When I closed out my position in Freeport McMoRan (FCX) near its max profit earlier this year, I received a hurried email from a reader asking if he should still keep the stock. I replied very quickly:
“Hell, yes!”
When I toured Australia a couple of years ago, I couldn’t help but notice a surprising number of fresh-faced young people driving luxury Ferraris, Lamborghinis, and Porsches.
I remarked to my Aussie friend that there must be a lot of indulgent parents in The Lucky Country these days. “It’s not the parents who are buying these cars,” he remarked, “It’s the kids.”
He went on to explain that the mining boom had driven wages for skilled labor to spectacular levels. Workers in their early twenties could earn as much as $200,000 a year, with generous benefits.
The big resource companies flew them by private jet a thousand miles to remote locations where they toiled at four-week on, four-week off schedules.
This was creating social problems, as it is tough for parents to manage offspring who make far more than they do.
The Great Commodity Boom has started, and in fact, we are already years into a prolonged super cycle.
China, the world’s largest consumer of commodities, is currently stimulating its economy on multiple fronts, including generous corporate tax breaks and relaxed reserve requirements. Get a trigger like the impending settlement of its trade war with the US and it will be off to the races once more for the entire sector.
The last bear market in commodities was certainly punishing. From the 2011 peaks, copper (COPX) shed 65%, gold (GLD) gave back 47%, and iron ore was cut by 78%. One research house estimated that some $150 billion in resource projects in Australia were suspended or canceled.
Budgeted capital spending during 2012-2015 was slashed by a blood-curdling 30%. Contract negotiations for price breaks demanded by end consumers broke out like a bad case of chicken pox.
The shellacking was reflected in the major producer shares, like BHP Billiton (BHP), Freeport McMoRan (FCX), and Rio Tinto (RIO), with prices down by half or more. Write-downs of asset values became epidemic at many of these firms.
The selloff was especially punishing for the gold miners, with lead firm, Barrack Gold (GOLD), seeing its stock down by nearly 80% at one point, lower than the darkest days of the 2008-9 stock market crash.
You also saw the bloodshed in the currencies of commodity-producing countries. The Australian dollar led the retreat, falling 30%. The South African Rand has also taken it on the nose, off 30%. In Canada, the Loonie got cooked.
The impact of China cannot be underestimated. In 2012, it consumed 11.7% of the planet’s oil, 40% of its copper, 46% of its iron ore, 46% of its aluminum, and 50% of its coal. It is much smaller than that today, with its annual growth rate dropping by more than half, from 13.7% to 2.3% in 2020.
What happens to commodity prices if China recovers the heady growth rates of yore? It boggles the mind. If China doesn’t step up then India certainly will.
The rise of emerging market standards of living will also provide a boost to hard asset prices. As China goes, so do its satellite trading partners, who rely on the Middle Kingdom as their largest customer. Many are also major commodity exporters themselves, like Chile (ECH), Brazil (EWZ), and Indonesia (IDX), who are looking to come back big time.
As a result, western hedge funds will soon be moving money out of paper assets, like stocks and bonds, into hard ones, such as gold, silver (SIL), palladium (PALL), platinum (PPLT), and copper.
A massive US stock market rally has sent managers in search of any investment that can’t be created with a printing press. Look at the best-performing sectors this year and they are dominated by the commodity space.
The bulls may be right for as long as a decade thanks to the cruel arithmetic of the commodities cycle. These are your classic textbook inelastic markets.
Mines often take 10-15 years to progress from conception to production. Deposits need to be mapped, plans drafted, permits obtained, infrastructure built, capital raised, and bribes paid in certain countries. By the time they come online, prices have peaked, drowning investors in red ink.
So a 1% rise in demand can trigger a price rise of 50% or more. There are not a lot of substitutes for iron ore. Hedge funds then throw gasoline on the fire with excess leverage and high-frequency trading. That gives us higher highs, to be followed by lower lows.
I am old enough to have lived through a couple of these cycles now, so it is all old news for me. The previous bull legs of supercycles ran from 1870-1913 and 1945-1973. The current one started for the whole range of commodities in 2016. Before that, it was down from seven years.
While the present one is short in terms of years, no one can deny how business cycles will be greatly accelerated by the end of the pandemic.
Some new factors are weighing on miners that didn’t plague them in the past. Reregulation of the US banking system has forced several large players, like JP Morgan (JPM) and Goldman Sachs (GS) to pull out of the industry completely. That impairs trading liquidity and widens spreads— developments that can only accelerate upside price moves.
The prospect of falling US interest rates is also attracting capital. That reduces the opportunity cost of staying in raw metals, which pay neither interest nor dividends.
The future is bright for the resource industry. While the gains in Chinese demand are smaller than they have been in the past, they are off of a much larger base. In 20 years, Chinese GDP has soared from $1 trillion to $14.5 trillion.
Some 20 million people a year are still moving from the countryside to the coastal cities in search of a better standard of living and improved prospects for their children.
That is the good news. The bad news is that it looks like the headaches of Australian parents of juvenile high earners may persist for a lot longer than they wish.
Buy all commodities on dips for the next several years.
https://www.madhedgefundtrader.com/wp-content/uploads/2013/08/copper-mining.png412550Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2024-06-28 09:02:492024-06-28 10:17:53The Next Commodity Supercycle Has Already Started
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or DOW 40,000 AND HANGING WITH THE AMAZON HEADHUNTERS)
(TLT), (JNK), (WES), (ET), (GLD), (SLV), (MSFT),
(NVDA), (AAPL), (SPY), (FXI), (COPX), (FCX)
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE GREAT AMERICAN GOLDEN AGE HAS ONLY JUST BEGUN and SWIMMING WITH THE SHARKS)
(AAPL), (NVDA), (META), (GLD), (GOLD), (SLV), (WPM), (MSFT), (NVDA), (TLT), (FCX), (FXI), (BRK/B)
The Bull Market has Five More Years to Run, with S&P 500 growing earnings at 10% a year for the foreseeable future. Last year brought in $222 per share, 2024 will see $250, 2025 $270, and $300 for 2026. The Great American Golden Age has only just begun.
Profit margins will expand to all-time record highs. Falling interest rates and a weak dollar will boost exports to a recovering Europe and Japan. Inflation should hit the Fed’s 2% in 2025 as AI chatbots replace workers at a breakneck rate, cutting costs dramatically as they already have at some firms. The future is happening fast. Buy everything on dips, even bonds.
The stock market couldn’t even manage a 10% correction in April. We got a measly 6.10% instead. It’s all about the economy, stupid. Leftover massive Covid spending and the $280 billion CHIPS Act have created a tidal wave of cash surging through the system with much of it ending up in stocks.
The top eight tech companies (the Magnificent Seven plus Netflix (NFLX)) accounting for 30% of the entire market cap are only getting stronger. The (SPY) has a current price-earnings multiple of 20X with the Big 8 and 17X without them going forward. It’s not cheap but better than a poke in the eye with a sharp stick.
Boring old high-yielding utilities will become a big play as the electric power grid has to triple in size to accommodate the voracious appetites of EV’s and AI. And as we have already seen in California and much of the country, utilities have no reservations about raising prices.
We are back to normal with interest rates, returning to pre-financial crisis levels. Certainly, a stock market at all-time highs is happy with rates. The real concern here is that the Fed DOES cut rates too fast to bail out the loan-dependent half of the economy and the US Treasury as well. That could trigger a melt-up in stocks that would make the last six months pale in comparison and make my own $6,000 target for the (SPX) look ridiculously conservative.
There is also a major generational change in demographics underway. Previous retiring generations, having experienced the Great Depression, hoarded savings and were a drag on the economy. The Baby Boomers are spending like there is no tomorrow because after going through COVID-19, there might not BE a tomorrow. The Boomers have thus turned into the greatest job creators of all time through their spending.
I’ve seen them everywhere in recent weeks in Florida, Cuba, Ecuador, the Galapagos Islands, Panama, and of course, San Francisco where a Big Mac Happy Meal costs $11. What they don’t spend is being passed on to Gen Xers and Millennials, creating a $75 trillion wealth transfer, the largest in history. A lot of this is going into stocks as well. Wonder where all that “meme stock” money is coming from?
And from the “Department of I Told You So”, notice that precious metals were on an absolute tear last week, with gold (GLD) up 4.78% and silver posting a gob-smacking 7.40%. The new demand that I was aware of but had no hard data on finally became public. Solar Panels are Driving Global Silver Demand in an unprecedented fashion. Global investment in solar PV manufacturing more than doubled last year to around $80 billion.
Miners are expanding their operations and ramping up production as prices for the precious metal climb to decade highs, sending gross revenues to the moon. Demand for silver from the makers of solar PV panels, particularly those in China, is forecast to increase by almost 170% by 2030, to roughly 273 million ounces—or about one-fifth of total silver demand.
That’s a lot of silver. Buy (SLV) and (WPM) on dips.
So far in May, we are up +4.14%. My 2024 year-to-date performance is at +18.75%, a new all-time high.The S&P 500 (SPY) is up +10.48%so far in 2024. My trailing one-year return reached +35.79%versus +30.58% for the S&P 500. That brings my 16-year total return to +695.38%.My average annualized return has recovered to +51.83%.
I stopped out of short positions for small losses in (AAPL) and (NVDA) last week. I took profits on my long in (META). I am running my longs in (GLD) and (SLV) and my shorts in (MSFT) and (NVDA) into the Friday, May 17 options expiration. The only new position I added last week was a short in the (TLT).
Some 63 of my 70 round trips were profitable in 2023. Some 27 of 37 trades have been profitable so far in 2024.
Weekly Jobless Claims Hit a Nine Month High at 233,000, the bitter fruit of persistently high interest rates. New York City public school workers such as bus drivers are allowed to apply for benefits during winter and spring breaks, which tend to boost weekly claims numbers. Claims also picked up in California, Indiana, and Illinois.
Underwater Home Mortgages are Soaring, with the South taking the biggest hit. Roughly one in 37 homes are now considered seriously underwater in the US and that share is much higher across a swath of southern states. Nationally, 2.7% of homes carried loan balances at least 25% more than their market value in the first few months of the year. That’s up from 2.6% in the previous quarter. It’s another cost of high rates.
Online Retail Spending Up 7%, during the January-April period YOY. Cheaper items are seeing the fastest growth. Consumer discretionary spending has been in focus over the past several months, as sticky inflation has forced shoppers in various categories to trade down to more affordable products. It’s another sign of a modest slow, 1.6% growing economy.
Morgan Stanley (MS) Pushes Back Rate Cut Expectations to September. I couldn’t agree more. You see this in the $4 rally in bonds since last week. Sell short (TLT) for the very short term.
TikTok Sues the US Government, claiming its first amendment rights have been violated in a ban imposed on Congress. They will probably win. The national security threat posed by millions of dancing teenagers has never been showed. It’s just another talking point for technology-ignorant politicians egged on by Facebook (META) and other competitors. No one ever said the people in Silicon Valley were nice.
Social Security Trust Fund to Go Broke by 2035, according to US Treasury estimates. I knew they wouldn’t pay me after 55 years of contributions. Medicare is in less bad shape, not running out until 2036, a five-year extension. Retirees, the baby boomers, and exceeding new contributors, the Gen Xers. Expect your taxes to go up to fill the gap.
Berkshire Hathaway Delivers Blockbuster Earnings in Q1, thanks to a $9 billion pop in (AAPL) stock last year. Buffet just cut his massive position by 13% and will cut more. Total 2023 profits came in at a mind-numbing $93 billion. The company — whose divisions include insurance, the BNSF railroad, an expansive power utility, Brooks running shoes, Dairy Queen and See’s delivered a sharp swing from its $22 billion loss in 2022 because of the bear market. Its vast insurance operations that include Geico car insurance and reinsurance reported $5.3 billion in after-tax earnings for 2023, thanks to steep premium increases which we have all felt. Sell (AAPL), buy (BRK/B).
Bond Investors are Making a Killing, with the US Treasury paying out $900 billion in interest in 2023. That’s double the annual cost of the past decade. Remember those coupons? That’s another reason for the Fed to cut rates soon, to lessen this backbreaking burden on the government. After being held hostage by zero-rate policies for almost two decades, US Treasuries are finally reverting to their traditional role in the economy. Bonds are becoming respectable again after a long winter. Buy (TLT) on dips.
China Home Sales Plunge by 47%, as the real estate crisis deepened, indicating that a recovery may be far off. But when it does bounce back, expect all commodities to hit record highs. Buy (FCX) on dips.
Biden Piles on the Foreign Tariffs, announcing new China tariffs aimed at the EV Industry that is currently decimating Europe. Europe is in danger of giving away its edge in cars to the Chinese and a proactive response would ensure American car manufacturers can stand up to the low-priced onslaught.
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, May 13, at 10:30 AM EST, the Consumer Inflation Expectations are announced.
On Tuesday, May 14 at 8:30 AM EST, Producer Price Index for Aprilis released.
On Wednesday, May 15 at 8:30 AM EST, the Consumer Price Index is published
On Thursday, May 16 at 8:30 AM EST, the Weekly Jobless Claims are announced.
On Friday, May 17 at 8:30 AM the Monthly Options Expiration takes place at the close.
At 2:00 PM the Baker Hughes Rig Count is printed.
As for me, I will never forget the words from my underwater guide: “Stay where you are and the current will bring the sharks to you.”
Is that something we want, I queried in my fractured Spanish. “Don’t worry”, he answered, “The sharks are vegetarians.” Yes, but did anyone tell the sharks that they were vegetarians?
Sure enough, two six-foot-long hammerhead sharks hungrily swam by me within feet in the green murk, not even pausing to give me the time of day. They swam so close that one almost slapped me in the Face with his tailfin. I guess I wasn’t on the menu that day, not even as a special.
Fortunately, I brought a GoPro underwater video with me and filmed the whole thing. Otherwise, you wouldn’t believe me for a second (click here for the link.)
Such was the high point of my week in the Galapagos Islands last week, a remote archipelago of 13 volcanic islands some 600 miles west of Ecuador, 2 degrees South Latitude in the Pacific Ocean. Sitting in my beachfront house in San Cristobal, I worked all morning, knocking out some eight trade alerts on the week, and explored every afternoon.
It was bliss.
You scientists out there will already know the Galapagos Islands as the place where Charles Darwin landed in 1835 on the HMS Beagle and collected the data that led to the Theory of Evolution and the concept of the Survival of the Fittest. (It was all about black Finches, now known as Darwin’s finches, of which I saw hundreds).
Darwin was at first widely ridiculed, as are the creators of all new revolutionary advances. Critics highlighted his close relationship with monkeys. Now it’s required reading for all high school students. While I was there a reproduction of the Beagle sailed in from Holland to celebrate the 200th anniversary of Darwin’s discoveries….11 years early.
The Galapagos Islands are not an easy place to get to. It was a four-hour flight from Miami to Quito in Ecuador, the worlds third highest airport at 9,500 feet. A lot of transients get altitude sickness. Then an hour's flight to Guayaquil on the coast where the Ecuadorian drug trade is run and another hour to San Cristobal. When I tried to visit here in the 1970’s there was only one ship a week and no planes.
Galapagos connected to the outside world just last year when Space X’s Starlink service initiated a 200mb/sec service. With that, I can trade stocks as if I were in downtown Manhattan. This is true for virtually every remote location in the world now, the consequences of which we have yet to imagine. I set up a Starlink in Ukraine last October while under fire and the Russians never were able to jam it.
The Ecuadorian government has gone through great lengths to keep the Galapagos Islands a pristine eco-tourism destination and they have largely succeeded. I counted only one Cessna G5 jet at the airport. Incoming luggage is X-Rayed for foreign fruit and sniffed for drugs by German Shepherds. Residents are limited to a tiny southwestern sliver of San Cristobal island and the rest is a national park.
A friend charitably turned down a $20 million offer from the Four Seasons international hotel chain for his 120 acres of land there. There are not a lot of places in the world left where you can walk out of your front door to a deserted beach unscarred by footprints. Yet, it offers Ecuadorian prices, about one-third of those found in the US.
I think you should visit there.
HMS Beagle, kind of
55 Years of Trading and Finally my Own Beach!
Let the Current Bring the Sharks to You
Chillin with the Crew
My New Office
The View from Home
My New Neighbors
Good Luck and Good Trading,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
https://www.madhedgefundtrader.com/wp-content/uploads/2024/05/John-thomas-beach.png700820april@madhedgefundtrader.comhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngapril@madhedgefundtrader.com2024-05-13 09:02:232024-05-13 11:52:14The Market Outlook for the Week Ahead or The Great American Golden Age has Only Just begun and Swimming with the Sharks
(MARKET OUTLOOK FOR THE WEEK AHEAD, or DIGESTION TIME)
(NVDA), (FCX), (META), (MSFT), (TLT), (TSLA), (AAPL), (VISA), (FCX), (COPX), (GOOGL),
(A TRIP TO CUBA)
Before you even ask, I’ll give you the answer you’ve all been waiting for: It’s too late to sell and too early to buy.
Stocks may still have some digesting to do having soared by 27% in six months. Nobody wants to look like an idiot by buying a market top. As I have learned over the decades, investors fear looking stupid more than they fear losing money, especially if they are professionals.
Everyone knows the market is eventually going higher so they are not selling in any meaningful way unless they are short-term, algos, or day traders.
This means we may have a whole lot of nothing going on in the coming weeks or months.
That leaves us time to examine the most interesting trends going on in the markets right now, especially the new bull market in commodities. Believe it or not, we are still unwinding the long-term effects of Covid 19 and commodities have only recently come to the fore.
Remember Covid?
Since October, copper prices have risen by 22%, oil by 23%, gold by 34%, and uranium by a gobsmacking 83%. What’s causing this sudden new interest? It’s not a recovering Chinese economy, that’s for sure. Investors have been waiting for a bounce back in the Middle Kingdom seemingly forever. But China remains hobbled by the bitter fruit of a 40-year one-child policy and an ineffective government. History tells us that the United States does not make a great enemy.
So what’s driving the new demand? Remember Covid? Believe it or not, we are still unwinding the long-term effects of Covid 19 and commodities have only recently started to play catch up.
Commodities are unique in that they have such a long lead time to add new supply. It can take 5-10 years, to map out new sites, get government approvals, deliver heavy equipment, and mine, process, refine, and ship the final product.
In the meantime, enormous new demand has arisen. There have been 10 million EVs manufactured in recent years and each one needs 200 pounds of copper. AI means the electric power grid has to double in size quickly. Commodity markets are unable to meet the supply. Therefore, prices can only go up.
That enabled Freeport McMoRan (FCX), the world’s largest copper producer,to handily beat its earnings expectations, helped by higher production and easing costs. The mining giant said its quarterly production of copper rose to 1.1 billion pounds from 965 million pounds a year earlier, helped by a 49% jump in output from its Indonesia operations. (FCX) said it was working with the Indonesian government, which has put a ban on raw material exports, to obtain approvals to continue shipping copper concentrates and anode slimes. Its current license is set to expire in May. Buy (FCX) and (COPX) on dips.
Corporate raiders have taken notice.
Activist Elliot is taking a Run at Mining Giant Anglo American, accumulating a $1 billion stake. BHP, the largest iron ore miner, is also making a takeover bid here on the coattails of which Elliot is trying to ride. It just highlights the global interest in mining shares.
Anglo American plc is a British multinational mining company that is the world's largest producer of platinum, with around 40% of world output, as well as being a major producer of diamonds, copper, nickel, iron ore, polyhalite, and steelmaking coal. On a side note, copper hit a two-year high above $10,000 per metric tonne in the London Market last week.
Needless to say, the commodity boom could continue for another decade.
So far in April, we are up +4.24%. My 2024 year-to-date performance is at +13.61%.The S&P 500 (SPY) is up +6.50%so far in 2024. My trailing one-year return reached +32.40%versus +23.14% for the S&P 500. That brings my 16-year total return to +690.24%.My average annualized return has recovered to +51.77%.
Some 63 of my 70 round trips were profitable in 2023. Some 25 of 33 trades have been profitable so far in 2024.
Tesla Delivers Worst Earnings in 12 Years, with a 9% revenue drop, but the stock rallies big as the disappointment was well telegraphed. Revenue declined from $23.33 billion a year earlier and from $25.17 billion in the fourth quarter. Net income dropped 55% to $1.13 billion, or 34 cents a share, from $2.51 billion, or 73 cents a share, a year ago. The drop in sales was even steeper than the company’s last decline in 2020, which was due to disrupted production during the Covid-19 pandemic. Tesla’s automotive revenue declined 13% year over year to $17.38 billion in the first three months of 2024. I’ll watch (TSLA) from the sidelines from now.
Personal Consumption Expenditures (PCE) Comes in Warm for March, up 2.8% YOY, the same as for February. Service prices led. But the numbers were not as hot as feared so both bonds and stocks rose.
Big Tech Crashes, with all of the Magnificent Seven breaking 50-day moving averages. (NVDA) alone gave up 10% on Friday. The next stop is the 200-day moving averages, which are far, far away. If those hold this is just a correction. If they don’t the bear market is back.
Biggest Treasury Bill Auction in History is a Huge Success, at $69 billion for a two-year paper with a 4.898% yield. That is almost a risk-free government-guaranteed 10% yield in two years. Another $70 billion of five-year notes go on sale today. Half of this is going to foreign investors and central banks. Faith in America and the US dollar remains strong. Who else’s bonds would you rather buy? Passage of the Ukraine aid bill was probably a help. Wait for (TLT) to bottom.
Visa Pops on Earnings Beat, continuing as the powerhouse that it has been for years.Reported at $4.7 billion, showing a 10% increase year-over-year, slightly above the estimate of $4.943 billion. Visa is a call option on the growth of the Internet. Buy (V) on dips.
Apple China Sales Dive, by 19% as Chinese switch to cheaper Huawei phones for nationalism reasons. It’s also another sign of a slow Chinese economy. China remains one of the company’s biggest markets, but business there has grown harder after Beijing escalated a ban on foreign devices in state-backed firms and government agencies. Avoid (AAPL) until the turnaround.
Alphabet Earnings Beat Delivers Monster 10% Move, recovering a $2 trillion market cap. It also announced its first-ever dividend and a $70 billion share back, the second largest after Apple. Buy (GOOGL) on dips.
March New Home Sales Jump, by 8.1% when only 1.1% is expected, to 693,000. The median price of a home sold fell to $430,700 as builders pulled back on incentives like those cherry cabinets. It’s an uphill slog with those 7.0% mortgage rates.
CDC Birth Data Fall to Lowest Level Since the Great Depression, 1.1 births per 1,000 people. That is well below the Great Depression levels. Only 3,664,292 new Americans were born in 2021. It means there will be a shortage of consumers in 20 years so be out of stock by then. The good news is that Covid deaths have fallen from 4,000 per day to only 19 a day since January 2020.
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, April 29, at 10:30 AM EST, the Dallas Fed Manufacturing Index is announced.
On Tuesday, April 30 at 9:00 AM, S&P Case Shiller National Home Price Index is released.
On Wednesday, May 1 at 2:00 PM, the ADP Private Employment Change report will be published
On Thursday, May 2 at 8:30 AM, the Weekly Jobless Claims are announced.
On Friday, May 3 at 8:30 AM, the April Nonfarm Payroll Report is announced. At 2:00 PM, the Baker Hughes Rig Count is printed.
As for me, I have wanted to visit Cuba for decades. But relations with the US have run hot and cold over the years and whenever I had the time and money to go, the was a chill on, sometimes an extreme one.
So when I arrived in Key West and learned they were offering Cuba tour packages, I jumped at the chance. Unfortunately, you need to book three months in advance so that option was out.
Then I thought, “Why not fly there myself?” After payment of some hefty fees, commissions, and some outright bribes, I scored a Cuban visa and an aging Britten-Norman Islander twin built in the UK some 40 years ago. It was perhaps the smallest twin I have ever flown, with two minuscule 270 horsepower engines.
Although it was only 90 miles to Cuba, I had to load up with full tanks. Cuban aviation fuel is often contaminated with sludge or water and is unsafe to use. Losing both engines over shark-infested waters doesn’t fit in with my retirement plan. So I needed enough 100LL avgas to make the round drip, which meant skipping breakfast to stay within my weight limitations.
It was a clear and balmy morning when I received my clearance for takeoff, the sky dotted with fluffy white cumulus clouds. Of course, I had to skirt the Bermuda Triangle to get there, but no worries.
Amazingly Cuban air traffic control spoke English. Soon, the green hills of Cuba appeared on the horizon, and I received the words I will never forget: “N686KW you are cleared for landing in Havana.” I haven’t felt like that since I last landed in Moscow.
Much to my surprise, I found other US aircraft there as I was parked near jets from Southwest and American Airlines. I was greeted by an immigration officer who escorted me into the country, putting my Spanish skills to the test.
I had some concerns that I might be arrested in case Russia put me on a wanted list due to my recent work in Ukraine. But my fears proved unwarranted. You see, you get paranoid in your old age. A private car, a French Citroen van, a driver, and a government guide were waiting for me outside the airport.
Suddenly, I found myself in a strange new world. A darkly tanned people wore tired polyester clothes. Everyone was rail thin and the only obese people I saw were foreign tourists. There was an incredible variety of vehicles on the road, including ancient cars from Russia, China, Poland, and Japan. Apparently, Chevrolet had a great year in Cuba in 1956 because no American cars have entered the country since then and they are everywhere.
We headed straight for Earnest Hemingway’s Cuban home, known as Finca Vigia, or “Lookout Farm” built in 1886 on a hilltop overlooking Havana. The building was falling apart and showed large cracks, but going inside I was transported in time back to 1960, when Hemingway left the property ahead of the Cuban Revolution.
Finca Vigia has been untouched since. The walls are covered with an assortment of hunting trophies from Africa, including springboks, cape buffalo, lions, and leopards. They were collections of African spears and gun cases. Mounted on the walls were paintings of bullfights in Spain, cartoons about Hemingway, and family photos.
Magazine racks were stuffed with the 1960 issues of Life, Look, and The Saturday Evening Post. The National Geographic issues looked positively prehistoric. And there were thousands of books. Anyone who read his books would recognize all of this.
Hem, as his friends called him, bought the property in 1940 for $8,000, living there with wife three for five years, the famed war correspondent Martha Gellhorn, and wife four, Time magazine reporter Mary Welsch, who became his widow.
After passing on a Che Guevara T-shirt in the gift shop, I enjoyed a glass of freshly squeezed sugar cane juice. Then I headed into Havana, escorted by my guide, Eliar. The trip turned into a Hemingway bar crawl. I visited the well-known La Floridita, which made Hem’s favorite Daiquiri, La Bodegita, which mixed the best mojito and had lunch at his favorite roof terrace restaurant.
Cuba has long been one of the worst-managed countries in the world, second only to North Korea, and I learned why after grilling my guide all day about economic conditions. It’s 11.2 million people earn a per capita of $11,255, with 71% living below the poverty line. The real figure is a third of that as there are now 300 pesos to the US dollar, not the fictitious 120 that the government pretends.
When the Soviet Union collapsed in 1992, generous subsidies ended and Cuba quickly lost 33% of its GDP. With some of the richest farmland in the world, it imports 80% of its food and is currently suffering a food crisis. Even the bottled water I drank came from Panama.
Oil accounts for 100% of its energy supply which mostly comes from Russia and is paid for with raw sugar. Cuba’s largest exports are tobacco, nickel, and zinc most of which are exported to China. China also provided $11 billion in loans which Cuba promptly defaulted on.
The country would have been much better off if only Fidel Castro had accepted an offer from the Washington Senators to play US major league baseball in the early 1950s. Cuba is officially one of the last communist countries in the world, with Russia and China abandoning it years ago. After reforms in the 1990s, what they now practice is an odd mixture of communism and capitalism, with the government and the private sector competing side by side.
With thousands fleeing the country every year the real estate market has collapsed. You can buy a two-bedroom apartment in Havana for $30,000. Flying over the countryside at low altitude you fund vast expanses of agricultural land undeveloped for want of machinery and parts. There is unused labor everywhere. Cuba should be one of the richest countries in the world with all those beaches. The tourism possibilities are enormous. But with a 60-year trade and investment ban from the US, nothing can happen.
American credit cards and cell phones don’t work, so I brought in $200 in ones. You can’t bring back to the US the country’s only two worthy exports, rum and cigars. But there are buskers everywhere and by the end of the trip, I ended up giving it all away in tips. I did OK with the food, but only ate overcooked meals in high-end restaurants. Salads were out of the question but drink all the local beer and rum you can.
I ended my trip with a tour of the enormous Revolution Square where Fidel Castro used to give four-hour speeches to one million. One area the government did not skimp on spending was on the massive ministry buildings that surround the square. It seems the image of a strong government, especially the police, is essential in a workers’ socialist paradise.
Then it was back to the airport where surprisingly I obtained immediate clearance for takeoff. No passport stamps, as the government wanted to leave no evidence of my visit in an American passport. I returned to Key West just in time to catch a magnificent sunset over the Gulf of Mexico. US customs recognized my face and waved me right through.
Damn! Should have picked up some of those $5 bottles of rum.
It's all just another day in the life of John Thomas.
At Hemingway’s Cuban Home
A Look Back into 1960
Where Hem Wrote “Old Man and the Sea”, Standing
Hemingway’s Office
I passed on Che
Meeting an Old Friend for a Round at Floridita
Mixing it up with the Locals
One of Cuba’s Only Exports
Looks Like Chevy had a Great Year in 1956
Good Luck and Good Trading,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
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Whenever I change my positions, the market makes a major move, suffers a “black swan” or reaches a key level, I stress test my portfolio by inflicting various scenarios upon it and analyzing the outcome.
This is common practice and second nature for most hedge fund managers.
In fact, the larger ones will use top-of-the-line mainframes powered by $100 million worth of in-house custom programs to produce a real-time snapshot of their positions in hundreds of imaginable scenarios at all times. This is the sort of thing Ray Dalio used to do.
If you want to invest with these guys feel free to do so.
They require a $10-$25 million initial slug of capital, a one-year lock-up, charge a fixed management fee of 2%, and a performance bonus of 20% or more.
You have to show minimum liquid assets of $2 million and sign 100 pages of disclosure documents.
If you have ever sued a previous manager, forget it.
And, oh yes, the best-performing funds have a ten-year waiting list to get in, as with my friend David Tepper. Unless you are a major pension fund like the State of California, they don’t want to hear from you.
Individual investors are not so sophisticated and it clearly shows in their performance, which usually mirrors the indexes with less of a large haircut.
So, I am going to let you in on my own, vastly simplified, dumbed down, the seat of the pants, down-and-dirty style of scenario analysis and stress testing that replicates 95% of the results of my vastly more expensive competitors.
There is no management fee, performance bonus, disclosure document, lock up, or upfront cash requirement. There’s just my token $3,500 a year subscription and that’s it.
To make this even easier for you, you can perform your own analysis in the Excel spreadsheet I post every day in the paid-up members section of Global Trading Dispatch.
You can just download it and play around with it whenever you want, constructing your own best-case and worst-case scenarios. To make this easy, please log into your Mad Hedge Fund Trader, click on “MY ACCOUNT”, then click on Global Trading Dispatch, then Current Positions, and download the Excel spreadsheet for April 25, 2024.
There you will find my current trading portfolio showing:
Current Capital at Risk
Risk On
(NVDA) 5/$710-$720 call spread 10.00%
(TLT) 5/$82-$85 call spread 10.00%
(FCX) 5/$42-$45 call spread 10.00%
Risk Off
(NVDA) 5/$960-$970 put spread -10%
Total Net Position 30.00%
Total Aggregate Position 40.00%
Since this is a “for dummies” explanation, I’ll keep this as simple as possible.
No offense, we all started out as dummies, even me.
I’ll the returns in three possible scenarios: (1) The (SPY) is unchanged at $505 by the May 17 expiration of my front month option positions, which is 15 trading days away, (2) The S&P 500 rises 5.0% to $530 by then, and (3) The S&P 500 falls 5.0% to $480.
Scenario 1 – No Change
The value of the portfolio rises from a 5.07% profit to a 13.00% Profit. My existing longs in (FCX), (TLT), and (NVDA) expire at their maximum profits. So does my one short in (NVDA). Scenario 2 – S&P 500 rises to $530
You can easily forget about the long positions in (FCX), (TLT), and (NVDA) as they will expire well in the money. If they go up fast enough, I might even take an early profit and roll into a June or July position. Our short in (NVDA) might take some heat. But in the current environment of going into the summer doldrums, there is no way (NVDA) shoots up to a new all-time high, right where our strike prices were set at on purpose. The net of all this is that our portfolio should expire at a maximum profit for the year at up 13.00%.
Scenario 3 – S&P 500 falls to $480
All three of my stocks fall, but not enough for my three call spreads to go out of the money. (FCX) will stay above my stop-out level at $45, (TLT) at $85, and (NVDA) at $720. Obviously, the short in (NVDA) becomes a chipshot. Again, we expire at a maximum profit for the year at up 13.00%.
Up we make money, down we make money, sideways we make money, I like it! This is why I run long/short baskets of options spreads whenever the market allows me. It’s a “Heads I win, tails you lose strategy”.
If the market goes up, I’m looking for stocks to sell. If the market goes down, I'm looking for securities to buy. Boy low, sell high, I’m thinking of patenting the idea.
This is the type of extremely asymmetric risk/reward ratio hedge funds are always attempting to engineer to achieve outsized returns. It is also the one you want after the stock market has risen by 25% a year since the 2020 pandemic.
All that’s really happened is that the world has gone from slightly good to better this year. I can rejigger this balance anytime I want. If I think that a change in the economy or the Fed’s interest rate policy is in the works.
Keep in mind that these are only estimates, not guarantees, nor are they set in stone. Future levels of securities, like index ETF’s are easy to estimate. For other positions, it is more of an educated guess. This analysis is only as good as its assumptions. As we used to do in the computer world, garbage in equals garbage out.
Professionals who may want to take this out a few iterations can make further assumptions about market volatility, options implied volatility or the future course of interest rates. Keep the number of positions small to keep your workload under control. I never have more than ten. Imagine being at Goldman Sachs and doing this for several thousand positions a day across all asset classes.
Once you get the hang of this, you can start projecting the effect on your portfolio of all kinds of outlying events. What if a major world leader is assassinated? Piece of cake. How about another 9/11? No problem. Oil at $150 a barrel? That’s a gimme. What if there is an Israeli attack on Iranian nuclear facilities? That might take you all of two minutes to figure out.The Federal Reserve launches a surprise interest rate rise? I think you already know the answer.
The bottom line here is that the harder I work, the luckier I get.
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00april@madhedgefundtrader.comhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngapril@madhedgefundtrader.com2024-04-25 09:02:162024-04-25 14:23:15Risk Control for Dummies
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