This could be the proverbial canary in the coal mine for the consumer falling off a cliff.
There have been soft signals showing that credit card debt is piling up, but the truth is that Americans are spending more money on things they need and not on luxuries.
Snap (SNAP) recording a disastrous earnings report is showing us rapidly slowing growth and digital ad spend is usually first to go in the broader economy.
This leading indicator is essential to understanding the economy because companies don’t and won’t advertise when they understand the incremental marketing spend won’t result in meaningful sales.
Companies are just losing money at that point.
What happens is just a complete freeze of ad spend only to hibernate until the next cycle picks up again and demand returns.
The same dynamics apply to the other digital ad players like Google (GOOGL), Facebook (FB), and Twitter (TWTR) which is why we are seeing 10% selloffs in Google.
The benefit to being such a big and strong company is that Google sells off by 10% while Snap drops by 45%.
Not exactly fair but long-term holders won’t dump Google right away unless there are real structural problems.
To break it down even further, the recession is quickly approaching and the economy is now going into reverse.
Next will be job layoffs and laid-off workers won’t buy much if marketed to.
Snaps’ macroeconomic environment has deteriorated further and faster than anticipated since its last earnings update just a month ago.
Digital ad spend goes quicker than local TV and radio following shortly after.
National TV was much later, and ad agency spend was also later than cycle media buying.
Roku and FuboTV will be hardest hit initially. The length and depth of the recessionary slowdown will determine whether or not pain makes its way to the longer cycle areas of the ad market.
In its first-quarter earnings disclosure in April, Snapchat’s daily active users hit 332 million, an increase from 319 million at the end of 2021.
Snap accounts for only a small low-single digit percentage of total digital advertising, but the macro factors cited should be relevant for all companies.
I believe the read-through is most negative for Twitter, which is 75% dependent on brand ad revenue and has 15-20% exposure to Europe.
Facebook also has significant European exposure (25% of its ad revenue), though its brand advertising exposure is likely well under 25%.
The Nasdaq continues to be a sell the rally type of market because there are no dip buyers.
For years, the dip buyers would save the Nasdaq.
Not only that, but the widespread destruction of tech has also forced many big whales to sit on the sidelines.
Why buy now when the risk reward isn’t favorable?
So now we are headed to a recession and traders are waiting for the recessionary data to flow to confirm these Snap earnings.
If this occurs, don’t be surprised to see a negative feedback loop that triggers algorithms to sell.
The Fed still hasn’t nearly been aggressive enough as well and is selling this false belief that there won’t be a recession and the consumer is strong.
That is yet to be priced into technology shares.
The upcoming data will reflect that the opposite is happening which means the buyer strike continues.
Avoid the dip and sell the rip.
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(MARKET OUTLOOK FOR THE WEEK AHEAD, or ALL QUIET ON THE WESTERN FRONT)
(SPY), (TLT), (TBT), (GOOGL), (AAPL), (MSFT), (BRKB), (NVDA), (JPM), (BAC), (WFC), ($BTCUSD)
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When I first joined Morgan Stanley in 1983, a number of my clients were old enough to have experienced the 1929 stock market crash and the Great Depression that followed.
One was Sir John Templeton, who confided in me over lunch at his antebellum-style mansion at Lyford Cay in the Bahamas, that his long career started with a lot of excitement, and then became incredibly boring for a decade.
It looks like we entered the incredibly boring phase on January 4, when the stock market began its current downtrend. Last week brought the longest weekly losing streak since 1923, some eight weeks so far.
The market is actually down a lot more than it looks, meaning that we are a lot closer to the bottom than you think. Some 87% of the S&P 500 is down more than 10% and 61% is down 20%. The damage is far worse with the NASDAQ, with some 93% of shares down 10%, and a gut-punching 73% down 20% or more.
While tech has already gone down a lot, some 32% so far this year, it is still trading at an 18% premium to the main market. Remember, in this business, timing is everything. If you invested in tech at the Dotcom peak in 1999, it took you 14 years to break even. Latecomers in this cycle could suffer a similar duration of pain and suffering.
And while these are the kind of moves that usually precede a recession, there is still an overwhelming amount of data that says it won’t happen. We here at Mad Hedge Fund Trader analyze, dissect, and examine data all day long.
I will once again repeat what my UCLA math professor told me a half-century ago. “Statistics are like a bikini bathing suit; what they reveal is fascinating, but what they conceal is essential.”
For a start, 3.6% unemployment rates are not what recessions are made of. Double-digit ones are. The next jobless rate print in June is likely to be down, not up. The country in fact is suffering its worst worker shortage in 80 years. There are currently 6 million more jobs than workers. And wages are rising, putting more money in the pockets of consumers.
Last month, airline ticket prices rose by 25%. Good luck trying to get a plane anywhere as all are full. Last winter, I bought a first-class round-trip ticket from San Francisco to London for $6,000. Today, the same ticket is $10,000. During recessions, planes fly empty, routes get cancelled, and staff laid off. Airlines also go bust and are not subject to the takeover wars we are seeing now. Recessions also bring dramatic credit crises. Rising default rates force banks to retreat from lending, FICO scores tank, and debt markets dry up. It’s all quiet on the western front now, with all fixed income and liquidity indicators are solidly in the green. And while interest rates are higher, they are nowhere near the peaks seen during past recessions.
All this may explain that after the horrific market moves we have already seen but we may be only 4% from the final bottom in this bear move to an S&P 500 at $3,600, or 7% from an (SPX) of $3,500. That means it is time to start scaling into long-term positions now in the best quality names.
That’s why I have been aggressively piling on call spreads in technology that are 10%-20% in the money with only 19 days to expiration, making money hand over fist.
An interesting headline caught my attention last week. The Russians were stealing farm equipment from Ukraine on an epic scale. When they couldn’t steal it, such as when the electronics were disabled, they were destroying it.
That means the Russians didn’t invade Ukraine to get more beachfront territory on the Black Sea, although that is definitely a plus. They want to destroy a competitor’s agricultural production in order to raise the value of their own output.
Yes, this is the beginning of the Resource Wars that could continue for the rest of this century. Resource producers like the US, Russia, Canada, Australia, and Ukraine will be the big winners. Resource consumers like China, India, and the Middle East will be the big losers.
JP Morgan cuts US GDP Forecasts, with the second half marked down from 3% to 2.4% and 2023 from 2.1% to 1.5%. This means no recession, which requires two back-to-back negative quarters.
China’s Industrial Production collapses by 2.9%, and Retail Sales fell by a shocking 11.1%. The Shanghai shutdown is to blame. It means longer supply chain disruptions for longer and another drag on our own economy. If Tesla has a bad quarter, it will be because of a shortage of vehicles in China. So, will the end of Covid in China bring the bull market back in the US?
The US Budget Deficit is in free fall, putting our hefty bond shorts at risk. While Trump was president the national debt exploded by $4 trillion, a dream come true for bond shorts. Since Biden became president, the annual budget deficit has plunged from $3.1 trillion to $360 billion for the first seven months of fiscal 2022, and we could approach zero by yearend. An exploding economy has sent tax revenues soaring, and taxpayers still have to pay a gigantic bill for last year’s monster capital gains in the stock market. Biden has also been unable to get many spending bills through the Senate, where he lacks a clear majority.
India Bans Food Exports. Climate change is destroying its output with heat waves, while the Ukraine War has eliminated 13% of the world’s calories. This is a problem when you have 1.2 billion to feed. Expect food inflation to worsen.
Consumer Sentiment hits an 11-year low according to the University of Michigan, dipping from 64 to 59.1. Record gas prices and soaring inflation are the reasons, but spending remains strong off the super strong jobs market.
Homebuilder Sentiment hits a two-year low, down from 77 to 69 in May, according to the National Association of Homebuilders. Recession fears and soaring interest rates are the big reasons.
Building Permits dive in April by 3.2%, and single family permits were down 4.6%. The onslaught of bad news for housing continues. Avoid.
Target implodes on terrible earnings, taking the stock down 25%, the worst in 40 years. They finally got the inventory they wanted. Too bad consumers are too poor to buy it with $6.00 a gallon.
Commodities send Battery Costs soaring by 22%. Who knew you were going long copper, lithium, and chromium when you bought your Tesla? It’s a good thing you did. Now you can give the middle finger salute when you drive past gas stations.
Average Household now spending $5,000 a year on gasoline, which is $5,000 they’re not spending on anything else. Just ask Target (TGT) and Walmart (WMT). My Ten-Year View
When we come out the other side of pandemic, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still historically cheap, oil peaking out soon, and technology hyper-accelerating, there will be no reason not to. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The America coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 240,000 here we come!
With some of the greatest market volatility seen since 1987, my May month-to-date performance recovered to +4.79%.
My 2022 year-to-date performance exploded to 34.97%, a new high. The Dow Average is down -16.4% so far in 2022. It is the greatest outperformance on an index since Mad Hedge Fund Trader started 14 years ago. My trailing one-year return maintains a sky-high 62.99%.
This week, I added new long positions in Visa (V) and Microsoft (MSFT) when the Volatility Index (VIX) was in the mid $30s. I also did a nice round trip on an Apple (AAPL) short which brought in $1,740. I also took profits on two longs in the (SPY) and two shorts in the (TLT). Overall, it was a great week!
That brings my 14-year total return to 547.53%, some 2.40 times the S&P 500 (SPX) over the same period and a new all-time high. My average annualized return has ratcheted up to 43.78%, easily the highest in the industry.
We need to keep an eye on the number of US Coronavirus cases at 82.5 million, up 300,000 in a week and deaths topping 1,000,000 and have only increased by 2,000 in the past week. You can find the data here.
On Monday, May 23 at 8:30 AM EST, the Chicago Fed National Activity Index for April is out. On Tuesday, May 24 at 8:30 AM, New Home Sales for April are released.
On Wednesday, May 25 at 8:30 AM, Durable Goods for April are published.
On Thursday, May 26 at 8:30 AM, Weekly Jobless Claims are disclosed. The first look at Q2 GDP is printed.
On Friday, May 27 at 8:30 AM, Personal Income & Spending is out. At 2:00 the Baker Hughes Oil Rig Count is out.
As for me, one of my fondest memories takes me back to England in 1984 for the 40th anniversary of the D-Day invasion of France. On June 6, 160,000 Americans stormed Utah and Omaha beaches, paving the way for the end of WWII.
My own Uncle Al was a participant and used to thrill me with his hair-raising D-Day experiences. When he passed away, I inherited the P-38 Walther he captured from a German officer that day.
The British government wanted to go all out to make this celebration a big one as this was expected to be the last when most veterans, now in their late fifties and sixties, were in reasonable health. President Ronald Reagan and prime minister Margaret Thatcher were to be the keynote speakers.
The Royal Air Force was planning a fly past of their entire fleet that started over Buckingham Palace, went on the to the debarkation ports at Southampton and Portsmouth, and then over the invasion beaches. It was to be led by a WWII Lancaster bomber, two Supermarine Spitfire, and two Hawker Hurricane fighters.
The only thing missing was American aircraft. The Naval and Military Club in London, where I am still a member, wondered if I would be willing to participate with my own US-registered twin-engine plane?
“Hell yes,” was my response.
Of course, the big concern was the weather, as it was in 1944. Our prayers were answered with a crystal clear day and a gentle westerly wind. The entire RAF was in the air, and I found myself the tail end Charlie following 175 planes. I was joined by my uncle, Medal of Honor winner Colonel Mitchell Paige.
We flew 500 feet right over the Palace. I could clearly see the Queen, a WWII veteran herself, Prince Philip, Lady Diana, and her family waving from the front balcony. Massive shoulder-to-shoulder crowds packed St. James Park in front.
As I passed over the coast, much of the Royal Navy were out letting their horns go full blast. Then it was southeast to the beaches. I flew over Pont du Hoc, which after 40 years still looked like a green moonscape, after a very heavy bombardment.
In one of the most courageous acts in American history, a company of Army Rangers battled their way up 100-foot sheer cliffs. After losing a third of their men, they discovered that the heavy guns they were supposed to disable turned out to be telephone poles. The real guns had been moved inland 400 yards.
We peeled off from the air armada and landed at Caen Aerodrome. Taxiing to my parking space, I drove over the rails for a German V2 launching pad. I took a car to the Normandy American Cemetery at Colleville-sur-Mer where Reagan and Thatcher were making their speeches in front of 9,400 neatly manicured graves.
There were thousands of veterans present from all the participating countries, some wearing period uniforms, most wearing ribbons. At one point, men from the 101st Airborne Division parachuted overhead from vintage DC-3’s and landed near the cemetery.
Even though some men were in their sixties and seventies, they still made successful jumps, landing with big grins on their faces. The task was made far easier without the 100 pounds of gear they carried in 1944.
The 78th anniversary of the D-Day invasion is coming up shortly. I won’t be attending this time but will remember my own fine day there so many years ago.
Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Pont du Hoc
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(MARKET OUTLOOK FOR THE WEEK AHEAD, or SIFTING THROUGH THE WRECKAGE),
(SPY), (TLT), (TBT), (GOOGL), (AAPL), (MSFT), (BRKB), (NVDA), (JPM), (BAC), (WFC), ($BTCUSD)LA),
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I have many superpowers, but one of the most useful ones is picking market bottoms. It looks like another one is at hand.
The past week has been one of epic wreckage in the stock market. It’s as if Hurricanes Sandy and Katrina both hit at the same time and were followed by a good old California earthquake.
Your favorite share prices have gone from mildly irritating to disappointing to absolutely gobsmackingly awful in only five months.
As a result, some of the best buying opportunities of the decade are setting up, the kind that you will be able to will on to your grandchildren. This is when mortgages get paid off, college debt is retired, and retirements financed.
There are a couple of key measurements here to watch. When the number of stocks above their 200-day moving averages falls below 20%, it always signifies an important market bottom. At the Thursday low, we were at 15% for the (SPY) and 12% for NASDAQ. It’s just another technical indicator among the hundreds, but a useful one, nonetheless.
Another one that helps is that on Friday, we also saw the first 90% advancing day since June 2020. All correlations went to one last week, meaning that all asset classes went down in unison.
That puts the bottom for the S&P 500 at $3,800 with an initial upside target of $4,200. We are way overdue for an 8%-12% relief rally. If I am wrong, we are only dropping another 200 points, or 5%.
Except that this time, it’s different.
At $3,600, down 25% from the January high, the market will have fully discounted a fairly severe recession that isn’t going to happen. Amazing as it may seem, some of the stocks having the biggest falls are still seeing earnings grow nicely. They are simply being sold because they are widely owned. That snares them in all of the algorithm-driven high-frequency trading that is going on.
I know I’ve said this a million times, but you use markets like this to buy Rolls Royces at Volkswagen prices. I’m talking about Alphabet (GOOGL), Microsoft (MSFT), and Apple (AAPL).
These companies are solid as the Rock of Gibraltar, with massive cash flows, huge cash balances, unassailable moats, and steady, if not spectacular earnings prospects. People have not suddenly abandoned Google as a search engine, Microsoft still has a near-monopoly in PC operating software, and Apple will sell more new and more expensive iPhones than ever.
The other baby that is being thrown out with the bathwater here are the banks. Recession fears have given these shares a haircut by a third by recession fears that damage the credit quality of their loan books.
What if there is no recession? Then the bear market in banks goes up in a puff of smoke. It helps that this time, there is no liquidity or capital crisis to be seen whatsoever. Add JP Morgan (JPM), Bank of America (BAC), and Wells Fargo (WFC) to your growing “BUY” lists.
Buying the best stocks with a recession already baked in the price? Sounds like a winner to me.
As for the smaller tech stocks, I’d take a pass, at least for now. Most of these companies, which never made any money, now have shares down 70% to 90% and are not coming back. They provided to be perfect money destruction machines. Never confuse “gone down a lot” with “cheap.” Take away the punch bowl and suddenly the party becomes very boring.
The Mad Hedge Market Timing Index certainly earned its weight in gold last week. We saw a multi-year low of 6 on Thursday and I was sending out trade alerts to “BUY” as fast as I could write them. A 1,200-point snap-back rally ensued, setting up a bottom that could last for weeks, if not forever.
The other great thing to come out of this selloff is that we learned what a fantastic leading indicator of risk-taking Bitcoin has become. While the S&P 500 plunged by 20%, Bitcoin absolutely cratered by 60%. We saw the correlation on both the upside and the downside.
Bitcoin is basically the (SPY) X 3. Ignore Bitcoin at your peril, even if you think the whole thing is a scam. And keep reading your Mad Hedge Bitcoin Letter.
Was this the grand finale? Big tech stocks like Apple (AAPL) and Microsoft (MSFT) stubbornly held their ranges for months, supporting the market as a whole. That ended last week on no news with the decisive breakdown of the key names. Apple has lost a staggering $350 billion in market cap in a week. Does this signal the final washout of this correction? It could. The Volatility Index (VIX) has ceased rising, and bonds have begun a short-covering countertrend rally.
Jay Powell warns of more 50-basis point rate rises if the economic conditions justify it. He also can’t guarantee a soft landing for the economy. Thanks for telling us precisely nothing. The comments were made on NPR Radio’s marketplace program and immediately tanked Dow futures by 100 points.
Core Inflation moderates slightly, down from 8.5% to 8.3% in April, sparking a stock market rally. That is 0.2% lower than last month’s 8.5% print, hence the bond rally. It was the first decline in the inflation rate in seven months. The probability of a peak in inflation is increasing.
Producer Price Index soars 11.0% YOY and 0.5% in April alone. It is a red-hot number showing that inflation is getting worse. The Producer Price Index (PPI) program measures the average change over time in the selling prices received by domestic producers for their output.
Goldman Sachs quit the SPAC Market, citing unmanageable liability. More likely, they don’t want to get stuck with illiquid longs on SPACS they brought to the market. I warned you this was a roach motel market; you can check in but you can never check out. I have to admit that I never believed in this asset class for two seconds, regarding it as nothing more than a license to steal money from investors.
Bitcoin drops below $28,000, taking the cryptocurrency down to more than half its November peak. It’s acting more like a small-cap tech stock every day, not the thing to be right now. With the Fed shrinking liquidity at a record rate, this is not a favorable backdrop either.
Another crypto bites the dust, as the free fall continues. Tether, a stablecoin tied to the US dollar, has fallen to 69% of its face value. It turns out that backing by the US government is more reliable than support from a PO Box in the Cayman Islands. Expect more to fail. Avoid crypto at all cost.
Ford to unload 8 million Rivian shares, once a lockup expires. Other pick institutional blocks are waiting in the wings. The EV truck is smoking hot on the road, but the shares have been dead as a doorknob, down 85% from the peak and 16% on the day. Avoid (RIVN) while the sector is death warmed over.
Biden mulling dropping Chinese Tariffs to make a dent in inflation. It might help a bit. It just depends on what we might get in return. Such a move wouldn’t exactly protect American workers, a top Biden priority. Relations with China are still fraught at best.
US Dollar blasts through to 20-year high, but a cooling inflation number on Wednesday may signal the top. Soaring interest rates, a strong economy, and a weak Europe and Japan are the drivers. There’s a short play here someday, but not yet.
Housing Supply improves for the first time in three years. Supply of mid-sized single-family loans takes the lead. Inventories are showing smallest declines in a year. Finally, the buyers get a break….now that prices are falling. Almost all new loans are 5/1 ARMS.
Air Ticket Prices are through the roof and were the biggest single factor keeping the CPI inflation figure sky-high yesterday. Buyers cite as reasons a long time since visiting relatives, desperation to get outdoors, and a rush to travel before the next Covid wave hits. It may be a one-time pop only, as used car prices were in previous months.
30-Year Fixed Rate Mortgages Top 5.5% in the fastest rate rise in history. The housing market is still hot, now fueled by exploding adjustable-rate mortgages 1.5% cheaper. Refi’s, however, have gone to zero.
My Ten-Year View
When we come out the other side of pandemic, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still historically cheap, oil peaking out soon, and technology hyper accelerating, there will be no reason not to. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The America coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 240,000 here we come!
With some of the greatest market volatility seen since 1987, my May month-to-date performance recovered to +0.91%. Friday was up +5.12%, the biggest one-day gain in the 14-year history of the Mad Hedge Fund Trader.
My 2022 year-to-date performance exploded to 31.09%, a new high. The Dow Average is down -12.67% so far in 2022. It is the greatest outperformance on an index since Mad Hedge Fund Trader started 14 years ago. My trailing one-year return maintains a sky-high 58.48%.
I used last week’s meltdown to cover shorts in the (SPY) and bonds (TLT) and to buy new longs in technology like (AAPL), (NVDA), and (BRKB). I would have sent out more trade alerts if I had more time and didn’t have Covid and a 102 degrees temperature.
That brings my 14-year total return to 543.65%, some 2.40 times the S&P 500 (SPX) over the same period and a new all-time high. My average annualized return has ratcheted up to 43.78%, easily the highest in the industry.
We need to keep an eye on the number of US Coronavirus cases at 82.5 million, up 300,000 in a week, and deaths topping 1,000,000 and have only increased by 2,000 in the past week. You can find the data here.
On Monday, May 16 at 8:30 AM EST, the New York Empire State Manufacturing Index is released. On Tuesday, May 17 at 8:30 AM, Retail Sales for April are released.
On Wednesday, May 18 at 8:30 AM, Housing Starts and Building Permits for April are published.
On Thursday, May 19 at 8:30 AM, Weekly Jobless Claims are disclosed. Existing Home Sales for April are printed.
On Friday, May 20 at 8:30 AM, the Baker Hughes Oil Rig Count is out.
As for me, the 1980s found me heading the Japanese equity warrant trading department for Morgan Stanley in London, a unit which eventually produced 80% of the company’s equity division profits. It was like running a printing press for $100 bills.
My east end kids in their twenties were catapulted from earning $10,000 a year to a half million. After buying West End condos, the latest Ferrari or Jaguar, and picking up fashion model girlfriends, they ran out of ideas on how to spend the money.
Maybe it was time to upgrade from pints of Fosters at the local pub to fine French wines?
The problem was that no one knew what to buy. Bordeaux alone produced 5,000 labels, and Burgundy a further 7,000. France had 360 appellations in 11 major wine-growing regions. Worse yet, all the names were in French!
Following a firmwide search, it was decided that I should become the in-house wine connoisseur. After all, I was from a wine-growing region in California, spoke French, and was part-French. How could they lose?
As with everything I do, I intensively threw myself into research. It turns out that the insurance exchange, Lloyds of London, was suffering the first of its claims in its history. US asbestos-related insurance claims were exploding. Then, a giant offshore natural gas rig, Piper Alpha, blew up. Suddenly Lloyd’s syndicates were getting their first-ever cash calls.
These syndicates were sold to members as guaranteed risk-free cash flow. Suddenly many members had to come up with $250,000 each in months. No one was ready. How did many meet their cash calls? By selling off 100-year-old wine cellars through auctions at Sotheby’s in London.
Now let me tell you about the international wine auction business. Single cases of the first growth wines, like the 1983 Chateaux Laffite Rothchild, are traded on open markets like any other investment. They appreciate in value like bonds, about 5% a year. However, mixed cases filled with odds and ends from different wineries and different years, have no investment value and traded at enormous discounts.
I found my market!
In short order, I put together a syndicate of 20 new wine consumers and went to work.
To separate out the sheep from the goats, I relied on a wine guide that The Economist magazine included at the back of every wallet diary. As each auction catalog came out, I rated every bottle in the mixed cases coming for sale. I then showed up at the bi-monthly auctions and bought every case.
It wasn’t long before I became the largest buyer of wine at Sotheby’s, picking up 20 cases per auction. The higher the Japanese stock market rose, the more money the traders made, and the more they had to spend on better French wines.
It wasn’t long before Morgan Stanley became famed for being a firm of wine authorities. Our guys were getting invited to high-end dinners just so they could pick the wines, including me.
Sotheby’s took note, and set me up with their in-house wine expert, the famed Serena Sutcliffe. I became her favorite customer. Serena knew everyone in Bordeaux. Who is the most popular person in any wine-growing area? Not the one who makes the wine but the one who sells it.
It wasn’t long before Serena set me up with private tours of the top Bordeaux wineries. I’m talking about Laffite Rothchild, Haut-Brion, Yquem (once owned by US Treasury Secretary C. Douglas Dillon), Chateaux Margaux, and Pomerol. I then flew the two of us down to Bordeaux in my twin-engine Cessna 340 for the wine tasting opportunity of a lifetime. I came back full up, with about 10 cases per flight.
I was guided through ancient, spider web-filled, fungus-infused caves and invited to drink their prime stock. Let me tell you that the 1873 Laffite Rothchild is to die for but is bested by the 1848 Chateaux Yquem.
The stories I heard were incredible. During WWII, one winery dumped its entire stock in a nearby pond to keep the Germans from getting it. But the labels floated to the surface. After the war, they fished out the bottles. But they couldn’t identify them until they opened the bottles, where the vintage was printed on the cork. It was free fishing for years for the locals and there are probably a few bottles still in there.
In sommelier school, you have to taste 5,000 wines to graduate. They tell you up front that it will change your life. After my experience as the biggest wine buyer in London for five years, I can tell you this is true.
One of my treasured buys was a bottle of 1952 Laffite Rothchild, the year I was born. Then it was only 40 years old and went down well with a fine dinner of Beef Wellington. I had the bottle for years until a cleaning lady found it on a shelf after a party and put it in the recycling bin.
A few months ago, I was at the Marin French Antique Show browsing for hidden treasures. What did I find but an empty case of 1985 Romanee Conti, the greatest Burgundy of France. The vendor had no idea what he had. To him, it was just a wood box. I offered him $10. He said thanks. It now adorns a place of honor in my own wine cellar to remind me of this grand experience.
And if we ever meet for dinner, don’t bother with the wine list. I’ll be making the pick.
Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Fill Her Up with Bordeaux
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2022-05-16 10:02:312022-05-16 16:08:50The Market Outlook for the Week Ahead, or Sifting Through the Wreckage
My worst-case scenario for the S&P 500 this year was a dive of 20%. We are now off by 14%. And of course, most stocks are down a lot more than that.
Which means that we are getting close to the tag ends of this move. The kind of wild, daily 1,000-point move up and down we saw last week is typical of market bottoms.
Some $7 trillion in market capitalization lost this year. That means we could be down $10 trillion from a $50 trillion December high before this is all over. That’s a heck of a lot of wealth to disappear from the economy.
So, it may make sense to start scaling into the best quality names on the bad days in small pieces, like Apple (AAPL), Alphabet (GOOGL), Microsoft (MSFT), and NVIDIA (NVDA).
Whatever pain you may have to take what follows, the twofold to threefold gain that will follow over the next five years will make it well worth it. Is a 20% loss upfront worth a long-term gain of 200%? For most people, it is.
Bonds may also be reaching the swan song for their move as well. The United States Treasury Bond Fund (TLT) at $113 has already lost a gobsmacking $42 since the November $155 high.
The markets have already done much of the Fed’s work for it, discounting 200 basis points of an anticipated 350 basis points in rate rises in this cycle. Therefore, I wouldn’t get too cutesy piling on new bond shorts here just because it worked for five months.
Yes, there is another assured 50 basis point rise in six weeks towards the end of June. Jay Powell has effectively written that in stone. We might as well twiddle our fingers and keep playing the ranges until then. We have in effect been sent to the trading leper colony.
The barbarous relic (GLD) seems to be looking better by the day. Q1 saw a massive 551 metric tonnes equivalent pour into gold ETF equivalents, an increase of 203%. Of course, we already know of the step-up in Russian and Chinese demand to defeat western sanctions.
But the yellow metal is also drawing more traditional investment demand. Gold usually does poorly during rising interest rates. This time, it's different. An inflation rate of 8.5% minus an overnight Fed rate of 1.0%, leaving a real inflation rate of negative -7.5%. That means gold has 7.5% yield advantage over cash equivalents.
Gold’s day as an inflation hedge is back!
The April Nonfarm Payroll Report came in near-perfect at 459,000, holding the headline Unemployment Rate at 3.5%. It’s proof that a recession is nowhere near the horizon. A record 2 million workers have recovered jobs during the last four months and 6.6 million over the past 12.
Warren Buffet is Buying Stocks, some $51 billion in Q1. That includes $26 billion into California energy major Chevron (CVX), followed by a big bet on Occidental Petroleum (OXY). These are clearly a bet that oil will remain high for at least five more years. That has whittled his cash position down from $147 billion to only $106 billion. Buffet likes to keep a spare $100 billion on hand so he can take over a big cap at any time. Warren clearly eats his own cooking, buying $26 billion worth of his own stock in 2021. If you can’t afford the lofty $4,773 price for the “A” shares, try the “B” shares at $322.83, which also offer listed options on NASDAQ and in which Mad Hedge Fund Trader currently has a long position.
Elon Musk Crashes His Own Stock, selling $8.4 billion worth last week. His Twitter purchase has already been fully financed, so what else is he going to buy. The move generates a massive Federal tax bill, but Texas, his new residence, is a tax-free state. It continues a long-term trend of billionaires piling fortunes in high tax states, like Jeff Bezos in Washington, and then realizing the gains in tax-free states.
Adjustable-Rate Mortgages are Booming, replacing traditional 30-year fixed-rate mortgage at a rapid pace. Interest rates are 20% lower, but if rates skyrocket to double digits or more in five years, you have a really big problem. ARMs essentially take the interest rate risk off the backs of the lenders and place it firmly on the shoulders of the borrowers.
Travel Stocks are On Fire, with all areas showing the hottest numbers in history. Average daily hotel rates are up 20% YOY, stayed room nights 52%, airfares 39%, and airline tickets sold 48%. Expect these numbers to improve going into the summer.
JOLTS Hits a Record High, with 11.55 million job openings in March, up 205,000 on the month. There are now 5.6 million more jobs than people looking for them. No sign of a recession here. It augurs for a hot Nonfarm Payroll report on Friday.
Natural Gas Soars by 9% in Europe as the continent tries to wean itself off Russian supplies. In the meantime, US producers are refusing to boost output for a commodity that may drop by half in a year, as it has done countless times in the past. If the oil majors are avoiding risk here, maybe you should too.
My Ten-Year View
When we come out the other side of pandemic, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still historically cheap, oil peaking out soon, and technology hyper accelerating, there will be no reason not to. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The America coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 240,000 here we come!
With some of the greatest market volatility seen since 1987, my May month-to-date performance lost 4.27%. My 2022 year-to-date performance retreated to 25.91%. The Dow Average is down -9.3% so far in 2022. It is the greatest outperformance on an index since Mad Hedge Fund Trader started 14 years ago. My trailing one-year return maintains a sky-high 56.62%.
On the next capitulation selloff day, which might come with the April Q1 earnings reports, I’ll be adding long positions in technology, banks, and biotech. I am currently in a rare 50% cash position awaiting the next ideal entry point.
That brings my 13-year total return to 538.47%, some 2.30 times the S&P 500 (SPX) over the same period. My average annualized return has ratcheted up to 43.36%, easily the highest in the industry.
We need to keep an eye on the number of US Coronavirus cases at 81.9 million, up 500,000 in a week, and deaths topping 998,000 and have only increased by 5,000 in the past week. You can find the data here.
The coming week is a big one for jobs reports.
On Monday, May 9 at 8:00 AM EST, US Consumer Inflation Expectations are released. On Tuesday, May 10 at 7:00 AM, the NFIB Business Optimism Index is confirmed.
On Wednesday, May 11 at 8:30 AM, the Core Inflation Rate for April is printed.
On Thursday, May 12 at 8:30 AM, Weekly Jobless Claims are disclosed. Conoco Phillips (COP) reports. We also get the Producer Price Index. On Friday, May 13 at 8:30 AM, the University of Michigan Consumer Price Index for May is disclosed. At 2:00 PM, the Baker Hughes Oil Rig Count is out.
As for me, not just anybody is allowed to fly in Hawaii. You have to undergo special training and obtain a license endorsement to cope with the Aloha State’s many aviation challenges.
You have to learn how to fly around an erupting volcano, as it can swing your compass by 30 degrees. You must master the fine art of getting hit by a wave on takeoff since it will bend your wingtips forward. And you’re not allowed to harass pods of migrating humpback whales, a sight I will never forget.
Traveling interisland can be highly embarrassing when pronouncing reporting points that have 16 vowels. And better make sure your navigation is good. Once a plane ditched interisland and the crew was found months later off the coast of Australia. Many are never heard from again.
And when landing on the Navy base at Ford Island, you were told to do so lightly, as they still hadn’t found all the bombs the Japanese had dropped during their Pearl Harbor attack.
You are also informed that there is one airfield on the north shore of Molokai you can never land at unless you have the written permission from the Hawaii Department of Public Health. I asked why and was told that it was the last leper colony in the United States.
My interest piqued, the next day found me at the government agency with application in hand. I still carried my UCLA ID which described me as a DNA researcher which did the trick.
When I read my flight clearance to the controller at Honolulu International Airport, he blanched, asking if a had authorization. I answered that yes, I did, I really was headed to the dreaded Kalaupapa Airport, the Airport of no Return.
Getting into Kalaupapa is no mean feat. You have to follow the north coast of Molokai, a 3,000-foot-high series of vertical cliffs punctuated by spectacular waterfalls. Then you have to cut your engine and dive for the runway in order to land into the wind. You can only do this on clear days, as the airport has no navigational aids. The crosswind is horrific.
If you don’t have a plane, it is a 20-mile hike down a slippery trail to get into the leper colony. It wasn’t always so easy.
During the 19th century, Hawaiians were terrified of leprosy, believing it caused the horrifying loss of appendages, like fingers, toes, and noses, leaving bloody open wounds. So, King Kamehameha I exiled them to Kalaupapa, the most isolated place in the Pacific.
Sailing ships were too scared to dock. They simply threw their passengers overboard and forced them to swim for it. Once on the beach, they were beaten a clubbed for their positions. Many starved.
Leprosy was once thought to be the result of sinning or infidelity. In 1873, Dr. Gerhard Henrik Armauer Hansen of Norway was the first person to identify the germ that causes leprosy, the Mycobacterium leprae.
Thereafter, it became known as Hanson’s Disease. A multidrug treatment that arrested the disease, but never cured it, did not become available until 1981.
Leprosy doesn’t actually cause appendages to drop off as once feared. Instead, it deadens the nerves and then rats eat the fingers, toes, and noses of the sufferers when they are sleeping. It can only be contracted through eating or drinking live bacteria.
When I taxied to the modest one-hut airport, I noticed a huge sign warning “Closed by the Department of Health.” As they so rarely get visitors, the mayor came out to greet me. I shook his hand but there was nothing there. He was missing three fingers.
He looked at me, smiled, and asked, “How did you know?”
I answered, “I studied it in college.”
He then proceeded to give me a personal tour of the colony. The first thing you notice is that there are cemeteries everywhere filled with thousands of wooden crosses. Death is the town’s main industry.
There are no jobs. Everyone lives on food stamps. A boat comes once a week from Oahu to resupply the commissary. The government stopped sending new lepers to the colony in 1969 and is just waiting for the existing population to die off before they close it down.
Needless to say, it is one of the most beautiful places on the planet.
The highlight of the day was a stop at Father Damien’s church, the 19th century Belgian catholic missionary who came to care for the lepers. He stayed until the disease claimed him and was later sainted. My late friend Robin Williams made a movie about him but it was never released to the public.
The mayor invited me to stay for lunch, but I said I would pass. I had to take off from Kalaupapa before the winds shifted.
It was an experience I will never forget.
Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
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It’s not that easy to make money in big tech these days – that is what the big takeaway was with the Google (GOOGL) or Alphabet earnings report that came out after the close yesterday.
The glory years are long gone.
First, it was almost like Groundhog Day with the Netflix-like streaming catastrophe that has now victimized yet another tech company.
YouTube competes differently with other streamers and is reliant on the digital ad model which is why an ad shows every 10 seconds when we watch YouTube.
I know it’s annoying but that’s how they grow revenue, and the blame was squarely attributed to China’s TikTok which is a short-form video platform eating everyone else’s lunch.
YouTube led all platforms in the first quarter of 2022 when respondents were asked which platform they used most often for mobile video, but YouTube dropped to 35% of respondents vs. 45% in the first quarter of 2021 while TikTok was #2 with 22%.
Besides, YouTube is literally entertainment, and with the health situation normalized again and the weather heating up, don’t blame others for grabbing a beer or two with their friends whom they haven’t seen for ages.
That clearly doesn’t help the YouTube ad revenue when people are out and about.
Google will need to deal with this TikTok problem because it’s real and it’s not disappearing anytime soon.
Google has a TikTok copy called YouTube Shorts and it’s not going that well if we compare it to TikTok which has surged to well over 1 billion subscribers.
If management allows the platform to get stale, it could become another dying tech company like Facebook.
The sum of the parts wasn’t particularly impressive either and that is weird to say based on Google’s history of outperformance.
Investors almost never see them miss on the top and bottom line and the EPS miss was not even close.
Things are getting more expensive for all of us, and Google just laid bare what we knew it our guts.
Just look at their research and development spend, it went from $7.5 billion to $9.1 billion which is a $1.6 billion increase in nominal spend.
They are also getting less revenue from Google Play which lowered developer fees to 15% or less for 99% of apps, down from 30% previously.
The bright spots were search advertising and cloud businesses.
Google Cloud has been growing quickly, but still remains unprofitable. It grew sales 43% for the first quarter to reach $5.8 billion, which was about in line with expectations. However, operating losses were wider than expected at $931 million.
Investing aggressively in the cloud is Google’s silver bullet, and that’s clearly having an impact in terms of the free cash flow numbers as well as the higher expenses and the margin compression we’re seeing not only in that segment but in the broader business.
Big Tech is decelerating, and external forces are magnifying the weakness in growth.
I do believe much of the negativity has been priced into GOOGL’s stock and this isn’t the case of a broken business model like Netflix (NFLX) or Facebook (FB).
I believe GOOGL shares will have a positive second half of the year.
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(TESTIMONIAL),
(TEN MORE TRENDS TO BET THE RANCH ON),
(AAPL), (AMZN), (GOOGL), (TSLA), (CRSP), (EDIT), (NTLA)
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