Posts

April 8, 2019

Global Market Comments
April 8, 2019
Fiat Lux

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD, OR THE FLIP-FLOPPING MARKET),
(SPY), (TLT), (TSLA), (BA), (LUV), (DAL)

The Market Outlook for the Week Ahead, or the Flip-Flopping Market

Easy come easy go.

Flip flop, flip flop.

Up until March 25, the bond market was discounting a 2019 recession. Bonds soared and stocks ground sideways. Exactly on that day, it pushed that recession out a year to 2020.

For that was the day that bond prices hit a multiyear peak and ten-year US Treasury yields (TLT) plunged all the way to 2.33%. Since then, interest rates have gone straight up, to 2.52% as of today.

There was also another interesting turn of the calendar. Markets now seem to be discounting economic activity a quarter ahead. So, the 20% nosedive we saw in stocks in Q4 anticipated a melting Q1 for the economy, which is thought to come in under 1%.

What happens next? A rebounding stock market in Q2 is expecting an economic bounce back in Q2 and Q3. What follows is anyone’s guess. Either continuing trade wars drag us back into a global recession and the stock market gives up the $4,500 points it just gained.

Or the wars end and we continue with a slow 2% GDP growth rate and the market grinds up slowly, maybe 5% a year.

Which leads us to the current quandary besieging strategists and economists around the world. Why is the government pressing for large interest rate cuts in the face of a growing economy and joblessness at record lows?

Of course, you have to ask the question of “what does the president know that we don’t.” The only conceivable reason for a sharp cut in interest rates during “the strongest economy in American history” is that the China trade talks are not going as well as advertised.

In fact, they might not be happening at all. Witness the ever-failing deadlines that always seem just beyond grasp. The proposed rate cut might be damage control in advance of failed trade talks that would certainly lead to a stock market crash, the only known measure of the administration view of the economy.

This also explains why politicization of the Fed is moving forward at an unprecedented rate. You can include political hack Stephen Moore who called for interest rate RISES during the entire eight years of the Obama administration but now wants them taken to zero in the face of an exploding national debt. There is also presidential candidate Herman Cain.

Both want the US to return to the gold standard which will almost certainly cause another Great Depression (that’s why we went off it last time, first in 1933 and finally in 1971). The problem with gold is that it’s finite. Economic growth would be tied to the amount of new gold mined every year where supplies have been FALLING for a decade.

The problem with politicization of the Fed is that once the genie is out of the bottle, it is out for good. BOTH parties will use interest rates to manipulate election outcomes in perpetuity. The independence of the Fed will be a thing of the past.

It has suddenly become a binary world. It either is, or it isn’t.

Positive China rumors lifted markets all week. Is this the upside breakout we’ve been looking for? Buy (FXI). While US markets are up 12% so far in 2019, Chinese ones have doubled that.

The Semiconductor Index, far and away the most China-sensitive sector of the market, hit a new all-time high. Advanced Micro Devices (AMD), a Mad Hedge favorite, soared 9% in one day. It’s the future so why not? This is in the face of semiconductor demand and prices that are still collapsing. Buy dips.

Verizon beat the world with its surprise 5G rollout. It’s really all about bragging rights as it is available only in Chicago and Minneapolis and it will take time for 5G phones to get to the store. 5G iPhones are not expected until 2020. Still, I can’t WAIT to download the next Star Wars movie on my phone in only ten seconds.

US auto sales were terrible in Q1, the worst quarter in a decade, and continue to die a horrible death. General Motors (GM) suffered a 7% decline, with Silverado pickups off 16% and Suburban SUVs plunging 25%. Is this a prelude to the Q1 GDP number? Risk is rising. You have to wonder how much electric cars are eating their lunch, which now accounts for 4% of all new US sales.

Tesla (TSLA) disappointed big time, and the stock dove $30. Q1 deliveries came in at only 63,000 as I expected, compared to 90,700 in Q4, down 30.5%. I knew it would be a bad number but got squeezed out of my short the day before for a small loss. That’s show business. It’s all about damping the volatility of profits.

By cutting the electric car subsidy by half from $7,500 in 2019 and to zero in 2020, the administration seems intent on putting Tesla out of business at any cost. I hear the company has installed a revolving door at its Fremont headquarters to facilitate the daily visits by the Justice Department and the SEC. Did I mention that the oil industry sees Tesla as an existential threat?

The March Nonfarm Payroll Report rebounded to a healthy 196,000, just under the 110-month average. Weekly Jobless Claims dropped to New 49-Year Low. Whatever the problems the economy has, it’s not with job creation. But at what cost? Of course, we have to cut interest rates!

Boeing successfully tested new software, even taking the CEO for a ride. Maybe it will work this time. Airlines will love it. (BA) shares have already made back half their $80 losses since the recent crash and we caught the entire move. Buy (BA), (DAL), and (LUV).

The Mad Hedge Fund Trader hit a new all-time high briefly, up 15.46% year to date, and beating the pants off the Dow Average. Good thing I didn’t buy the bearish argument. There’s too much cash floating around the world. However, my downside hedges in Disney and Tesla cost me some money when I stopped out. I was late by a day.

We are taking profits on a six-month peak of 13 positions across the GTD and Tech Letter services and will wait for markets to tell us what to do next.

March turned positive in a final burst, up +1.78%.  April is so far down -1.76%. My 2019 year to date return retreated to +13.69%,  paring my trailing one-year return back up to +26.59%. 

My nine and a half year return recovered to +313.83%, pennies short of a new all-time high. The average annualized return appreciated to +33.62%. I am now 80% in cash and 20% long, and my entire portfolio expires at the April 18 option expiration day in 9 trading days.

The Mad Hedge Technology Letter has gone ballistic, with an aggressive and unhedged 40% long, rising in value almost every day. It is maintaining positions in Microsoft (MSFT), Alphabet (GOOGL), and PayPal (PYPL), and Amazon (AMZN), which are clearly going to new highs.

It’s going to be a dull week on the data front after last week’s fireworks.

On Monday, April 8 at 10:00 AM, February Factory Orders are released.

On Tuesday, April 9, 6:00 AM EST, the March NFIB Small Business Optimism Index is published.

On Wednesday, April 10 at 8:30 AM, we get the March Consumer Price Index. 

On Thursday, April 11 at 8:30 AM EST, the Weekly Jobless Claims are announced. The March Producer Price Index is printed at the same time.

On Friday, April 12 at 10:00 AM, the April Consumer Sentiment Index is published.

The Baker-Hughes Rig Count follows at 1:00 PM.

As for me, I have two hours until the next snow storm pounds the High Sierras and closes Donner Pass. So I have to pack up and head back to San Francisco.

But I have to get a haircut first.

Incline Village, Nevada is the only place in the world where you can get a haircut from a 78-year-old retired Marine Master Sargent, Louie’s First Class Barbers. Civilian barbers can never grasp the concept of “high and tight with a shadow”, a cut only combat pilots are entitled to. He’ll regale me with stories of the Old Corps the whole time he is clipping away. I wouldn’t miss it for the world. 

Good luck and good trading.

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

 

 

 

 

 

 

May 11, 2018

Global Market Comments
May 11, 2018
Fiat Lux

Featured Trade:
(WEDNESDAY, JUNE 13, 2018, PHILADELPHIA, PA, GLOBAL STRATEGY LUNCHEON),
(MAY 9 BIWEEKLY STRATEGY WEBINAR Q&A),
(FB), (MU), (NVDA), (AMZN), (GOOGL),
(TLT), (SPX), (MSFT), (DAL),
(MAD HEDGE DINNER WITH BEN BERNANKE)

May 10, 2018

Global Market Comments
May 10, 2018
Fiat Lux

Featured Trade:
(TUESDAY, JUNE 12, NEW ORLEANS, LA, GLOBAL STRATEGY LUNCHEON),
(THE END OF THE IRAN NUCLEAR DEAL AND YOUR PORTFOLIO),
(USO), (XOM), (OXY), (CVX), (DAL), (XLP),
(UPGRADING OUR CUSTOMER SUPPORT)

More Pain to Come in Oil

There are very few people I will drop everything to listen to.

One of the handful is Daniel Yergin, the bookish founder and CEO of Cambridge Energy Research Associates, the must-go-to source for all things energy.

Daniel received a Pulitzer Prize for The Prize: The Epic Quest for Oil, Money, and Power, a rare feat for a non-fiction book (I?ve never been able to get one).

Suffice it to say that every professional in the oil industry, and not a few hedge fund traders, have devoured this riveting book and based their investment decisions upon it.

Yergin thinks that the fracking and horizontal drilling revolutions have made the United States the new swing producer of oil. There is so much money in the investment pipeline that American oil production will continue to increase for the next six months, by some 500,000 barrels a day.

Much of this oil is coming from heavily leveraged, thinly capitalized producers whose bankers won?t let them cut back a drop on production so they can maintain interest payments on their debt.

This new supply will run head on into the seasonal drop in demand for energy, when spring ritually reduces heating bills, but the need for air-conditioning has not yet kicked in.

The net net could be a further drop in the price for Texas tea from the present $31 a barrel, possibly a dramatic one into the teens.

Yergin isn?t predicting any specific oil price as a potential floor, as it is an impossible task. While OPEC was a monolithic cartel, the US fracking industry is made up of thousands of mom and pop operators, and no one knows what anyone else is doing.

However, he is willing to bet that the price of oil will be higher in a year.

Currently, the 96 million barrel global market for oil is oversupplied with 2 million barrels a day.

If the International Monetary Fund is right, and the world adds 3.0% in economic growth this year, we will soak up 1 million b/d of that with new demand.

In the end, the oil price collapse is a self-solving problem. The new economic growth engendered by ultra low fuel prices eventually drives prices higher.

Where we reach the tipping point, and the oil market comes back into balance, is anyone?s guess. But when it does, prices will go substantially higher. The cure for low prices is low prices.

This is why I listed energy as the top performing asset class this year (click here for my ?2016 Annual Asset Class Review? by clicking here.

The bottom line is that there will be a great time to buy oil companies, but it is not yet.

What we are witnessing now is the worst energy crash since the 1980?s, when new supplies from the North Sea, Mexico and Alaska all hit at the same time.

I remember the last time oil plunged to $8 a barrel, because Morgan Stanley then set up a private partnership that bought commercial real estate in Houston for ten cents on the dollar. The eventual return on this fund was over 1,000%.

This time it is more complicated. Prices lived over $100 for so long that it sucked in an unprecedented amount of capital into new drilling, some $100 billion worth.

As a result, sources were brought online from parts of the world as diverse as Russia, the Arctic, Central Asia, Africa, the Canadian tar sands and remote and very expensive offshore platforms.

Yergin believes that Saudi Arabia can survive for three years with prices at current levels. After that, it will burn through its $150 billion of foreign exchange reserves, and could face a crisis.

Clearly, the Kingdom is betting that prices will recover with its market share based strategy before then. They are playing for the long haul.

The transition of power to the new King Salman was engineered by a committee of senior family members, and has been very orderly.

However, King Salman, a Sunni, will have his hands full. The current takeover of Yemen by a hostile Shiite minority, the Houthis, is a major concern. Yemen shares a 1,100 mile border with Saudi Arabia.

Daniel says that a year ago, there was a lot of geopolitical risk priced into oil, with multiple crises in the Ukraine, Syria, Libya and Iraq frightening consumers, so trading levitated over $100 for years. Delta Airlines, Inc. (DAL) even went to the length of buying its own refiner to keep fuel prices from rising further.

US oil producers have a unique advantage over competitors in that they can cut costs faster than any other competitors in the world. On the other hand, they are eventually going head to head against the Saudis, whose average cost of production is a mere $5/barrel.

A native of my own hometown of Los Angeles, Yergin started his professional career as a lecturer at Harvard University. He founded Cambridge Energy in 1982 with a $7.00 investment in a file cabinet at the Good Will. He later sold Cambridge Energy to the consulting group IHS Inc. for a small fortune.

To buy The Prize at discount Amazon pricing, please click here.

The Prize

world liquid

More Pain to Come in Oil

There are very few people I will drop everything to listen to. One of the handful is Daniel Yergin, the bookish founder and CEO of Cambridge Energy Research Associates, the must-go-to source for all things energy.

Daniel received a Pulitzer Prize for The Prize: The Epic Quest for Oil, Money, and Power, a rare feat for a non-fiction book (I?ve never been able to get one).

Suffice it to say that every professional in the oil industry, and not a few hedge fund traders, have devoured this riveting book and based their investment decisions upon it.

Yergin thinks that the fracking and horizontal drilling revolutions have made the United States the new swing producer of oil. There is so much money in the investment pipeline that American oil production will continue to increase for the next six months, by some 500,000 barrels a day.

This new supply will run head on into the seasonal drop in demand for energy, when spring ritually reduces heating bills, but the need for air-conditioning has not yet kicked in.

The net net could be a further drop in the price for Texas tea from the present $45 a barrel, possibly a dramatic one.

Yergin isn?t predicting any specific oil price as a potential floor, as it is an impossible task. While OPEC was a monolithic cartel, the US fracking industry is made up of thousands of mom and pop operators, and no one knows what anyone else is doing. However, he is willing to bet that the price of oil will be higher in a year.

Currently, the 91 million barrel global market for oil is oversupplied with 1 million barrels a day. That includes the 2 million b/d that has been lost from disruptions in Libya, Syria and Iraq.

If the International Monetary Fund is right, and the world adds 3.8% in economic growth this year, we will soak up 1.1 million b/d of that with new demand. In the end, the oil price collapse is a self-solving problem. The new economic growth engendered by ultra low fuel prices eventually drives prices higher.

Where we reach the tipping point, and the oil market comes back into balance, is anyone?s guess. But when it does, prices will go substantially higher. The cure for low prices is low prices.

The bottom line is that there will be a great time to buy oil companies, but it is not yet.

What we are witnessing now is the worst energy crash since the 1980?s, when new supplies from the North Sea, Mexico and Alaska all hit at the same time. The price of oil eventually crashed from $42 to $8.

I remember it well, because Morgan Stanley then set up a private partnership that bought commercial real estate in Houston for ten cents on the dollar. The eventual return on this fund was over 1,000%.

This time it is more complicated. Prices lived over $100 for so long that it sucked in an unprecedented amount of capital into new drilling, some $100 billion worth. As a result, sources were brought online from parts of the world as diverse as Russia, the Arctic, Central Asia, Africa, the Canadian tar sands and remote and very expensive offshore platforms.

Yergin believes that Saudi Arabia can survive for three years with prices at current levels. After that, it will burn through its $150 billion of foreign exchange reserves, and could face a crisis. Clearly, the Kingdom is betting that prices will recover with its market share based strategy before then. They are playing for the long haul.

The transition of power to the new King Salman was engineered by a committee of senior family members, and has been very orderly. However, King Salman, a Sunni, will have his hands full. The current takeover of Yemen by a hostile Shiite minority, the Houthis, is a major concern. Yemen shares a 1,100 mile border with Saudi Arabia.

Daniel says that a year ago, there was a lot of geopolitical risk priced into oil, with multiple crises in the Ukraine, Syria, Libya and Iraq frightening consumers, so trading levitated over $100 for years. Delta Airlines Inc. (DAL) even went to the length of buying its own refiner to keep fuel prices from rising further.

US oil producers have a unique advantage over competitors in that they can cut costs faster than any other competitors in the world. On the other hand, they are eventually going head to head against the Saudis, whose average cost of production is a mere $5/barrel.

A native of my own hometown of Los Angeles, Yergin started his professional career as a lecturer at Harvard University. He founded Cambridge Energy in 1982 with a $7.00 investment in a file cabinet at the Good Will. He later sold Cambridge Energy to the consulting group IHS Inc. for a small fortune.

To buy The Prize at discount Amazon pricing, please click here.

The Prize

WTIC 1-26-15

USO 1-26-15

DIG 1-26-15

LINE 1-26-15

The Bottom Building Process Has Begun

I have an arrangement with several large hedge funds where they pay me a small fortune every month for the privilege of calling me one day a year.

Wednesday was that day.

It was a day when the $20 billion hedge fund waited on hold while I got off the phone with the $100 billion hedge fund. And that?s not including urgent calls from the White House, the office of the Joint Chiefs, and the Federal Reserve.

Of course, no one needs to tell these guys how to chew gum. They were interested to know if they were missing anything.

The advice I gave them was very short and simple: ?Keep your eye on the economic data, and ignore everything else.?

You can palpably feel the tension when enduring crisis like these. The Internet noticeably slows down. Transatlantic and Transpacific phone lines get clogged up. Traffic on our website, www.madhedgefundtrader.com, rises tenfold.

So do plaintive emails from followers, everyone of which I attempt to answer quickly. To save time, I will give a generic answer to all of you in advance: ?No, it is not time to stop out of your ProShares Ultra Short 20+ Treasury Bond ETF (TBT) position at the $46 handle.? We are at a multiyear peak in bonds, and this is absolutely not the place to puke out. That?s why I always keep my positions small.

You have to allow room for markets to breathe and still be able to hang on when it goes against you. It is also nice to have the dry powder to double up.

I know some of you are suffering from sleepless nights, so I?ll make it easy for you. We have hit bottom for the year. This is the best time in three years to buy stocks, just in case you forgot to load up at any time since 2011. Ditto for bonds on the sell side.

Earnings started coming out last week, and many companies have been delivering blockbuster reports, as I expected. Over all, I think we can expect total S&P 500 earnings to rise by $11.

This means that, given the market?s recent 10% plunge, stocks are now selling at 12.5 X 2015 earnings. That is a rare bargain. It is a chance to buy shares at 2011 valuations. Don?t blink and miss it.

The big driver hasn?t been the Ebola virus, the risk of which has been wildly exaggerated by the media, but the collapse of the price of oil.

I think we got very close to a bottom of the entire move this morning when we tickled $80. I take North Dakota fracking pioneer John Hamm?s view: If this isn?t the bottom, it is close, and wherever the bottom, we will race right back up to $100 sometime next year on China?s insatiable demand.

That means you buy stocks right now.

For a fuller explanation of the fundamentally bullish argument for the stock market, please click here ?10 Reasons Why the Bull Market is Still Alive?.

 

TBT 10-16-14

SPX 10-16-14

VIX 10-16-14

SPX 10-15-14

BRENT 10-14-14

TNX 10-16-14

IWM 10-16-14

John Thomas - Young Man - ArmedNow Is the Time to Have a Gunslinger Working on Your Behalf

Delta Airlines is Cleared for Takeoff

When I was a young, clueless investment banker at Morgan Stanley 30 years ago, the head of equity sales took me aside to give me some fatherly advice. Never touch the airlines.

The profitability of this industry was totally dependent on fuel costs, interest rates and the state of the economy, and management hadn’t the slightest idea of what any of these were going to do. If I were ever tempted to buy an airline stock, I should lie down and take a long nap first.

At the time, the industry had just been deregulated, and was still dominated by giants like Pan Am, TWA, Eastern Air, Western, Laker, Braniff, and a new low cost upstart called People Express. None of these companies exist today. It was the best investment advice that I ever got.

If you total up the P&L’s of all of the US airlines that ever existed since Orville and Wilber Wright first flew in 1903 (their pictures are on my new anti-terrorism edition commercial pilots license), it is a giant negative number, well in excess of $100 billion. This is despite the massive government subsidies that have prevailed for much of the industry’s existence.

The sector today is hugely leveraged, capital intensive, heavily regulated, highly unionized, offers customers terrible service, and is constantly flirting with, or is in bankruptcy. Its track record is horrendous. It is a prime terrorist target. A worse nightmare of an industry never existed.

I became all too aware of the travails of this business while operating my own charter airline in Europe as a sideline to my investment business during the 1980?s.

The amount of paperwork involved in a single international flight was excruciating. Every country piled on fees and taxes wherever possible. The French air traffic controllers were always on strike, the Swiss were arrogant, and the Italians unintelligible and out of fuel.

The Greek military controllers once lost me over the Aegean Sea for two hours, while the Yugoslavs sent out two MIG fighter jets to intercept me. As for the US? Did you know that every rivet going into an American built aircraft must first be inspected by the government and painted yellow before it can be used in manufacture?

While flying a Red Cross mission into Croatia, I got shot down by the Serbians, crash landed at a small Austrian Alpine river, and lost a disc in my back. I had to make a $300 donation to the Zell Am Zee fire department Christmas fund to get their crane to lift my damaged aircraft out of the river (see picture below). Talk about killing the competition!

Anyway, I diverge.

So you may be shocked to hear that I think there is a great opportunity here in airline stocks. A Darwinian weeding out has taken place over the last 30 years that has concentrated the industry so much that it would attract the interest of antitrust lawyers, if consumers weren?t such huge beneficiaries.

With the American-US Air (AAL) deal done, the top four carriers (along with United-Continental (UAL), Delta (DAL), and Southwest (LUV) will control 90% of the market.

That is up from 60% only five years ago. The industry has fewer seats than in 1982; while inflation adjusted fares are down 40%. Analysts are referring to this as the industry?s new ?oligopoly advantage.?

Any surprise bump up in oil prices is met with a blizzard of higher fares, baggage fees, and fuel surcharges. I can’t remember the last time I saw an empty seat on a plane, and I travel a lot. Lost luggage rates are near all time lows because so few now check in bags. Interest rates staying at zero don?t hurt either.

The real kicker here is that stock in an airline is, in effect, a free undated put on the price of oil. If the price of oil stays in the $80 handle for a prolonged period of time, which it should, or continues to fall, airline stocks will rocket. This is on top of a $27 plunge in the price of Texas tea, the largest single cost item for the airline industry.

If you are looking for another indirect play, look at the bond market. With a new Boeing 787 Dreamliner costing up to $300 million each, airlines are massive borrowers of capital. With interest rates at all time lows, another huge source of costs have just been lifted off the airlines? backs.

The Ebola virus is an additional sweetener (if you could use such a term for a deadly disease), because it is enabling us to buy the stock down 30% than it would be otherwise. Delta Airlines (DAL) just so happened to be the airline that brought the first Ebola carrier to the US, so it has suffered the most. As frightening as this disease is (I studied it in my Army bacteriological warfare days), I doubt we will see more than a dozen cases in the US.

At least we are finally getting something for our $120 billion investment in Homeland Security since 2002. How much do you want to bet that they don?t cut the budget for the Center for Disease Control (CDC) this year, as they have for the past dozen!

On top of the massive fuel savings, a recovering US economy should boost profitability, given its recent maniacal pursuit of controlling costs. Some airlines have become so cost conscious that they are no longer painting their planes to gain fuel savings from carrying 100 pounds less weight! Just the missing pretzels alone should be worth a few cents a share in earnings.

This is not just a US development, but an international one. The International Air Transport Association (IATA) has just raised its forecast of member earnings from $7.6 billion in 2012 to $10.6 billion in 2013, a gain of 40%. The biggest earnings are based in Asia (China Southern Airlines, China Eastern Airlines, Air China), followed by those in the US, with $3.6 billion in profits.

Add all this together, and the conclusion is clear. The checklist is complete, the IFR clearance is in hand, and it is now time to push the throttles to the firewall for the airline stocks and get this bird off the ground.

And no, I didn’t get free frequent flier points for writing this piece.

Meet the New Big Four

DAL 10-15-14

UAL 10-15-14

AAL 10-15-14

LUV 10-15-14

John Thomas CroatiaMaybe I Should Try Hedge Fund Trading?

 

Delta Airplane

It?s Pedal to the Metal Once Again

If the prospect of WWIII can?t knock this market down, what will it take? A giant asteroid that destroys the earth?

I would have used ?Balls to the Wall? in the headline for this piece. But as this is a family oriented newsletter I opted for the more politically correct screamer.

Even the most hardened and seasoned traders, like me and Mad Day Trader Jim Parker, were stunned by how fast the markets bounced back from Monday?s war scares in the Ukraine. Of course, everything I said in my Monday letter came true.

It would have been nice if the recovery stretched out over a longer period of time, giving me better entry points for my Trade Alerts. But that was not to be. Too many people are still frantically trying to get in this market. There are oceans of cash everywhere earning virtually nothing. It seems the new trading strategy is that if something hasn?t gone down for three days, you buy it.

Bizarre as it may seem, the weather is emerging as the big driver of markets this year. Even the Federal Reserve is now saying that the weather was a big drag on the economy. This means that every negative data point for the next few months has a great excuse to be ignored.

It also means the growth which was lost in Q1 will get added back in during Q2 as the economy plays catch up. This has the potential to create a growth surge, possibly from a 1% annualized rate to as much as a 5% in the spring.

It is inevitable that this would trigger a major spike up in all risk assets. This realization is rippling throughout the markets to create one of those ?Aha? moments, much like we saw last October, when it became obvious that the indexes would melt up for the rest of 2013. Fasten your seat belt!

If you have any doubts about this scenario, you better take a look at the commodities markets, both hard and soft (DBA). After a dreadful three years, the chart now has the trajectory of a bat out of hell. What might cause this? How about a global synchronized economic recovery that boost US growth by a full 100 basis points or higher in 2014?

So I am going to take advantage of the pre Friday nonfarm payroll doldrums to start loading the boat with positions and scaling up risk. That?s why I picked up General Electric (GE) and Delta Airlines (DAL) today, classic cyclical names. Also on the short list are EBAY (EBAY), Gilead Sciences (GILD) for another visit to the trough, Goldman Sachs Group (GS), and QUALCOMM (QCOM).

Today?s new trades graciously turned immediately profitable, taking my performance up to yet another all time high of 134.41% since inception, and a 2014 year to date gain of 11.91%. That improves my average annualized return to a stratospheric 41.4%. Incredibly, after last year?s torrid 68% profit, my performance is getting even better. It appears that, like a fine Napa Valley wine, I improve with age.

Yes, I know you have been told by the talking heads on TV that stocks are expensive, and that a crash is imminent. Personally, I think equities are cheap and that we are on our way to a Dow Average of 100,000-200,000 by 2030 (no typo here). I will keep that view as long as the stocks that I am buying pay higher dividends than the ten-year Treasury yield (TLT), now at 2.69%.

To support my view take a look at the chart below produced by my friends at Business Insider. It shows that the share of technology names, the lead sector for the entire market, trading at more than five times sales is below 40%, a fraction of the 2000 peak.

I think we have to match, or exceed, this peak before the party is over and the lights get turned out.

GE 3-5-14

DAL 3-5-14

DBA 3-5-14

Markets Chart of the Day

Delta

Airline Stocks are Cleared for Take Off

When I was a young, clueless investment banker at Morgan Stanley 30 years ago, the head of equity sales took me aside to give me some fatherly advice. Never touch the airlines.

The profitability of this industry was totally dependent on fuel costs, interest rates and the state of the economy and management hadn’t the slightest idea of what any of these were going to do. If I were ever tempted to buy an airline stock, I should lie down and take a long nap first.

At the time, the industry had just been deregulated and was still dominated by giants like Pan Am, TWA, Eastern Air, Western, Laker, Braniff, and a new low cost upstart called People Express. None of these companies exist today. It was the best investment advice that I ever got.

If you total up the P&L’s of all of the US airlines that ever existed since Orville and Wilber Wright first flew in 1903 (their pictures are on my new anti-terrorism edition commercial pilots license), it is a giant negative number, well in excess of $100 billion. This is despite the massive government subsidies that have prevailed for much of the industry’s existence.

The sector today is hugely leveraged, capital intensive, heavily regulated, highly unionized, offers customers terrible service, and is constantly flirting with or is in bankruptcy. Its track record is horrendous. It is a prime terrorist target. A worse nightmare of an industry never existed.

I became all too aware of the travails of this business while operating my own charter airline in Europe as a sideline to my investment business. The amount of paperwork involved in a single international flight was excruciating. Every country piled on fees and taxes wherever possible. The French air traffic controllers were always on strike, the Swiss were arrogant, and the Italians unintelligible and out of fuel.

The Greek military controllers once lost me over the Aegean Sea for two hours, while the Yugoslavs sent out two MIG fighter jets to intercept me. As for the US? Did you know that every rivet going into an American built aircraft must first be inspected by the government and painted yellow before it can be used in manufacture?

While flying a Red Cross mission into Croatia, I got shot down by the Serbians, crash landed at a small Austrian Alpine river, and lost a disc in my back. I had to make a $300 donation to the Zell Am Zee fire department Christmas fund to get their crane to lift my damaged aircraft out of the river (see picture below). Talk about killing the competition!

So you may be shocked to hear that I think there is a great opportunity here in airline stocks. A Darwinian weeding out has taken place over the last 30 year that has concentrated the industry so much that it would attract the interest of antitrust lawyers, if consumers weren?t such huge beneficiaries.

With the American-US Air (AAL) deal done, the top four carriers (along with United-Continental (UAL), Delta (DAL), and Southwest (LUV) will control 90% of the market. That is up from 60% only five years ago. The industry has fewer seats than in 1982; while inflation adjusted fares are down 40%. Analysts are referring to this as the industry?s new ?oligopoly advantage.?

Any surprise bump up in oil prices is met with a blizzard of higher fares, baggage fees, and fuel surcharges. I can’t remember the last time I saw an empty seat on a plane, and I travel a lot. Lost luggage rates are near all time lows because so few now check in bags. Interest rates staying at zero don?t hurt either.

The real kicker here is that stock in an airline is, in effect, a free undated short volatility play on oil. If oil doesn?t move, airline stocks go up. You may have noticed that I have written at length on the rough balance that has emerged in the global oil markets, where rising Chinese demand is offset by increasing US production from fracking. The end result has been the lowest volatility in the oil market in years.

This is not a bad position to have when peace talks in Geneva with Iran threaten to collapse the price of oil. On top of that, you can add the huge economies offered by the new Boeing 787, known in the industry as the ?plastic fantastic, which uses 40% less fuel than existing models.

I picked United Continental Group (UAL) because it suffered from some integration problems from their recent merger, like a reservations system that wouldn?t work. That gives them the greatest snap back potential.

And even if the fuel savings turn out to be modest, a recovering US economy should boost profitability, given its recent maniacal pursuit of controlling costs. Some airlines have become so cost conscious that they are no longer painting their planes to gain fuel savings from carrying 100 pounds less weight! Just the missing pretzels alone should be worth a few cents a share in earnings.

This is not just a US development, but an international one. The International Air Transport Association (IATA) has just raised its forecast of member earnings from $7.6 billion in 2012 to $10.6 billion in 2013, a gain of 40%. The biggest earnings are based in Asia (China Southern Airlines, China Eastern Airlines, Air China), followed by those in the US, with $3.6 billion in profits.

Add all this together, and the conclusion is clear. The checklist is complete, the IFR clearance is in hand, and it is now time to push the throttles to the firewall for the airline stocks and get this bird off the ground.

And no, I didn’t get free frequent flier points for writing this piece.

Meet the New Big Four

LUV 1-22-14

AAL 1-22-14

UAL 1-22-14

DAL 1-22-14

John Thomas CroatiaTime to Consider Another Career

United AirplainFly the Friendly Skies with a Long Position