Global Market Comments
October 1, 2021
Fiat Lux
Featured Trade:
(WHY WATER WILL SOON BE WORTH MORE THAN OIL),
(CGW), (PHO), (FIW), (VE), (TTEK), (PNR), (BYND),
(WHY WARREN BUFFETT HATES GOLD),
(GLD), (GDX), (ABX), (GOLD)
We view The Mad Hedge Fund Trader as a vital resource that helps us focus on major market trends that are most likely to make money over time. It is a resource that helps us filter out the daily noise in various markets and the mostly irrelevant commentary of TV's talking heads.
Unlike many newsletters that focus on one strategy or asset class, The Mad Hedge Fund Trader's experience stretches across currencies, commodities, international markets, and equities. His writing sews these themes together, painting an investment picture that makes you never want to miss an issue. He is also able to bring a deep network of professionals into his analysis providing a perspective that is hard to match elsewhere.
We find that MHFT is often early in identifying major potential changes in the market. It is not a market timing tool. It sometimes takes patience to see ideas come to fruition, but when they do, the surprise is often to the upside.
It has helped us to identify important trades that really help us add alpha to a portfolio. Whether we are looking for equity ideas in emerging markets or analysis of real time macro situations nearer to home The Mad Fund Hedge Trader provides great perspective on what is important now.
Lee
Napa, California
Global Market Comments
September 30, 2021
Fiat Lux
Featured Trade:
(WHAT TO BUY AT MARKET TOPS?),
(CAT), ($COPPER), (FCX), (BHP), (RIO),
(EUROPEAN STYLE HOMELAND SECURITY),
(TESTIMONIAL)
I will start today’s letter by listing six more data points showing how overbought stocks have become.
1) While the number of outstanding shares in the US has remained unchanged since 2006, thanks to M&A, buybacks, bankruptcies, and privatizations, the average weighted share price has more than doubled from $50.15 to $137.00.
2) The Volatility Index (VIX) has just jumped from a recent high of $29 to $21 today.
3) The Mad Hedge Market Timing Index has just soared from a recent low of 19 eight months ago to 30 today, still in “BUY” territory.
4) 2022 forward stock earnings growth maintains at 20%.
5) Almost every investor is bullish once more, now that their stocks are going up.
6) The stock market has had its best 18 months in history. Grizzled, long in the tooth readers can’t be more cautious right now.
This all leads to the urgent question of the day, WHICH stocks do you buy as we approach market tops? The answer is very simple. You buy cheap ones. And what are the cheapest stocks out there?
Commodity stocks.
My friend, Jim Umpleby, said that we are just entering a ten-year super cycle in commodities.
Jim should know. He is the CEO of Caterpillar (CAT), a company I have been following for 45 years. I even have one of their cool worn yellow baseball caps from years past.
Thanks to the 2017 tax bill, companies can now buy Caterpillar’s bulldozers, backhoes, and heavy trucks, and expense 100% of the investment in the first year. (Last year, I bought a new $162,500 Tesla Model X using the same break). That makes a purchase of (CAT)’s products one of the best tax breaks ever.
Needless to say, this has created a stampede to buy the companies heavy machinery because they fear this tax windfall will be reversed by the next administration. This is equipment with a 30-year life or longer.
Industrial commodities are in fact the perfect sector to buy right now. Take a look at the long-term chart for copper prices, which are a great bellwether for the entire industry. They are imminently poised to make a long-term upside breakout.
Copper last peaked at the beginning of 2011, when the Chinese infrastructure build-out suddenly outdrew to a juddering halt. Prices cratered from $4.60 a pound to a lowly $1.90. Mines were sold off, mothballed, or permanently closed at a record rate.
Copper prices fell so low that the US Mint finally started making a profit on pennies they struck.
Then a funny thing happened.
Copper will soon bottom, assisted by the global synchronized economic recovery I have been writing about for years. The recent collapse of the Chinese real estate market prompted by the China Evergrande Group will eventually give us a great entry point.
The share prices of copper and other major commodity producers will go ballistic. Freeport McMoRan (FCX), the world’s largest copper producer, (whose management is a long-time reader of this letter) has just seen its stock jump ten-fold from a near $4.00 a share to $46.00. It is now back at $33.00.
You may think that it’s too late to get into the commodities space, but you’d be wrong. Having covered the sector for nearly a half-century there is one thing you learn quickly. While you can shut down a mine in weeks, it can take years to bring them back on line.
As for developing a new mine from scratch, that can take a decade by the time you get design, permits, infrastructure, equipment, and labor in place.
My Australian readers tell me that (BHP) is flying young skilled workers from Brisbane an incredible 2,000 miles to work in Northwest mines in a six weeks on - six weeks off work schedule and paying them $200,000 a year to do it. And they’re making a profit doing this!
The bottom line here is that a short squeeze has developed for industrial commodities which will last for years.
Oh, and that global economic recovery? It is on vacation until delta ends. That could happen in a few months, and no more than a year.
At least you have something to buy now besides more technology stocks. As much as we here at the Mad Hedge Fund Trader all love them for the long term, they are extremely overbought for the short term.
Tech always comes back.
Commodities Are In Our Blood
I have just seen the movie “Dunkirk” for the second time, a film that is close to me because I knew several of the participants. A boat that made the crossing memorialized with a bronze plaque moored in the canal in front of my West London mansion for several years.
I also recall a lunch I had with British comedian John Cleese many years ago (he is my height) soliciting an investment in my hedge fund. He kept his money, but I recall with great humor his version of homeland security.
The English are feeling the pinch in relation to recent geopolitical events, and have therefore raised their security level from "Miffed" to "Peeved."
Soon, security levels may be raised yet again to "Irritated" or even "A Bit Cross." The English have not been "A Bit Cross" since the blitz in 1940, when tea supplies nearly ran out.
Terrorists have been re-categorized from "Tiresome" to "A Bloody Nuisance." The last time the British issued a "Bloody Nuisance" warning level was in 1588, when threatened by the Spanish Armada.
The Scots have raised their threat level from "Pissed Off" to "Let's get the
Bastards." They don't have any other levels. This is the reason they have been used on the front line of the British army for the last 300 years.
The French government announced yesterday that it has raised its terror alert
level from "Run" to "Hide." The only two higher levels in France are "Collaborate" and "Surrender." The rise was precipitated by a recent fire that destroyed France 's white flag factory, effectively paralyzing the country's military capability.
Italy has increased the alert level from "Shout Loudly and Excitedly" to
"Elaborate Military Posturing." Two more levels remain: "Ineffective Combat Operations" and "Change Sides."
The Germans have increased their alert state from "Disdainful Arrogance" to
"Dress in Uniform and Sing Marching Songs." They also have two higher levels: "Invade a Neighbor" and "Lose."
Belgians, on the other hand, are all on holiday as usual; the only threat they
are worried about is NATO pulling out of Brussels.
The Spanish are all excited to see their new submarines ready to deploy. These beautifully designed subs have glass bottoms so the new Spanish navy can get a really good look at the old Spanish navy.
Australia, meanwhile, has raised its security level from "No worries" to
"She'll be alright, Mate." Two more escalation levels remain: "Crikey! I think we'll need to cancel the barbie this weekend!" and "The barbie is canceled." So far no situation has ever warranted use of the final escalation level.
-- John Cleese - British writer, actor and tall person.
Global Market Comments
September 29, 2021
Fiat Lux
Featured Trade:
(PLEASE SIGN UP NOW FOR MY FREE TEXT ALERT SERVICE NOW),
(BIDDING MORE FOR THE STARS)
The stock market has turned into the real estate market, where everyone is afraid to sell for fear of being unable to find a replacement. Will it next turn into the Bitcoin market, which has gone ballistic?
Risk assets everywhere are now facing a good news glut.
My 2021 market top target of 40,000 for the Dow Average has come within range.
This year’s price action really gives you the feeling of an approaching short-term blow-off market top. If Covid-19 crashed the market, will the vaccine boosters the recovery?
A few years ago, I went to a charity fundraiser at San Francisco’s priciest jewelry store, Shreve & Co., where the well-heeled men bid for dates with the local high society beauties, dripping in diamonds and Channel No. 5.
Amply fueled with Dom Perignon champagne, I jumped into a spirited bidding war over one of the Bay Area’s premier hotties, who shall remain nameless. Suffice to say, she is now married to a well-known tech titan and has a local sports stadium named after her.
Obviously, I didn’t work hard enough.
The bids soared to $33,000, $34,000, $35,000.
After all, it was for a good cause. But when it hit $36,000, I suddenly developed a severe case of lockjaw. Later, the sheepish winner with a rampant case of buyer’s remorse came to me and offered his date back to me for $35,000. I said, “no thanks.” $34,000, $33,000, $32,000?
I passed.
The altitude of the stock market right now reminds me of that evening.
If you rode the S&P 500 (SPX) from 700 to 4,50 and the Dow Average (INDU) from 7,000 to 35,000, why sweat trying to eke out a few more basis points.
And if there was ever an excuse to take a break it is the blistering 18,000 point rally off the March 2020 bottom.
I realize that many of you are not hedge fund managers and that running a prop desk, mutual fund, 401k, pension fund, or day trading account has its own demands.
But let me quote what my favorite Chinese general, Deng Xiaoping, once told me in person: “There is a time to fish, and a time to hang your nets out to dry. You don’t have to chase every trade.
At least then I’ll have plenty of dry powder for when the window of opportunity reopens for business. So, while I’m mending my nets, I’ll be building new lists of trades for you to strap on when the sun, moon, and stars align once again.
What Am I Bid?
Global Market Comments
September 28, 2021
Fiat Lux
Featured Trade:
(TESTIMONIAL),
(THE DEATH OF KING COAL),
(BTU), (ARCH)
Hi John,
You have been doing this for a long time indeed. The recent bounce has been nice. How did you feel that it was going to bounce given the Fed meeting and the noise around the China Evergrande Group?
Or have you seen this movie so many times that unless it was a major black swan event (like February-March 2020) that this was always buy the dip?
Or does it even matter as long as you are controlling your risk given how much you have made in the market in your lifetime?
For someone trying to reset and start growing their account, I don't have this luxury but have been selectively choosing the trades to take.
Again, great trading.
Regards,
Dallas
Melbourne, Australia
Virtually all of the research you receive are about stocks you should buy. This report is about stocks you should sell….with both hands as fast as you can.
It is perhaps the most important data release of the last several years that no one noticed. As a result, one of the best shorting opportunities in years is rearing its ugly head.
US coal production hit a 41-year low in 2020. Coal as a percentage of US power output has plunged from 28% to 10% over the last decade to only 437 million short tons. Total coal production has plunged by 64% during this time.
The end result will be a massive shift of wealth out of the major coal-producing regions of the US in the east.
If energy has a proverbial buggy whip maker, it is king coal. And while US coal production has been in free fall, alternatives have been rising sharply, especially solar, now accounting for 20% of US energy consumption.
The implications for the US economy are enormous. I used to be kept awake at night by the wailing whistles of Union Pacific (UNP) engines delivering Wyoming coal to California ports for shipment on to China. They have all disappeared.
Those trains are now moving oil south from Canada and North Dakota to the oil distribution hub in Cushing, Oklahoma, or even all the way to Gulf ports, except that this time they are using a North/South rail line like Norfolk Southern (NSC) rather than the East/West running Union Pacific. Clearly, there are consequences.
In recent the last year, the few listed coal names left have enjoyed a nice rally. This is because of the generalized global “RISK ON” move that has unfolded since the pandemic peaked. The Van Eck Vectors Coal ETF was shut down in 2020 for lack of interest.
It also helps that the incoming Biden administration is unlikely to hammer away at China on trade front as did the previous one. China is far and away the world’s largest buyer of coal.
I believe that in the coming years, the entire US coal industry will go bankrupt and get purchased by the Chinese for pennies on the dollar, or for their outstanding debt alone at a big discount. Needless to say, this makes the entire sector a great candidate for a core short.
Coal is hopelessly uncompetitive with natural gas. Burning gas produces a fraction of the carbon dioxide of coal, and alternatives like wind and solar produce none whatsoever. Coal faces onerous environmental regulation, which will almost certainly get worse under a future administration. US utilities are therefore closing coal-fired power plants as fast as they can.
The outgoing administration was the most pro-coal one in American history. Yet, not a single new coal-fired was built during their reign.
However, coal-dependent communities are not about to turn into ghost towns. They have the great advantage of offering some of the lowest operating costs anywhere in the country. Free rent is becoming common. You'd be nuts to start a new business in the San Francisco Bay Area these days, which has become a haven of the wealthy.
Throw in some decent broadband and they can handily join the global economic community. Yes, you can turn coal miners into programmers, at least the young ones. They all grew up playing video games just like the rest of us.
I Don’t See Any Future in This, Do You?