from January, thanks to a bill passed in the recent election. The TAs, most of whom are working on master’s degrees and PhD’s in all kinds of advanced esoteric subjects, are simply asking to bring their pay in line with Taco Bell.
The entire UC system is on strike, affecting ten campuses, 17,000 TAs and 200,000 students. I have noticed that the most liberal universities often have the most draconian employment policies. It’s legalized slave labor. I speak from experience as a past victim, as I was once an impoverished work-study student at UCLA earning $1.00 an hour experimenting with highly radioactive chemicals.
What was my tuition for four years at the best public university in the world? Just $3,000, and I didn’t even pay that, as I was on a full scholarship, something about rocket engines I built when I was a kid. Werner Von Braun liked them. The 800 Math SAT score probably helped a tiny bit too.
UCSC is the feeder university for Silicon Valley. Graduates in Computer Science earn $150,000 a year out the door and $200,000 with a Master's degree. PhDs get offered founders’ stock in the hottest Silicon Valley startups.
I hope the TAs get their raise.
My daughter was calling me to apologize for her poor trading performance this year. I thought, “My goodness, did she just lose her entire college fund in some crypto scam?”
“How much did you lose,” I asked.
She answered that she didn’t lose anything and in fact was up 59% this year. She knew my performance was topping 78%, and that some subscribers had made up to 1,000%.
But she missed the October low because she had a midterm and was late on my (TLT) LEAPS because she was on a field trip. She promised to pay closer attention so she could earn the money to pay for her PhD.
My kids never ask me for money. If they need it, they just go into the markets and get it themselves. But then this is a family that discussed implied volatilities, chaos theory, and the merits of the Black Scholes equation over dinner every night. That’s what it’s like to have a hedge fund manager for a dad. Any extra money I have I give away to kids not as lucky as mine.
Then we talked about the most important issue of the day, how to cook the turkey this week. Brine, or no brine, with or without a T-shirt, or deep fat fry? She cautioned me to take it out of the freezer three days early to thaw. I bought my turkey a month ago because I knew prices would rise, and they have done so mightily. In case I get in over my head, I can always call the Butterball Thanksgiving Turkey Emergency Hotline at 844-877-3436.
But that’s just me.
Whenever making money gets too easy, I get nervous.
There’s a 90% chance we saw the bottom in this bear market on October 14. But how we proceed from here is the tricky part. Too much now depends on a single monthly data point, namely the Consumer Price Index, and that is a tough game to play. The next one is out on December 13.
The truth is that even with overnight interest rates at 4.75%-5.00% , the economy is holding up far better than anyone imagined possible. Some sectors, like financials, are positively booming. And while housing is weak, we really have not seen any major price falls that could threaten a financial crisis. Consumers are in good shape with savings near record levels.
There isn’t going to be a hard landing. There isn’t even going to be a soft landing. In fact, we may not have a landing at all, with the economy continuing to motor along, albeit at a slower rate just above stall speed.
Which begs me to repeat that the next new trend in interest rates will be down, and that this will be the principal driver of all your investment decisions going forward. Bonds may make the initial move up, as last week’s trade alerts suggested. But I have no doubt that equities will have a big move in 2023 as well.
Producer Price Index Fades, up only 0.2%, half of what was expected. That’s a big decline from 8.4% to 8.0% YOY. It’s another bell ringing that inflation has topped. Stocks rallied 500 on the news.
Bonds Continue on a Tear, with the (TLT) up a breathtaking eight points from the October low. It could reach $120 in 2023. Keep buying (TLT) calls, call spreads, and LEAPS on dips.
FTX Keeps Getting Worse, as it is looking like it’s a Bernie Madoff X 10, or an Enron X 20. A new CEO has been appointed by the bankruptcy court, John Ray, the former liquidator of Enron and a distant relative of mine. This will spoil investment in most digital coins and tokens for good, which are now worthless, and coins unless they are guaranteed by JP Morgan (JPM) or Goldman Sachs (GS). FTX never had a CFO, and Sam Bankman-Fried is blaming it all on his girlfriend, not exactly what creditors want to hear. In any case, Bitcoin has been replaced by Taylor Swift tickets.
A Massive Silver Shortage is Developing, with demand up 16% in 2023 to 1.21 million ounces. With EV production increasing from 1.5 million to 20 million units a year within the decade, its share of the market will rise from 5% to 75%. Solar panel demand is also rising. Buy (SLV) and (WPM) on dips. My next LEAPS will be for silver on the next dip.
NVIDIA Sales Rise, but profits dip, taking the stock up 3%. Games sales dropped a heartbreaking 50% and crypto took a big hit. The company expects $6 billion in sales in Q4 and is still operating at an incredible 53.6% gross margin. The company is creating a new line of dumbed-down products to comply with China export bans. Keep buying (NVDA) on dips. We caught a 50% move in the past month.
Retail Sales Rise 1.3% in October, causing analysts to raise Q4 GDP forecasts. Rising prices are a major factor. Where is that darn recession?
Who Has the World’s Worst Inflation? Not the US, where price gains have been relatively muted. Venezuela leads with 21,912%, followed by Zimbabwe at 2019%, Lebanon at 1071%, Argentina at 194%, Turkey at 124%. Even Russia is at 25%. Who has the lowest? Japan at 1.0%, but their currency has just collapsed by 40%.
The 60/40 Portfolio is Back, after a 15-year hiatus. JP Morgan Chase says that keeping 60% of your money in stocks and 40% in bonds should deliver a 7.2% annual return. I believe the balanced portfolio return will be much higher, as everything will go up in 2023 and fixed income is now yielding 5% or better. 2022 saw the worst 60/40 return in 100 years.
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. With the economy decarbonizing and technology hyper-accelerating, there will be no reason not to. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The America coming out the other side will be far more efficient and profitable than the old. Dow 240,000 here we come!
On Monday, November 21 at 8:00 AM, the Chicago Fed National Activity Index for October is out.
On Tuesday, November 22 at 8:30 AM, the Richard Fed Manufacturing Index is released.
On Wednesday, November 23 at 8:30 AM, Durable Goods for October is published. At 11:00 AM, the FOMC minutes from the previous meeting are out. Weekly Jobless Claims are announced. New Homes Sales for October are out.
On Thursday, November 24, Markets are closed for Thanksgiving.
On Friday, November 25, stock markets close early at 1:00 PM. At 2:00 the Baker Hughes Oil Rig Count is out.
As for me, I have dated a lot of interesting women in my lifetime, but one who really stands out is Melody Knerr, the daughter of Richard Knerr, the founder of the famed novelty toy company Wham-O (click here). I dated her during my senior year in high school.
At six feet, she was the tallest girl in the school, and at 6’4” I was an obvious choice. After the senior prom and wearing my cheap rented tux, I took her to the Los Angeles opening night of the new musical Hair.
In the second act, the entire cast dropped their clothes onto the stage and stood there stark naked. The audience was stunned, shocked, embarrassed, and even gob-smacked. Fortunately, Melody never revealed the content of the play to her parents, or I would have been lynched.
In a recurring theme of my life, while Melody liked me, her mother liked me even more. That enabled me to learn the inside story of Wham-O, one of the great untold business stories of all time.
Richard Knerr started Wham-O in a South Pasadena garage in 1948. His first product was a slingshot, hence the company name, the sound you make when firing at a target. Business grew slowly, with Knerr trying and discarding several different toys.
Then in 1957, he borrowed an idea from an Australian bamboo exercise hoop, converted it to plastic, and called it the “Hula Hoop.” It instantly became the biggest toy fad of the 20th century, with Wham-O selling an eye-popping 25 million in just four months. By 1959, they had sold a staggering 100 million.
The Hula Hoop was an extremely simple toy to manufacture. You took a yard of cheap plastic tubing and stapled it together with an oak plug, and you were done. The markup was 1,000%. Knerr made tens of millions and bought a mansion in a Los Angeles suburb with a stuffed lion guarding his front door which he had shot in Africa.
The company made the decision to build another 50 million Hula Hoops. Then the bottom absolutely fell out of the Hula Hoop market. Midwestern ministers perceived a sexual connotation in the suggestive undulating motion to use it and decried it the work of the devil. Orders were cancelled en masse.
Whamo-O tried to stop their order for 50 million oak plugs, which were made in England, but to no avail. They had already shipped. So, to cut their losses Whamo-O ordered the entire shipment dumped overboard in the North Atlantic, where they still bob today. The company almost went bankrupt.
Knerr saved the company with another breakout toy, the Frisbee, a runaway success which is still sold today. Even Incline Village, Nevada has a Frisbee golf course. The US Army tested it as a potential flying hand grenade. That was followed by other monster hits like the Super Ball, the Slip N Slide, and the Slinky.
Richard Knerr sold his company to toy giant Mattel (MAT) for $80 million in 1994. He passed away in 2008 at the age of 82.
As for Melody, we lost touch over the years. The last I heard she was working at a dive bar in rural California. Apparently, I was the high point of her life. The last time I saw her I learned the harshest of all lessons, never go back and visit your old high school girlfriend. They never look that good again.
Stay healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Hula Hoop Inventor Chuck Knerr
“The two things the Fed can’t do is print humans to fill jobs and print oil to stop inflation,” said Bryn Talkington of Requisite Capital Management.
Sunday morning
November 20, 2022
Hello everyone,
Welcome to a new week. We are quickly closing out Spring or Fall, depending on where you are in the world.
The holiday season will soon be upon us in earnest. But I wonder will consumers be feeling jolly enough to part with a lot of their hard-earned money? In parts of Australia, people are being pounded by floods back-to-back and another wave of covid. Unfortunately, I think climate crisis and covid will be a constant in our lives in the future. Covid may become weaker in its virulence, but the climate disasters will only escalate and become more intense – a lesson not to mess with nature.
Survival gear helps us out when the going gets tough in the wilderness, but what sector do investors turn to when there are macro-economic headwinds? The pharmaceutical industry could be the answer. It has a history of doing well in tough economic times. Large-cap biopharma could be a key sector to own for defensive exposure at a reasonable price, according to Credit Suisse.
They go on to say that U.S. pharma as a group is trading at a price-earnings ratio of 16 times to 17 times while defensive sectors utilities and consumer staples have 18-20 P-E ratios, on average.
There is a history showing U.S. pharma beats the S&P500 during major recessions. The Van Eck Pharmaceutical ETF is down just 4.7% on the year, compared to a 17% loss for the S&P 500 so far in 2022. Merck is up 33% this year and AbbVie is up 12% in 2022 with more room to run. Credit Suisse indicates Eli Lilly and Pfizer will outperform. John’s bio-pharmaceutical newsletter has been stellar in picking stocks that have been bullish this year. We could be well into 2023 before the macroeconomic trends start to settle. Consequently, Credit Suisse and John believe large-cap biopharma should remain a solid outperformer in the coming months. And they go on to say that if there is more clarity in the markets going forward and a solid rally is seen, higher-growth names, such as Eli Lilly, will be insulated from the rotation away from defensives and back into growth names. In short, you can’t go wrong owning a big pharma stock or ETF in your portfolio if you want to diversify and be defensively positioned.
Finally, let’s consider the ramifications of the Fed’s target of 2% inflation. When you are focused on one target, sometimes we miss other things or dismiss them as unimportant. How far can you push something until cracks appear? Parallel to that push for 2%, a flock of black swans could be circling, and then what? In other words, even though the sun may be coming out from behind the clouds and the economy appears to be in better health, don’t let your guard down. Be prepared for any shocks that may eventuate.
It’s all about being defensive.
As always, follow John’s trades and you will be well looked after financially.
Wishing you all a wonderful week.
Cheers,
Jacque
"It is during our darkest moments that we must focus to see the light. " - Aristotle
Mad Hedge Technology Letter
November 18, 2022
Fiat Lux
Featured Trade:
(THE LUCK OF SILICON VALLEY)
(TWITTER)
Elon Musk sends people to outer space; I’m confident he can figure out how to run a simple app run by juveniles.
Let’s talk about the most controversial tech company out there right now, Twitter, and a tech firm that sets the tone for the rest of the industry.
Twitter has undergone an extreme makeover lately.
Not the product, but the staff.
Musk started off by firing half the staff, which later turned into an ultimatum for the rest to either get on board with the new Twitter or accept 3 months’ severance pay out the exit door.
Many left.
Cutting staff was rejuvenating, maybe not for the employees who were let go, but for a dire need of a mentality change.
Twitter became too corporate and too political inside its office.
Most of the former Twitter staff was utterly useless.
The 10% leftover is really what is essential and like Musk said, he was able to hang on to the “best people.”
Next, he should cut the office space to increase efficiencies or at the very minimum renegotiate the office lease to downsize the square footage by 90%. San Francisco city center is a ghost town now – a relic of its former self.
Twitter’s big layoff will also act as a feeder strategy for the rest of Silicon Valley to push staff into a leaner and more efficient model.
In a way, Musk is saving the technology sector by offering the blueprint of how to manage a software company.
Silicon Valley needs to fire 90% of staff immediately, maybe even 95%.
Elon Musk noted that Twitter was paying an average of $400 per lunch at the Twitter headquarters in San Francisco.
I know San Francisco is expensive and almost unlivable, but this was the type of extreme activity that was allowed to happen under the past management whose main job was to wait for their monthly paycheck.
It’s no wonder that shareholders were getting screwed.
Although it’s quite fashionable to jump on the Musk hate wagon lately to say how Twitter will go down in flames, I don’t think it’s justified and it appears to be more about sour grapes because many don’t like Musk’s politics.
Ruthlessly cutting costs is a great tactic for tech executives. Costs are way too high, which is why Facebook let go of 11,000 workers last week.
Amazon just announced 10,000 firings too, and I think they could handle 50,000 firings easily.
Luckily, positions like Chief Diversity Officer, Chief Ethics Officer, and the managers of middle managers need no replacements at all.
Musk noted that Twitter is losing $4 million per day and these measures will go a long way to fixing that.
He’s smart enough to find solutions and I wouldn’t bet against him. I can already visualize him picking apart the best slices of Twitter and supercharging them.
Twitter is a premium asset with unlimited scarcity value. We are just scratching the surface with it.
Where is the end game?
I wouldn’t be surprised if Twitter went public in 5-7 years with a valuation of $150 billion after Musk unlocks the embedded value that is literally everywhere on Twitter.
I would say $150 billion is lowballing him and this company will be worth between $180 billion- $220 billion in the next 7-10 years.
Many people still don’t understand Twitter very well and it’s become even more important than the mainstream media.
“Build something 100 people love, not something 1 million people kind of like.” – Said Co-Founder and CEO of Airbnb Brian Chesky
When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more
When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more