Global Market Comments
November 17, 2023
Fiat Lux
Featured Trade:
(NOVEMBER 15 BIWEEKLY STRATEGY WEBINAR Q&A),
(TLT), (AMD), (SPY), (FXA), (WYNN), (MGM), (RCL), (CCL), (TSLA), (SCHW), (BLK), (JPM), (XHB), (TSLA), (FXI), (FCX)
Tag Archive for: (JPM)
Below please find subscribers’ Q&A for the November 15 Mad Hedge Fund Trader Global Strategy Webinar, broadcast from Incline Village, NV.
Q: I was a little surprised that you closed the (TLT) $79-$82 vertical bull call spread so early. Why not wait longer?
A: I took an 84% profit in only four trading days and skipped the last 16% which I would have had to wait another month to get. I was much better off putting on another position and making another 100%. In this kind of market, you want to take quick profits and then roll them into new positions as fast as you can. That’s where you make the big money, and that's what we’ve been doing. You have to strike when the iron is hot.
Q: November’s results are phenomenal!
A: Yes they are, 55 years of practice makes it easy.
Q: Thoughts on Advanced Micro Devices (AMD)?
A: It’s going higher. I think the whole semiconductor sector is the leading sector in the market; we have seen that with these gigantic 30-40% moves in the semis. That will continue, and then it will spread out to the rest of big tech (which it’s already done), and eventually, we get to the industrials and commodities in the second half of 2024 when the big economic growth returns. So that is the script for the coming year.
Q: Will the upcoming Fed interest rate cuts crash the dollar, and which emerging currency should I buy?
A: Yes and yes. It will crush the dollar–we could be entering a new decade of a falling U.S. dollar. The number one currency to buy is the Australian dollar (FXA). It has the most leverage for a global economic recovery. And you can see when we get to the currency section of today’s webinar that the currencies are already starting to move. Whatever currency has falling interest rates is always the weakest, and the U.S. dollar is about to become just that.
Q: What’s the deal with casino stocks lately like Wynn Resorts (WYNN) and MGM Resorts International (MGM)?
A: These companies took on massive amounts of debt during the pandemic to stay in business, so they are now highly sensitive to interest rates. If you look at the collapse of these stocks in the last four months, it is almost perfectly in sync with rising interest rates, and that’s why the stocks performed so poorly. By the way, the same is true for all the cruise companies like Royal Caribbean (RCL), and Carnival (CCL). The flip side of that is when interest rates start to go down these stocks do great, and they are falling interest rate plays, so you probably should be buying the casinos, the cruise lines, and the hotel stocks here because they are all suffering from massive debt loads, the cost of which is about to decline sharply.
Q: Should we roll up the expiration of LEAPS to 2026?
A: Probably not a bad idea, because we may get weakness in commodities for the next several months before we enter a massive new bull market. If you have the 2025, you’ll probably make money on that, but to be ultra-safe you could roll it forward to 2026. We know there’s a global copper shortage developing because of EVs, but right now EV sales are slow, so you don’t want to be piling onto the leverage plays on that too soon. That’s also why I am not in Tesla (TSLA) for the Moment.
Q: What will happen if the Fed cuts interest rates and there’s no recession? Won’t prices of everything from houses to butter go wild?
A: They won’t go wild, but they will go up at a 2% inflation rate, which is what the Fed wants. And house prices, which have been flat for the last year, will rise. And they may rise greater than the inflation rate of 2%; they may rise more like 5%. Falling interest rates mean falling mortgages; we’ve already seen mortgage rates drop from 8 to 7.4%. It's one of the sharpest drops in history, and more drops bring more first-time home buyers into the market. And don’t forget that the Fed could also raise interest rates down the road. If the economy gets too hot again, they may raise again, but I think we’ll see a lot of cuts first.
Q: Do you think financial stocks will go up or fall with potential rate decreases?
A: Banks always go up during falling interest rates because their cost of funds goes down and the default rate on their loans also goes down, so they get a hockey stick effect on earnings; that’s why you’re seeing such monster moves in stocks like JP Morgan (JPM) and the brokers (SCHW) as well as the money managers like BlackRock (BLK).
Q: Does the bull market keep going since unemployment still hasn’t made a dent, meaning consumers are fueling the rise in stocks?
A: Yes, consumer spending is still doing well. People seem to be getting the money from somewhere and it seems to be rising wages. But I expect wage gains to drop by half; people will still get wage increases, but not the peak levels that the UAW got in their deal with Detroit. Is a Goldilocks economy that is setting up, and the economy keeps growing We never do get a recession, and all risk assets rise as a result. That is the outlook!
Q: Bullish on Berkshire Hathaway (BRK/B)?
A: I completely agree, it’s one of the best-run companies in the world. 93-year-old Warren Buffet and 99-year-old Charlie Munger have delivered double the performance of the S&P 500 over the last three years.
Q: When does the IPO market come back to life, and which industries will benefit the most?
A: AI and Technology will benefit the most. There are several AI companies in the wings waiting to go public, and they will be the first out the door with the highest multiples, and then the IPO business will broaden out from there.
Q: Will a worsening Chinese property market blow up the U.S. Stock rally or is it just a fake risk I shouldn’t worry about?
A: The Chinese (FXI) real estate market is detached from the global economy. There is no international implication, and it’s also typical of emerging markets to overbuild and then have a financial collapse. Nobody I know has suffered anything in China in a long time, and if anything, they’re liquidating what little they have left. It doesn’t affect us at all. It’s interesting reading about it in the newspapers, and that’s about it.
Q: What are some stocks we should consider day trading these days?
A: None. Most people who try day trading lose money doing it; some people pull it off but they have many years of experience. Algorithms from big brokers have essentially taken over the day trading business with high-frequency trading. You do better on a one-month view, which I do on my front-month options. Most 2023 Stock Gains Happened in only eight days, up some 14% since January 1, and only seven stocks accounted for most of the increase. If you are a day trader, you most likely missed all of this because most of the moves were on gap openings.
Q: Home builders (XHB) have just had a great run, is this an area too short?
A: “Short” is a term you need to remove from your language! You don’t want to short a big bull move like this. If anything, wait until May when the summer seasonals start to favor short positions, and it depends on how high the market runs up until then. Don’t ever think about shorting the very beginning of a new bull market in stocks–not for housing, not for anything! And the outlook for housing over the long term looks fantastic; there’s still an overwhelming supply and demand in favor of the home builders. Some 85 million new Millennials need to buy first-time homes.
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, select your subscription (GLOBAL TRADING DISPATCH, TECHNOLOGY LETTER, or Jacquie's Post), then click on 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
2023 Kherson Ukraine – Ha Ha Missed Me! It was a dud.
Global Market Comments
October 16, 2023
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or TAKING SOME FIRE)
(USO), (UUP), (JPM),
I am writing this letter in a Ukrainian army truck on the banks of the Black Sea right where the Dnieper River flows in. Crimea is 20 miles across the water. We just watched an American HIMERS missile destroy a Russian facility there and the black smoke is billowing upward.
We’ve been stuck here at this army checkpoint for two hours on this gorgeous autumn day so they can check my papers and decide if I’m a Russian spy. I definitely don’t look like your average Ukrainian. What better time to knock a newsletter? After I finished my letter I took a nap.
I have to admit I have been somewhat remiss in following the market the past week.
Whenever I had the choice of checking my stock market app or Look Out Ukraine, which tracks incoming Russian missiles, the latter usually won out. Not always, but usually. Then it’s on to the next app, which gives the location of the nearest bomb shelter.
Some people go to the beach for vacations, while I choose war zones. Different strokes for different folks, I guess. Maybe I’m trying to relive my long-lost youth as a war correspondent in Southeast Asia all those years ago.
It’s Becoming increasingly obvious to all that the Fed is done raising interest rates. The only question is how long they will remain at this elevated level. Then year US Treasury yields, which hit a 17-year high of 4.80% last week, might visit 5.0% and then that’s it.
I must apologize to owners of the (TLT) October $89-$92 vertical bear put spread. I should have sent out a trade alert to take profits on Thursday during the bond market meltdown when the price hit $2.92. I know it hit this price because several followers emailed me to say thanks for the trade.
But I was pinned down by Russian fire on the west bank of the Dnieper River and couldn’t escape until after nightfall. Yes, I know, excuses, excuses.
Technical analysts are having a field day with the (SPY) seemingly trapped between the 50 and 200-day moving averages in a narrowing range. Something big is going to happen eventually.
Indexes could get resolved to the upside when big tech earnings come out the week of October 28, which are expected to be great. It could also be resolved to the downside on November 17 when the House of Representatives shuts down the US government.
Maybe this is why markets are going nowhere. In any case, the disaster in the Middle East is blotting out all other news.
Another matter on which traders increasingly agree is that big tech will lead any upside breakout. A sure sign is that they have been moving sideways for the last 2 1/2 months while interest rates-sensitive sectors have been getting slaughtered. Indeed, Alphabet (GOOGL) is down only 3% from its high for the year, a huge AI winner.
Look no further than Microsoft (MSFT), which trades at only 28.2 times earnings. The company expects 16.2% annual growth for the next three years and is the best growth and AI play out there with its ownership of OpenAI. That’s boosting Mr. Softy’s Azure cloud business enormously.
So far in August, we are up +2.23%. My 2023 year-to-date performance is still at an eye-popping +63.03%. The S&P 500 (SPY) is up +13.42% so far in 2023. My trailing one-year return reached +xx% versus +xx% for the S&P 500.
That brings my 15-year total return to +660.22%. My average annualized return has recovered to +47.71%, another new high, some 2.62 times the S&P 500 over the same period.
Some 44 of my 49 trades this year have been profitable.
It’s a Black Swan a Week that is conspiring to keep markets trapped in narrow ranges. The natural tendency seems to be up into a yearend rally, but they keep getting slammed by shocks, like a government shutdown, a leaderless house, and the Middle East War. The trade has been long big tech, long oil, and short small tech and bonds, of which Mad Hedge caught all four through its various services.
The Middle East Descends on Wall Street, and so far, the damage is limited to a few big techs. Oil (USO) is up 3% and gold caught a bid as well. If this develops into a major regional war expect more downside. It paid to buy every geopolitical crisis over the last 30 years.
Dollar (UUP) Soars on Mid East Chaos, as it catches its traditional flight to safety bid. We could be approaching a top here.
IMF Hikes US Growth Forecast. The International Monetary Fund raised its U.S. growth projection for this year by 0.3 percentage points compared with its July update, to 2.1%. It lowered its euro zone forecast by 0.2 percentage points, to 0.7%. China gets a downgrade too. For the US, 2024 is looking better and better.
The Producer Price Index Jumps 0.5%, more than expected. Markets didn’t really care. Gasoline as the biggest gainer.
The Consumer Price Index Explodes to 3.7%, Inflation is still transitory after over 3 years. Strip out food and energy and core inflation is over 4% year over year. The big question moving into 2024 is if the US consumer can handle these uncontrollable price rises and coalesce a Democratic government that parades around prices not going up less than before. The Fed hasn’t budged from their 2% inflation target, but they are taking their sweet time to get there.
JP Morgan (JPM) Announced Record Earnings, boosting the stock by 5%. With high rates, net interest income is the big winner. Reserves for loan losses were also cut. But (JPM) on dips.
Oil (USO) Jumps 4%, on a tightening of US sanctions against Russia. The goal is to deprive Russia of excess profits used to fund its war against Ukraine. Two foreign-flagged ships were barred from moving their cargo.
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 16, at 2:30 PM EST, the New York State Manufacturing Index is out.
On Tuesday, October 17 at 2:30 PM, the US Retail Sales are released.
On Wednesday, October 18 at 2:30 PM, the US Building Permits are published.
On Thursday, October 19 at 8:30 AM, the Weekly Jobless Claims are announced. We also get Existing Home Sales.
On Friday, October 20 at 2:00 PM the Baker Hughes Rig Count is printed.
As for me, I’ll record the Story of John Thomas’s Wild Ride, which took place only last Thursday.
We had just finished delivering the last of our food bags to starving peasants in the Kherson region, which is a 12-hour train ride east of Kiev. I received maybe 100 kisses and hugs from aging babushkas who had been cut off from their food supply for months. Most of their homes had been destroyed by Russian fire and they were living in basements.
They said, “Thank you.” I replied, “Stay strong.” They cried.
Then my army escort, a major who we called “Vitally”, got a call. A Russian mortar was harassing Kerson with intermittent fire inflicting casualties, and they were unable to spot it. Would we be willing to act as a decoy and draw fire?
The major looked at me to ask permission. I was on a humanitarian mission and had no obligation to engage in combat. What did I think?
I did the math. A mortar is a notoriously inaccurate weapon, plus we’d be doing at least 80 miles an hour. I decided it was more likely that I win the California lottery than get hit. So I told the major “Sure, why not.” I looked at the rest of my team and they agreed wholeheartedly. So, we headed down to the waterfront in Kherson.
The city has this long street which follows the banks of the Dnieper River. The Russian Army occupies the eastern bank and are well fortified. Kherson was completely deserted without a person or vehicle in sight. It was like a ghost town. Every statue in town had been stolen when the Russians retreated. Once we turned north, we poured on the gas.
We raced along the river as fast as the car would go, weaving left and right to avoid shell craters in the road. Occasionally we hit one and our heads bumped up against the ceiling. We sped through every red light. It was the thrill of a lifetime!
As we approached the bridge over the Dnieper River, which had already been blown up, sure enough, a mortar shell went sailing right overhead, hitting a building 100 yards to our left. Then we screeched to a halt, did a rapid 180, and tore off in the opposite direction. The Ukrainian Army’s 155 mm shells fired over our heads seconds later.
A minute later, we found a bomb shelter and jammed on the brakes. As we piled out of the car the air raid sirens were wailing. Once we got inside, we all burst into laughter. We couldn’t believe what we had just gotten away with.
And I got the whole thing on video.
Sitting in the bomb shelter I felt a stinging in my right hip. I looked down to find an AK 47 7.62mm copper jacketed bullet embedded in my flak jacket about an inch from the edge. When we left the bomb shelter, I inspected the car and sure enough, we had been sprayed with machine gun fire from across the river (see picture below).
It was a lucky hit. The bullet lost much of its velocity crossing the river and the sheet metal of the car slowed it down even further. The Kevlar bulletproof vest did its job. I got away with only a nice bruise.
As we drove out of town the major received another call. Thanks to our effort the mortar had been silenced. He gave me a big smile and a thumbs-up.
At the edge of town, we stopped for a victory photo at the city gates. That’s my team holding the American flag. The major has a scarf covering his face to keep his identity secret.
The major told me I was the bravest man he ever met. Then he turned and started walking back into Kherson.
If you want to watch the video of John Thomas’s Wild Ride please tune into my biweekly webinar on Wednesday, October 18 at 12:00 noon EST.
Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
September 22, 2023
Fiat Lux
Featured Trade:
(SEPTEMBER 20 BIWEEKLY STRATEGY WEBINAR Q&A),
(AMZN), (SPX), (TLT), (TSLA), (DIS), (LEN), (KBH), (PHM), (USO), (FXA), (UNG), (JPM), (C), (BAC)
Below please find subscribers’ Q&A for the September 20 Mad Hedge Fund Trader Global Strategy Webinar, broadcast from Silicon Valley, CA.
Q: How do we know when interest rates have peaked?
A: Well, that's easy—the Fed announces it and they start cutting interest rates. The first hint of that is they don’t raise interest rates when they have the opportunity to do so. That will be today as it was in July. So we’re at the top now, and they’ll probably go sideways for 6 months or even longer before they start cutting. Markets will start to discount this 6-9 months in advance, or about now.
Q: Year-end target for the S&P 500? What about Amazon (AMZN)?
A: 5,000. For the (SPX). For Amazon, I think we could easily tack on another 20-25%.
Q: Does the Mad Hedge Global Trading Dispatch include tech trade alerts?
A: It does, but only the higher quality, lower risk trades. Pure Tech traders are a much higher-risk bunch of people, and they want more aggressive trade alerts in smaller companies. As for me, with Global Trading Dispatch I try to stick to a 90% success rate, and the only way to do that is to avoid tech when it flatlines and not try to catch any falling knives.
Q: Any hope of recovery for the iShares 20 Plus Year Treasury Bond ETF (TLT)?
A: Yes; as I said, the Fed will start cutting interest rates next year, and markets discount 6-9 months in advance, so that gives us 3 months for our January 2024 $100/$105 call spreads to expire at max profit. So yes, it is entirely possible, if not likely, that we will see those numbers by January.
Q: Can you help me jump the line for a Cybertruck from Tesla (TSLA)?
A: Well, if I was going to help anyone get a Cybertruck, it would be me! And I can't get one. Back in the old days, Tesla people would fall down on their knees crying “thank you!” when you bought one of their cars. Now, I think I’m number 2 million on the waiting list. You’re on your own on that one.
Q: Is Disney (DIS) a good LEAP stock?
A: No, Disney has some major problems with their streaming business, and the parks have maxed out. That is why the stock seems immune to good news—unless you know something I don’t. So go for it if you’re ready for that risk.
Q: What is your fact-finding trip to Ukraine all about?
A: Nothing beats research on the ground for finding out what really happened. Second, Ukraine got a lot of aid from other countries when the war started, but it’s since run out and we know that hospitals and orphanages in Ukraine are in trouble and running out of money. So, nothing beats showing up with US dollar cash in that situation. So that is why I’m going. This’ll be my eighth war. I guess the war correspondent in me never left. I’ll also be escorting American doctors to Ukrainian hospitals who don’t know how to do this. There’s more to life than just making money.
Q: Should I buy the dip in homebuilders like Lennar Homes (LEN), D.R. Horton (DHI), and KB Homes (KBH)?
A: Absolutely, yes—with both hands. Who does better with a falling interest rate cycle than home builders who have to depend on falling mortgage rates for business to boom once again. So yes, any dip in this sector and I would be loading the boat. The next declining interest rate cycle could last 5 or 10 years.
Q: Will the United Auto Workers strikes cause inflation to rocket and feed into higher inflation figures?
A: No, not really. Union membership has declined by 75% over the last 40 years. The UAW itself has declined from 1.6 million members to 400,000, and they really have become too small to affect the general economy. What they will do is accelerate existing trends, like people dumping their ice cars and moving to Tesla and other EV manufacturers. This is sort of like a gift for Tesla, and that's why the stock was up 10% last week. Also, in the long, long run, if they force the car companies to move to Mexico and cut the same deals that Elon Musk got, then it reduces inflation.
Q: Does the recent increase in Chinese ships and warplanes near Taiwan change anything?
A: No, it just shows us how weak the economy in China is. It’s effectively in recession even though they refuse to admit it, and therefore they have to create more distractions. The Chinese have been bluffing on Taiwan for 70 years—why stop now?
Q: What is a good time to buy banks?
A: I would start scaling into (JPM), (BAC), and (C) now. They will be a major beneficiary of an economic recovery next year and falling interest rates; and the prices down here are good. They’re one of the worst performers so far this year—one of the few cheap sectors left in the market.
Q: Should I buy Tesla (TSLA) here?
A: The thing here that I’m telling my professional money managers is: scale in on a one-month basis. Figure out how much you want to buy, and then buy 1/30th of that amount every day for a month. Then, you’ll scale in, you won’t get the absolute bottom but you’ll get some kind of bottom, and when a turnaround happens, then it goes up 50% or 100%. That’s the way to play Tesla. A lot of the professional money managers and investment advisors who follow me have a problem; they’re getting tons of new customers based on their performance this year. So yes, what do you do when you get money after a great run? You can only scale in.
Q: Is oil (USO) topping and going back to 70 a barrel?
A: I think yes. We saw the run from $70 to $95; it looks like it’ll probably hit $100. After that, Saudi Arabia will start bringing supply back on. What they did is create an artificial short squeeze in oil by taking 5 million barrels off the market with Russia—that got prices up. Any higher than that, and high oil starts to adversely affect Saudi Arabia’s foreign investments. So yes, they do back off when we get over 100; they’re very happy with $100/barrel, as is the American oil industry. So, I’m inclined to take profits if you did the oil trade in June.
Q: Would you buy iShares 20 Plus Year Treasury Bond ETF (TLT) now?
A: No, I’ve been holding back because it seems to want to have a capitulation; that’s why it’s not rallying off the 93 level—it’s been bouncing on the bottom. Some piece of bad news, some kind of high inflation, could trigger a capitulation, which would take us down another 5 points—that's where you buy it. Then, all of a sudden something like a 2024 $85/$90 bull call spread is offering you 100% return one year out.
Q: Do you recommend 4-week T-bills?
A: No, I recommend 4-month T-bills. Those expire in January and take advantage of the cash squeeze in the financial system you always get in New Years. Returns on 4-month T-bills are much higher than 3 month, 2 month, or 1 month. I just bought some before this meeting because I’m not going to do a lot of trading this month, and I got a 5.48% yield. For me to do a trade now, it has to have a very low-risk 20% return. That’s what I need to beat T-bills at 5.48%, which have zero risk and a guaranteed return of money. You need the extra 15% return on a 1-month trade to justify the risk that individual stocks have.
Q: Will the Australian dollar (FXA) stay weak as long as China is weak?
A: Yes, and the flip side is also true: Will the Australian dollar be strong when China recovers? Absolutely. I still see 1 to 1 against the US dollar for the long term.
Q: Why is everyone pouring into short-term options?
A: They’re buying lottery tickets. A lot of people are in the markets not to invest, but to gamble. They have gambling addictions quite often, and nothing beats the instant gratification of a same-day win, even though 80% of the same-day options expire worthless. So, enter that market with caution.
Q: After artificial intelligence destroys 90% of jobs, won’t there be nobody left to buy stocks since stocks won’t go up solely on institutional buying?
A: While AI will destroy a lot of jobs, it’s creating even more jobs—that has always been the case with technology from day one. However, you do get mismatches from the time a job is destroyed to when a new one is created. There are also mismatches in skill levels and that can create turmoil in the economy. Look at the United Auto strike, which is hell-bent on stopping technology and automation—stopping any kind of technology they can. Technology in the long term always destroys jobs, but it also creates more jobs, just moving them from old economies into new industries. I’m sure the same thing went on with the hay and leather industries 120 years ago when we moved from horses to internal combustion cars.
Q: If companies go to a four-day workweek, how will that affect stocks?
A: It’ll probably make them go up. When people go to four-day work weeks, productivity goes up and companies get more output for their dollar of labor costs. That’s why it’s happening and why it’s so popular. People who work at home and get to play with their kids on weekends will work for less money—that is a proven fact.
Q: Any thoughts on when we will see the United States Natural Gas Fund (UNG) turn upward?
A: This winter. (UNG) is priced for perfection, sitting around here at the $7 level. The slightest surprise like a cold winter, for example, which we may get (at least in California we will), and then the thing will spike up.
To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in to www.madhedgefundtrader.com, go to MY ACCOUNT, click on GLOBAL TRADING DISPATCH, then WEBINARS, and all the webinars from the last 12 years are there in all their glory.
Good Luck and Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
2018 On the HMS Victory in Plymouth, England
Global Market Comments
August 21, 2023
Fiat Lux
Featured Trades:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or LEARNING A NEW WORD),
(JPM), (WPM), (FCX), (OXY), (CCI)
(SPY), (TLT), (TSLA), (NVDA), ($WTIC)
CLICK HERE to download today's position sheet.
It’s not often that I learn a new word, at least in English anyway. Anyone who has read all 4,000 pages of John Steinbeck, where you are sent running for your Funk & Wagnalls on every page, shouldn’t be surprised too often. Steinbeck spent two winters house-sitting at Lake Tahoe where he memorized the dictionary cover to cover. But, last week I was.
The word in question is “disinversion.”
Disinversion happens in two ways. When bond yields fall and short yields fall much faster, you get good disinversion and stocks usually rise. This is what I expect to happen in 2024 and is why I am loading the boat with falling interest plays like banks (JPM), precious metals (WPM), commodities (FCX), energy (OXY), and REITS (CCI).
However, stock markets are insecure things, afraid of their own shadows, always shrinking from a fight, and constantly looking for new reasons to worry. Now they are also losing sleep over disinversion.
Disinversion also takes place when short rates are falling but bond yields are rising. When that happens the real estate market gets slaughtered but sky-high mortgage rates, the economy collapses and stocks fall. The good news is that bad disinversion only happens about 10% of the time.
However, a rising number of bond analysts are raising the alarm that we may be in for a dose of the bad kind of disinversion before the good kind kicks in. That could trigger a capitulation in the bond market that could take the ten-year US Treasury bond yield from the current 4.25% yield to 5.0% or even higher, and take the (TLT) down to a low of $90, or even $85. Stocks would drop 10%.
That would be a nightmare for 2024 LEAPS holder, no matter how brief it may be.
It doesn’t help that the government is borrowing now at a record pace, some $109 billion last week alone. That is why the (TLT) is probing one-year lows.
But whether bonds are inverting, disinverting, converting, or perverting, I’ll be buying two-year bond (LEAPS) if that happens. A 100% return in two years on a government bond risk sounds like a petty good deal to me, even if they are now rated only AA+, thanks to you know who. However you look at it, there is one heck of a bond trade setting up.
We may get our answer at 10:05 AM EST on Friday, August 25.
That’s when Jay Powell, the governor of the Federal Reserve, is due to be the keynote speaker at the meeting of global central bankers at Jackson Hole. Will this mark the bottom in bond prices and the top in yields?
Last year, Jay’s mumblings lasted only eight minutes and warned of “pain to come.” Pain we got, but for only two months. After that, it was nine months of pleasure in the form of straight-up stock prices.
Will Jay Powell Drop a Bomb Next Week?
Only Jay Powell knows for sure.
In the meantime, stocks will remain as dead as a doorknob and moribund, if not catatonic. Volatility ($VIX) will hug the $15 level, the “A” Team traders will remain at the Hamptons, and the number of new trades alerts emanating from me will remain precisely at zero.
There never is a profit trading when the Mad Hedge AI Market Timing Index vacillates around 50, as it is doing now. Sometimes you just get paid to wait, especially when 90-day T-bills are paying a healthy 5.25%.
So far in August, we are down -4.70%. My 2023 year-to-date performance is still at an eye-popping +60.80%. The S&P 500 (SPY) is up +17.10% so far in 2023. My trailing one-year return reached +92.45% versus +8.45% for the S&P 500.
That brings my 15-year total return to +657.99%. My average annualized return has fallen back to +48.15%, another new high, some 2.50 times the S&P 500 over the same period.
Some 41 of my 46 trades this year have been profitable.
My Ten-Year View
When we come out the other side of the recession, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. The economy decarbonizing and technology hyper-accelerating, creating enormous investment opportunities. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The new America will be far more efficient and profitable than the old.
Dow 240,000 here we come!
On Monday, August 21, BHP (BHP) and Zoom (ZM) announce earnings.
On Tuesday, August 22 at 7:00 AM EST, Existing Homes Sales for July are released.
On Wednesday, August 23 at 2:30 PM EST, the New Homes Sales are published.
On Thursday, August 24 at 8:30 AM EST, the Weekly Jobless Claims are announced. So are US Durable Goods.
On Friday, August 25 at 7:00 AM, Fed Governor Jay Powell gives his keynote speech at the Jackson Hole Central Bankers Conference. At 2:00 PM, the Baker Hughes Rig Count is printed.
As for me, I am often told that I am the most interesting man people ever met, sometimes daily. I had the good fortune to know someone far more interesting than myself.
When I was 14, I decided to start earning merit badges if I was ever going to become an Eagle Scout. I decided to begin with an easy one, Reading Merit Badge, where you only had to read four books and write one review. I loved reading, so “Piece of cake,” I thought.
I was directed to Kent Cullers, a high school kid who had been blind since birth. During the late 1940s, the medical community thought it would be a great idea to give newborns pure oxygen. It was months before it was discovered that the procedure caused the clouding of corneas and total blindness in infants.
Kent was one of these kids.
It turned out that everyone in the troop already had Reading Merit Badge and that Kent had exhausted our supply of readers. Fresh meat was needed.
So, I rode my bicycle over to Kent’s house and started reading. It was all science fiction. America’s Space Program had ignited a science fiction boom and writers like Isaac Asimov, Jules Verne, Arthur C. Clark, and H.G. Welles were in huge demand. Star Trek came out the following year, in 1966. That was the year I became an Eagle Scout.
It only took a week for me to blow through the first four books. In the end, I read hundreds to Kent. Kent didn’t just listen to me read. He explained the implications of what I was reading (got to watch out for those non-carbon-based life forms).
Having listened to thousands of books on the subject, Kent gave me a first-class education and I credit him with moving me towards a career in science. Kent is also the reason why I got an 800 SAT score in Math.
When we got tired of reading, we played around with Kent’s radio. His dad was a physicist and had bought him a state-of-the-art high-powered short-wave radio. I always found Kent’s house from the 50-foot-tall radio antenna.
That led to another merit badge, one for Radio, where I had to transmit in Morse Code at five words a minute. Kent could do 50. On the badge below, the Morse Code says “BSA.” In those days, when you made a new contact, you traded addresses and sent each other postcards.
Kent had postcards with colorful call signs from more than 100 countries plastered all over his wall. One of our regular correspondents was the president of the Palo Alto High School Radio Club, Steve Wozniak, who later went on to co-found Apple (AAPL) with Steve Jobs.
It was a sad day in 1999 when the US Navy retired Morse Code and replaced it with satellites and digital communication far faster than any human could send. However, it is still used as beacon identifiers at US airfields.
Kent’s great ambition was to become an astronomer. I asked how he would become an astronomer when he couldn’t see anything. He responded that Galileo, the inventor of the telescope, was blind in his later years.
I replied, “Good point.”
Kent went on to get a PhD in Physics from UC Berkeley, no mean accomplishment. He lobbied heavily for the creation of SETI, or the Search for Extra-Terrestrial Intelligence, once an arm of NASA. He became its first director in 1985 and worked there for 20 years.
In the 1987 movie Contact, written by Carl Sagan and starring Jodie Foster, Kent’s character is played by Matthew McConaughey. The movie was filmed at the Very Large Array in western New Mexico. The algorithms Kent developed there are still in widespread use today.
Out here in the West, aliens are a big deal, ever since that weather balloon crashed in Roswell, New Mexico in 1947. In fact, it was a spy balloon meant to overfly and photograph Russia, but it blew back on the US, thus its top secret status.
When people learn I used to work at Area 51, I am constantly asked if I have seen any spaceships. The road there, Nevada State Route 375, is called the Extra Terrestrial Highway. Who says we don’t have a sense of humor in Nevada?
After devoting his entire life to searching, Kent gave me the inside story on searching for aliens. We will never meet them but we will talk to them. That’s because the acceleration needed to get to a high enough speed to reach outer space would tear apart a human body. On the other hand, radio waves travel effortlessly at the speed of light.
Sadly, Kent passed away in 2021 at the age of 72. Kent, ever the optimist, had his body cryogenically frozen in Hawaii where he will remain until the technology evolves to wake him up. Minor planet 35056 Cullers is named in his honor.
There are no movies being made about my life…. yet. But there are a couple of scripts out there under development.
Watch this space.
Good Luck and Good Trading,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Dr. Kent Cullers
New Mexico Very Large Array
Reading Merit Badge
Radio Merit Badge
Some 14 months into my enforced home quarantine, I am resorting to some oldies but goodies for home entertainment. They’re not making movies anymore, so oldies are all we get.
I just finished watching Von Ryan’s Express (1965), and Frank Sinatra got shot in the back. It was a timely movie for me to revisit because I rode the exact Italian Alpine rail lines used in the film only two years ago and recognized some of the precise scenery and rail junctions used by the filmmakers.
What would you do if I recommended an investment strategy that would cause your accountant to disown you, your inheritance-anticipating children to sue you, and your wife to file for divorce?
Chances are you would designate all my future mailings as SPAM, unfriend me from Facebook, and tear my card out of your Rolodex.
Well, here it is anyway. I’ll call it my “Ignore All Risk” portfolio. It’s really quite simple. This is all you have to do:
1) Buy stocks that have already gone up the most, boast the highest year-to-date performance, and have momentum overwhelmingly on their side. Only do what everyone else is doing. Go for the easy trade.
2) Buy stocks with the highest price earnings multiples. I’m talking mid to high hundreds.
3) Lean towards stocks with the highest short interest. GameStop (GME) was a perfect example of this.
4) Put every free penny you have into cryptocurrency bets, like Bitcoin. In fact, avoid all financials, period.
5) Ignore all valuations and fundamentals. Don’t waste a minute reading a single page of research, especially from an old-line legacy broker. Seeking Alpha, where none of the information is independently verified, is a far better source of information than JP Morgan (JPM).
6) Big institutions should allocate all of their assets only to their youngest traders and portfolio managers. Old farts, or anyone with any memory or experience whatsoever, should be completely ignored. A person who’s never seen a stock go down is now your best friend.
7) Oh, and there is one more thing. Go hugely overweight bonds over equities in the face of unprecedented and massive government borrowing at all-time low-interest rates.
Any professional manager pursuing an approach like this would surely get fired, lose all of their securities registrations and licenses, and get banned from the industry for life.
But there is one big offset to these career-ending consequences. They would also be the top-performing money manager of the year, beating the pants off of all competitors. Every investment they made this year worked.
They would be regarded a trading genius on par with my friends Paul Tudor Jones and Appaloosa’s David Tepper. If they invested their own money using this strategy, they would be so filthy rich they wouldn’t care what happened to themselves.
We are now in an environment where EVERY trade is crowded, be they in equities, fixed income, or foreign exchange. There is no value anywhere. The metaphors coming to mind are legion. There are too many passengers on one side of the canoe. The lemmings are mindlessly stampeding towards a giant cliff. I could go on.
Of course, incredible excess liquidity is to blame. That is the only time both stocks AND bonds go up at the same time. The world’s central banks have been flooding the globe with cash for over a decade now, and the pandemic has given them license to increase these efforts vastly.
The end result has been to undervalue all asset classes, be they paper or hard. Cash is trash, especially in Japan and Europe where you have to PAY banks to take your money.
The fact is that shares with the fastest price appreciation over the past 12 months are trading at valuations that are almost 25% higher than normal.
I have traded and invested through all of this before; the Nifty Fifty of the early 1970s, the Great Japan Bubble of the 1980s, the Dotcom Bubble of the 1990s, and of course the 2007 bubble top. And there is one thing all of these market apexes have in common. They inflated a lot longer than anyone expected, sometimes FOR YEARS!
You could be conservative, go into 100% cash, and just stay on the sidelines until mass group think, hysteria, and insanity leave the market. But that could be a very long time.
And after more than a half-century in this business, there is one thing I know for sure. Traders who don’t trade, investors who don’t invest, and newsletters that don’t recommend all have one thing in common. THEY GET FIRED. Just because investing gets hard is no reason to quit the market.
The Japanese have a great expression for this: “When the fool is dancing, the greater fool is watching.” So, I’m going to start dancing away. What will it be? The cha cha, the limbo, or the Watusi?
Hmmmm. Let me see. Let me Google what everyone else is doing.
Mad Hedge Technology Letter
July 3, 2023
Fiat Lux
Featured Trade:
(WILL AI DESTROY THE JOB MARKET?)
(JPM), (AI), (UBER)
