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The Market Outlook for the Week Ahead, or Goldilocks is Back!

After too long of an absence, Goldilocks has moved back in once again. She arrived with Santa Claus too, a month ahead of schedule.

Can life get any better than that, Goldilocks and Santa Claus?

Santa confused Thanksgiving with Christmas this year. I saw it coming a mile off, and it’s not because my failing eyesight has suddenly improved.

Since October 26, Mad Hedge followers have earned an impressive 25%. We are on track to top an 86.5% profit for 2023, the best in the 15-year history of the service.

Concierge members who own our substantial LEAPS portfolio, now at 33 names, are up much more.

I hate to boast but let me take my victory lap. I earned it.

Stocks and bonds should continue rising but at a much slower rate. More likely is the diversification of the rally from Big Tech and big bonds (TLT) to medium tech, commodities (FCX), industrials (CAT), junk bonds (JNK), (HYG), and REITS (NLY).

Buy everything on dips.

And here are your assumptions. Collapsing energy prices will lead the inflation rate down to the Fed’s well-publicized 2% inflation rate target in the coming months. Accelerating technology and AI will reign in this year’s runaway wage increases, if not reverse them.

The UAW’s 25% salary increase over four years will only hasten the demise of General Motors (GM), as well as their own. Interest rates have to take a swan dive, supercharging all risk assets.

Goldilocks is not moving in for a fling, but a long-term relationship. Your retirement funds will love it.

Last spring, with 75 feet of snow over the winter, the rivers pouring out of the High Sierras were at record levels. That brought the solo hobbyist gold miners out in force.

It is widely believed that the 1849 gold rush extracted only 10% of the gold in the mountains and the remaining 90% is still up there. Heavy rainfalls like we received last winter flushed out some of the rest.

Rounding a turn in the river, I spotted a group of modern-day 49ers equipped with shoulder-high waders and inner tubes floating pumps and sluice boxes. So I parked the car and waded out in the freezing, fast-running water to get an update on this market.

One man proudly showed off a one-ounce gold nugget that he had found only that morning worth about $1,800. Nuggets are worth more than spot gold because they attract a collector’s market.

A record eight-ounce nugget was discovered in a river near Merced the week earlier. This year, the state government in Sacramento issued a record number of gold mining licenses.

I explained to my newfound friend that he should hang on to his gold because it would be worth a lot more the following year. Inflation was falling and that would eventually induce the Federal Reserve to cut interest rates sharply.

That meant less interest rate competition for gold and silver, which yielded nothing taking prices upward. Personally, I think this gold could hit $3,000 an ounce and silver $50 an ounce in 2025.

In addition, there was a constant bid from Russia, China, and North Korea looking to dodge financial sanctions. Money managers are also picking up the yellow metal as a hedge against any unanticipated volatility in 2024.

My friend looked at me quizzically, wondering if perhaps I was some kind of nutjob who had waded out mid-river to rob him of his prized nugget.

I’ll do anything to gain a trading edge, even freezing off my cajones.

It was a tough week for 90- and 100-year-olds with the passing of Charlie Munger, Henry Kissinger, and Supreme Court Justice Sandra Day O’Connor. I had the privilege of knowing all three.

I was in the White House Press Room one day when the press secretary James Brady asked if any of the press could ride a horse. Sheepishly, I was the only one to raise a hand.

I was ordered to pick up my riding boots and report to the White House Stables on 17^th Street. I had no idea why. Back then, even the press didn’t ask some questions.

When I arrived, I understood why. Supreme Court Justice Sandra Day O’Connor was already there kitted out ready to ride. It turns out that the justice from Arizona rode weekly with Ronald Reagan. This week, an international crisis prevented the president from doing so. I was the fill-in escort.

We talked about growing up in the Colorado Desert, and pre-air conditioning, as we enjoyed a peaceful ride along the Potomac River. A security detail kept a safe distance.

A lot of history is being in the right place at the right time.

The clock is ticking.

November closed out at +15.54%. My 2023 year-to-date performance is still at an eye-popping +81.71%. The S&P 500 (SPY) is up +19.73% so far in 2023. My trailing one-year return reached +80.80% versus +18.19% for the S&P 500.

That brings my 15-year total return to +678.90%. My average annualized return has exploded to +52.26%, another new high, some 2.48 times the S&P 500 over the same period.

I am 90% fully invested, with longs in (MSFT), (NLY), (BRK/B), (CCJ), (GOOGL), (SNOW), (CAT), and (XOM). I have one short in the (TLT). I took profits on (CRM) on Friday.

Some 56 of my 61 trades this year have been profitable this year.

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, December 4, at 8:30 AM EST, the US Factory Orders are out.

On Tuesday, December 5 at 2:30 PM, the JOLTS Job Openings Report is released.

On Wednesday, December 6 at 8:30 AM, the ADP Private Employment Report is published.

On Thursday, December 7 at 8:30 AM, the Weekly Jobless Claims are announced.

On Friday, December 8 at 2:00 PM the Baker Hughes Rig Count is printed and at 2:30 PM, the November Nonfarm Payroll Report is published.

As for me, back in the early 1980s, when I was starting up Morgan Stanley’s international equity trading desk, my wife Kyoko was still a driven Japanese career woman.

Taking advantage of her near-perfect English, she landed a prestige job as the head of sales at New York’s Waldorf Astoria Hotel.

Every morning we set off on our different ways, me to Morgan Stanley’s HQ in the old General Motors Building on Avenue of the Americas and 47^th street and she to the Waldorf at Park and 34^th.

One day, she came home and told me this little old lady living in the Waldorf Towers needed an escort to walk her dog in the evenings once a week. Back in those days, the crime rate in New York was sky-high, and only the brave or the reckless ventured outside after dark.

I said “Sure” “What was her name?”

Jean MacArthur.

I said THE Jean MacArthur?

She answered “Yes.”

Jean MacArthur was the widow of General Douglas MacArthur, the WWII legend. He fought off the Japanese in the Philippines in 1941 and retreated to Australia in a dramatic night PT Boat escape.

He then led a brilliant island-hopping campaign, turning the Japanese at Guadalcanal and New Guinea. My dad was part of that operation, as were the fathers of many of my Australian clients. That led all the way to Tokyo Bay where MacArthur accepted the Japanese in 1945 on the deck of the battleship USS Missouri.

The MacArthur then moved into the Tokyo embassy where the general ran Japan as a personal fiefdom for seven years, a residence I know well. That’s when Jean, who was 18 years the general’s junior, developed a fondness for the Japanese people.

When the Korean War began in 1950, MacArthur took charge. His landing at Inchon Harbor broke the back of the invasion and was one of the most brilliant tactical moves in military history. When MacArthur was recalled by President Truman in 1952, he had not been home for 13 years.

So it was with some trepidation that I was introduced by my wife to Mrs. MacArthur in the lobby of the Waldorf Astoria. On the way out, we passed a large portrait of the general who seemed to disapprovingly stare down at me taking out his wife, so I was on my best behavior.

To some extent, I had spent my entire life preparing for this job.

I had stayed at the MacArthur Suite at the Manila Hotel where they had lived before the war. I knew Australia well. And I had just spent a decade living in Japan. By chance, I had also read the brilliant biography of MacArthur by William Manchester, American Caesar, which had only just come out.

I also competed in karate at the national level in Japan for ten years, which qualified me as a bodyguard. In other words, I was the perfect after-dark escort for Midtown Manhattan in the early eighties.

She insisted I call her “Jean”; she was one of the most gregarious women I have ever run into. She was grey-haired, petite, and made you feel like you were the most important person she had ever run into.

She talked a lot about “Doug” and I learned several personal anecdotes that never made it into the history books.

“Doug” was a staunch conservative who was nominated for president by the Republican party in 1944. But he pushed policies in Japan that would have qualified him as a raging liberal.

It was the Japanese that begged MacArthur to ban the army and the navy in the new constitution for they feared a return of the military after MacArthur left. Women gained the right to vote on the insistence of the English tutor for Emperor Hirohito’s children, an American Quaker woman. He was very pro-union in Japan. He also pushed through land reform that broke up the big estates and handed out land to the small farmers.

It was a vast understatement to say that I got more out of these walks than she did. While making our rounds, we ran into other celebrities who lived in the neighborhood who all knew Jean, such as Henry Kissinger, Ginger Rogers, and the UN Secretary-General.

Morgan Stanley eventually promoted me and transferred me to London to run the trading operations there, so my prolonged free history lesson came to an end.

Jean MacArthur stayed in the public eye and was a frequent commencement speaker at West Point where “Doug” had been a student and later the superintendent. Jean died in 2000 at the age of 101.

I sent a bouquet of lilies to the funeral.

Kyoko passed away in 2002.

In 2014, Chinas Anbang Insurance Group bought the Waldorf Astoria for $1.95 billion, making it the most expensive hotel ever sold. Most of the rooms were converted to condominiums and sold to Chinese looking to hide assets abroad.

The portrait of Douglas MacArthur is gone too. During the Korean War, he threatened to drop atomic bombs on China’s major coastal cities.

Good Luck and Good Trading,

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

The Market Outlook for the Week Ahead, or The Fed is Done!

Diary, Newsletter

We’ve just seen our last interest rate rise in the economic cycle. Yes, I know that our central bank took no action at their last meeting in September. The market has just done its work for it.

And the markets are no shrinking violet when it comes to taking bold action. The 50 basis points it took bond yields up over the last two weeks is far more than even the most aggressive, economy-wrecking, stock market-destroying Fed was even considering.

And that doesn’t even include the rate hikes no one can see, the deflationary effects of quantitative tightening, or QT. That is the $1 trillion a year the Fed is sucking out of the economy with its massive bond sales.

It really is a miracle that the US economy is growing as fast as it is. After a warm 2.4% growth rate in Q2, Q3 looks to come in at a blistering 4%-5%. That is definitely NOT what recessions are made of.

Where is all this growth coming from?

Some of the credit goes to the pandemic spending, the free handouts we call got to avoid starvation while Covid ravaged the country. You probably don’t know this, but nothing happens fast in Washington. Government spending is an extremely slow and tedious affair.

By the time that contracts are announced, bids awarded, permits obtained, men hired, and the money spent, years have passed. That means money approved by Congress way back in 2020 is just hitting the economy now.

But that is not the only reason. There is also the long-term structural push that is a constant tailwind for investors:

Hyper-accelerating technology.

Yes, I know, there goes John Thomas spouting off about technology again. But it is a really big deal.

I have noticed that the farther away you get from Silicon Valley, the more clueless money managers are about technology. You can pick up more stock tips waiting in line at a Starbucks in Palo Alto than you can read a year’s worth of research on Wall Street.

What this means is that most large money managers, who are based on the east coast are constantly chasing the train that is leaving the station when it comes to tech.

On the west coast, managers not only know about the new tech, but the tech that comes after that and another tech that comes after that, if they are not already insiders in the current hot deal. This is how artificial intelligence stole a march on almost everyone, until a year ago, unless you were on the west coast already working in the industry. Mad Hedge has been using AI for 11 years.

You may be asking, “What does all of this mean for my pocketbook?” a perfectly valid question. It means that there isn’t going to be a recession, just a recession scare. That technology will bail us out again, even though our old BFF, the Fed, has abandoned us completely.

Which brings me to the current level of interest rates. I have also noticed that the farther away you get from New York and Washington, the less people know about bonds. On the west coast mention the word “bond” and they stare at you cluelessly. Indeed, I spent much of this year explaining the magic of the discount 90-day T-bill, which no one had ever heard of before (What! They pay interest daily?).

In fact, most big technology companies have positive cash balances. Look no further than Apple’s $140 billion cash hoard, which is invested in, you guessed it, 90-day T-bills when it isn’t buying its own stock, and is earning a staggering $7.7 billion a year in interest.

The great commonality in the recent stock market correction is easy to see. Any company that borrows a lot of money saw its stock get slaughtered. Technology stocks held up surprisingly well. That sets up your 2024 portfolio.

Put half your money in the Magnificent Seven stocks of Apple (AAPL), Amazon (AMZN), Meta (META), Microsoft (MSFT), Tesla (TSLA), (NVIDIA), and Salesforce (CRM).

Put your other half into heavy borrowers that benefit from FALLING interest rates, including bonds (TLT), junk bonds (JNK), (HYG), Utilities (XLU), precious metals (GOLD), (WPM), copper (FCX), foreign currencies (FXA), (FXE), (FXY), emerging markets (EEM).

As for me, I never do anything by halves. I’m putting all my money into Tesla. If I want to diversify, I’ll buy NVIDIA. Diversification is only for people who don’t know what is going to happen.

I just thought you’d like to know.

So far in October, we are up +2.96%. My 2023 year-to-date performance is still at an eye-popping +63.76%. The S&P 500 (SPY) is up +12.89% so far in 2023. My trailing one-year return reached +76.46% versus +22.57% for the S&P 500.

That brings my 15-year total return to +660.95%. My average annualized return has fallen back to +48.07%, another new high, some 2.64 times the S&P 500 over the same period.

Some 44 of my 49 trades this year have been profitable.

Chaos Reigns Supreme in Washington, with the firing of the first House speaker in history. Will the next budget agreement take place on November 17, or not until we get a new Congress in January 2025? Markets are discounting the worst-case scenario, with government debt in free fall. Definitely NOT good for stocks, which are reaching for a full 10% correction, half of 2023’s gains.

September Nonfarm Payroll Report Rockets, to 336,000, and August was bumped up another 50,000. The economy remains on fire. The headline Unemployment Rate remains steady at an unbelievable 3.8%. And that’s with the UAW strike sucking workers out of the system. This is supposed to by impossible with 5.5% interest rates. Throw out you economics books for this one!

JOLTS Comes in Hot at 9.61 million job openings in August, 700,000 more than the July report. The record labor shortage continues. Will the Friday Nonfarm Payroll Report deliver the same?

ADP Rises 89,000 in September, down sharply from previous months, showing that private job growth is growing slower than expected. August was revised down. It’s part of the trifecta of jobs data for the new month. The mild recession scenario is back on the table, at least stocks think so.

Weekly Jobless Claims Rise to 207,000, still unspeakably strong for this point in the economic cycle. Continuing claims were unchanged at 1.664%.

Traders Pile on to Strong Dollar, headed for new highs, propelled by rising interest rates. There is a heck of a short setting up for next year.

Yen Soars on suspected Bank of Japan intervention in the foreign exchange markets to defend the 150 line against the US dollar. The currency is down 35% in three years and could be the BUY of the century.

Kaiser Goes on Strike with 75,000 health care workers walking out on the west coast. The issue is money. The company has a long history of labor problems. This seems to be the year of the strike.

Oil (USO)Gets Slammed on Recession Fears, down 5% on the day to $85, in a clear demand destruction move and worsening macroeconomic picture. Europe and China are already in recession. It’s the biggest one-day drop in a year. Is the top in?

Tesla Delivers 435,059 Vehicles in September, down 5% from forecast, but the stock rose anyway. The Cybertruck launch is imminent, where the company has 2 million new orders. Keep buying (TSLA) on Dips. Technology is accelerating.

EVs have Captured an Amazing 8% of the New Car Market. They have been helped by a never-ending price war and generous government subsidies. EV sales are now up a miraculous 48% YOY and are projected to account for a stunning 23% of all California sales in Q3. Tesla is the overwhelming leader with a 52% share in a rapidly growing market, distantly followed by Ford (F) at 7% and Jeep at 5%. However, a slowdown may be at hand, with EV inventories running at 97 days, double that of conventional ICE cars. This could create a rare entry point for what will be the leading industry of this decade, if not the century. Buy more Tesla (TSLA) on bigger dips, if we get them.

Apple Upgrades New iPhone 15 to deal with overheating from third-party gaming. It will shut down some of its background activity, including some of the new AI functions, which were stressing the central processor. Third-party apps were adding to the problem, such as Uber and games from (META). This is really cutting-edge technology.

Moderna (MRNA) Bags a Nobel Prize in Chemistry. Katalin Kariko and Drew Weissman’s work helped pioneer the technology that enabled Moderna and the Pfizer Inc.-BioNTech SE partnership to swiftly develop shots. I got four and they saved my life when I caught Covid. I survived but lost 20 pounds in two weeks. It was worth it.

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, October 9, there is no data of note released.

On Tuesday, October 10 at 8:30 AM EST, the Consumer Inflation Expectations is released.

On Wednesday, October 11 at 2:30 PM, the Producer Price Index is published.

On Thursday, October 12 at 8:30 AM, the Weekly Jobless Claims are announced. The Consumer Price Index is also released.

On Friday, October 13 at 1:00 PM the September University of Michigan Consumer Expectations is published. At 2:00 PM, the Baker Hughes Rig Count is printed.

As for me, one of the many benefits of being married to a British Airways senior stewardess is that you get to visit some pretty obscure parts of the world. In the 1970s, that meant going first class for free with an open bar, and occasionally time in the cockpit jump seat.

To extend our 1977 honeymoon, Kyoko agreed to an extra round trip for BA from Hong Kong to Colombo in Sri Lanka. That left me on my own for a week in the former British crown colony of Ceylon.

I rented an antiquated left-hand drive stick shift Vauxhall and drove around the island nation counterclockwise. I only drove during the day in army convoys to avoid terrorist attacks from the Tamil Tigers. The scenery included endless verdant tea fields, pristine beaches, and wild elephants and monkeys.

My eventual destination was the 1,500-year-old Sigiriya Rock Fort in the middle of the island which stood 600 feet above the surrounding jungle. I was nearly at the top when I thought I found a shortcut. I jumped over a wall and suddenly found myself up to my armpits in fresh bat shit.

That cut my visit short, and I headed for a nearby river to wash off. But the smell stayed with me for weeks.

Before Kyoko took off for Hong Kong in her Vickers Viscount, she asked me if she should bring anything back. I heard that McDonald’s had just opened a stand there, so I asked her to bring back two Big Macs.

She dutifully showed up in the hotel restaurant the following week with the telltale paper bag in hand. I gave them to the waiter and asked him to heat them up for lunch. He returned shortly with the burgers on plates surrounded by some elaborate garnish and colorful vegetables. It was a real work of art.

Suddenly, every hand in the restaurant shot up. They all wanted to order the same thing, even though the nearest stand was 2,494 miles away.

We continued our round-the-world honeymoon to a beach vacation in the Seychelles where we just missed a coup d’état, a safari in Kenya, apartheid South Africa, London, San Francisco, and finally back to Tokyo. It was the honeymoon of a lifetime.

Kyoko passed away in 2002 from breast cancer at the age of 50, well before her time.

Stay Healthy,

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

Sigiriya Rock Fort

Kyoko

August 8, 2023

Diary, Newsletter, Summary

Global Market Comments
August 8, 2023
Fiat Lux

Featured Trades:

(THIS WILL BE YOUR BEST-PERFORMING ASSET FOR THE NEXT 30 YEARS),
(IYR), (PHM), (LEN), (DHI), (TLT), (HYG), (MUB), (SPY)

CLICK HERE to download today's position sheet.

April 28, 2023

Diary, Newsletter, Summary

Global Market Comments
April 28, 2023
Fiat Lux

Featured Trade:

(THURSDAY, MAY 16, 2023 KEY WEST, FLORIDA STRATEGY LUNCHEON)
(APRIL 26 BIWEEKLY STRATEGY WEBINAR Q&A),
(FRC), (IWM), (QQQ), (AAPL), (TSLA), (AMZN), (TSLA), (RIVN), (CRM), (TLT), (HYG)

CLICK HERE to download today's position sheet.

April 26 Biweekly Strategy Webinar Q&A

Diary, Newsletter

Below please find subscribers’ Q&A for the April 26 Mad Hedge Fund Trader Global Strategy Webinar, broadcast from Las Vegas, NV.

Q: Would you start adding to The Russell 2000 (IWM) around here?

A: No, the Russell 2000 is the most sensitive to market action and the most sensitive to an economic downturn, which it seems we have already entered. And you don’t add positions one week into the downturn, you do it like 3-6 months into the downturn. So, I would not touch (IWM) right around here.

Q: Are you buying more First Republic Bank (FRC) down here?

A: No, at this point the stock is a no-go. It is a ripe takeover target for someone, and the risk is, the takeover price is lower than your cost. I don’t understand why First Republic is down this far—like 97% — and when I don't understand things, I stay away. I had never seen a bank go under before that didn’t have bad loans, nor has anyone else. A lot of people were asking if they should double up, we went from $16 to $6 in a day, and the firm answer is that I just don’t know. The fundamentals of the company by no means justify that discount, it must be discounting something terrible that we haven’t heard yet. So I’m going to stay away and look for better trades to do.

Q: I missed the Tesla (TSLA) trade on Friday, should I be looking to buy the dips down here?

A: Yes, I would. I put out a May $110-$120 vertical bull call debit spread on Tesla, which is now only 3 weeks to expiration. Remember, at Tesla’s growth rate, the company is now 12% larger than it was when it hit the $104 bottom in January. I should point out that once our trade alert went out, it literally triggered billions of dollars worth of market action and crushed volatility. It took the implied volatility on Tesla options down 10% on that one day. So, with implied volatility this low, I’m not sure you can get Tesla done at any price that makes sense—but if you can, I’m all for it. As for the short, we’re almost in max profit on our Tesla short position. It’s cratered about $35 since we put it on, so I wouldn’t be chasing that one.

Q: Is there a reason why Freeport McMoRan (FCX) is not progressing upwards?

A: Recession fears—the long-term case for copper is spectacular— I’m looking for $100 in (FCX) a couple years down the road. With the short term, all they see is recession and US government debt default, and as long as those two things are overhanging the market, all of the economically sensitive plays are going to go down. You’re not going to get gains, you’re going to get losses. If you want to know how the debt default is working out, you can write a letter to Kevin McCarthy in Washington DC and ask him what he’s going to do. The stock market doesn’t like it for sure, so I’m inclined to go back to 100% cash and duck that whole cluster.

Q: Can China survive without foreign investment?

A: Yes, with a much lower standard of living, and technology that is greatly lagging behind the US. The Chinese use all the foreign investment going on to upgrade their own technology—it's very common for a Chinese worker to work for an American company for a year and then walk across the street and work for their main Chinese competitor. That is a major means of technology transfer. Without that, they fall way behind, and they know it. You can’t copy your way to leadership, as Japan found out to their great expense in the 1990s. You can add that to the long list of reasons why China will never invade Taiwan. Not only have they cut off their food and energy supply, but also their technology supply.

Q: Would it be safe to deposit my money with Apple (APPL) who’s offering a 4.15% interest rate?

A: Yes, Apple has about $150 billion in cash on the balance sheet to back up any deposit runs. I imagine Apple financially is probably far safer than any small regional bank in the US. But, there are better things to do than Apple, and that’s the good old 90-day US T-bill. That bill never defaults; it’s offering 5.2% — it may even be a little bit higher after May 3 when the Federal Reserve raises interest rates by 25 basis points.

Q: Aren’t earnings coming in better than expected?

A: Yes they are, however, the earnings season was frontloaded with the best-performing sector in the market—i.e. the banks—which you were 100% long of until last week, and the weaker performers are next. That seems to be what the stock market is telling us with the selloff, and of course, the weaker performers are technology stocks. So that's why I piled on the shorts (especially in the Invesco QQQ Trust), that’s why I cut back position sizes, it’s time to take the money and run.

Q: How much longer do you plan to do this?

A: Well Warren Buffet is 92 and he seems to be doing just fine. Joe Biden plans to be President of the United States until he is 86. Work for these men is their lives and they will never quit. The same is true for me. If they can do that, I can certainly run Mad Hedge Fund Trader until I am 92, or for 21 more years. Besides, what else would I do? I’m terrible at golf, I hate pickleball, Bingo is boring and is usually rigged, and all the other stuff that people my age do doesn’t appeal in the least.

Q: Are there ETFs that mirror the rates of 90-day T-bills, or is it better just to buy direct through my broker?

A: It’s always better to buy T-bills directly because your ETF does not work for free. They’re taking out fees somewhere, even if you can’t see them, even if they’re not in the marketing material—nobody works for free; except the US government, it would seem. So buy directly from the US government. If you own the T-bills and your institution goes bankrupt, you can always get your T-bills back in a couple of days. If you own their ETF that mirrors the T-bill, that can become a complete loss and you’ll get tied up in bankruptcy proceedings that last three years (and you may or may not get your money back.) So T-bills directly are the gold standard, I would buy those if you’re looking for a cash alternative.

Q: What about Rivian (RIVN)?

A: It’s red meat in this kind of market—don’t touch it. If the entire car industry is rolling over, including Tesla, don’t expect Rivian to outperform in that situation. As for Amazon (AMZN), like all tech stocks, I’m going to wait for the current selloff to work its way for its system, but then it’s probably a great long term buy and a two-year LEAPS.

Q: What’s your estimate for S&P earnings?

A: I’m at $220 a share which today gives us a multiple of 18.73, which is the middle of the recent range. We may drop a point or two from there, but that’s close enough for the cigar.

Q: Won’t wider credit spreads hurt iShares iBoxx $ High Yield Corporate Bond ETF (HYG)?

A: Yes, for the short term, but you’re being compensated for that by the 8% yield; and you’re buying junk bonds not for where they are for the next month or two, but where they are for the end of the year, which would be at least 10$-15% higher than they are now, so your total “all in” return might be as much as 25%. Not bad.

Q: What’s your thought on the Salesforce (CRM) drop?

A: I’ll buy it in about 3 months, once the next tech washout is finished and they’re throwing these things out with the bathwater.

Q: Do you think iShares 20 Plus Year Treasury Bond ETF (TLT) will trade higher if the market collapses?

A: Yes it will; that is your classic flight to safety out of stocks into bonds. We haven’t seen it in quite a while because both of them have been moving up and down together.

To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in to www.madhedgefundtrader.com, go to MY ACCOUNT, click on GLOBAL TRADING DISPATCH or TECHNOLOGY LETTER, then WEBINARS, and all the webinars from the last 12 years are there in all their glory.

Good Luck and Stay Healthy.

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

Playing the Penny Slots in Las Vegas is Definitely NOT my Retirement

January 17, 2023

Diary, Newsletter, Summary

Global Market Comments
January 17, 2023
Fiat Lux

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD, or GOING AGAINST THE CONSENSUS),
(TLT), (MUB), (JNK), (HYG), (GLD), (SLV), (GOLD), (WPM), (FCX), (BHP), (EEM), (MS), (GS), (JPM), (BAC), (C), (BRK/B), (SPY), (QQQ), (IWM), (VIX)

The Market Outlook for the Week Ahead, or Going Against the Consensus

Diary, Newsletter

Going against the market consensus has been working pretty well lately.

When the world prayed for a Santa Claus rally, I piled on the shorts. When traders expected a New Year January crash, I filled my boots with longs.

That’s how you earn an eye-popping 19.83% profit in a mere nine trading says, or 2.20% a day.

The other day, someone asked me how it is possible to get mind-blowing results like these. It’s very simple. Get insanely aggressive when everyone else is terrified, which I did on January 3. I also knew that with the Volatility Index (VIX) falling to $18, pickings would quickly get extremely thin. It was make money now, or never.

To quote my favorite market strategist, Yankees manager Yogi Berra, “No one goes to that restaurant anymore because it’s too crowded.”

My performance in January has so far tacked on a welcome +19.83%. Therefore, my 2023 year-to-date performance is also +19.83%, a spectacular new high. The S&P 500 (SPY) is up +3.78% so far in 2023.

It is the greatest outperformance on an index since Mad Hedge Fund Trader started 15 years ago. My trailing one-year return maintains a sky-high +103.30%.

That brings my 15-year total return to +617.03%, some 2.73 times the S&P 500 (SPX) over the same period and a new all-time high. My average annualized return has ratcheted up to +47.17%, easily the highest in the industry.

I took profits in my February bonds last week (TLT), taking advantage of a $5 pop in the market. All my remaining positions are profitable, including longs in (GOLD), (WPM), (TSLA), (BRK/B), and (TLT), with 30% in cash for a 10% net long position.

Since my New Year forecasts have worked out so well, I will repeat the high points just in case you were out playing golf or bailing out from a flood when they were published.

Buy Falling Interest Rate Plays, as I expect the yield on the ten-year US Treasury yield to fall from 3.50% to 2.50% by yearend. That means Hoovering up any kind of bond, like (TLT), (MUB), (JNK), and (HYG). Falling interest rates also shine a great spotlight on precious metals like (GLD), (SLV), (GOLD), and (WPM).

The US Dollar Will Continue to Fall. Commodities love this scenario, including (FCX), (BHP), and emerging markets (EEM).

Inflation Will Decline All Year and should go below 4% by the end of 2023. In fact, we have had real deflation for the past six months. Financials do well here, like (MS), (GS), (JPM), (BAC), (C), and (BRK/B).

Which creates another headache for you, if not an opportunity. We may have a situation where the main indexes, (SPY), (QQQ), and (IWM) go nowhere, while individual stocks and sectors skyrocket. That creates a chance to outperform benchmarks…and everyone else.

There has been a lot of discussion among traders lately about the collapse of the Volatility Index ($VIX) to $18, a two-year low and what it means.

They are distressed because a ($VIX) this low greatly shrinks the availability of low risk/high return trading opportunities. A ($VIX) this low is basically shouting at you to “STAY AWAY!”

Does it mean that an explosion of volatility is following? Or are markets going to be exceptionally boring for the next six months?

Beats me. I’ll wait for the market to tell me, as I always do.

Current Positions

Risk On

(TSLA) 1/$75-$80 call spread 10.00%
(GOLD) 1/$15.50-$16.50 call spread. 10.00%
(WPM) 1/$$36-$39 call spread. 10.00%
(BRKB) 1/$290-$300 call spread 10.00%

Risk Off

(TLT) 1/$96-$99 call spread - 10.00%
(TLT) 1/$95-$98 call spread -20.00%

Total Net Position 10.00%

Total Aggregate Position 70.00%

Consumer Price Index Falls 0.1% in December, continuing a trend that started in June. Stocks popped and bonds rallied. YOY inflation has fallen to 6.5%. “RISK ON” continues. Now we have to wait another month to get a new inflation number. The economy has now seen de facto deflation for six months. Gas prices led the decline, now 9.4%. We might get away with only a 0.25% interest rate hike at the February 1 Fed meeting.

Bond Default Risk Rises, as well as a government shutdown, as radicals gain control of the House. This is the group that lost the most seats in the November election. Bonds are the only asset class not performing today, and paper with summer maturities is trading at deep discounts. It certainly casts a shadow over my 50% long bond position. However, I don’t expect it to last more than a month and my longest bond maturity is in February.

The US Consumer is in Good Shape, according to JP Morgan’s Jamie Diamond. Spending is now 10% greater than pre covid, and balance sheets are healthy. No sign of an impending deep recession here.

Boeing Deliveries Soar from 340 to 480 in 2022, and 479 new orders. A sudden aircraft shortage couldn’t have happened to a nicer bunch of people. The 737 MAX has shaken off all its design problems after two crashes four years ago. Cost-cutting here can be fatal. Europe’s Airbus is still tops, with 663 deliveries last year. Don’t chase the stock up here, up 79% from the October lows, but buy (BA) on dips.

Small Business Optimism Hits Six-Month Low to from 91.9 to 89.8, adding to the onslaught of negative sentiment indicators, so says the National Federation of Independent Business (NFIB).

Copper Prices Set to Soar Further with the post-Covid reopening of China, according to research firm Alliance Bernstein. After a three-year shutdown, there is massive pent-up demand. Copper prices are at seven-month highs. Keep buying (FCX) on dips.

Australian Metals Exports Soar, as the new supercycle in commodities gains steam. Shipments topped $9 billion in November, 20% higher than the most optimistic forecasts. Keep buying copper (FCX), aluminium (AA), iron ore (BHP), gold (GLD) and silver (SLV) on dips.

My Ten-Year View

On Monday, January 16, markets are closed for Martin Luther King Day.

On Tuesday, January 17 at 8:30 AM EST, the New York Empire State Manufacturing Index is out

On Wednesday, January 18 at 11:00 AM, the Producer Price Index is announced, giving us another inflation read.

On Thursday, January 19 at 8:30 AM, the Weekly Jobless Claims are announced. US Housing Starts and Building Permits are printed.

On Friday, January 20 at 7:00 AM, the Existing Home Sales are disclosed. At 2:00, the Baker Hughes Oil Rig Count is out.

As for me, the University of Southern California has a student jobs board that is positively legendary. It is where the actor John Wayne picked up a gig working as a stagehand for John Ford which eventually made him a movie star.

As a beneficiary of a federal work/study program in 1970, I was entitled to pick any job I wanted for the princely sum of $1.00 an hour, then the minimum wage. I noticed that the Biology Department was looking for a lab assistant to identify and sort Arctic plankton.

I thought, “What the heck is Arctic plankton?” I decided to apply to find out.

I was hired by a Japanese woman professor whose name I long ago forgot. She had figured out that Russians were far ahead of the US in Arctic plankton research, thus creating a “plankton gap.” “Gaps” were a big deal during the Cold War, so that made her a layup to obtain a generous grant from the Defense Department to close the “plankton gap.”

It turns out that I was the only one who applied for the job, as postwar anti-Japanese sentiment then was still high on the West Coast. I was given my own lab bench and a microscope and told to get to work.

It turns out that there is a vast ecosystem of plankton under 20 feet of ice in the Arctic consisting of thousands of animal and plant varieties. The whole system is powered by sunlight that filters through the ice. The thinner the ice, such as at the edge of the Arctic ice sheet, the more plankton. In no time, I became adept at identifying copepods, euphasia, and calanus hyperboreaus, which all feed on diatoms.

We discovered that there was enough plankton in the Arctic to feed the entire human race if a food shortage ever arose, then a major concern. There was plenty of plant material and protein there. Just add a little flavoring and you had an endless food supply.

The high point of the job came when my professor traveled to the North Pole, the first woman ever to do so. She was a guest of the US Navy, which was overseeing the collection hole in the ice. We were thinking the hole might be a foot wide. When she got there, she discovered it was in fact 50 feet wide. I thought this might be to keep it from freezing over but thought nothing of it.

My freshman year passed. The following year, the USC jobs board delivered up a far more interesting job, picking up dead bodies for the Los Angeles Counter Coroner, Thomas Noguchi, the “Coroner to the Stars.” This was not long after Charles Manson was locked up, and his bodies were everywhere. The pay was better too, and I got to know the LA freeway system like the back of my hand.

It wasn’t until years later when I had obtained a high-security clearance from the Defense Department that I learned of the true military interest in plankton by both the US and the Soviet Union.

It turns out that the hole was not really for collecting plankton. Plankton was just the cover. It was there so a US submarine could surface, fire nuclear missiles at the Soviet Union, then submarine again under the protection of the ice.

So, not only have you been reading the work of a stock market wizard these many years, you have also been in touch with one of the world’s leading experts on Artic plankton.

Live and learn.

CLICK HERE to download today's position sheet.

1981 On Peleliu Island in the South Pacific

January 4, 2023

Diary, Newsletter, Summary

Global Market Comments
January 4, 2023
Fiat Lux

2023 Annual Asset Class Review
A Global Vision

FOR PAID SUBSCRIBERS ONLY

Featured Trades:

(SPX), (QQQ), (IWM) (AAPL), (XLF), (BAC) (JPM), (BAC), (C), (MS), (GS),

(X), (CAT), (DE),(TLT), (TBT), (JNK), (PHB), (HYG), (MUB), (LQD), (FXE), (EUO),

(FXC), (FXA), (YCS), (FXY), (CYB), (DIG), (RIG), (USO), (DUG), (UNG), (USO),

(XLE), (AMLP),(GLD), (DGP), (SLV), (PPTL), (PALL), (ITB), (LEN), (KBH), (PHM)

2023 Annual Asset Class Review

Diary, Newsletter, Research

I am once again writing this report from a first-class sleeping cabin on Amtrak’s legendary California Zephyr.

By day, I have two comfortable seats facing each other next to a panoramic window. At night, they fold into two bunk beds, a single and a double. There is a shower, but only Houdini could navigate it.

I am anything but Houdini, so I foray downstairs to use the larger public hot showers. They are divine.

We are now pulling away from Chicago’s Union Station, leaving its hurried commuters, buskers, panhandlers, and majestic great halls behind. I love this building as a monument to American exceptionalism.

I am headed for Emeryville, California, just across the bay from San Francisco, some 2,121.6 miles away. That gives me only 56 hours to complete this report.

I tip my porter, Raymond, $100 in advance to make sure everything goes well during the long adventure and to keep me up to date with the onboard gossip.

The rolling and pitching of the car is causing my fingers to dance all over the keyboard. Microsoft’s Spellchecker can catch most of the mistakes, but not all of them.

As both broadband and cell phone coverage are unavailable along most of the route, I have to rely on frenzied Internet searches during stops at major stations along the way to Google obscure data points and download the latest charts.

You know those cool maps in the Verizon stores that show the vast coverage of their cell phone networks? They are complete BS.

Who knew that 95% of America is off the grid? That explains so much about our country today.

I have posted many of my better photos from the trip below, although there is only so much you can do from a moving train and an iPhone 14 Pro Max.

Here is the bottom line which I have been warning you about for months. In 2023, we will probably top the 84.63% we made last year, but you are going to have to navigate the reefs, shoals, and hurricanes. Do it and you can laugh all the way to the bank. I will be there to assist you to navigate every step.

The first half of 2023 will be all about trading. After that, I expect markets to go straight up.

And here is my fundamental thesis for 2023. After the Fed kept rates too low for too long, then raised them too much, it will then panic and lower them again too fast to avoid a recession. In other words, a mistake-prone Jay Powell will keep making mistakes. That sounds like a good bet to me.

Let me give you a list of the challenges I see financial markets are facing in the coming year:

The Ten Key Variables for 2023

1) When will the Fed pivot?
2) How much of a toll will the quantitative tightening take?
3) How soon will the Russians give up on Ukraine?
4) When will buyers return to technology stocks from value plays?
5) Will gold replace crypto as the new flight to safety investment?
6) When will the structural commodities boom get a second wind?
7) How fast will the US dollar fall?
8) How quickly will real estate recover?
9) How fast can the Chinese economy bounce back from Covid-19?
10) How far will oil prices keep falling?

The Thumbnail Portfolio

Equities – buy dips
Bonds – sell buy dips
Foreign Currencies – buy dips
Commodities – buy dips
Precious Metals – buy dips
Energy – stand aside
Real Estate – buy dips

1) The Economy – Bouncing Along the Bottom

Whether we get a recession or not, you can count on markets fully discounting one, which it is currently doing with reckless abandon.

Anywhere you look, the data is dire, save for employment, which may be the last shoe to fall. Technology companies seem to be leading us in the right direction with never-ending mass layoffs. Even after relentless cost-cutting though, there are still 1.5 tech job offers per applicant, which is down from last year’s three.

The Fed is currently predicting a weak 0.5% GDP growth rate for 2023, the same feeble rate we saw for 2022. What we might get is two-quarters of negative growth in the first half followed by a sharp snapback in the second half.

Whatever we get, it will be one of the mildest recessions or growth recessions in American economic history. There is no hint of a 2008-style crash. The banking system was shored up too well back then to prevent that. Thank Dodd/Frank.

So far, so good.

A Rocky Mountain Moose Family

2) Equities (SPX), (QQQ), (IWM) (AAPL), (XLF), (BAC) (JPM), (BAC), (C), (MS), (GS), (X), (CAT), (DE)

Since my job is to make your life incredibly easy, I am going to narrow my equity strategy for 2023.

It's all about falling interest rates.

When interest rates are high, as they are now, you only look at trades and investments that can benefit from falling interest rates.

In the first half, that will be value plays like banks, (JPM), (BAC), (C), financials (MS), (GS), homebuilders (KBH), (LEN), (PHM), industrials (X), capital goods (CAT), (DE).

As we come out of any recession in the second half, growth plays will rush to the fore. Big tech will regain leadership and take the group to new all-time highs. That means the volatility and chop we will certainly see in the first half will present a generational opportunity to get into the fastest-growing sectors of the US economy at bargain prices. I’m talking Cadillacs at KIA prices.

A category of its own, Biotech & Healthcare should do well on their own. Not only are they classic defensive plays to hold during a recession, technology and breakthrough new discoveries are hyper-accelerating. My top three picks there are Eli Lily (ELI), Abbvie (ABBV), and Merck (MRK).

Block out time on your calendars because whenever the Volatility Index (VIX) tops $30, I am going pedal to the metal, and full firewall forward (a pilot term), and your inboxes will be flooded with new trade alerts.

There is another equity subclass that we haven’t visited in about a decade, and that would be emerging markets (EEM). After ten years of punishment by a strong dollar, (EEM) has also been forgotten as an investment allocation. We are now in a position where the (EEM) is likely to outperform US markets in 2023, and perhaps for the rest of the decade.

Frozen Headwaters of the Colorado River

3) Bonds (TLT), (TBT), (JNK), (PHB), (HYG), (MUB), (LQD)

Amtrak needs to fill every seat in the dining car to get everyone fed on time, so you never know who you will share a table with for breakfast, lunch, and dinner.

There was the Vietnam Vet Phantom Jet Pilot who now refused to fly because he was treated so badly at airports. A young couple desperately eloping from Omaha could only afford seats as far as Salt Lake City. After they sat up all night, I paid for their breakfast.

A retired British couple was circumnavigating the entire US in a month on a “See America Pass.” Mennonites are returning home by train because their religion forbade automobiles or airplanes.

The national debt ballooned to an eye-popping $30 trillion in 2021, a gain of an incredible $3 trillion and a post-World War II record. Yet, as long as global central banks are still flooding the money supply with trillions of dollars in liquidity, bonds will not fall in value too dramatically. I’m expecting a slow grind down in prices and up in yields.

The great bond short of 2021 never happened. Even though bonds delivered their worst returns in 19 years, they still remained nearly unchanged. That wasn’t good enough for the many hedge funds, which had to cover massive money-losing shorts into yearend.

Instead, the Great Bond Crash will become a new business. This time, bonds face the gale force headwinds of three promised interest rate hikes. The year-end government bond auctions were a complete disaster.

Fed borrowing continues to balloon out of control. It’s just a matter of time before the last billion dollars in government borrowing breaks the camel’s back.

That makes a bond short a core position in any balanced portfolio. Don’t get lazy. Make sure you only sell a rally lest we get trapped in a range, as we did for most of 2021.

A Visit to the 19^th Century

4) Foreign Currencies (FXE), (EUO), (FXC), (FXA), (YCS), (FXY), (CYB)

With a major yield advantage over the rest of the world, the US dollar has been on an absolute tear for the past decade. After all, we have the world’s strongest economy.

That is about to end.

If your primary assumption is that US interest rates will see a sharp decline sometime in 2023, then the outlook for the greenback is terrible.

Currencies are driven by interest rate differentials and the buck is soon going to see the fastest shrinking yield premium in the forex markets.

That shines a great bright light on the foreign currency ETFs. You could do well buying the Australian Dollar (FXA), Euro (FXE), Japanese yen (FXE), and British Pound (FXB). I’d pass on the Chinese yuan (CYB) right now until their Covid shutdowns end.

5) Commodities (FCX), (VALE), (DBA)

Commodities are the high beta play in the financial markets. That’s because the cost of being wrong is so much higher. Get on the losing side of commodities and you will be bled dry by storage costs, interest expenses, contangos, and zero demand.

Commodities have one great attribute. They predict recessions earlier than any other asset class. When they peaked in March of 2022, they were screaming loud and clear that a recession would hit in early 2023. By reversing on a dime on October 14, they also told us that the recovery would begin in July of 2023.

You saw this in every important play in the sector, including Broken Hill (BHP), Peabody Energy (BTU), Freeport McMoRan (TCX), and Alcoa Aluminum (AA). Excuse me for using all the old names.

The heady days of the 2011 commodity bubble top are about to replay. Now that this sector is convinced of a substantially weaker US dollar and lower inflation, it is once more a favorite target of traders.

China will still demand prodigious amounts of imported commodities once its pandemic shutdown ends, but not as much as in the past. Much of the country has seen its infrastructure built out, and it is turning from a heavy industrial to a service-based economy, much like the US. Investors are keeping a sharp eye on India as the next major commodity consumer.

And here’s another big new driver. Each electric vehicle requires 200 pounds of copper and production is expected to rise from 1 million units a year to 25 million by 2030. Annual copper production will have to increase three-fold in a decade to accommodate this increase, no easy task, or prices will have to rise.

The great thing about commodities is that it takes a decade to bring new supply online, unlike stocks and bonds, which can merely be created by an entry in an excel spreadsheet. As a result, they always run far higher than you can imagine.

Accumulate all commodities on dips.

Snow Angel on the Continental Divide

6) Energy (DIG), (RIG), (USO), (DUG), (UNG), (XLE), (AMLP)

Energy was the top-performing sector of 2022. But remember, you will be trading an asset class that is eventually on its way to zero sooner than you think. However, you could have several doublings on the way to zero. This is one of those times.

The real tell here is that energy companies are bailing on their own industry. Instead of reinvesting profits back into their future exploration and development, as they have for the last century, they are paying out more in dividends and share buybacks.

Take the money and run.

There is the additional challenge in that the bulk of US investors, especially environmentally friendly ESG funds, are now banned from investing in legacy carbon-based stocks. That means permanently cheap valuations and share prices for the energy industry.

Energy now counts for only 5% of the S&P 500. Twenty years ago, it boasted a 15% weighting.

The gradual shutdown of the industry makes the supply/demand situation infinitely more volatile.

Unless you are a seasoned, peripatetic, sleep-deprived trader, there are better fish to fry.

And guess who the world’s best oil trader was in 2022? That would be the US government, which drew 400 million barrels from the Strategic Petroleum Reserve in Texas and Louisiana at an average price of $90 and now has the option to buy it back at $70, booking a $4 billion paper profit.

The possibility of a huge government bid at $70 will support oil prices for at least early 2023. Whether the Feds execute or not is another question. I’m advising them to hold off until we hit zero again to earn another $18 billion. Why we even have an SPR is beyond me, since America has been a large net energy producer for many years now. Do you think it has something to do with politics?

To understand better how oil might behave in 2023, I’ll be studying US hay consumption from 1900-1920. That was when the horse population fell from 100 million to 6 million, all replaced by gasoline-powered cars and trucks. The internal combustion engine is about to suffer the same fate.

7) Precious Metals (GLD), (DGP), (SLV), (PPTL), (PALL)

The train has added extra engines at Denver, so now we may begin the long laboring climb up the Eastern slope of the Rocky Mountains.

On a steep curve, we pass along an antiquated freight train of hopper cars filled with large boulders.

The porter tells me this train is welded to the tracks to create a windbreak. Once, a gust howled out of the pass so swiftly that it blew a passenger train over on its side.

In the snow-filled canyons, we saw a family of three moose, a huge herd of elk, and another group of wild mustangs. The engineer informs us that a rare bald eagle is flying along the left side of the train. It’s a good omen for the coming year.

We also see countless abandoned 19^th century gold mines and the broken-down wooden trestles leading to huge piles of tailings, relics of previous precious metals booms. So, it is timely here to speak about the future of precious metals.

Fortunately, when a trade isn’t working, I avoid it. That certainly was the case with gold last year.

2022 was a terrible year for precious metals until we got the all-asset class reversal in October. With inflation soaring, stocks volatile, and interest rates soaring, gold had every reason to fall. Instead, it ended up unchanged on the year, thanks to a 15% rally in the last two months.

Bitcoin stole gold’s thunder until a year ago, sucking in all of the speculative interest in the financial system. Jewelry and industrial demand were just not enough to keep gold afloat. That is over now for good and that is why gold is regaining its luster.

Chart formations are starting to look very encouraging with a massive head-and-shoulders bottom in place. So, buy gold on dips if you have a stick of courage on you, which I hope you do.

Higher beta silver (SLV) will be the better bet as it already has been because it plays a major role in the decarbonization of America. There isn’t a solar panel or electric vehicle out there without some silver in them and the growth numbers are positively exponential. Keep buying (SLV), (SLH), and (WPM) on dips.

Crossing the Great Nevada Desert Near Area 51

8) Real Estate (ITB), (LEN), (KBH), (PHM)

The majestic snow-covered Rocky Mountains are behind me. There is now a paucity of scenery, with the endless ocean of sagebrush and salt flats of Northern Nevada outside my window, so there is nothing else to do but write.

My apologies in advance to readers in Wells, Elko, Battle Mountain, and Winnemucca, Nevada.

It is a route long traversed by roving banks of Indians, itinerant fur traders, the Pony Express, my own immigrant forebearers in wagon trains, the Transcontinental Railroad, the Lincoln Highway, and finally US Interstate 80, which was built for the 1960 Winter Olympics at Squaw Valley.

Passing by shantytowns and the forlorn communities of the high desert, I am prompted to comment on the state of the US real estate market.

Those in the grip of a real estate recession take solace. We are in the process of unwinding 2022’s excesses, but no more. There is no doubt a long-term bull market in real estate will continue for another decade, once a two year break is completed.

There is a generational structural shortage of supply with housing which won’t come back into balance until the 2030s. You don’t have a real estate crash when we are short 10 million homes.

The reasons, of course, are demographic. There are only three numbers you need to know in the housing market for the next ten years: there are 80 million baby boomers, 65 million Generation Xers who follow them, and 86 million in the generation after that, the Millennials.

The boomers (between ages 58 and 76) have been unloading dwellings to the Gen Xers (between ages 46 and 57) since prices peaked in 2007. But there are not enough of the latter, and three decades of falling real incomes mean that they only earn a fraction of what their parents made. That’s what caused the financial crisis. That has created a massive shortage of housing, both for ownership and rentals.

There is a happy ending to this story.

Millennials now aged 26-41 are now the dominant buyers in the market. They are transitioning from 30% to 70% of all new buyers of homes. They are also just entering the peak spending years of middle age, which is great for everyone.

The Great Millennial Migration to the suburbs and Middle America has just begun. Thanks to the pandemic and Zoom, many are never returning to the cities. That has prompted massive numbers to move from the coasts to the American heartland.

That’s why Boise, Idaho was the top-performing real estate market, followed by Phoenix, Arizona. Personally, I like Reno, Nevada, where Apple, Google, Amazon, and Tesla are building factories as fast as they can.

As a result, the price of single-family homes should continue to rise during the 2020s, as they did during the 1970s and the 1990s when similar demographic forces were at play.

This will happen in the context of a labor shortfall, soaring wages, and rising standards of living.

Rising rents are accelerating this trend. Renters now pay 35% of their gross income, compared to only 18% for owners, and less, when multiple deductions and tax subsidies are considered. Rents are now rising faster than home prices.

Remember, too, that the US will not have built any new houses in large numbers in 16 years. The 50% of small home builders that went under during the Financial Crisis never came back.

We are still operating at only a half of the 2007 peak rate. Thanks to the Great Recession, the construction of five million new homes has gone missing in action.

There is a new factor at work. We are all now prisoners of the 2.75% 30-year fixed rate mortgages we all obtained over the past five years. If we sell and try to move, a new mortgage will cost double today. If you borrow at a 2.75% 30-year fixed rate, and the long-term inflation rate is 3%, then, over time, you will get your house for free. That’s why nobody is selling, and prices have barely fallen.

This winds down towards the end of 2023 as the Fed realizes its many errors and sharply lowers interest rates. Home prices will explode…. again.

Quite honestly, of all the asset classes mentioned in this report, purchasing your abode is probably the single best investment you can make now after you throw in all the tax breaks. It’s also a great inflation play.

That means the major homebuilders like Lennar (LEN), Pulte Homes (PHM), and KB Homes (KBH) are a buy on the dip.

Recent Reno Real Estate Statistics

Crossing the Bridge to Home Sweet Home

9) Postscript

We have pulled into the station at Truckee amid a howling blizzard.

My loyal staff has made the ten-mile trek from my estate at Incline Village to welcome me to California with a couple of hot breakfast burritos and a chilled bottle of Dom Perignon Champagne, which has been resting in a nearby snowbank. I am thankfully spared from taking my last meal with Amtrak.

After that, it was over legendary Donner Pass, and then all downhill from the Sierras, across the Central Valley, and into the Sacramento River Delta.

Well, that’s all for now. We’ve just passed what was left of the Pacific mothball fleet moored near the Benicia Bridge (2,000 ships down to six in 50 years). The pressure increase caused by a 7,200-foot descent from Donner Pass has crushed my plastic water bottle. Nice science experiment!

The Golden Gate Bridge and the soaring spire of Salesforce Tower are just around the next bend across San Francisco Bay.

A storm has blown through, leaving the air crystal clear and the bay as flat as glass. It is time for me to unplug my MacBook Pro and iPhone, pick up my various adapters, and pack up.

We arrive in Emeryville 45 minutes early. With any luck, I can squeeze in a ten-mile night hike up Grizzly Peak and still get home in time to watch the ball drop in New York’s Times Square on TV.

I reach the ridge just in time to catch a spectacular pastel sunset over the Pacific Ocean. The omens are there. It is going to be another good year.

I’ll shoot you a Trade Alert whenever I see a window open at a sweet spot on any of the dozens of trades described above, which should be soon.

Good luck and good trading in 2023!

John Thomas
The Mad Hedge Fund Trader

The Omens Are Good for 2023!

November 14, 2022

Diary, Newsletter, Summary

Global Market Comments
November 14, 2022
Fiat Lux

Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE TOP FIVE TECHNOLOGY STOCKS OF 2023),
(RIVN), (ROM), (ARKK), (PANW), (CRM), (FXE), (FXY), (FXA), (LEN), (KBH), (DHI), (TLT), (UUP), (META), (TSLA), (BA), (JNK), (HYG), (BRKB), (USO)