I usually know what the stock market is going to do 99% of the time. Now is the 1% when I don’t have a clue.

Stocks have been on an unprecedented five-month tear, and everything is expensive. The risk/reward of entering new positions here is terrible. Market concentration is incredible, with Microsoft (MSFT) and Nvidia (NVDA) now 15% of the total stock market capitalization. Hedge funds are suffering their worst year in decades because everything is now unpredictable.

And if you are looking for contradictions in a world full of contradictions, consider this. A Bank of America (BAC) survey revealed that 91% of professional money managers believe stocks are overvalued while at the same time whittling down their cash positions to historically low levels. In other words, they’re cruising for a bruising.

Not with my money, thank you very much!

Suddenly, long-term index players look like geniuses. It all makes me want to sit here with my feet in the chill waters of Lake Tahoe and do nothing but admire the mountain scenery. That is effectively what I am doing now with a rare 100% cash position after the August 15 option expiration. To be more specific, I am 100% invested in one-year US Treasury bills yielding 4.3%. I am being paid handsomely to stay away.

Still, even the worst markets have something to offer to the discerning and the discriminating. That leads me to falling interest rate plays, which will probably become the new market leaders for the next year.

This is not such a stretch with the Fed funds futures assigning a 92% probability for a rate cut at the September 17 meeting (click here for the calendar). I think the real probability is more like 50/50. The Producer Price Index out on Thursday proved that runaway tariff-driven inflation (read “import taxes”) is here, with a red-hot increase of 0.9% in July. Jay Powell may well choose to keep interest rates unchanged or lower them by only a token 0.25%.

That might be the dream scenario for traders and investors because it would undoubtedly trigger a long-overdue selloff in the stock market. That would give us a fresh entry point for the many interest rate plays I have listed below. The market that comes back from the next selloff won’t be the same old one, but a brand new one. Tech stocks might have to flat-line for a while as they are so egregiously overbought.

If it’s good enough for Warren Buffett, it’s good enough for me. We learned last week that the Oracle of Omaha is making a major commitment to the new homebuilding sector, which has been in the doghouse for the last three years. You can, through guilt by association, include DH Horton (DHI), Lenar (LEN), KB Homes (KBH), and Pulte Homes (PHM), which should all trade together.

Interest rates, which have hobbled the sector, should now act as steroids as they fall. While (DHI) has already moved 54% off the bottom this year, it still has another 18% to go to reach its old high. And in a world where everything is expensive, the homebuilders remain cheap.

There is a structural shortage of ten million homes in the US, a holdover from the Great Financial Crisis of 2008-2009, which brought new home construction to a complete halt. With half of all homebuilders then going under, the industry never really recovered. And because these companies can offer back-door discounts, such as through loan buy-downs and kitchen cabinet upgrades. New homes are actually cheaper now than existing ones for the first time ever.

And this is a theme that you constantly see me returning to, structural shortages. I love them because they create a hockey stick effect on earnings, which can take a decade to address.

Who else does well when interest rates fall? Gold miners like Barrick Mining (B), Agnico Eagle Mines (AEM), and Newmont Mining (NEM). This is because falling interest rates offer less yield competition for the barbarous relic in a yield-hungry world. At the same time, the global supply of gold and silver, which are usually found together, is shrinking, driving prices and profit margins ever northward. They’re not making them anymore.

Denver-based Newmont is the only miner included in a major stock index, the S&P 500 (SPY), and expects to deliver 5.6 million ounces, or 14,000 gold bars worth, in 2025. Newmont is a leading gold and copper producer with operations in several countries, including the United States, Australia, Ghana, Peru, and Suriname. I have been to their mine in the later. (As you may have noticed, I use vacations to visit mine). The company vastly expanded its production with two blockbuster takeovers, Goldcorp in 2019 and Newcrest Mining in 2023.

The outlook for gold generally looks positive, with central banks continuing their buying with reckless abandon, as they have done for the past decade. ETF gold holdings are still 17% below their last peak, so there is plenty of upside potential. And if you are looking for alternative asset classes and don’t want to drink the crypto Kool-Aid, which is prone to 95% out-of-the-blue declines, the yellow metal fits the bill nicely.

My August performance is showing a rare decline so far, down -0.34%. That takes us to a year-to-date profit of +52.09%. My trailing one-year return rose to +93.92%. That takes my average annualized return to +51.31%, and my performance since inception finally topped +803.98%. These are all non-compounded numbers.

I let longs in (NFLX) and (FCX) and a short in and (TSLA) run into max profit at the August 15 option expiration. I stopped out of my short in (SPY) as it flip-flopped around the $645 strike price going into expiration, which is always a hopeless situation. Facing a very high-risk market with the Volatility Index ($VIX) back at a complacent $14 handle, I am keeping 100% in cash until better opportunities arise.

Some 63 of my 70 round trips in 2023, or 90%, were profitable. Some 74 of 94 trades were profitable in 2024, and several of those losses were really break-even. That is a success rate of +78.72%.

Try beating that anywhere.

My Ten-Year View – A Reassessment

CPI Rises by 0.2% and 2.7% on a YOY basis. Underlying US inflation accelerated in July by the most since the start of the year, though a tepid rise in the costs of goods tempered concerns about tariff-driven price pressures. The core consumer price index, which excludes the often-volatile food and energy categories, increased 0.3% from June, according to Bureau of Labor Statistics data out Tuesday. That was in line with economists’ forecasts, as was the overall CPI on a monthly basis. But does anyone believe the numbers now? Not many.

PPI Comes in Hot with a 0.9% gain in July. US wholesale inflation accelerated in July by the most in three years, suggesting companies are passing along higher import costs related to tariffs. The producer price index increased 0.9% from a month earlier and 3.3% from a year ago. Service costs jumped 1.1% last month. The stock market seems not to care.

US Government to take stake in Intel (INTC) to provide an indirect subsidy to domestic chip making. Intel declined to comment on the report but said it was deeply committed to supporting efforts to strengthen U.S. technology and manufacturing leadership.

Berkshire Hathaway’s Mystery Stock is UnitedHealthcare (UNH), which it has been quietly accumulating in recent weeks. The market knew that Buffett was picking up something big, but they didn’t know what. Nice to see that the old bottom fishing instinct is still there. The stock rallied 36% on the leaks. Buffett also loaded up on D.R. Horton (DHI), where I issued a LEAPS leverage long earlier in the week.

U.S. retail Sales Rise in July, up 0.9%, boosted by strong demand for motor vehicles as well as promotions by Amazon and Walmart, though a softening labor market and higher goods prices could curb growth in consumer spending in the third quarter. 

Consumer Sentiment Dives, down to 58.6, a four-month low according to the University of Michigan. This deterioration largely stems from rising worries about inflation. Buying conditions for durables plunged 14%, its lowest reading in a year, on the basis of high prices. Current personal finances declined modestly amid growing concerns about purchasing power. 

Trade Negotiations Will Extend for China Another 90 Days to November 9, and probably another 90 days after that. The new order prevents U.S. tariffs on Chinese goods from shooting up to 145%, while Chinese tariffs on U.S. goods were set to hit 125% – rates that would have resulted in a virtual trade embargo between the two countries. It locks in place – at least for now – a 30% tariff on Chinese imports, with Chinese duties on U.S. imports at 10%.

Administration Hits Nvidia and AMD with 15% Export Tax on chip sales to China. The government wants a piece of the action on chip sales to the Middle Kingdom. National security concerns are out the window. This is unprecedented in the history of global trade and a step towards government control of private industry. Incredible, both stocks are up on the news.

Computers are Bulls, While Humans are Bears. Machines are trading off momentum and volatility, while humans are looking at valuations and macroeconomics. Computers are at pre-pandemic highs in risk, while humans have been moving towards an underweight position in stocks all summer. Watch out when the rubber band snaps. These two strategies remain out of synch for weeks, not months.

Lithium Stocks Surge, as a major Chinese producer halts exports. The most recent 90-day extension of trade negotiations ends tomorrow, and this may be a retaliation. Contemporary Amperex Technology (CATL) suspended production at a mine in China that plays a key role in supplying the global market. It’s a great time to buy lithium stocks while EV plays are out of favor. Buy Albermarle (ALB) on dips.

On Monday, August 18, nothing of note takes place.

On Tuesday, August 19, at 7:30 AM EST, Housing Starts and Building Permits are announced.

On Wednesday, August 20, at 7:00 AM, we get the Minutes from the last Federal Reserve Open Market Committee Meeting. The Jackson Hole Meeting of central bankers takes place.

On Thursday, August 21, we get Weekly Jobless Claims. We also get Existing Home Sales.

On Friday, August 22, at 10:00 AM, we get the Baker Hughes Rig Count. Fed Chairman Jay Powell speaks.

As for me, I am reminded of my own summer of 1967, back when I was 15, which may be the subject of a future book and movie.

My family’s summer vacation that year was on the slopes of Mount Rainer in Washington state. Since it was raining every day, the other kids wanted to go home early. So my parents left me and my younger brother in the hands of Mount Everest veteran Jim Whitaker to summit the 14,411-foot peak (click here for his story). The deal was for us to hitchhike back to Los Angeles when we got off the mountain.

In those days, it wasn’t such an unreasonable plan. The Vietnam War was on, and a lot of soldiers were thumbing their way to report to duty. My parents figured that since I was an Eagle Scout, I could take care of myself.

When we got off the mountain, I looked at the map and saw there was this fascinating country called “Canada” just to the north. So, it was off to Vancouver. Once there, I learned there was a world’s fair going on in Montreal, some 2,843 miles away, so we hit the TransCanada Highway going east.

Crossing the Rockies, the road was closed by a giant forest fire. The Mounties were desperate and were pulling all able-bodied men out of the cars to fight the fire. Since we looked 18, we were drafted, given an ax and a shovel, and sent to the front line for a week, meals included.

We ran out of money in Alberta, so we took jobs as ranch hands. There we learned the joys of running down lost cattle on horseback, working all day at a buzz saw making fence posts, inseminating cows with a giant hypodermic, and eating steak three times a day.

I made friends with the cowboys by reading them their mail, which they were unable to do. There were lots of bills due, child support owed, and alimony demands. Now I know where all those country western lyrics come from.

In Saskatchewan, the roads ran out of cars, so we hopped on a freight train in Manitoba, narrowly missing getting mugged in the rail yard in the middle of the night. We camped out in a boxcar occupied by other rough sorts for three days. There’s nothing like opening the doors and watching the scenery go by with no billboards and the wind blowing through your hair!

When the engineer spotted us on a curve, he stopped the train and gestured to us to join him in the engine. There, we slept on the floor, and he even let us take turns driving! That’s how we made it to Ontario, the most mosquito-infested place on the face of the earth.

Our last ride into Montreal offered to let us stay in his boathouse as long as we wanted, so there we stayed. Thank you, WWII RAF bomber pilot Group Captain John Chenier!

Broke again, we landed jobs at a hamburger stand at Expo 67 in front of the imposing Russian pavilion. The pay was $1 an hour, and all we could eat was burgers. At the end of the month, Madame Desjardin couldn’t balance her inventory, so she asked how many burgers I was eating a day. I answered 20, and my brother answered 21. “Well, there’s my inventory problem,” she replied.

And then there was Suzanne Baribeau, the love of my life. I wonder whatever happened to her?

I had to allow two weeks to hitchhike home in time for school. When we crossed the border at Niagara Falls, we were arrested as draft dodgers, as we were too young to have driver’s licenses. It took a long conversation between US Immigration and my dad to convince them we weren’t.

Then they asked Dad if we should be arrested and sent back on the next plane. He replied, “No, they can make it on their own.”

We developed a clever system where my parents could keep track of us. Long-distance calls were then enormously expensive. So, I called home collect, and when my dad answered, he asked what city the call was coming from. When the operator gave him the answer, he said he would not accept the call. I remember lots of surprised operators. But the calls were free, and Dad always knew where we were.

We had to divert around Detroit to avoid the race riots there. We got robbed in North Dakota, where we were in the only car for 50 miles. We made it as far as Seattle with only three days left until school started.

Finally, my parents had a nervous breakdown. They bought us our first air tickets ever to get back to LA, then quite an investment.

I haven’t stopped traveling since, my tally now topping all 50 states and 135 countries.

And I learned an amazing thing about the United States. Almost everyone in the country is honest, kind, and generous. Virtually every night, our last ride of the day took us home, gave us a generous dinner, and provided us with an extra bedroom or a garage to sleep in. The next morning, they fed us a big breakfast and dropped us off at a good spot to catch the next ride.

It was the adventure of a lifetime, and I am a better man for it. I left the West Coast a child and returned a man, and I am infinitely better for it.

Summit of Mt. Rainier 1967

McKinnon Ranch Bassano Alberta 1967

American Pavilion Expo 67

Hamburger Stand at Expo 67

My Brother Picking Cherries in Michigan 1967

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader