Main Story Archives

Posts

MARKET OUTLOOK FOR THE WEEK AHEAD, or IT’S CORRECTION TIME

Global Market Comments
June 21, 2021
Fiat Lux

Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or IT’S CORRECTION TIME),
(SPY), (TLT), (JPM), (BRKB), (AMZN), (ADBE), (NVDA)

1.) The Market Outlook for the Week Ahead or Its Correction Time

OK, I’ll give it to you straight.

The market has just entered a correction that will take the Dow Average down precisely 7.81% from the recent 35,050 high down to 32,515. That just so happens to be the 150-day moving average.

During this time, interest rates will rise, possibly taking the ten-year US Treasury bond yield to 1.30% and the United States Treasury Bond Fund (TLT) to $151.

Technology stocks will take the lead this summer. After not moving for nearly a year, Amazon (AMZN) will take the lead, discounting the last year’s 44% growth in sales. NVIDIA (NVDA) and Adobe will follow.

Bank stocks and other financials like JP Morgan Chase (JPM) and Berkshire Hathaway (BRKB) will suffer, dropping 10% so far and 20% before the crying is all over.

In other words, we just flipped from one half of the barbell to the other in a heartbeat. That will last until late summer to the fall. After that, we shift to the other side of the barbell.

That means the best opportunity to buy financials and sell short bonds in a year is setting up in the coming weeks, if not months.

That takes us until the end of 2021 when I expect another liquidity surge to take everything up. Then we all walk together hand in hand into the sunset signing glory halleluiah. It doesn’t get any easier than that.

I saw all of this coming at the beginning of the year, which is why I raced to rack up a 68.60% profit in the first half of the year and went 100% cash with the June 18 option expiration. I succeeded right on the money.

As for 2022, that is a different story entirely.

The big view here that the stock market is transitioning from an 80% gain to a 30% gain to a more normal average annualized 15% gains. The big game is how far in advance stocks will discount these smaller gains.

It will take a lot to get me off the bench and risk any of this hard-won profit. A Volatility Index (VIX) over $35 would help (we closed at $20.70 on Friday). So would a Mad Hedge Market Timing Index under 20. So would JP Morgan under $127.

The Fed Takes a Turn, leaning towards more inflation. It is keeping interest rates unchanged at 0%-0.25% and continuing bond purchases at $120 billion a month. It is still sticking with the “transitory” argument on inflation but raised its full-year target from 2.4% to 3.4%, more than most expected. It went more specific on rate rises, predicting two 0.25% increases by the end of 2023. Bonds and technology stocks crashed, and inflation plays like banks, Bitcoin, and Berkshire Hathaway soared. The barbell strategy wins again!

The Big Rotation is On, with traders moving out of inflation plays and into big tech. That is the outcome of the shocking bond market spike that came out of last week’s 5% print for the Consumer Price Index. The Fed is telling the world that any inflation is temporary, and the world is believing them. It could give us a bond and tech rally that lasts a couple of months.

Commodities Crash, on a soaring US dollar and shrinking interest rates. The 15-month bull move is taking a summer vacation, unwinding 2X-10X moves racked up since the 2020 lows. Palladium took an 11% hit, with platinum off 7%, corn 6%, and copper 4%. Banks also sold off big as the whole inflation trade unwinds. Buy all of these on the next bottom for a rebound.

Shipping Costs are Out of Control, for everything from everywhere to everywhere else. Transporting a 40-foot steel container of cargo by sea from Shanghai to Rotterdam now costs a record $10,522, up a whopping 547%. Tens of thousands of containers are on the wrong side of the Pacific. Shortages of truck drivers are extreme, with $50,000 signing bonuses rampant. It is one thing that could make continuing inflation pernicious.

If Copper Sells Off It Won’t be by Much. Convention internal combustion cars use 40 pounds of copper for wiring. EV’s use 200 pounds for the heavy copper rotors in each wheel, in addition to two ounces of silver (SLV). EV production will rise from 700,000 units last year to 25 million by 2030. You do the math. There aren’t enough copper mines in the world to accommodate this demand and it takes five years to build a new one. Buy (FCX) on the next big dip. It’s going to $100 in five years.

Paul Tudor Jones Says the Taper Tantrum is Coming, despite last week’s perverse reaction by the bond market to the red hot 5% inflation rate. The Fed’s obsession with jobs only and not inflation will end in tears. My old client and legendary investor has 20% of his assets in inflation plays, including gold (GLD), Bitcoin, commodities, and short US Treasury bonds (TLT). When Paul is wrong it’s usually not for very wrong.

Housing Starts Up Only 3.6% in May, to a seasonally adjusted 1.57 million units, with sky-high lumber and other materials prices a major drag. New Permits hit a seven-month low.

Weekly Jobless Claims Jump to 412,000, the largest increase since March. Could the economy be slowing?

Tech Soars, getting a new lease on life with the collapse of interest rates this week. My favorite, Amazon (AMZN), picked up a health $80 yesterday on a 44% YOY gain in sales. Even Apple (AAPL) is coming back from the dead, up $2.00. I sent out long-term at-the-money LEAPS on these last week. It hard to hold quality down for the long term.

Factory Activity Fell in June, for the second month in a row according to the Philly Fed, backing off from an all-time high in the spring. Parts and materials shortages are plaguing manufacturers everywhere as the economy struggles to escape from its pandemic torpor.

My Ten Year View

When we come out the other side of the pandemic, we will be perfectly poised to launch into my new American Golden Age or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 400% to 120,000 or more in the coming decade. The Americans coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 120,000 here we come!

My Mad Hedge Global Trading Dispatch profit reached 0.71% gain so far in June on the heels of a spectacular 8.13% profit in May. That leaves me 100% in cash.

My 2021 year-to-date performance appreciated to 68.60%. The Dow Average is up 8.8% so far in 2021.

I spent the week taking profits on the 40% in remaining positions either by selling or running them into the Friday expiration. My goal was to go 100% before the market completely fell to pieces and I succeeded handily. It’s going to be a grim summer.

I rang the cash register on Berkshire Hathaway (BRKB) and the S&P 500 (SPY), and my short in the (SPY). Perhaps my best trade of the year was stopping out of my short in the (TLT) for an $800 loss when it topped $140.

That brings my 11-year total return to 491.15%, some 2.00 times the S&P 500 (SPX) over the same period. My 11-year average annualized return now stands at an unbelievable 42.70%, easily the highest in the industry.

My trailing one-year return exploded to positively eye-popping 126.07%. I truly have to pinch myself when I see numbers like this. I bet many of you are making the biggest money of your long lives.

We need to keep an eye on the number of US Coronavirus cases at 33.1 million and deaths topping 600,000, which you can find here at https://coronavirus.jhu.edu. Some 33.1 million Americans have contracted Covid-19.

The coming week will be weak on the data front.

On Monday, June 21, at 8:30 AM, the Chicago Fed National Activity Index is out.

On Tuesday, June 22, at 10:00 AM, Existing Home Sales for May are released

On Wednesday, June 23 at 10:00 AM, New Home Sales for May are Published.

On Thursday, June 24 at 8:30 AM, the Weekly Jobless Claims are Published. We also get US Durable Goods Orders for May.

On Friday, June 25 at 8:30 AM, US Personal Income & Spending for May are disclosed.

At 2:00 PM, we learn the Baker-Hughes Rig Count.

As for me, with all the recent violence in the Middle East, I am reminded of my own stint in that troubled part of the world. I have been emptying sand out of my pockets since 1968, when I hitchhiked across the Sahara Desert, from Tunisia to Morocco.

During the mid-1970s, I was invited to a press conference given by Yasser Arafat, founder of the Al Fatah terrorist organization and leader of the Palestine Liberation Organization, at the Foreign Correspondents Club of Japan. His organization then rampaging throughout Europe, attacking Jewish targets everywhere.

Japan recognized the PLO to secure their oil supplies from the Persian Gulf, on which they were utterly dependent.

It was a packed room on the 20th floor of the Yurakucho Denki Building, and much of the world’s major press was represented, as the PLO had few contacts with the west.

Many placed cassette recorders on Arafat’s table in case he said anything quotable. Then Arafat ranted and raved about Israel in broken English.

Mid-sentence, one machine started beeping. A journalist jumped up to turn his tape over. Suddenly, four bodyguards pulled out Uzi machine guns and pointed them directly at us.

The room froze.

Then a bodyguard deftly set his Uzi down on the table flipped over the offending cassette, and the remaining men stowed their weapons. Everyone sighed in relief. I thought it was interesting that the PLO was using Israeli firearms.

The PLO was later kicked out of Jordan for undermining the government there. They fled Lebanon for Tunisia after an Israeli invasion. Arafat was always on the losing side, ever the martyr.

He later shared a Nobel Prize for cutting a deal with Israel engineered by Bill Clinton in 1993, recognizing its right to exist. He died in 2004.

Many speculated that he had been poisoned by the Israelis. My theory is that the Israelis deliberately kept Arafat alive because he was so incompetent. That is the only reason he made it until 75.

Stay healthy,

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

The Middle East Does Have Some Advantages

Quote of the Day
“We have not been investing this year, we have been on a battleground,” says noted UK hedge fund manager Crispin Oday.

This is not a solicitation to buy or sell securities
The Mad Hedge Fund Trader is not an Investment advisor
For full disclosures click here at https://www.madhedgefundtrader.com/disclosures
The “Diary of a Mad Hedge Fund Trader”(TM) and the “Mad Hedge Fund Trader” (TM) are protected by the United States Patent and Trademark Office
The “Diary of the Mad Hedge Fund Trader” (C) is protected by the United States Copyright Office
Futures trading involves a high degree of risk and may not be suitable for everyone.

June 21, 2021/by Douglas Davenport

Watch Out for the Coming Copper Shock

Diary, Newsletter, Research

You remember the two oil shocks, don’t you? The endless lines at gas stations, soaring prices, and paying close attention to OPEC’s every murmur?

Now we are about to get the 2020s, environmentally friendly, decarbonizing economy version: the copper shock.

For, copper is about to become the new oil.

The causes of the coming supply crunch for the red metal are manyfold.

If you take all of the commitments to green energy made by the Paris Climate Accord, which the US just reentered, they amount to demand for copper amount to about ten times current world production.

Oops, nobody thought of that.

Copper is needed in enormous quantitates to build millions of electric cars, solar panels, batteries, windmills, and long-distance transmission lines for a power grid that is going to have to triple in size. Lift a 50-pound rotor from a Tesla wheel as I have and most of the weight is in the copper.

You basically don’t have a green movement without copper.

In addition, existing copper miners seem utterly clueless about the coming shortage of their commodities. Capital spending has been deferred for decades and maintenance delayed. New greenfield mines are scant and far between. Copper inventories are at a ten-year low. Mines were closed for months in 2020 thanks to a shortage of workers caused by the pandemic.

Copper is the last of the old-school commodities that is still actively traded. It takes 5-10 years at a minimum to bring new mines online. By the time potential sites are surveyed, permits obtained, heavy equipment moved on-site, rail lines laid, water supplies obtained, and bribes paid, it can be a very expensive proposition.

That’s why near-term prospects are only to be found in Chile, Peru, and South Africa, not your first choices when it comes to political stability.

Copper is the single best value for money conductor of electricity for which there are very few replacements. Aluminum melts and corrodes. And then there is silver (SLV), right below copper of the periodic chart, which gangster Al Capone used to wire his bullet-proof 1928 Cadillac so electricity could move faster. Below silver is gold (GLD), a fine conductor of electricity but is somewhat cost-prohibitive.

As a result, base metal copper prices could more than double from here to $15,000 a metric tonne or more. The last time the price was that high was in 1968, when the Vietnam War was in full swing, as the military needs a lot of copper to fight wars. The economy was then booming.

You can’t have a synchronized global economic recovery without a bull market in commodities, and the mother of all recoveries is now in play according to the latest economic data. Phoenix, AZ Freeport-based McMoRan (FCX) is one of the world’s largest producers of copper and a long-time Mad Hedge customer.

The stock has been on a tear for a year on the back of record Chinese buying of copper ahead of their economic recovery, which started well before ours. (FCX) has soared from a $5 low a year ago to near $40 at the February high. I believe this move will continue for years. The old high for the stock in the last cycle was $50.

Riding My Way to a Copper Killing

April 20, 2021/by Mad Hedge Fund Trader

A New Theory of the American Economy

Diary, Newsletter

The US economy is currently recovering at double the rate of past recoveries. No one has ever seen anything like this before.

Sometimes a trader can turn wildly bullish, not really understanding why. He is just responding the market price action. Often the reasons why don’t become obvious for months, or even years after the event.

This is one of those times.

A year ago, you could come up with all kinds of theories as to why stocks should rise in two years: valuation, QE, ultra-low interest rates, lack of alternatives, end of the pandemic. But they were just that: theories.

However, the price action was indicating that the biggest bull markets of all time was underway. That is exactly what we got.

Now, we are slowly starting to understand why.

It turns out the American economy coming out of the pandemic is very different from the one that went in. The end result is that stock prices will rise faster to greater levels than ever imagined possible.

I am looking for another 20% gain in the (SPX) to $4,800 by the end of this year, and $16,000 by 2030. If I’m wrong, we’ll get $16,000 by 2025.

There are an abundance of reasons why.

US corporations are now immensely more profitable and productive than only two years ago. All of the cost savings taken as emergency measures in 2020 will become permanent.

Perhaps one-third of all employees sent home to work will stay there forever. Workers who don’t have to commute are happier and work cheaper. And we didn’t really like them anyway.

As we reopen, some big tech companies are asking workers back to the head office only two days a week. You’ll have a Monday/Wednesday shift, a Tuesday/Thursday shift, and nobody comes to the office on Friday. This drops office expenses by half, a huge overhead item for many firms.

So will commercial real estate crash? No. Hypergrowth will refill that space in a year or two and they’ll sublease until then. Most big tech companies own their own office buildings in any case.

Legacy bank branches were cut by half and those remaining are chronically understaffed. Legacy banks have been trying to figure out how to unload these expensive branch networks for years. The pandemic just did it for them.

Customer support has virtually ceased to exist. Want to call Interactive Brokers with a question about your account? Expect to remain on hold for 2 ½ hours, as I did last week.

Business travel is now the equivalent to flying in a private jet. A friend of mine had to fly to New York and was required to fill out an 11-page form detailing the necessity of an in-person meeting. The cost savings will be enormous.

While costs are plunging, revenues are soaring. The pandemic hyper-accelerated the development of new technologies allowing us to be inundated with countless new products and services.

Zoom (ZM) is a perfect example. No one heard of it in 2019 except a handful of Bay Area tech nerds like me. Now, it’s a daily factor in most people’s lives. Some people, like me, join a dozen Zoom calls a day, from staff meetings to customer calls, to Boy Scout meetings. Mad Hedge followers already know that this has led to a 12X move in the (ZM) share prices. (ZM) in San Jose is hiring as fast as it can.

Another effect of the pandemic has been to digitize the global economy far faster than once imagined possible. This is not a bad thing when you live in the digital capital of the world. Unlike a store accepting cash, you can’t catch a virus from a digital transaction. This is important not just in this pandemic, but the next one and the one after that.

Exploding digitization also automatically leads to vastly accelerated globalization. Another friend of mine runs an online business in Australia, but after a decade was only able to attract local interest. Suddenly, his business doubled. An analysis of the new subscriber addresses showed that all the new customers came from China. It turns out that there are a lot of Chinese surfing the net to kill time as well.

By default, America has evolved into a disease-free economy in a mere 12 months. The telling statistic here is that the Rite-Aid drug store chain saw earnings crash because no one catches the flue of a cold anymore. These viruses can get through a mask or survive hand sanitizers either.

Of course, I would be remiss not to mention massive government spending and Federal Reserve quantitative easing. Cassandras worry about a shut-off of the money spigot when inflation returns and an ensuing market crash.

Here’s a news flash for you: Inflation is never coming back.

The end effect of accelerating technology is to drive prices ever downward, especially the cost of labor. When Treasury Secretary Janet Yellen (I can’t believe I’m saying that!) says she won’t want interest rates rises until she sees the whites of inflation’s eyes, she means inflation is NEVER coming back. Deflation will be the greater challenge, as it has been for the last 40 years.

That means the US government could keep stimulating until the headline Unemployment Rate returns to 3.0%, with no consequences whatsoever.

If this sounds like a Goldilocks scenario, it is. Enjoy your bull market.

The Goldilocks Economy is Here

April 14, 2021/by Mad Hedge Fund Trader

The Barbell Play with Berkshire Hathaway

Diary, Newsletter

It’s time to give myself a dope slap.

I have been pounding the table all year about the merits of a barbell strategy, with equal weightings in technology and domestic recovery stocks. By owning both, you’ll always have something doing well as new cash flows bounce back and forth between the two sectors like a ping pong ball.

After all, nobody gets sector rotation right, unless they have been practicing for 50 years, like me.

Full disclosure: I have to admit that after 50 years of following him, I love Buffet. He was one of the first subscribers to my newsletter when it started up in 2008. Some of his best ideas have come from the Mad Hedge Fund Trader, like buying Bank of America for $5 in 2008.

Oh, and he hates Wall Street for constantly fleecing people. Ditto here.

In reading Warren Buffet’s annual letter (click here for the link), it occurred to me that his Berkshire Hathaway (BRKB) shares were in effect a one-stop barbell investment.

For a start, Warren owns a serious slug of Apple (AAPL), some $120 billion worth, or 2.5% of the total fund. That gives (BRKB) some technology weighting. It cost him only $20 billion. The dividends he received entirely paid for the initial cost. So he owns 4% of Apple for free.

I remember the battle over the initial “BUY” five years ago. Warren fought it, insisting he didn’t understand the smart phone business. In the end, he bought Apple for its global brand value alone.

That is Warren Buffet to a tee.

The next five largest publicly listed holdings are Bank of America (BAC), Coca-Cola (KO), American Express (AXP), and Verizon Communications (VZ). These are your classic domestic recovery sectors. And with a heavy weighting in other banks (BK) (USB), Buffet is effectively short the bond market (TLT), another position I hugely favor.

Also included in the package is a liberal salting of pharmaceuticals, Merck (MRK) and AbbVie (ABBV). He has a small energy weighting with Chevron (CVX). He even has a position in old heavy metal America with General Motors (GM).

Berkshire is also one of the world’s largest property & casualty insurance owners. Its current “float” is $138 billion. You all know his flagship holding, GEICO. And the gecko mascot isn’t going anywhere as long as Warren lives. It was Warren’s idea.

It all seems to work for Warren. In 2020, he earned a staggering $42.5 billion. All told, Berkshire’s businesses employ 360,000, second to only Amazon (AMZN), and is the largest taxpayer in the United States, accounting for 3% of government revenues. Berkshire is also the largest owner of capital goods & equipment in the US worth $156 billion, topping (AT&T).

Many of Warrens’s early 1956 $1,000 investors are millionaires many times over….and over 100 years old, prompting him to muse if ownership of his shares extended life.

Warren’s annual letter, which he spends practically the entire year working on, is always one of the best reads in the financial markets. There isn’t a better 50,000-foot view out there. He also admits to his mistakes, such as his disastrous purchase of Precision Castparts (PCC) in 2016 for $37 billion, which later suffered from the crash in the aerospace industry. In 2020, Buffet wrote off $11 billion of that acquisition.

He can do worse. In 1993, he bought the Dexter Shoe Company for $433 million worth of Berkshire stock. The company went under, but the Berkshire stock today is worth $8.7 billion.

Buffet’s letters always refer back to some of his “greatest hits,” today legends in the business history of the United States: GEICO, Furniture Mart, Berkshire Hathaway Energy, and See’s Candies, one of the largest employers of women in the US using 150-year-old recipes. Its peanut brittle is to die for.

In 2009, Buffet snatched away from me BNSF for a song, now the most profitable railroad in the country, an amalgamation of 360 railroads over 170 years. I say “snatched away” because it was my favorite railroad trading vehicle for decades until he bought the entire company. I hear its trains run by my home every night as a grim reminder.

Another benefit to owning (BRKB) is that Buffet is far and away the largest buyer of his own shares, soaking up $25 billion worth in 2020. And he is buying the shares of other companies that are also aggressively buying their own shares, like Apple ($200 billion with last year). It all sounds like the perfect money creation machine to me.

It gets better. Berkshires “B” shares trade options, meaning you can buy LEAPS (Long Term Equity Anticipation Securities), which by now, you all know and love. I’ll run some numbers for you.

With (BRKB) now trading at $254, you can buy the January 2023 $300-$310 call spread for $2.50. If the shares close anywhere over $310 by the 2023 expiration, the position will be worth $10.00, giving you a gain of 300%. And you only need an appreciation of $56, or 22% in the shares to capture this blockbuster profit, giving you upside leverage of an eye-popping 13.63X in the best run company in America.

See, I told you you’d like it.

This is how poor people become rich. In fact, my target for (BRKB) is $300 for end of 2021 and $400 for 2022, right when the two-year LEAPS expire.

One question I often get about Berkshire is what happens when Warren Buffet goes to his greater reward, not an impossible concept given that he is 90 years old.

I imagine the shares will have a bad day or two, and then recover. Buffet has been hiring his replacements for a decade or more, and he handed off day-to-day operation years ago (I didn’t want to move to Omaha, no mountains).

When that happens, it will be the best buying opportunity of the year. And another chance to load up on those LEAPS.

March 4, 2021/by Mad Hedge Fund Trader

The Next Commodity Supercycle Has Already Started

Diary, Newsletter

When I closed out my position in Freeport McMoRan (FCX) near its max profit, I received a hurried email from a reader if he should still keep the stock. I replied very quickly:

“Hell, yes!”

When I toured Australia a couple of years ago, I couldn’t help but notice a surprising number of fresh-faced young people driving luxury Ferraris, Lamborghinis, and Porsches.

I remarked to my Aussie friend that there must be a lot of indulgent parents in The Lucky Country these days. “It’s not the parents who are buying these cars,” he remarked, “It’s the kids.”

He went on to explain that the mining boom had driven wages for skilled labor to spectacular levels. Workers in their early twenties could earn as much as $200,000 a year, with generous benefits.

The big resource companies flew them by private jet a thousand miles to remote locations where they toiled at four-week on, four-week off schedules.

This was creating social problems, as it is tough for parents to manage offsprings who make far more than they do.

The Great Commodity Boom has started, and in fact, we are already two years into a prolonged supercycle.

China, the world’s largest consumer of commodities, is currently stimulating its economy on multiple fronts, including generous corporate tax breaks and relaxed reserve requirements. Get a trigger like the impending settlement of its trade war with the US and it will be off to the races once more for the entire sector.

The last bear market in commodities was certainly punishing. From the 2011 peaks, copper (COPX) shed 65%, gold (GLD) gave back 47%, and iron ore was cut by 78%. One research house estimated that some $150 billion in resource projects in Australia were suspended or cancelled.

Budgeted capital spending during 2012-2015 was slashed by a blood curdling 30%. Contract negotiations for price breaks demanded by end consumers broke out like a bad case of chickenpox.

The shellacking was reflected in the major producer shares, like BHP Billiton (BHP), Freeport McMoRan (FCX), and Rio Tinto (RIO), with prices down by half or more. Write-downs of asset values became epidemic at many of these firms.

The selloff was especially punishing for the gold miners, with lead firm, Barrick Gold (GOLD), seeing its stock down by nearly 80% at one point, lower than the darkest days of the 2008-2009 stock market crash.

You also saw the bloodshed in the currencies of commodity-producing countries. The Australian dollar led the retreat, falling 30%. The South African Rand has also taken it on the nose, off 30%. In Canada, the Loonie got cooked.

The impact of China cannot be underestimated. In 2012, it consumed 11.7% of the planet’s oil, 40% of its copper, 46% of its iron ore, 46% of its aluminum, and 50% of its coal. It is much smaller than that today, with its annual growth rate dropping by more than half, from 13.7% to 2.3% in 2020.

What happens to commodity prices when China recovers the heady growth rates of yore? It boggles the mind.

The rise of emerging market standards of living will also provide a boost to hard asset prices. As China goes, so does its satellite trading partners, who rely on the Middle Kingdom as their largest customer. Many who are also major commodity exporters themselves, like Chile (ECH), Brazil (EWZ), and Indonesia (IDX), are looking to come back big time.

As a result, western hedge funds will soon be moving money out of paper assets, like stocks and bonds, into hard ones, such as gold, silver (SIL), palladium (PALL), platinum (PPLT), and copper.

A massive US stock market rally has sent managers in search of any investment that can’t be created with a printing press. Look at the best performing sectors this year and they are dominated by the commodity space.

The bulls may be right for as long as a decade, thanks to the cruel arithmetic of the commodities cycle. These are your classic textbook inelastic markets.

Mines often take 10-15 years to progress from conception to production. Deposits need to be mapped, plans drafted, permits obtained, infrastructure built, capital raised, and bribes paid in certain countries. By the time they come online, prices have peaked, drowning investors in red ink.

So a 1% rise in demand can trigger a price rise of 50% or more. There are not a lot of substitutes for iron ore. Hedge funds then throw gasoline on the fire with excess leverage and high frequency trading. That gives us higher highs, to be followed by lower lows.

I am old enough to have lived through a couple of these cycles now, so it is all old news to me. The previous bull legs of supercycles ran from 1870-1913 and 1945-1973. The current one started for the whole range of commodities in 2016. Before that, it was down from seven years.

While the present one is short in terms of years, no one can deny how business cycles will be greatly accelerated by the end of the pandemic.

Some new factors are weighing on miners that didn’t plague them in the past. Reregulation of the US banking system has forced several large players, like JP Morgan (JPM) and Goldman Sachs (GS) to pull out of the industry completely. That impairs trading liquidity and widens spreads— developments that can only accelerate upside price moves.

The prospect of flat US interest rates is also attracting capital. That reduces the opportunity cost of staying in raw metals, which pay neither interest nor dividends.

The future is bright for the resource industry. While the gains in Chinese demand are smaller than they have been in the past, they are off of a much larger base. In 20 years, Chinese GDP has soared from $1 trillion to $14.5 trillion.

Some 20 million people a year are still moving from the countryside to the coastal cities in search of a better standard of living and improved prospects for their children.

That is the good news. The bad news is that it looks like the headaches of Australian parents of juvenile high earners may persist for a lot longer than they wish.

Buy all commodities on dips for the next several years.

February 11, 2021/by Mad Hedge Fund Trader

A New Theory of Equities

Diary, Newsletter

So far, 2021 is playing out just as I expected. Followers of the Mad Hedge Fund Trader are already up by 20% during the first five weeks of 2021, and it has only just started.

However, I have been getting some pushback from some of my readers, especially the many new ones. Yes, the Dow Average has risen a ballistic 13,000 points over the past ten months, the sharpest increase in history.

However, we are only just getting started.

While snowshoeing up to 10,000 feet in the High Sierras the other day from the East Shore of Lake Tahoe (where I always get my best ideas), I had an epiphany.

I finally realized that nothing less than a New Theory of Equities was needed to get followers to understand WHY the Dow will rise from 30,000 to 120,000 by 2030, a gain of 400%. If I’m wrong, it will happen by 2025 or 2026.

It’s really very simple. Recall the laws of supply and demand.

From 2010 to 2020, roughly $6 trillion was invested in financial assets. Because the Great Recession and the 2008-2009 crash had just happened, some 94% of this money went into bonds, while only 6% went to equities.

During the entire decade, portfolio managers, strategists, and hedge fund managers pronounced that bonds were overpriced and would imminently crash.

Instead, they went up for ten years.

Fast forward to 2021. A new decade has begun and bonds around the world are offering negative inflation-adjusted real returns. The planet is massively overweight in bonds.

Many people don’t realize how stupidly low interest rates are right now. Triple “C” rated bonds are yielding what Triple “A” paper was a decade ago, about 7.5%.

I looked at municipal bond yields the other day and my eyes almost popped out of my head when I saw 0.85%. This is a yield that is so low that it is beyond any economic rationale. Buyers are locking in a guaranteed 25% decline in purchasing power over the next decade.

So, what happens next.?

Let’s say that those bond/equity cash flow weightings reverse, that all new investment for the coming decade goes 94% into equities and 6% into bonds. Stock markets would rise for the decade while bonds fall. There’s your Dow at 120,000 right there.

Portfolio managers, strategists, and hedge fund managers predicting that stocks are overpriced and ready for a crash will be wrong for ten years. We won’t be massively overweight equities until 2030.

They are wringing their hands that stock prices have outrun fundamentals. In fact, the opposite is true. Fundamentals are outrunning stock prices….in a big way. Productivity and profit margins are exploding.

Traditional asset managers would correctly point out that price earnings multiples are historically high. And they’d be right if you were only looking at tech growth stocks, the market leaders since 2009. The big caps are priced at mid 30’s multiples, while the smaller ones sport multiples of 200 or more.

This ignores the huge chunk of the market, the value stocks, that are selling at low teens or single-digit multiple and basically haven’t moved in a decade.

What happens next is that value stock multiples rise to match those of the FANGs. Add in earnings growth and that gets you to 120,000 also. By the way, in this scenario price earnings rise a lot, from the current 20 to 30, 35, or even 40.

I’ve seen it all before.

The fact is that America companies cut costs so dramatically in 2020 that they have spectacular earnings leverage in 2021 and beyond. Last year, it was cut or die.

Except that this time it’s different.

Remember the 2009 Obama stimulus package? It amounted to a measly $831 billion because Republicans were doing everything they could to block it and Obama was new at the job. Only major banks, brokers, insurance companies, and car makers got bailed out. The rest of us were left to stew in our own juices.

This time, aggregate stimulus is looking like $10 trillion by the time you add in packages 1,2,3,4, Covid-19 rescues, an infrastructure bill, and a huge middle class tax cut.

But wait, there’s more!

What about quantitative easing? There was none in 2008. Ben Bernanke didn’t start his QE until 2009 and then only at miniscule levels. This time, Jay Powell is pouring $120 billion a month into the financial markets, matched by another $120 billion in QE from foreign central banks. We all know that most of this is going into US stock markets.

It gets better.

You have to live in Silicon Valley to know this, but the rate of technology innovation has increased by tenfold since the nineties and is far broader than ever imagined. You won’t believe what’s coming your way!

You might ask what happens if interest rates eventually rise, and they will. It turns out that all big tech companies don’t borrow and in fact are net lenders to the system because their cash flows are so enormous.

Other industries benefit from rising rates, like banks, brokers, insurance companies, payday lenders, and money managers. Companies that DO borrow substantially, you don’t want to buy anyway as they are in the wrong industries.

Interest rates would have to get really high before they act as a drag on the stock market, and that is probably a 2026 or 2027 event.

The bottom line here is that we are about to see the biggest binge of equity buying in 50 years. Yes, it really WILL be a new American Golden Age and Roaring Twenties. Start practicing that, Charleston!

I have run this scenario past several of my big-time hedge fund buddies and they ask why I’m being so conservative. They are looking at a Dow Average of 200,000 or 300,000 by 2030 if everything plays out as I expect.

I guess I’m just a conservative kind of guy. Old age will do that to a person.

Is That A 120,000 Dow?

February 4, 2021/by Mad Hedge Fund Trader

A New Theory of Tesla, or Why I’m Raising My Target to $10,000

Diary, Newsletter

By the time you read this, Tesla should have reported blockbuster Q4 earnings and taken it’s run at $1,000 a share.

If not, all of my existing Tesla long call spreads should still expire at their maximum profit points, adding 7% to our already robust 2021 performance.

If those lose money, then I’m retiring.

Heads, I win, tails, the shorts lose . . . I love this business.

I’ve been battling shorts in Tesla for a decade….and you won.

Look at the price of Tesla shares today at $900, I have to laugh. For the $3.30 bid/offered spread today amounts to the entire price I paid for the shares after its IPO bombed in 2010. Back then, even Elon Musk gave the company only a 10% chance of surviving.

My first Tesla, chassis no 125, was scrapped for parts a long time ago, thanks to a drunk driver in a GM Silverado on Christmas Eve. A lot of people talk about Tesla, but few have completely taken them apart, as I have….twice.

Yes, it’s still true that if you buy the stock, you get the car for free, possibly a fleet of them.

I set my target at $1,000 a decade ago, which we are now within 10% of reaching. My assumption was that the company would take over a large part of the global car market, about 90 million vehicles a year globally and 17 million in the US alone. Tesla’s own plans have it manufacturing about 20 million units in 2030.

Add in an eye-popping $8,000 upgrade for fully autonomous street to street driving, and Tesla should be making tons of money by then.

That looks on track to happen and is already reflected in the current share price.

But what if there is more to Tesla? A lot more?

In fact, after making the rounds in Silicon Valley, it’s clear that there is a lot more than meets the eye. Tesla will become the largest publicly listed company in the world and account for an important share of US GDP.

It might even become the world’s first $10 trillion company.

Yes, it will even grow larger than Saudi Aramco, which manages the kingdom’s oil riches. The irony is rich.

Let’s say that it reaches its ambitious 2030 goal of 20 million units, what else is there?

For a start, when Tesla goes solid-state, battery efficiencies will increase 20-fold, costs will drop by 95%, and vehicle ranges will double. This could happen in eight years, or as soon as two. They already have the solid-state batteries. All they need now is to understand economical mass production.

The company has already said it is dropping the price of its cars to $25,000 in three years, but much more is possible.

Converting the car bodies from aluminum to carbon fiber, which the wheel wells are made of now, will further cut costs, increase ranges, and improve safety. Carbon fiber is five times stronger than steel at one-tenth the weight.

To reach that goal, the total Tesla fleet will have grown from 1.5 million units today to 75 million by 2030 and account for one-third of all the cars on the road. Those cars are going to need one heck of a lot of electricity to run.

Step in Tesla.

The company already has 20,000 superchargers in the US. No place in the country is more than 100 miles away from a supercharger.

A Tesla Model 3 with a 100W battery pack driving 20,000 miles a year costs $720 to power at current prices. The entire fleet would cost $54 billion a year to run at a national average price of 12 cents/kWh.

Ring the cash register for Tesla….again.

Let’s say that rather than paying for electricity at an external charger at some distant shopping mall, you’d rather get the power at home for free.

Enter Tesla.

Finally, after a decade of waiting, Solar City, a Tesla subsidiary, is manufacturing cost-competitive solar roof tiles, or photovoltaic tiles. With a ten-year head start in silicon and battery technology, there is no reason why Tesla shouldn’t dominate in this industry as it already has with cars.

To keep the calculations simple, if 75 million homeowners buy solar roofs at an average of $36,000 each, the gross sales would reach $2.7 trillion. Kaching! To get a quote for your new solar roof, please click here.

To get the most out of your solar roof, you really need to buy a couple of 13.5W Tesla Powerwall storage batteries, which would cost $25,000 installed. That way, the solar tiles will charge the batteries during the day, which will then power your house at night. You will become grid-independent forever, as I am.

Where do Powerwalls come from? Not the stork. They are recycled batteries from old Tesla cars.

That will protect you from soaring electric power costs driven by coming cascading bankruptcies of public utilities around the country, all caused by global warming. You also have your own power supply for the ten days a year the grid is down from wildfires on the west coast, or hurricanes on the east coast.

When the neighborhood lights go out, I charge my neighbors a bottle of wine for a cell phone charge. It’s not a bad racket, but I’m getting more than I can drink.

Under current law, the federal government will pay for 26% of your cost with alternative energy tax credits. With a new environmentally-oriented president, my bet is that this goes up a lot in the next tax bill, out in a couple of months.

Naturally, you are going to want highspeed WIFI so all of the elements of your integrated solar solution can talk to each other and upgrade whenever they want. So, you’re going to need a Tesla Starlink satellite connection. The system now in beta testing will eventually deliver a 500 megabyte a second WIFI connection anywhere in the world.

The global WIFI market is expected to grow to $7.2 trillion by 2022 (click here for the data). Give half of that to Tesla and you get another $3.6 trillion in sales. Oh, and if you want to sign up as a beta tester for Starlink, please click here.

Did I mention that Musk also owns a rocket company, Space X, which can launch satellites into space at one-tenth the cost of all competitors? Elon’s goal is to cut costs by 100-fold.

Looking at Elon’s big picture as an engineer and a scientist, I am amazed to find so many 10X and 100X improvements going on all at the same time!

Add all this together and you might get a market capitalization for Tesla of $10 trillion. Elon Musk would become worth $2.4 trillion. Then he really can afford that trip to Mars.

This prompts me to raise my target for Tesla shares to $10,000.

That’s not a particularly bold prediction. It’s only 12X the current share price, compared to the 300X gain seen since the IPO.

Hey, I got the last 300X right, what’s another 12X?

Nobody ever accused me of thinking small.

And if Tesla really does become a $10 trillion company, you’d be right to raise antitrust concerns. But as anyone who has done the math on breaking up these big companies can tell you; such a move would double their value. Tesla at $20,000 a share, anyone?

And as incredible as it may seem, Elon Musk outlined all of his grand global vision to me personally in great detail when I first met him in 1999 pitching me for an investment in X.com, which later became PayPal (PYPL).

Then the bright-eyed, fresh-faced overconfident kid was only 27 and worth a mere $10 million. But he had a nice car.

A pittance really.

I passed, which is why I am still working today.

No kidding.

Tesla’s Solid State Batter Design

What its Modeled After

Chassis No. 125….R.I.P.

My Latest Set of Wheels

Like-Minded Found in Chicago

At the Pebble Beach Car Show

Going All-Electric

13.5 kWh Powerwall, Enough Juice to Run My House for a Day

This Lot of 300 Cars in Fremont Gets Filled and Emptied Out Three Times a Day

Back in 2010, The First Tesla They Had Ever Seen

January 27, 2021/by Mad Hedge Fund Trader

Here’s an Easy Way to Play Artificial Intelligence

Tech Letter

Suppose there was an exchange-traded fund that focused on the single most important technology trend in the world today.

You might think that I was smoking California’s largest export (it’s not grapes). But such a fund DOES exist.

The Global X Robotics & Artificial Intelligence ETF (BOTZ) drops a gilt-edged opportunity into investors’ laps as a way to capture part of the growing movement behind automation.

The fund currently has an impressive $2.2 billion in assets under management.

The universal trend of preferring automation over human labor is mushrooming with each passing day. Suffice to say there is the unfortunate emotional element of sacking a human and the negative knock-on effect to the local community like in Detroit, Michigan.

But simply put, robots do a better job, don’t complain, don’t fall ill, don’t join unions, or don’t ask for pay rises. It’s all very much a capitalist’s dream come true.

Instead of dallying around in single stock symbols, now is the time to seize the moment and take advantage of the single seminal trend of our lifetime.

No, it’s not online dating, gambling, or bitcoin, it’s Artificial Intelligence.

Selecting individual stocks that are purely exposed to AI is a challenging endeavor. Companies need a way to generate returns to shareholders first and foremost, hence, most pure AI plays do not exist right now.

However, the Mad Hedge Fund Trader has found the most unadulterated AI play out there. A real diamond in the rough.

The best way to expose yourself to this AI trend is through Global X Robotics & Artificial Intelligence ETF (BOTZ).

This ETF tracks the price and yield performance of ten crucial companies that sit on the forefront of the AI and robotic development curve. It invests at least 80% of its total assets in the securities of the underlying index. The expense ratio is only 0.68%.

Another caveat is that the underlying companies are only derived from developed countries. Out of the 10 disclosed largest holdings, seven are from Japan, two are from Silicon Valley, and one, ABB Group, is a Swedish-Swiss multinational headquartered in Zurich, Switzerland.

Robotics and AI walk hand in hand, and robotics are entirely dependent on the germination prospects of AI. Without AI, robots are just a clunk of heavy metal.

Robots require a high level of AI to meld seamlessly into our workforce. The stronger the AI functions, the stronger the robot’s ability, filtering down to the bottom line.

AI-embedded robots are especially prevalent in the defense industry, automobile manufacturing, and heavy industrial machinery. The industrial robot industry projects to reach $80 billion per year in sales by 2024 as more of the workforce gradually becomes automated.

The robotic industry has become so prominent in the automotive industry that they constitute greater than 50% of robot investments in America.

Let’s get the ball rolling and familiarize readers of the Mad Hedge Technology Letter with the most influential weightings in the underlying ETF (BOTZ).

Nvidia (NVDA)

Nvidia Corporation is a company I often write about as their main business is producing GPU chips for the video game industry.

This Santa Clara, California based company is spearheading the next wave of AI advancement by focusing on autonomous vehicle technology and AI-integrated cloud data centers as their next cash cow.

All these new groundbreaking technologies require ample amounts of GPU chips. Consumers will eventually cohabitate with state of the art IOT products (internet of things), fueled by GPU chips, coming to mass market like the Apple Homepod.

The company is led by genius Jensen Huang, a Taiwanese-American who cut his teeth as a microprocessor designer at competitor Advanced Micro Devices (AMD).

Nvidia constitutes a hefty 6.60% of the BOTZ ETF.

To visit their website please click here.

Yaskawa Electric (Japan)

Yaskawa Electric is the world’s largest manufacturer of AC Inverter Drives, Servo and Motion Control, and Robotics Automation Systems, headquartered in Kitakyushu, Japan.

It is a company I know well, having covered this former zaibatsu company as a budding young analyst in Japan 45 years ago.

Yaskawa has fully committed to improving global productivity through Automation. Yaskawa was recently switched out of the index in favor of an American newcomer John Bean Technologies specializing in the food processing and air transportation industries. Nevertheless, Yaskawa is still a company to have on your radar screen.

To visit Yaskawa’s website, please click here.

Intuitive Surgical (ISRG)

Intuitive Surgical Inc (ISRG) trades on Nasdaq and is located in sun-drenched Sunnyvale, California.

This local firm designs, manufactures, and markets surgical systems and is industriously focused on the medical industry.

The company’s da Vinci Surgical System converts the surgeon’s hand movements into corresponding micro-movements of instruments positioned inside the patient.

The products include surgeon’s consoles, patient-side carts, 3-D vision systems, da Vinci skills simulators, and da Vinci Xi integrated table motions.

This company comprises 7.71% of BOTZ. To visit their website, please click here.

Fanuc Corp. (Japan)

Fanuc was another one of the hit robotics companies I used to trade in during the 1970s and I have visited their main factory many times.

The 4^thlargest portion in the (BOTZ) ETF at 6.11% is Fanuc Corp. This company provides automation products and computer numerical control systems, headquartered in Oshino, Yamanashi.

They were once a subsidiary of Fujitsu, which focused on the field of numerical control. The bulk of their business is done with American and Japanese automakers and electronics manufacturers.

They have snapped up 65% of the worldwide market in the computerized numerical device market (CNC). Fanuc has branch offices in 46 different countries.

To visit their company website, please click here.

Keyence Corp (Japan)

Keyence Corp is the leading supplier of automation sensors, vision systems, barcode readers, laser markers, measuring instruments, and digital microscopes.

They offer a full array of service support and closely work with customers to guarantee full functionality and operation of the equipment. Their technical staff and sales teams add value to the company by cooperating with its buyers.

They have been consistently ranked as the top 10 best companies in Japan and boast an eye-opening 50% operating margin.

They are headquartered in Osaka, Japan and make up 6.10% of the BOTZ ETF.

To visit their website please click here.

(BOTZ) does has some pros and cons. The best AI plays are either still private at the venture capital level taken over by the SoftBank Vision Fund wielding its war chest of $100 billion or a Silicon Valley mainstay such as Andreessen Horowitz.

You also need to have a pretty broad definition of AI to bring together enough companies to make up a decent ETF.

However, it does get you a cheap entry into many for the illiquid foreign names in this fund.

Automation is one of the reasons why this is turning into the deflationary century and I recommend all readers who don’t own their own robotic led business, pick up some Global X Robotics & Artificial Intelligence ETF (BOTZ).

And by the way, the entry point right here on the charts is almost perfect.

To learn more about (BOTZ) please visit their website by clicking here.