“As a rule, men worry more about what they can't see than about what they can.” – Said Roman Leader Julius Caesar
Global Market Comments
August 21, 2023
Fiat Lux
Featured Trades:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or LEARNING A NEW WORD),
(JPM), (WPM), (FCX), (OXY), (CCI)
(SPY), (TLT), (TSLA), (NVDA), ($WTIC)
CLICK HERE to download today's position sheet.
It’s not often that I learn a new word, at least in English anyway. Anyone who has read all 4,000 pages of John Steinbeck, where you are sent running for your Funk & Wagnalls on every page, shouldn’t be surprised too often. Steinbeck spent two winters house-sitting at Lake Tahoe where he memorized the dictionary cover to cover. But, last week I was.
The word in question is “disinversion.”
Disinversion happens in two ways. When bond yields fall and short yields fall much faster, you get good disinversion and stocks usually rise. This is what I expect to happen in 2024 and is why I am loading the boat with falling interest plays like banks (JPM), precious metals (WPM), commodities (FCX), energy (OXY), and REITS (CCI).
However, stock markets are insecure things, afraid of their own shadows, always shrinking from a fight, and constantly looking for new reasons to worry. Now they are also losing sleep over disinversion.
Disinversion also takes place when short rates are falling but bond yields are rising. When that happens the real estate market gets slaughtered but sky-high mortgage rates, the economy collapses and stocks fall. The good news is that bad disinversion only happens about 10% of the time.
However, a rising number of bond analysts are raising the alarm that we may be in for a dose of the bad kind of disinversion before the good kind kicks in. That could trigger a capitulation in the bond market that could take the ten-year US Treasury bond yield from the current 4.25% yield to 5.0% or even higher, and take the (TLT) down to a low of $90, or even $85. Stocks would drop 10%.
That would be a nightmare for 2024 LEAPS holder, no matter how brief it may be.
It doesn’t help that the government is borrowing now at a record pace, some $109 billion last week alone. That is why the (TLT) is probing one-year lows.
But whether bonds are inverting, disinverting, converting, or perverting, I’ll be buying two-year bond (LEAPS) if that happens. A 100% return in two years on a government bond risk sounds like a petty good deal to me, even if they are now rated only AA+, thanks to you know who. However you look at it, there is one heck of a bond trade setting up.
We may get our answer at 10:05 AM EST on Friday, August 25.
That’s when Jay Powell, the governor of the Federal Reserve, is due to be the keynote speaker at the meeting of global central bankers at Jackson Hole. Will this mark the bottom in bond prices and the top in yields?
Last year, Jay’s mumblings lasted only eight minutes and warned of “pain to come.” Pain we got, but for only two months. After that, it was nine months of pleasure in the form of straight-up stock prices.
Will Jay Powell Drop a Bomb Next Week?
Only Jay Powell knows for sure.
In the meantime, stocks will remain as dead as a doorknob and moribund, if not catatonic. Volatility ($VIX) will hug the $15 level, the “A” Team traders will remain at the Hamptons, and the number of new trades alerts emanating from me will remain precisely at zero.
There never is a profit trading when the Mad Hedge AI Market Timing Index vacillates around 50, as it is doing now. Sometimes you just get paid to wait, especially when 90-day T-bills are paying a healthy 5.25%.
So far in August, we are down -4.70%. My 2023 year-to-date performance is still at an eye-popping +60.80%. The S&P 500 (SPY) is up +17.10% so far in 2023. My trailing one-year return reached +92.45% versus +8.45% for the S&P 500.
That brings my 15-year total return to +657.99%. My average annualized return has fallen back to +48.15%, another new high, some 2.50 times the S&P 500 over the same period.
Some 41 of my 46 trades this year have been 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!
On Monday, August 21, BHP (BHP) and Zoom (ZM) announce earnings.
On Tuesday, August 22 at 7:00 AM EST, Existing Homes Sales for July are released.
On Wednesday, August 23 at 2:30 PM EST, the New Homes Sales are published.
On Thursday, August 24 at 8:30 AM EST, the Weekly Jobless Claims are announced. So are US Durable Goods.
On Friday, August 25 at 7:00 AM, Fed Governor Jay Powell gives his keynote speech at the Jackson Hole Central Bankers Conference. At 2:00 PM, the Baker Hughes Rig Count is printed.
As for me, I am often told that I am the most interesting man people ever met, sometimes daily. I had the good fortune to know someone far more interesting than myself.
When I was 14, I decided to start earning merit badges if I was ever going to become an Eagle Scout. I decided to begin with an easy one, Reading Merit Badge, where you only had to read four books and write one review. I loved reading, so “Piece of cake,” I thought.
I was directed to Kent Cullers, a high school kid who had been blind since birth. During the late 1940s, the medical community thought it would be a great idea to give newborns pure oxygen. It was months before it was discovered that the procedure caused the clouding of corneas and total blindness in infants.
Kent was one of these kids.
It turned out that everyone in the troop already had Reading Merit Badge and that Kent had exhausted our supply of readers. Fresh meat was needed.
So, I rode my bicycle over to Kent’s house and started reading. It was all science fiction. America’s Space Program had ignited a science fiction boom and writers like Isaac Asimov, Jules Verne, Arthur C. Clark, and H.G. Welles were in huge demand. Star Trek came out the following year, in 1966. That was the year I became an Eagle Scout.
It only took a week for me to blow through the first four books. In the end, I read hundreds to Kent. Kent didn’t just listen to me read. He explained the implications of what I was reading (got to watch out for those non-carbon-based life forms).
Having listened to thousands of books on the subject, Kent gave me a first-class education and I credit him with moving me towards a career in science. Kent is also the reason why I got an 800 SAT score in Math.
When we got tired of reading, we played around with Kent’s radio. His dad was a physicist and had bought him a state-of-the-art high-powered short-wave radio. I always found Kent’s house from the 50-foot-tall radio antenna.
That led to another merit badge, one for Radio, where I had to transmit in Morse Code at five words a minute. Kent could do 50. On the badge below, the Morse Code says “BSA.” In those days, when you made a new contact, you traded addresses and sent each other postcards.
Kent had postcards with colorful call signs from more than 100 countries plastered all over his wall. One of our regular correspondents was the president of the Palo Alto High School Radio Club, Steve Wozniak, who later went on to co-found Apple (AAPL) with Steve Jobs.
It was a sad day in 1999 when the US Navy retired Morse Code and replaced it with satellites and digital communication far faster than any human could send. However, it is still used as beacon identifiers at US airfields.
Kent’s great ambition was to become an astronomer. I asked how he would become an astronomer when he couldn’t see anything. He responded that Galileo, the inventor of the telescope, was blind in his later years.
I replied, “Good point.”
Kent went on to get a PhD in Physics from UC Berkeley, no mean accomplishment. He lobbied heavily for the creation of SETI, or the Search for Extra-Terrestrial Intelligence, once an arm of NASA. He became its first director in 1985 and worked there for 20 years.
In the 1987 movie Contact, written by Carl Sagan and starring Jodie Foster, Kent’s character is played by Matthew McConaughey. The movie was filmed at the Very Large Array in western New Mexico. The algorithms Kent developed there are still in widespread use today.
Out here in the West, aliens are a big deal, ever since that weather balloon crashed in Roswell, New Mexico in 1947. In fact, it was a spy balloon meant to overfly and photograph Russia, but it blew back on the US, thus its top secret status.
When people learn I used to work at Area 51, I am constantly asked if I have seen any spaceships. The road there, Nevada State Route 375, is called the Extra Terrestrial Highway. Who says we don’t have a sense of humor in Nevada?
After devoting his entire life to searching, Kent gave me the inside story on searching for aliens. We will never meet them but we will talk to them. That’s because the acceleration needed to get to a high enough speed to reach outer space would tear apart a human body. On the other hand, radio waves travel effortlessly at the speed of light.
Sadly, Kent passed away in 2021 at the age of 72. Kent, ever the optimist, had his body cryogenically frozen in Hawaii where he will remain until the technology evolves to wake him up. Minor planet 35056 Cullers is named in his honor.
There are no movies being made about my life…. yet. But there are a couple of scripts out there under development.
Watch this space.
Good Luck and Good Trading,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Dr. Kent Cullers
New Mexico Very Large Array
Reading Merit Badge
Radio Merit Badge
“If you want to make enemies, try to change something,” said the late President Woodrow Wilson.
High-Frequency Trading (HFT) has revolutionized the financial industry by executing a large volume of trades at astonishing speeds, often within milliseconds. In this dynamic and competitive landscape, the integration of Artificial Intelligence (AI) systems has emerged as a game-changer, offering numerous benefits that propel HFT to new heights. This article delves into the advantages of using AI systems in High-Frequency Trading, shedding light on how these technologies empower traders to make split-second decisions and achieve unprecedented levels of efficiency and accuracy.
HFT operates in a realm where the slightest delay can result in missed opportunities or financial losses. AI systems excel in processing vast amounts of real-time data swiftly and accurately, allowing traders to make informed decisions with minimal latency. Advanced machine learning algorithms can analyze market data, identify patterns, and uncover hidden correlations, enhancing the precision of trade execution.
AI-driven algorithms are capable of handling complex trading strategies that involve multiple parameters, conditions, and data sources. These algorithms can adapt to changing market conditions, optimizing trading strategies in real-time. By adjusting their parameters based on new data inputs, AI systems ensure that trading strategies remain effective and competitive in rapidly evolving markets.
In HFT, risk management is crucial due to the potential for rapid and significant losses. AI systems can monitor positions, market volatility, and other risk factors in real-time. They can automatically implement risk-reduction measures, such as dynamically adjusting position sizes or hedging strategies, to minimize potential losses and protect traders' capital.
AI's predictive capabilities are invaluable in HFT, where anticipating market movements is key to profitability. Machine learning models trained on historical data can identify trends, patterns, and anomalies that human traders might overlook. This predictive power empowers traders to make timely decisions based on data-driven insights, increasing the likelihood of favorable outcomes.
Sometimes, human emotions can cloud judgment and lead to impulsive decisions. AI systems are devoid of emotional biases, enabling traders to maintain a rational and systematic approach to trading. By adhering strictly to predefined algorithms and strategies, AI helps avoid costly emotional mistakes.
These AI systems can detect price discrepancies across multiple markets and execute trades to exploit arbitrage opportunities almost instantaneously. This capability enhances market efficiency by aligning prices across different exchanges and minimizing price discrepancies. As a result, AI-powered HFT contributes to smoother market operations and fairer pricing mechanisms.
News and sentiment play a significant role in influencing market movements. AI-powered natural language processing (NLP) models can swiftly analyze news articles, social media posts, and other textual sources to gauge market sentiment. Traders can adjust their strategies based on the sentiment analysis results, ensuring that their decisions are aligned with prevailing market sentiment.
HFT relies on executing trades at optimal prices. AI systems can execute orders with high precision and minimal slippage, as they can process market data and execute trades at lightning speeds. This precision leads to cost savings and improved overall trade performance.
HFT systems typically have the capacity to learn from past trades and adapt their strategies over time. Through a process called machine learning, these systems analyze the outcomes of previous trades, identify patterns, and refine their algorithms to enhance future performance. This iterative learning process enables AI-powered HFT to evolve and remain effective in dynamic market environments.
Traditional trading often requires significant human resources for analysis, monitoring, and execution. AI systems can automate many of these tasks, reducing the need for extensive human intervention. This not only lowers operational costs but also frees up traders to focus on more strategic aspects of their trading activities.
The integration of AI systems in High-Frequency Trading has ushered in a new era of efficiency, accuracy, and competitiveness. With their rapid data processing capabilities, predictive analytics, and adaptability, AI systems empower traders to make split-second decisions in a high-stakes environment. From risk management to real-time sentiment analysis, these systems offer an array of benefits that elevate HFT to unprecedented levels of success. As technology continues to advance, AI's role in HFT is likely to expand further, shaping the future of financial markets and redefining the landscape of trading strategies. However, it's crucial to recognize that while AI offers remarkable advantages, its implementation requires a deep understanding of both technology and market dynamics to ensure responsible and effective use.
Midjourney prompt: “AI high-frequency trading”
Mad Hedge Technology Letter
August 18, 2023
Fiat Lux
Featured Trade:
(A POOR OMEN)
($TNX), ($COMPQ)
The U.S. 10-year Treasury bond ($TNX) has surged past the October 2022 high so what does that mean for tech stocks ($COMPQ)?
In short term, tech shares will be held back.
Tech stocks are the most exposed to collateral damage from surging interest rates because of the growth nature of the sector.
Funnily enough, much of this 2023 rally has been fueled by the notion of a Fed “pivot” coming down the pipeline.
It still hasn’t come, but now the pendulum has swung the other way and tech shares, even the biggest and best, and getting brutalized.
The people short tech stocks in 2023 couldn’t have been more wrong even if betting against the Fed doesn’t usually work.
Now, the inverse of the Fed pivot is taking place as the U.S. 10-year Treasury bond has hit highs of 4.32% demolishing last years’ peak.
Technically, once recent highs shatter, it is common for set algorithms to motion another wave of money to continue the trend.
The trend for yields is now higher.
It’s highly plausible that this bull market in bond yields picks up and pushes to 5%.
Why is this happening?
The surprisingly resilient US economy has meant the job market is on fire. Tech companies have become leaner, but have abstained from mass firings.
Also, Americans are spending like there is no tomorrow which has kept stocks going up for most of the year and the latest earnings season reinforces this trend.
The result will mean that inflation could remain stubbornly above the Fed’s target, leaving room for long-term yields to push even higher.
There is a remarkable repricing higher in longer-term rates and many traders have been caught off guard.
The market is coming more to the view that there is going to be long-term inflation pressures despite recent progress.
Macro uncertainty is going to remain the story for the next few years, and that requires greater compensation to own long-dated bonds.
But many now expect a soft landing that would leave inflation the dominant risk.
For much of the year, the market worked its way towards a hard landing/Fed pivot scenario which factors in lower inflation. Now the opposite is happening.
Broader economic shifts are also driving speculation that the low rates — and inflation — of the post-crisis period were an anomaly. Among them: surging wage costs, deglobalization, and corporates padding their net margins.
The U.S. is drowning in its own federal debt but must issue more to service the interest on this debt meaning the purchasing power in the United States is crashing.
The net net of this is very negative for technology stocks and it’s a tough pill to swallow after benefiting from the AI bubble and Fed pivot narrative for the first 7 months of the year.
It’s difficult to see another burst of hot money pouring into tech stocks for the rest of 2023.
If we are stuck with the soft landing and the higher for longer narrative, then markets will bid up higher inflation which will suppress tech stocks.
That is what the 4.33% in the 10-year is telling us and tech stocks in the near term will be negatively correlated with this yield moving into the last 3 months of the year.
(AN UPDATE ON MR MARKET AND OXY)
August 18, 2023
Hello everyone,
We are now into the middle of August. It’s looking like August and September will be bearish months for the markets and yields on the 2- and 10-year Bonds will continue to make a final push to the upside. Yields on the 10-year could get up to 4.33% or even 4.80%. Then there is likely to be a medium-term retracement. S&P 500 could dip to around 4,300 before rallying into the end of the year. The gold sell-off is persisting. A final bottom may be found around 1880 or 1850, or even into the 1700’s if there is a capitulation sell-off. Then, it is the buy of the century. Look for Oil to be in the low to mid $90s by the end of the year.
There is constant talk about whether the so-called landing will be soft or hard. Whatever it is, volatility is sure to be present. So, if we have some gut-churning down days in the market, and all the numbers turn red on your screen, please don’t sell everything in your portfolio. This only benefits the brokers, who get the commission on your sales, and the institutions who buy everything you sold at great prices.
Update on Occidental Petroleum
Our OXY trade sent out at the beginning of July is doing well. I hope many of you managed to enter the trade or bought the stock or did both. Looks like we got in near the low in the stock.
In a deal worth more than $1 billion, Occidental Petroleum (OXY) will acquire Carbon Engineering. It’s just another sign how focused the oil majors are on carbon mitigation. Such partnerships will help Occidental develop carbon air capture solutions as clean energy grows increasingly important to corporate America. Occidental will also likely be a beneficiary of the Inflation Reduction Act benefits for carbon storage. (I mentioned the latter act in Monday’s Post when I was speaking about Hydrogen). Occidental and a handful of other companies such as Baker Hughes, Weyerhaeuser, and Bloom Energy (see Monday’s Post) are potential winners arising from the growing focus on carbon technology.
Some housekeeping:
I am now starting to pair or group subscribers together according to the Buddy System. So, if you answered B in the survey (and would be happy for some help) you will be likely to get a call or email from your Buddy peer over the next week or so. This will only work if people engage with the idea. It is designed to help everyone.
A social get-together is in the planning. It’s likely to be in the next few months. I will give you a fair warning. A survey will be sent out, so we can gauge interest and numbers. It will be held in the U.S.
August Zoom meeting will be held in the next couple of weeks. A Zoom link will be sent out giving you access. This is an informal meeting allowing you to interact with other subscribers, ask questions and make comments.
Wishing you all a great weekend.
Cheers,
Jacquie
Global Market Comments
August 18, 2023
Fiat Lux
Featured Trades:
(WEDNESDAY, SEPTEMBER 6, 2023 SAN DIEGO, CALIFORNIA GLOBAL STRATEGY LUNCHEON)
(TESTIMONIAL)
(AUGUST 16 BIWEEKLY STRATEGY WEBINAR Q&A),
(SNOW), (PANW), (AMZN), (FCX), (WPM), (CCI), (GOLD), (WEAT), (JNK), (TLT), (X), (XOM), (HD), (AA), (UNG), (TSLA)
CLICK HERE to download today's position sheet.
Come join me for lunch at the Mad Hedge Fund Trader’s Global Strategy Update, which I will be conducting in San Diego California at 12:00 noon on Wednesday, September 6, 2023.
The event will be held at a famous downtown San Diego restaurant with a spectacular harbor view. An excellent meal will be followed by a wide-ranging discussion and an extended question-and-answer period.
I’ll be giving you my up-to-date view on stocks, bonds, currencies, commodities, precious metals, and real estate. And to keep you in suspense, I’ll be throwing a few surprises out there too. Tickets are available for $279.
I’ll be arriving on time and leaving late in case anyone wants to have a one-on-one discussion, or just sit around and chew the fat about the financial markets.
The lunch will be held at an exclusive private restaurant in the downtown San Diego. The precise location will be emailed with your purchase confirmation.
I look forward to meeting you, and thank you for supporting my research.
To purchase tickets for the luncheons, please click the BUY NOW! button above or click here.
