Diary Archives - Mad Hedge Fund Trader

The Market Outlook for the Week Ahead, or the Great Rotation of 2023 is On

What a difference a vacation makes!

When I boarded the Queen Mary II in early July, big technology stocks (AAPL), (TSLA), (NVDA), (GOOGL) were on fire and knew no bounds, while bonds (TLT) were holding steady at a 3.40% yield. Energy stocks (OXY) were scraping the bottom.

One month later and big tech is in free fall while energy, commodities, and precious metals have taken over the lead. Bonds are probing for new lows at a 4.20% yield and may have another $5.00 of downside.

The Great Rotation of 2023 has begun!

The only question is how long it will last.

I happen to believe that we are into a traditional summer correction that could last until the usual September or October bottom. That is when I will be picking up long-term bull LEAPS with both hands. After that, it’s off to the races once again to new all-time highs once again.

Except that this time, everything will go up, both big tech, the domestics recovery plays, and bonds. That’s because they will be discounting the next great market mover, several successive cuts in interest rates by the Federal Reserve certain to take place in 2024.

We all know that markets discount market-moving developments six to nine months in advance. That means you should start buying about….September or October.

Perhaps the best question asked at my many strategy luncheons this summer came from a dear old friend in London. “Where is all the money coming from to pay for all this”? The answer is, well complicated. I’ll give you a list”

1) All of the Quantitative Easing money created since 2008, some $10 trillion worth, is still around. It is just sleeping in 90-day T-bills.

2) With inflation basically over, thanks to hyper-accelerating technology and collapsing energy prices, the case for the Fed to stop raising and start cutting interest rates is clear.

3) Falling interest rates trigger a collapse in the US dollar.

4) Earnings at big tech companies explode, which earn about half of their revenues from abroad.

5) The falling interest rate sectors are also set alike. These include energy, commodities, precious metals, and bonds.

6) A cheap greenback pours gasoline on the economy.

7) The $1 trillion in stimulus approved last year provides the match as most of it has yet to be spent.

8) China finally recovers and turbocharges all of the above trends.

9) 2024 is a presidential election year and the economy always seems to do mysteriously well going into such events.

10) All we are left to do is sit back and watch all our positions go up, figure out how we are going to spend all that money, and sing the praises of the Mad Hedge Fund Trader.

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%, some 2.50 times the S&P 500 over the same period.

Some 41 of my 46 trades this year have been profitable.

The Nonfarm Payroll drops to 187,000 in July, a one-year low, less than expectations. The Headline Unemployment Rate returned to 3.5%, a 50-year low. The soft-landing scenario lives! That’s supposed to be impossible in the face of 5.25% interest rates. Average hourly earnings grew at a restrained 3.6% annual rate. Half of the new jobs were in health care. At the rate we are aging, that is no surprise.

Rating Agencies Strike Again, with Moody’s threatened downgrade of a dozen regional banks. Stocks took it up on the nose giving up Monday’s 400-point gain. Higher funding costs, potential regulatory capital weaknesses, and rising risks tied to commercial real estate are among strains prompting the review, Moody’s said late Monday. The summer correction is finally here.

Berkshire Hathaway Post Record Profit, with profits up 38% and interest and other investment income growing sixfold as Warren Buffet’s trading vehicle goes from strength to strength to strength. Sky-high interest rates enabled its Geico insurance holding to really coin it this time. Buffet turns 93 this month. Keep buying (BRK/B) on dips. Our LEAPS are looking great, up 327% in 11 months.

Rivian Beats, losing only $1.08 a share versus an expected $1.41. The stock jumped 3% on the news. The gross profit per vehicle showed a dramatic improvement at $35,000. The production forecast edged up from 50,000 to 52,000 vehicles for 2023. Momentum is clearly improving making our LEAPS look better by the day. Buy (RIVN) on dips as the next (TSLA).

Deflation Hits China, as the post-Covid recovery continues to lag. Their Consumer Price Index fell 0.3% YOY. Imports and exports are falling dramatically as trade sanctions bite. Youth unemployment hit a new high as 11.6 million new college grads hit the market. Global commodities could get hit but so far the stocks aren’t seeing it. Avoid anything Chinese (FXI), even the food.

Inflation Jumps, 0.2% in July and 3.2% YOY. Rents, education, and insurance (climate change) were higher while used cars were down 1.3% and airfares plunged by 8.1%. Stocks rallied on the small increase preferring to focus on the smallest back-to-back increase in two years. Bonds (TLT) rallied big. The big question is what will the Fed do with this?

Weekly Jobless Claims came in at a strong 278,000, showing the Fed’s high-interest rate policy is having an effect on the jobs market. Stocks want to know how much longer it will last.

Natural Gas Soars to a new high and accomplished an upside breakout on all charts. European gas prices have just jumped 40%. An Australian strike shut down an LNG export facility. Energy traders are looking for higher highs. My (UNG) LEAPS, a Mad Hedge AI pick, are looking great, doubling off our cost in two months.

Biden Cracks Down on Technology Investment in China, especially on our most advanced tech which can be used in weapons development. Tech investment in the Middle Kingdom is already down 70% over the last two years. No point in selling China the rope with which to hang us.

Home Mortgage Rates Hit a 22-Year High, at 7.08%. But the existing home market is heating up and the new home market is absolutely on fire in anticipating of a coming rate fall. You can’t beat a gale-force demographic tailwind.

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 14 at 8:00 AM EST, the US Consumer Inflation Expectations are out,

On Tuesday, August 15 at 8:30 AM, US Retail Sales are released.

On Wednesday, August 16 at 2:30 PM, the US Building Permits are published.

On Thursday, August 17 at 8:30 AM, the Weekly Jobless Claims are announced.

On Friday, August 18 at 2:00 PM, the Baker Hughes Rig Count is printed.

As for me, occasionally, I tell close friends that I hitchhiked across the Sahara Desert alone when I was 16 and I am met with looks that are amazed, befuddled, and disbelieving, but I actually did it in the summer of 1968.

I had spent two months hitchhiking from a hospital in Sweden all the way to my ancestral roots in Monreale, Sicily, the home of my Italian grandfather. My next goal was to visit my Uncle Charles who was stationed at the Torreon Air Force base outside of Madrid, Spain.

I looked at my Michelin map of the Mediterranean and quickly realized that it would be much quicker to cut across North Africa than hitching all the way back up the length of Italy, cutting across the Cote d’Azur, where no one ever picked up hitchhikers, then all the way down to Madrid, where the people were too poor to own cars.

So one fine morning found me taking deck passage on a ferry from Palermo to Tunis. From here on, my memory is hazy and I remember only a few flashbacks.

Ever the historian, even at age 16, I made straight for the Carthaginian ruins where the Romans allegedly salted the earth to prevent any recovery of a country they had just wasted. Some 2,000 years later it, worked as there was nothing left but an endless sea of scattered rocks.

At night, I laid out my sleeping bag to catch some shut-eye. But at 2:00 AM, someone tried to bash my head in with a rock. I scared them off but haven’t had a decent night of sleep since.

The next day, I made for the spectacular Roman ruins at Leptus Magna on the Libyan coast. But Muamar Khadafi pulled off a coup d’état earlier and closed the border to all Americans. My visa obtained in Rome from King Idris was useless.

I used to opportunity to hitchhike over Kasserine Pass into Algeria, where my uncle served under General Patton in WWII. US forces suffered an ignominious defeat until General Patton took over the army 1n 1943. Some 25 years later, the scenery was still littered with blown-up tanks, destroyed trucks, and crashed Messerschmitts.

Approaching the coastal road, I started jumping trains headed west. While officially the Algerian Civil War ended in 1962, in fact, it was still going on in 1968. We passed derailed trains and smashed bridges. The cattle were starving. There was no food anywhere.

At night, Arab families invited me to stay over in their mud brick homes as I always traveled with a big American Flag on my pack. Their hospitality was endless, and they shared what little food they had.

As a train pulled into Algiers, a conductor caught me without a ticket. So, the railway police arrested me and on arrival took me to the central Algiers prison, not a very nice place. After the police left, the head of the prison took me to a back door, opened it, smiled, and said “si vou plais”. That was all the French I ever needed to know. I quickly disappeared into the Algiers souk.

As we approached the Moroccan border, I saw trains of camels 1,000 animals long, rhythmically swaying back and forth with their cargoes of spices from central Africa. These don’t exist anymore, replaced by modern trucks.

Out in the middle of nowhere, bullets started flying through the passenger cars splintering wood. I poked my Kodak Instamatic out the window in between volleys of shots and snapped a few pictures.

The train juddered to a halt and robbers boarded. They shook down the passengers, seizing whatever silver jewelry and bolts of cloth they could find.

When they came to me, they just laughed and moved on. As a ragged backpacker, I had nothing of interest for them.

The train ended up in Marrakesh on the edge of the Sahara and the final destination of the camel trains. It was like visiting the Arabian Nights. The main Jemaa el-Fna square was amazing, with masses of crafts for sale, magicians, snake charmers, and men breathing fire.

Next stop was Tangiers, site of the oldest foreign American embassy, which is now open to tourists. For 50 cents a night, you could sleep on a rooftop under the stars and pass the pipe with fellow travelers which contained something called hashish.

One more ferry ride and I was at the British naval base at the Rock of Gibraltar and then on a train for Madrid. I made it to the Torreon base main gate where a very surprised master sergeant picked up a half-starved, rail-thin, filthy nephew and took me home. Later, Uncle Charles said I slept for three days straight. Since I had lice, Charles shaved my head when I was asleep. I fit right in with the other airmen.

I woke up with a fever, so Charles took me the base clinic. They never figured out what I had. Maybe it was exhaustion, maybe it was prolonged starvation. Perhaps it was something African. Possibly, it was all one long dream.

Afterwards, my uncle took for to the base commissary where I enjoyed my first cheeseburger, French fries, and chocolate shake in many months. It was the best meal of my life and the only cure I really needed.

I have pictures of all this which are sitting in a box somewhere in my basement. The Michelin map sits in a giant case of old, used maps that I have been collecting for 60 years.

Mediterranean in 1968

Stay healthy,

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

August 11, 2023

Diary, Newsletter, Summary

Global Market Comments
August 11, 2023
Fiat Lux

Featured Trades:

(THE DEATH OF THE FINANCIAL ADVISOR)

CLICK HERE to download today's position sheet.

The Death of the Financial Advisor

Diary, Newsletter

About one-third of my readers are professional financial advisors who earn their crust of bread telling clients how to invest their retirement assets for a fixed fee.

They used to earn a share of the brokerage fees they generated. After stock commissions went to near zero, they started charging a flat 1.25% a year on the assets they oversaw.

So it is with some sadness that I have watched this troubled industry enter a long-term secular decline which seems to be worsening by the day.

Some miscreants steered clients into securities solely based on the commissions they earned, which could reach 8% or more, whether it made any investment sense or not. Some of the instruments they recommended were nothing more than blatant rip-offs.

Knowing hundreds of financial advisors personally, I can tell you that virtually all are hardworking professionals who go the extra mile to safeguard customer assets while earning incremental positive returns.

That is no easy task given the exponential speed with which the global economy is evolving. Yesterday’s “widow and orphans” safe bets can transform overnight into today’s reckless adventure.

Look no further than coal, energy, and the auto industry. Once a mainstay of conservative portfolios, all of these sectors have, or came close to filing for bankruptcy two years ago.

Even my own local power utility, Pacific Gas & Electric Company (PGE), filed for chapter 11 in 2019 because they couldn’t handle the liability created by massive wildfires.

Some advisors even go the extent of scouring the Internet for a trade mentoring service that can ease their burden, like the Diary of a Mad Hedge Fund Trader, to get their clients that extra edge.

Traditional financial managers have been under siege for decades.

Commissions have been cut, expenses increased, and mysterious “fees” have started showing up on customer statements.

Those who work for big firms, like UBS, Morgan Stanley, Goldman Sacks, Merrill Lynch, and Charles Schwab, have seen health insurance coverage cut back and deductibles raised.

The safety of custody with big firms has always been a myth. Remember, all of these guys would have gone under during the 2008-09 financial crash if they hadn’t been bailed out by the government. It will happen again.

The quality of the research has taken a nosedive, with sectors, like small caps, no longer covered.

What remains offers nothing but waffle and indecision. Many analysts are afraid to commit to a real recommendation for fear of getting sued, or worse, scaring away lucrative investment banking business.

And have you noticed that after Dodd-Frank, two-thirds of a brokerage report is made up of disclosures?

Many advisors have, in fact, evolved over the decades from money managers to asset gatherers and relationship managers.

Their job is now to steer investors into “safe” funds managed by third parties that have to carry all of the liability for bad decisions (buying energy plays in 2014?).

The firms have effectively become toll-takers, charging a commission for anything that moves.

They have become so risk-averse that they have banned participation in anything exotic, like options, option spreads, (VIX) trading, any 2X leveraged ETFs, or inverse ETFs of any kind. When dealing in esoterica is permitted, the commissions are doubled.

Even my own newsletter has to get compliance review before it is distributed to clients, often provided by third parties to smaller firms.

“Every year they try to chip away at something”, one beleaguered advisor confided to me with despair.

Big brokers often hype their own services with expensive advertising campaigns that unrealistically elevate client expectations.

Modern media doesn’t help either.

I can’t tell you how many times I have had to convince advisors not to dump all their stocks at a market bottom because of something they heard on TV, saw on the Internet, or read in a competing newsletter warning that financial Armageddon was imminent.

Customers are force-fed the same misinformation. One of my main jobs is to provide advisors with the fodder they need to refute the many “end of the world” scenarios that seem to be in continuous circulation.

In fact, a sudden wave of such calls has proven to be a great “bottoming” indicator for me.

Personally, I don’t expect to see another major financial crisis until 2032 at the earliest, and by then, I’d probably be dead.

Because of all of the above, about half of my financial advisor readers have confided in me a desire to go independent in the near future, if they are not already.

Sure, they won’t be ducking all these bullets. But at least they will have an independent business they can either sell at a future date or pass on to a succeeding generation.

Overheads are far easier to control when you own your own business, and the tax advantages can be substantial.

A secular trend away from non-discretionary to discretionary account management is a decisive move in this direction.

There seems to be a great separation of the wheat from the chaff going on in the financial advisory industry.

Those who can stay ahead of the curve, both with the markets and their own business models, are soaking up all the assets. Those that can’t are unable to hold on to enough money to keep their businesses going.

Let’s face it, in the modern age, every industry is being put through a meat grinder. Thanks to hyper-accelerating technology, business models are changing by the day.

Just be happy you’re not a doctor trying to figure out Obamacare.

Those individuals who can reinvent themselves quickly will succeed. Those that won’t, will quickly be confined to the dustbin of history.

It’s Not as Easy as It Looks

August 10, 2023

Diary, Newsletter, Summary

Global Market Comments
August 10, 2023
Fiat Lux

Featured Trades:

(WEDNESDAY, SEPTEMBER 6, 2023 SAN DIEGO, CALIFORNIA GLOBAL STRATEGY LUNCHEON)
(HOW TO GAIN AN ADVANTAGE WITH PARALLEL TRADING),
(GM), (F), (TM), (NSANY), (DDAIF), BMW (BMWYY), (VWAPY),
(PALL), (GS), (EZA), (CAT), (CMI), (KMTUY),
(KODK), (SLV), (AAPL)

CLICK HERE to download today's position sheet.

How to Gain an Advantage with Parallel Trading

Diary, Newsletter, Research

One of the most fascinating things I learned when I first joined the equity trading desk at Morgan Stanley during the early 1980s was how to parallel trade.

A customer order would come in to buy a million shares of General Motors (GM) and what did the in-house proprietary trading book do immediately?

It loaded the boat with the shares of Ford Motors (F).

When I asked about this tactic, I was taken away to a quiet corner of the office and read the riot act.

“This is how you legally front-run a customer,” I was told.

Buy (GM) in front of a customer order, and you will find yourself in Sing Sing shortly.

Ford (F), Toyota (TM), Nissan (NSANY), Daimler Benz (DDAIF), BMW (BMWYY), or Volkswagen (VWAPY), are no problem.

The logic here was very simple.

Perhaps the client completed an exhaustive piece of research concluding that (GM) earnings were about to rise.

Or maybe a client's old boy network picked up some valuable insider information.

(GM) doesn’t do business in isolation. It has tens of thousands of parts suppliers for a start. While whatever is good for (GM) is good for America, it is GREAT for the auto industry.

So through buying (F) on the back of a (GM) might not only match the (GM) share performance, it might even exceed it.

This is known as a Primary Parallel Trade.

This understanding led me on a lifelong quest to understand Cross Asset Class Correlations, which continue to this day.

Whenever you buy one thing, you buy another related thing as well, which might do considerably better.

I eventually made friends with a senior trader at Salomon Brothers while they were attempting to recruit me to run their Japanese desk.

I asked if this kind of legal front running happened on their desk.

“Absolutely,” he responded. But he then took Cross Asset Class Correlations to a whole new level for me.

Not only did Salomon’s buy (F) in that situation, they also bought palladium (PALL).

I was puzzled. Why palladium?

Because palladium is the principal metal used in catalytic converters, which remove toxic emissions from car exhaust, and has been required for every U.S. manufactured car since 1975.

Lots of car sales, which the (GM) buying implied, ALSO meant lots of palladium buying.

And here’s the sweetener.

Palladium trading is relatively illiquid.

So, if you catch a surge in the price of this white metal, you would earn a multiple of what you would make on your boring old parallel (F) trade.

This is known in the trade as a Secondary Parallel Trade.

A few months later, Morgan Stanley sent me to an investment conference to represent the firm.

I was having lunch with a trader at Goldman Sachs (GS) who would later become a famous hedge fund manager and asked him about the (GM)-(F)-(PALL) trade.

He said I would be an IDIOT not to take advantage of such correlations. Then he one-upped me.

You can do a Tertiary Parallel Trade here through buying mining equipment companies such as Caterpillar (CAT), Cummins (CMI), and Komatsu (KMTUY).

Since this guy was one of the smartest traders I ever ran into, I asked him if there was such a thing as a Quaternary Parallel Trade.

He answered “Abso******lutely,” as was his way.

But the first thing he always did when searching for Quaternary Parallel Trades would be to buy the country ETF for the world’s largest supplier of the commodity in question.

In the case of palladium, that would be South Africa (EZA), the world's largest non-sanctioned producer, which together accounts for 74% with Russia of the world’s total production.

Since then, I have discovered hundreds of what I can Parallel Trading Chains, and have been actively making money off of them. So have you, you just haven’t realized it yet.

I could go on and on.

If you ever become puzzled or confused about a trade alert I am sending out (Why on earth is he doing THAT?), there is often a parallel trade in play.

Do this for decades as I have and you learn that some parallel trades break down and die. The cross relationships no longer function.

The best example I can think of is the photography/silver connection. When the photography business was booming, silver prices rose smartly.

Digital photography wiped out this trade, and silver-based film development is still only used by a handful of professionals and hobbyists.

Oh, and Eastman Kodak (KODK) went bankrupt in 2012.

However, it seems that whenever one Parallel Trading Chain disappears, many more replace it.

You could build chains a mile long simply based on how well Apple (AAPL) is doing.

And guess what? There is a new parallel trade in silver developing. For whenever someone builds a solar panel anywhere in the world, they are using a small amount of silver for the wiring. Build several tens of millions of solar panels and that can add up to quite a lot of silver.

What goes around comes around.

Suffice it to say that parallel trading is an incredibly useful trading strategy.

Ignore it at your peril.

Sometimes Markets are Hard to Figure Out

August 9, 2023

Diary, Newsletter, Summary

Global Market Comments
August 9, 2023
Fiat Lux

Featured Trades:

(THE US NATIVE AMERICAN ECONOMY)

CLICK HERE to download today's position sheet.

A US Native American Economy

Diary, Newsletter

Since the market is as dead as a doorknob, at least until tomorrow’s inflation report is out, I thought I’d dive into the deep background of the country’s economy.

When I was remodeling my 170-year-old London house, the chimney was in desperate need of attention. After the chimneysweep crawled up the fireplace, he found a yellowed and somewhat singed envelope addressed to Santa Claus.

Thinking it was placed there by my kids, he handed it over to me. In it was a letter penned in a childlike scrawl, written with a quill and ink, dated Christmas, 1910 asking for a Red Indian suit.

Europeans have long had a fascination with our Native Americans. So in preparation for my upcoming European strategy luncheon tour I thought I would get myself up to date about out earliest North American residents.

Business is booming these days on Indian reservations these days, or it isn’t, depending on where they live. Of the country’s 565 reservations, some 239 have moved into the casino business and the cash flow has followed.

In 2010, Indian gaming reaped some $40.9 billion in revenues, up 4.9% YOY, or some $14,029 per indigenous native. That compares to $60 billion for the non-Indian gaming revenues for the same year, up 13% YOY.

Some, like the Pequot tribe’s massive Foxwoods operation just two hours from New York City, now the world’s largest casino, once had money raining down upon it. But the casino grew so large that it entirely occupied the diminutive Connecticut reservation allocated to it by an obscure 17^th century treaty.

During the salad days, the profits were so enormous that an annual $250,000 stipend was paid to each officially registered tribal member. A poker boom helped. No surprise that the tribe grew from 167 to 665 members during the last 30 years. Today, the operation is burdened with $2.5 billion in debt, thanks to some bad investments and an ill-timed pre-pandemic expansion.

Casinos in more rural locations in the far west, distant from population centers, have fared less well. Those that contracted out for professional management from Las Vegas and Atlantic City firms, like Harrah’s, MGM, and Caesars, earn a modest living.

But the reservations attempting local management on their own fall victim to inefficiencies, incompetence, corruption, nepotism, over hiring of locals, and outright theft. Believe it or not, it is possible to lose money in the casino business, and some have had to shut down.

Overbuilding is another problem. It Northern New Mexico you can find a half dozen casinos within five miles of each other competing for the same customer. Most of their clients (read losers) are in fact local tribal members, the same individuals these houses are intended to help.

The 326 tribes that avoided the casino industry do so at the cost of a big hit to their standard of living. That explains why Native American median household income reaches only $35,062, compared to $50,046 for the US as a whole. Many, like the numerous Hopi, shun it because of their religion.

Without gambling there are few economic opportunities on the reservations, which is why they were given the land in the first place. The parched conditions of the west limit farming. Unemployment runs as high as 80% on some reservations, such as the White Mountain Apaches.

As a result, a high proportion of the country’s 6.9 million Native Americans are wards of the federal government, living on food stamps and other government handouts.

That’s not how it was supposed to be. The first modern reservation was set up for the Navajo tribe in 1851 at a baking hellhole on the Pecos River, with the intention of enforcing a primitive form of apartheid to ensure their survival. The legendary scout Kit Carson was hired to herd the hapless Indians to their new home.

He did it buy burning all the crops in their homelands and cutting down every tree. Because they surrendered early rather than fight, today they are the most populous tribe, with 160,000, owning the largest reservation, at 24,000 square miles, mostly in Arizona.

Those who signed treaties early survived, which gave them status as an independent nation but ceded all matters regarding defense to the federal government. In fact, the Iroquois, Sioux, and Chippewa separately declared war on Germany during WWII. Some even issue their own passports to attend the last Olympics. Those that didn’t have to settle for much smaller reservations or got wiped out.

In 1975, congress passed the Indian Self-Determination Act, which devolved power from the government to the tribes. Florida’s Seminole tribe won the right to open a casino in court in 1981, which was confirmed by the Supreme Court in 1987. After that, it was off to the races, with Indian bingo parlors sprouting across the country.

During the 19^th century Indian Wars when hundreds of thousands died, the practice was to attack a wagon train, kill all the men, marry the women, and adopt the children. As a result, I am descended from three different tribes, the Delaware, Sioux, and the Cherokee, as are about a quarter of native Californians my age. So I tried to cash in on government largess by applying for tribal scholarships to go to college.

It was to no avail. Only those who can trace their lineage to a 1941 Bureau of Indian Affairs census and are one-eighth Native American can qualify. When whites married Indians 150 years ago, the common practice was to baptize them and give them Western names, obliterating their true origins.

They were also pretty casual with marriage records in the Wild West. Jumping over a broom doesn’t exactly make it into the county records. But we still have many of the wedding photos and it’s clear who they are.

I never did find out if that little boy got his Red Indian suit for Christmas, but I hope he did.

Is She Native American, French, or Both?

August 8, 2023

Diary, Newsletter, Summary

Global Market Comments
August 8, 2023
Fiat Lux

Featured Trades:

(THIS WILL BE YOUR BEST-PERFORMING ASSET FOR THE NEXT 30 YEARS),
(IYR), (PHM), (LEN), (DHI), (TLT), (HYG), (MUB), (SPY)

CLICK HERE to download today's position sheet.

August 7, 2023

Diary, Newsletter, Summary

Global Market Comments
August 7, 2023
Fiat Lux

Featured Trades:

(MARKET OUTLOOK FOR THE WEEK AHEAD, or TAKING IT IN THE SHORTS),
(TLT)

CLICK HERE to download today's position sheet.

The Market Outlook for the Week Ahead, or Taking It in the Shorts

Diary, Newsletter

I am writing this to you from the British Airways first class lounge at Rome’s Leonardo da Vinci airport. I arrived here early to avoid the hordes of travelers certain to follow.

At the entrance to the departure area, there is a 20-foot-high bronze statue of the great artist and scientist holding a model of his 15th century imaginative helicopter design. He never built it, but I have seen modern-day life-sized copies.

You’re really taking your life in your hands taking a taxi in Rome. The only law seems to be qui audet, vincit, or who dares, wins (the motto of the British Special Air Service).

I know the 140 on the odometer was only in kilometers so I shouldn’t worry. What concerned me was that we were being passed by other cars doing at least 180.

Tighten that seat belt!

One disturbing practice of Italian drivers is that they never commit to a lane. They drive on the center line until they see a gap in the traffic then they go for it.

There’s nothing like coming home, only to be slapped in the face by a wet kipper. That was delivered by a black swan in the form of the Fitch downgrade of US debt from AAA to AA+ which shaved a shocking seven points off the (TLT) in a week.

The (TLT) held up valiantly in the face of the surprise red-hot Q2 GDP figure of 2.4%, indicating that a soft landing was a done deal. But once the Fitch report was out, it was all over but the crying. The (TLT) now looks like it could double bottom at the October 2022 low of $90.

I thought it was a huge overreaction. Fitch was only mirroring Standard & Poor’s identical downgrade in 2011, the last time a default was in the cards. The US economy and its debt remain the strongest in the world.

But with Republican members of Congress threatening a debt default at every opportunity, what was Fitch supposed to tell its customers? Any lender who threatens not to pay gets downgraded, the US Treasury, you, and even me. The real question is why it took so long. Take your trading loss on the (TLT) out of your next campaign donation.

You never argue with Mr. Market, who is always right. What the selloff does is set up the LEAPS of the century, the (TLT) 2025 $90-$95 vertical bull call spread with a certain 100% profit built in. However, given last week’s experience, I’d rather be late in this trade than early.

We now have the curious situation with the Mad Hedge AI Market Timing Index stock at an extremely overbought level of 80 for two months, the result of a non-stop melt-up in big technology stocks. The begging question now is how far we pull back before an explosive yearend rally ensues. That will be your last entry point for stocks in 2023.

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 +17.80% so far in 2023. My trailing one-year return reached +91.08% versus +11.46% 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 2.48 times the S&P 500 over the same period.

Some 41 of my 46 trades this year have been profitable.

I really took it in the shorts stopping out of my long position in the (TLT), losing 4.00%, my second largest loss of 2023. Reversion to the mean is a bitch. Every time I break my own risk control rules, I come to regret it. I could have stopped out the day before with only a 1.73% loss. The one consolation is that I went into this correction 90% in cash. I bet the rest didn’t.

See, even old dogs can make mistakes.

The Nonfarm Payroll Drops to 187,000, a one-year low, less than expectations. The Headline Unemployment Rate returned to 3.5%, a 50-year low. The soft-landing scenario lives! That’s supposed to be impossible in the face of 5.25% interest rates. Average hourly earnings grew at a restrained 3.6% annual rate. Half of the new jobs were in health care. At the rate we are aging, that is no surprise.

JOLTS and Layoffs Drop, indicating a slight weakening in labor demand, an important Fed goal. JOLTS fell from 9.62 to 9.58 million in May, a two-year low, while layoffs dipped from 1.55 million to 1.53 million. This is despite red-hot GDP growth.

Panic Buying of Hedge Fund Shorts, drove the markets in July, with many throwing in the towel on bearish bets. This “smart money” has been chasing the market since it bottomed in October. The most extreme buying, like we saw last week, is often the sign of a short-term market top.

US Home Construction Rockets, up 0.5% in June, in an attempt to meet the insatiable demand for new homes. They can’t build them fast enough even though prices are rising fast.

US Debt Downgraded from AAA to AA+ by the well-known Fitch rating agency for only the second time in history. Bonds (TLT) took it on the nose. The January 6 attack on the capitol and standoff over the debt ceiling crisis were cited as the reasons. US bonds are still the safest and most liquid investment in the world when held to expiration.

Uber Announces First Ever Profit on a quarterly basis and $1 billion in free cash flow. The company has emerged as the preeminent ride-sharing company. The shares dropped 5% on a “sell the news” move on top of a double since May. Buy (UBER) on a much bigger dip.

AMD Beats Even as PC Market Slows in Q2 earnings, with revenues down 18% YOY, better than expected. H2 is expected to be hot as data center demand grows thanks to exploding AI demand.

SEC Bans Coinbase from Trading, except in Bitcoin itself. The Federal agency regards all NFTs as unregistered securities. The move is a body blow to the NFT market, which I always regarded as a scam and knocked 25% off the value of (COIN). Avoid (COIN) like Covid 3.0.

Apple Reports Earnings Decline, down 1.4% in its Q3, and expects the same in Q4. iPhone sales took a steep dive, the longest slowdown in its history and knocked 3.2% off of the Teflon stock. Weak foreign currencies also delivered a hit for the most global of companies. But revenues beat at an astonishing $81.8 billion, thanks to rising service sales. Buy (AAPL) on a bigger dip, which was up 47% so far in 2023.

Amazon Soars on Earnings Beat, nearly double Wall Street estimates as its massive bet on AI pays off big time. Aggressive cost-cutting helped. (AMZN) has laid off 100,000 in the past ear, replaced by machines. Amazon Web Services (AWS), the 800-pound gorilla in the sector, also prospered. Buy (AMZN) on dips.

Airbus Delivers an Incredible 381 Aircraft, in the first seven months of 2023 as the global plane shortage worsens. The European consortium booked 60 new orders in July alone. Buy Boeing (BA) on dips, up 105% from the October low.

Airbnb is Looking Good on the back of a massive increase in international travel. In some cities like Tokyo, you can’t even find an Airbnb rental. At a restaurant I visited in Florence last week, 100% of the customers were American, mostly from the east coast. Local regulations banning short-term rentals are also crimping supply. Buy (ABNB) on dips, already up 50% since May alone.

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 7 at 9:00 AM EST, the Used Car Prices are out, a recent big swing factor in the inflation calculation.

On Tuesday, August 8 at 8:30 AM, the NFIB Business Optimism Index is released.

On Wednesday, August 9 at 2:30 PM, the Crude Oil Stocks are published.

On Thursday, August 10 at 8:30 AM, the Weekly Jobless Claims are announced. The Consumer Price Index for July is printed, the principal inflation indicator.

On Friday, August 11 at 2:30 PM, the Producer Price Index is published. At 2:00 PM, the Baker Hughes Rig Count is printed.

As for me, one of the great shortcomings of San Francisco is that we only have a theater district with two venues and it is in the Tenderloin, the worst neighborhood in the city, an area beset with homeless, drug addicts, and prostitution.

I was walking to a parking lot after a show one evening when I passed a doorway. Three men were violently attacking a blond woman. Never one to miss a good fight, I dove in, knocking two unconscious in 15 seconds (thank you Higaona Sensei!). Unfortunately, number three jumped to my side, pulled a knife, and stabbed me.

The attacker and the woman ran off, leaving me bleeding in a doorway. I drove over the Golden Gate Bridge to Marin General Hospital, bleeding all over the front seat of my car, where they sewed me up nicely and put me on some strong drugs.

The doctor said, “You shouldn’t be doing this at your age.”

I responded that “good Samaritans are always rewarded, even if the work is its own reward.”

Fortunately, I still had my Motorola Flip Phone with me, so I called Singapore from my hospital bed for a market update. I liked what I saw and bought 100 futures contracts on Japan’s Nikkei 225. This was back in 1999 when anything you touched went straight up.

Then, I passed out.

An hour later, I woke up, called Singapore again and bought another 100 futures contracts, not remembering the earlier buy. This went on all night long.

The next morning, I was awoken by a call from my staff who excitedly told me that the overnight position sheets had just come in and I had made 40% on the day.

Was there some mistake?

Then I got a somewhat tense call from my broker. I had a margin call. I had also exceeded the exchange limits for a single contract and owned the equivalent of $200 million worth of Nikkei. I told them to sell everything I had at market and go 100% cash.

That was exactly what they wanted to hear.

That left me up 60% on the year and it was only May.

I then called all of the investors in my hedge fund. I told them the good news, that I wouldn’t be doing any more trades for the fund until I received my performance bonus the following January and was taking off on a long vacation. With a 2%/20% payout in those days, that meant I was owed 14% of the underlying assets of the fund at a very elevated valuation.

They said, "That’s great, have fun. By the way, how did you do it?"

I answered, “Great drug selection.” No questions were asked.

Then I launched on the mother of all spending sprees.

I flew to Germany and picked up a new Mercedes S600 V12 Sedan at the factory in Stuttgart for $160,000. I then immediately road-tested it on the Autobahn at 130 mph. I made it to Switzerland in only two hours. After all, my old car needed a new seat.

Next, I bought all new furniture for the entire house, each kid selecting their own unique style.

Then, I took the family to Las Vegas where we stayed in the “Rain Man Suite” at the Bellagio Hotel for $10,000 a night, where both the 1988 Rain Man and 2009 The Hangover were filmed.

I bought everyone in the family black wool Armani suits, plus a couple of Brionis for myself at $8,000 a pop. For good measure, I chartered a helicopter for a tour of the Grand Canyon the next day.

At the end of the year, I sold my hedge fund based on the incredible strength of my recent performance for an enormous premium. I then left the stock market to explore a new natural gas drilling technology I had heard about called “fracking”.

Four months later, the Dotcom Crash ensued in earnest.

I still have the scar on my right side, and it always itches just before it rains, which is now almost never. But it was worth it, every inch of it.

It’s all true, every word of it and I’ll swear to it on a stack of bibles.