“Never sell short anything just because it is expensive,” said the late Ace Greenberg, CEO of the late Bears Stearns
(THE MARKET APPEARS TO BE IN A CONSOLIDATION PHASE AS INTEREST RATES CONTINUE TO BITE)
August 28, 2023
Hello everyone,
Welcome to a new week. A Non-Farm Payroll week. And the week after the Fed informed us that interest rates would keep rising. The hype about Nvidia's (NVDA) earnings was well and truly put in its place once Powell at Jackson Hole started his speech. Many are now scratching their heads – is this a bull or bear market?
It’s complicated. This year through July, the S& P has risen 19.5% for a total return, including dividends, of 20.7%. When the market hit its bottom on Oct. 11, 2022, and then rose into June 2023 to gain 20%, many thought that a new bull market had begun. But alas, the markets had other ideas. This pause in August has been a healthy lull – which may continue into September. Only in a fantasmagorical land would the market continue up without a pause. Let me remind you, we are part of the real world and markets will take a breath when they have run too hard. They are also responding to interest rate movements and other fundamental data. So, let’s interpret the market movement as a non-trending market, which is in a period of consolidation.
Are you anxious about the market movements? Then step back from your micro analysis of the markets and take the macro view. I often rant about taking the big picture view of the market because investors sometimes sell their stocks when markets are drifting or correcting off their highs. And when the market has fallen quite substantially, many investors are often too nervous to buy. There are times when we would all like to grab the market and shake it out of its annoying directionless movements, but the market always knows the way. We just must be patient enough to follow and understand there is a time to have a break and a time to buy. The time to sell is an individual thing because it depends on whether you are short-term focused or investing for the long term.
I am bullish on the markets in the long term.
If you are looking for somewhere to put some funds now, 90-day T-bills are a good idea. Make sure you hold some cash, so you can make great stock buys/option trades as we near the end of this consolidation phase of the market.
Since interest rates started rising many people worldwide have been struggling with the cost-of-living pressures. People in the U.S. and elsewhere are tossing up whether to pay the utility bill or buy food, students are doing without many things, so they can buy textbooks and retirees are canceling overseas travel in favour of shorter breaks in their own country. Yet, many businesses are short of staff. And they will probably stay that way. Who is going to work for $7.25 an hour when you may be able to drum up some business working in an online platform like Fivver or Superprof for triple that amount? Furthermore, Gen Z, and other generations increasingly see the financial markets as a way to invest and earn some cash flow. The pandemic was a jolt to the world economy, and people are now deciding what they are worth and sending that sentiment out to the community.
Housing is another area that shows a picture of extremes. I have just read about a 71-year-old woman who has rented a house for 25 years, and at the beginning of August, she received an eviction notice. The rate of homelessness in Australia has become extreme. And the statistics are startling. About 19,300 Australians aged 55 or over are currently homeless, and 440,000 older households will be unable to find or afford suitable housing by 2031 as shown by research from the Australian Housing and Urban Research Institute. The research goes on to show that the total number of people aged 55 or over with a mortgage debt is 1,504,793, a 63% increase in 10 years. The Australian retirement system is built on the assumption or the expectation that older people will own a home by the time they retire. This is increasingly not the case.
Some housekeeping:
As per your request on the survey, I connected many of you with your peer last week. I hope you have made contact and find the connection helpful. If you would like to be set up with a buddy to learn more about the markets and trading, please drop me an email to request it. My email is munroj1461@gmail.com
I will be holding a Zoom on Thursday this week. Although I will send out a blanket invitation to everyone, you are welcome to drop me a note and let me know if you can attend.
I am still working on the social get-together date.
Impact of interest rates and inflation on the country.
Wishing you all a great week.
Cheers,
Jacquie
The stock market has long been a dynamic and complex environment, characterized by rapid fluctuations and intricate patterns that often baffle human traders. Over the years, technological advancements have transformed the way trading is conducted, with one of the most significant breakthroughs being the integration of artificial intelligence (AI). AI trading, powered by machine learning algorithms and advanced data analysis, has redefined how financial markets operate. This article delves into the pioneers of AI trading in the stock market, exploring the individuals and companies that laid the foundation for this revolutionary approach.
The roots of AI trading can be traced back to the late 20th century when pioneering individuals and institutions began experimenting with computational models to predict stock market movements. John Holland, a computer scientist and professor at the University of Michigan, is often credited as an early visionary in the application of AI to trading. He developed genetic algorithms that mimic the process of natural selection to optimize trading strategies, a concept that laid the groundwork for algorithmic trading techniques.
Simultaneously, companies like Renaissance Technologies, founded by mathematician James Simons, were making strides in applying quantitative analysis to trading. Simons and his team harnessed complex mathematical models to identify hidden patterns in financial data. While not explicitly AI, these approaches were precursors to the machine learning-based methods that would later revolutionize the industry.
The emergence of machine learning techniques breathed new life into AI trading. This approach involves training algorithms to improve their performance on a specific task by learning from data. As computational power increased, machine learning algorithms became more sophisticated, allowing traders to process vast amounts of data and recognize intricate patterns that were previously impossible to detect.
One of the pioneers who paved the way for machine learning in finance is David Shaw, the founder of D.E. Shaw & Co. In the late 1980s, Shaw's team began using machine learning algorithms to identify arbitrage opportunities. Their success propelled the integration of AI and machine learning into the financial industry, marking a turning point in how trading strategies were conceived.
As computing power continued to grow exponentially, high-frequency trading (HFT) emerged as a dominant force in the stock market. HFT relies on lightning-fast algorithms to execute trades in milliseconds, capitalizing on small price discrepancies. While controversial, HFT has undeniably reshaped the trading landscape, and AI plays a pivotal role in executing these rapid trades.
Among the key figures in the HFT realm is David Siegel, co-founder of Two Sigma Investments. Established in 2001, Two Sigma leveraged AI and data science to develop quantitative trading strategies. The company's success highlighted the potential of combining AI with market data to generate profits in real-time.
Deep learning, a subset of machine learning focused on neural networks, has further propelled AI trading to new heights. Neural networks are designed to mimic the human brain's structure, allowing them to process complex data and recognize intricate patterns. This technology has proven particularly adept at analyzing financial time-series data, which is crucial in predicting market movements.
A key trailblazer in applying deep learning to finance is Marcos López de Prado, a researcher and founder of True Positive Technologies. López de Prado's work has centered on developing algorithms that can discern meaningful signals from market noise. His efforts have not only enhanced trading strategies but also contributed to risk management practices.
The success of AI trading hinges on the availability and quality of data. Market data, economic indicators, news sentiment, and a plethora of other information sources feed into AI algorithms, enabling them to make informed trading decisions. The ability to process and analyze data swiftly and accurately is a cornerstone of effective AI trading strategies.
Simultaneously, individuals like Andreas Clenow, a quant trader and author, have advocated for a systematic approach to trading based on data-driven research. Clenow emphasizes the importance of long-term strategies and disciplined execution, aligning with AI's capability to analyze historical data and project future trends.
While the pioneers of AI trading have undoubtedly achieved remarkable success, the field is not without its challenges. Market unpredictability, overfitting of algorithms to historical data, and the risk of large-scale financial disruptions are just a few of the potential pitfalls. Additionally, the ethical considerations surrounding AI trading, such as its potential to exacerbate market volatility or exploit informational advantages, have sparked debates within the financial community.
The pioneers of AI trading in the stock market have reshaped the landscape of finance, ushering in a new era of data-driven decision-making. From early experiments with genetic algorithms to the sophisticated neural networks of today, these visionaries have harnessed the power of technology to uncover patterns and opportunities that eluded human traders. While challenges persist, the ongoing evolution of AI trading continues to redefine how markets operate, promising both new avenues for profit and novel avenues for scrutiny in the years to come.
Midjourney prompt: "The early pioneers of AI trading"
Mad Hedge Technology Letter
August 28, 2023
Fiat Lux
Featured Trade:
(ALL SYSTEMS GO FOR INSTACART)
(IPO)
I wasn’t surprised to see grocery tech platform Instacart announce that they are going public soon.
That seems very much the right strategy for them at this point of time in their growth cycle.
I highly doubt that this will kick start the IPO market because high-interest rates are prohibitive to young tech companies growing.
Funnily enough, Instacart is nothing new so it won’t mesmerize the incremental investor with a flashy business model they’ve never seen.
They were founded in 2012 and experienced a pandemic bump in sales as citizens were arbitrarily locked in their apartments.
Naturally, the dynamics behind the living situations meant that online grocers rode a lucky streak to profits and Instacart had some gaudy growth numbers for the a few years.
Fast forward to today, and people aren’t in lockdown again even though with U.S. elections coming up next year…things could get interesting.
Conditions today dictate that Instacart can kiss the massive growth numbers goodbye, and goodbye forever as management basically translated that to potential shareholders during the IPO roadshow.
The San Francisco-based company also revealed it turned a profit in the first half of the year which should be the high water market forever for this digital grocer.
Behind them are dozens of startups whose IPO aspirations have been stymied by the slowest year at this point for new listings since the depths of the financial crisis in 2009.
What kind of bad news am I talking about?
The company cut its internal valuation three times last year to about $13 billion by last October.
A half-dozen acquisitions have contributed to Instacart’s growth. Its largest was the $350 million purchase in 2021 of Caper AI, which offers retailers “smart” shopping carts that eliminate the need for customers to individually scan groceries or to line up at checkout.
The consumer-facing Marketplace is powered by more than 600,000 independent contractors — known as shoppers — who pick up items for consumers at more than 1,400 retailers including Kroger, Publix, and Walmart, across more than 80,000 stores in North America.
But growth in this core part of Instacart’s business has slowed to a snail's pace. Orders remained relatively consistent from 132.3 million for the six months ended June 30 2022 to 132.9 million for the same period in 2023. Gross transaction value increased 4% to $14.9 billion for the first half of this year, according to the filing.
Net income grew as a percent of gross transaction value from a loss of 0.3% in 2021 to a profit of 1.5% in 2022.
In conclusion, this reminds me of a liquidity grab for the Silicon Valley venture capitalists who own this company.
The company’s stock price will most likely grind lower as expenses explode.
The VCs rather liquidate this holding rather than tap the expensive debt markets.
Don’t forget that Instacart sub-contracts people to fetch the groceries and hard to see keeping a lid on those types of expenses.
Going public could result in around $2 billion in liquid cash infusion for the venture capitalists which is a godsend in today’s world.
They could just park the capital in 6% yielding fixed income instead of holding a sinking valuation in a company that likely will never do better than it did in 2021.
Retail traders should wait for any spike in this stock, and then sell this name to moon because I don’t see any sustainable growth on the horizon as their gross transaction volume has already topped out at a paltry 4%.
“A diploma is a dunce hat in disguise.” – Said German-American Tech Investor Peter Thiel
Global Market Comments
August 28, 2023
Fiat Lux
Featured Trades:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE FAILED RALLY)
(SPY), (TLT), (FCX), (TSLA), (AAPL), (UPS)
CLICK HERE to download today's position sheet.
Market’s tried to rally last week….and failed.
The reason, of course, is Fed governor Jay Powell’s comments that interest rates may have to stay higher for longer. He seems hell-bent on reaching his 2.0% inflation target, down from the current 3.2% and well off the 9.0% high.
That puts off any rally in the interest rate-sensitive sectors, which is almost everything, by three to six months. But then, markets discount fundamentals by six to nine months in advance.
You do the math.
That means a monster rally in all financial assets should ensue sometime in September or October that could last a decade.
What a surprise!
The possibility that the next rally will be explosive is bereft of doubt. A record $5.6 trillion is now sitting on the sidelines ready to dive into risk assets on the slightest pretense. We might be in for another January 4 repeat. That includes funds in money market funds, overnight bank deposits, 90-day T-bills, IRAs, 401Ks, and cash under the mattress.
It's all very reminiscent of 1982 when we enjoyed the exact demographic tailwind as we are enjoying now. An 18-year rally followed and took the Dow Average up 20-fold.
The United States has by far the strongest major economy in the world for a reason. A 3.5% Headline Unemployment Rate, 5.25% overnight interest rates, and a 3.2% inflation rate are supposed to be mathematically impossible, yet here we are.
Did I mention that 2024 is an election year? That's when the economic data magically improve, as they have during every election over the past 200 years. Stock investors notice this.
As I spent all day every day and well into the night conducting research, I noticed a curious development. All the bears seem to live on the East Coast, while those in Silicon Valley are the most bullish I’ve ever seen.
That’s because we here in California see the hyper-accelerating technology in every meeting, with every human contact, and right on our own doorsteps. We are the beta testers for the technology that the rest of the country and the world won’t see for a few years.
While the nation is debating climate change, there is a “Robot War” taking place in San Francisco over how rapidly to permit the expansion of the self-driving taxi fleet, now capped at 1,000.
The fact that their accident rate has been near zero, far lower than human-driven vehicles, is a major point in their favor. I’m getting used to seeing no driver in the car next to me.
Walked into a McDonald's or a Taco Bell lately? It’s all computers. My theory as to why UPS agreed to such a generous 40% pay increase over five years for 340,000 workers is that when the next contract comes up for negation, they will have gone all robotic by then.
Autonomous driving, artificial intelligence, quantum computers are all still in their infancy and are in no way reflected in share prices.
In the meantime, keep massaging those 5.25% 90-day T-bill rates and enjoy your summer vacation. But the time to go all in with risk is approaching.
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 Oracle Speaks! Fed Governor Jay Powell might as well have been reading me the New York telephone book when he indicated that “Interest rates may have to stay higher for longer” during his Jackson Hole speech. The Fed only knows two speeds: too slow and too fast. The bears are coming out of the woodwork once again. Look for lower lows to buy into for all asset classes. Start positioning yourself for a monster yearend rally.
Markets Will Snore Until September 1 Jobs Report. The August Nonfarm Payroll report is expected to come in at a weak 175,000. Enjoy the last week of summer.
The US Budget Deficit is Climbing Once Again, after a super spike in 2020. Recent environmental spending has added another trillion dollars to the bill. That will seem a bargain if we can’t slow down exploding global temperatures….quickly. It was 120 degrees in Italy this summer. Mama Mia!
Has Apple (AAPL) Topped Out? With no new products on the horizon and interest rates rising, the bull market in Apple shares may have called it a day at last month’s 200 peak. As with the rest of the “Magnificent Seven,” there was a giant pull forward of performance into the first half of this year. All of the stock’s gains have been through multiple expansions, regaining much of what was lost in 2022.
Existing Home Sales Drop Again, demolished by record-high mortgage rates. July saw sales decline by 2.2% to a six-month low on sales of 4.15 million units. Home resales, which account for a big chunk of U.S. housing sales, fell 16.6% on a year-on-year basis in July.
Ten-Year Treasuries Hit New 16-year High, at 4.32%. We could be approaching a bond-selling climax around Jay Powell’s Jackson Hole Speech on Friday and the buying opportunity of the decade.
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 28 at 8:00 AM EST, the Dallas Fed Manufacturing Index is out.
On Tuesday, August 29 at 8:30 AM, the US JOLTS Job Openings Report is released.
On Wednesday, August 30 at 2:30 PM, the ADP Employment Change is published.
On Thursday, August 31 at 8:30 AM, the Weekly Jobless Claims are announced. Personal Income & Spending are also announced.
On Friday, September 1 at 2:30 PM, the Nonfarm Payroll Report for August is published. At 2:00 PM, the Baker Hughes Rig Count is printed.
As for me, The Diary of a Mad Hedge Fund Trader is now celebrating its 15th year of publication.
During this time, I have religiously pumped out 3,000 words a day, or 18 newsletters a week, of original, independent-minded, hard-hitting, and often wickedly funny research.
I spent my life as a war correspondent, Marine Corps combat pilot, Wall Street trader, and hedge fund manager, and if you can’t laugh after that, something is wrong with you.
I’ve been covering stocks, bonds, commodities, foreign exchange, energy, precious metals, real estate, and even agricultural products.
You’ve been kept up on my travels around the world and listened in on my conversations with those who drive the financial markets.
I also occasionally opine on politics, but only when it has a direct market impact, such as with the recent administration's economic and trade policies. There is no profit in taking a side.
The site now contains over 20 million words, or 30 times the length of Tolstoy’s epic War and Peace.
Unfortunately, it feels like I have written on every possible topic at least 100 times over.
So, I am reaching out to you, the reader, to suggest new areas of research that I may have missed until now which you believe justify further investigation.
Please send any and all ideas directly to me at support@madhedgefundtrader.com/, and put “RESEARCH IDEA” in the subject line.
The great thing about running an online business is that I can evolve it to meet your needs on a daily basis.
Many of the new products and services that I have introduced since 2008 have come at your suggestion. That has enabled me to improve the product’s quality, to your benefit. Notice how rapidly my trade alert performance is going up, now annualizing at +47% a year.
This originally started out as a daily email to my hedge fund investors giving them an update on fast market-moving events. That was at a time when the financial markets were in free fall, and the end of the world seemed near.
Here’s a good trading rule of thumb: Usually, the world doesn’t end. History doesn’t repeat itself, but it certainly rhymes.
The daily emails gave me the scalability that I so desperately needed. Today’s global mega enterprise grew from there.
Today, the Diary of a Mad Hedge Fund Trader and its Global Trading Dispatch is read in over 140 countries by 30,000 followers. The Mad Hedge Technology Letter, the Mad Hedge Biotech & Health Care Letter, Mad Hedge AI, and Jacquie’s Post also have their own substantial followings. And the daily Mad Hedge Hot Tips is one of the most widely read publications in the financial industry.
I’m weak in distribution in North Korea and Mali, in both cases due to the lack of electricity. But that may change.
One can only hope.
If you want to read my first pitiful attempt at a post, please click here for my February 1, 2008 post.
It urged readers to buy gold at $950 (it soared to $2,200), and buy the Euro at $1.50 (it went to $1.60).
Now you know why this letter has become so outrageously popular.
Unfortunately, I also recommended that they sell bonds short. I wasn’t wrong on that one, just early, about eight years too early.
I always get asked how long will I keep doing this?
I am already collecting Social Security, so that deadline came and went. My old friend and early Mad Hedge subscriber, Warren Buffet is still working at 92, so that seems like a realistic goal. And my old friend, Henry Kissinger, is still hard at it at 100 years old.
Hiking ten miles a day with a 50-pound pack, my doctor tells me I should live forever. He says he spends all day trying to convince his other patients to be like me, and the only one who actually does it is me.
The harsh truth is that I don’t know how to NOT work. Never tried it, never will.
The fact is that thousands of subscribers love me for what I do, pay for me to travel around the world first class to the most exotic destinations, eat in the best restaurants, fly the rarest historical aircraft, then say thank you. I even get presents (keep those pounds of fudge and bottles of bourbon coming!).
Given the absolute blast I have doing this job; I would be Mad to actually retire.
Take a look at the testimonials I get only on an almost daily basis and you’ll see why this business is so hard to walk away from (click here for those).
In the end, you are going to have to pry my cold dead fingers off of this keyboard to get me to give up.
Fiat Lux (let there be light).
Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
“The most dangerous word in the English language is “cheap”” said a
hedge fund manager friend of mine.
(FOR HIS 18TH BIRTHDAY MY SON WANTS A *%$#&?)
August 25, 2023
Hello everyone,
My son, Alex, turns 18 next month and so is officially classed as an adult. So, I asked him what he wanted for his significant birthday.
I expected the most common requests: money, new iPhone, clothes, etc.
But he responded: a trading account in his name (which I will fund together with his savings)
I said, ok, that’s easy. Did anyone here ask for that from their parents when they turned 18?
But after we open that account, the real education starts. How many parents have tried to advise their adult teenagers how to manage their finances only to be met with offhand remarks, ridicule, rebukes, or sometimes even just plain disinterest? I imagine many parents have been blindsided by this old comment from young adults: “You invested in this stock/investment, and lost money, so why should I listen to you.”
Thankfully, my son and I have come to an understanding, whereby he will liaise with me before he invests/places a trade. This ensures that we, as a family, are moving in the same direction and are not at odds with one another, which can make achieving an end goal very difficult.
There are dozens of books in the world on finance and how to manage your money. But if you wanted one for young adults, I would recommend you look at the following: I Want More Pizza: Real World Money Skills for High School, College, and Beyond by Steve Burkholder.
Primary topics discussed include saving, spending, prioritization, goal setting, compound growth, investing, debt, credit cards, student loans, mental blocks, and taking real-world action.
Teaching young adults about anything, especially financial education, should be done in small chunks of time. Focus for about 20 minutes on a topic and then break. This ensures what is shared is taken in and processed. After all, does an 18-year-old want to hear your well-meaning advice for extended periods? Most young adults are easily distracted by other things going on in their lives.
The important things a teenager turning 18 can do/should know:
1) Open a bank account.
2) Open a credit card.
3) Understand their expenses.
4) Avoid debt at all costs.
5) Understand that there are dozens of ways to make money.
6) Get a job.
7) Be Careful Who You Trust.
8) You Don’t Have to Have It all Figured Out.
9) Take responsibility for Your mistakes.
10) Be kind to others and yourself.
I will also encourage Alex to keep a trading journal so that he can see where his profits and losses occurred. And he can also make notes on each trade he does. It’s a good habit to start and keep.
Beside the Thames in Twickenham, U.K. this past summer
The Fed remarks at the Jackson Hole Symposium on Friday could cause some volatility in the markets. Hang on!
Wishing you all a wonderful weekend.
Cheers,
Jacquie