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The Market Outlook for the Week Ahead or How the CPI Lied

It’s pretty obvious that when the Consumer Price Index was released last Tuesday, the data point was lying through its teeth. The 0.4% increase in the Core CPI brought the YOY gain to a heart-palpitating 3.9%, much higher than expected. The stock market thought it was telling God’s home truth by plunging 740 points at its low.

Interest rate sensitives, like bonds, utilities, real estate, precious metals, energy, and foreign currencies were particularly hard hit.

I have been in the financial markets quite a long time now and as a result, am pretty used to being told porky pies (lies in London’s East End). Take the CPI for example. The reported number came in at a sizzling 3.3% for January. That is enough to kill off any hopes of a Fed interest rate cut in 2024, thus the ensuing wreckage in the market.

However, back out a single number, the 6.0% rise in housing rental costs, and the inflation rate drops all the way to 2.0%, bang on the Fed’s long-term inflation target. In other words, interest rates should be cut RIGHT NOW!
That is clearly the view that the markets came around to on Wednesday, which saw the Dow Average recover 151 points.

Unfortunately, lying is a fact of life in the stock market at every conceivable level. But learn to tolerate it and you can make millions of dollars. That works for me. Like my old college statistics professor used to tell me: “Statistics are like a bikini bathing suit; what they reveal is fascinating, but what they conceal is essential.”

In fact, we may see the stock market bouncing back and forth like a ping pong ball between big technology and the interest rate sectors, depending on what the bond market is doing that day driving traders nuts. After all, it was YOU who wanted to be in show business!

In the meantime, complacency rules all. Cash flows into stocks are near all-time highs. Market strategists have been ratcheting up their yearend targets on a daily basis, even me (I’m now at SPX 6,000). The option put/call ratio is about as low as it gets, meaning there is a universal belief that stocks will continue to appreciate. That’s with the S&P 500 earnings multiple trading at a rich 20.5.

I would be remiss in my duties as a financial advisor if I did not also warn you that these are all market-topping signals, at least for the short term.

Double Yikes, and Heavens to Betsy!

Of course, all eyes will be on the Q4 NVIDIA earnings this week, out after the close on Wednesday and probably the most important data release of the year. Everything else this week is essentially meaningless.

If earnings come in anything less than perfect, up 100% YOY, it could trigger a long overdue correction in the stock market in general and (NVDA) in particular. On the other hand, earnings just might come in more than perfect.

I have been covering (NVDA) for more than a decade back when it was just a video game play and I describe it today as a monopoly on the world’s most valuable product. Their top-end H100 graphics cards are now selling for a breathtaking $30,000 each and Meta (META) just ordered 450,000 of these babies, partly so their competitors can’t get their hands on them. For those who don’t have a calculator that is a single order worth a mind-blowing $13.5 billion.

That is why the stock is up 224% in a year and 50X since the first Mad Hedge trade alert on the company went out at a split-adjusted $2.00. Those who think they can clone (NVDA) and their products overnight can dream on. Most employees have golden handcuffs in the form of vested options at the same $2.00 strike price or lower.

The Magnificent Seven are still cheap relative to the rest of the market. Their price-to-growth ratio (PEG Ratio) is still only half the rest of the market. The Mag Seven will see earnings grow 20% this year with a price-earnings multiple of 30X giving you a PEG of 1.5X. The Unmagnificent 493 are selling at a PEG ratio of 3.0X, meaning they are twice as expensive.

Just thought you’d like to know.

So far in February, we are up +3.42%. My 2024 year-to-date performance is also at -0.86%. The S&P 500 (SPY) is up +4.72% so far in 2024. My trailing one-year return reached +59.62% versus +24.57% for the S&P 500.

That brings my 15-year total return to +675.77%. My average annualized return has retreated to +51.32%.

Some 63 of my 70 trades last year were profitable in 2023.

I am maintaining a double long in, you guessed it, (NVDA). My longs in (MSFT), (AMZN), (V), (PANW), and (CCJ) all expired at their maximum potential profits with the February option expiration.

CPI Smacks Market, coming in at 0.3% in January instead of the expected 0.2%. The highflyers took the biggest hit. Bonds were destroyed, taking ten-year US Treasury yields up to 4.30%. Is the falling interest rate story dead, or just resting? Rising rents were the big villain here.

US Retail Sales Dive 0.8% in January, a shocking decline from the blowout in December. Consumers didn’t bite on those New Year Sales because they actually started in November. Winter storms as well as technical factors had distorted the data.

Weekly Jobless Claims Dropped to 212,000, an improvement of 8,000 from the previous week. Continuing claims rose to 1,895,000.
https://www.dol.gov/ui/data.pdf

Here are Dan Niles’ Tech Shorts, Apple (AAPL), (TSLA), and Alphabet (GOOGL). He is long Microsoft (MSFT), (AMZN), (META), and of course NVIDIA (NVDA). Sounds like a good call to me. Dan knows what he is doing.

Uber Announces First Ever Share Buy Back, some $7 billion. In the meantime, they have to cope with a driver strike. Buy (UBER) on dips.

$929 Billion in US Commercial Real Estate Loans are Due this Year or 20% of the total. Will there be widespread defaults or will borrowers get rescued by falling interest rates in the second half? Will they extend and pretend? Avoid regional banks like the plague, which lack the capital to cope with this.

US Dollar (UUP) Hits Three Month High, on the hot CPI. You need a falling CPI to get a weak buck. The Euro plunged to $1.07, the British pound to $1.25, the Australian dollar to 65 cents, and the Japanese yen to ¥151.

NVIDIA Now Tops Amazon in Market Value, at $1.2 trillion now the fourth most valuable company in the US. It could eventually top Microsoft’s (MSFT) market cap as it is growing much faster. Those (NVDA) LEAPS are looking pretty good. The shares are up 50% so far in 2024. Buy (NVDA) on dips.

Biden to Ban Chinese EV Car Imports. The measures would apply to electric vehicles and parts originating from China, no matter where they are assembled, in a bid to prevent Chinese makers from moving cars and components into the United States through third countries such as Mexico. Chinese cars will never meet US safety standards. Try driving in China.

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, February 19, the markets are closed for Presidents Day.

On Tuesday, February 20 no data of importance is released.

On Wednesday, February 21 at 2:00 PM EST, the Minutes from the previous Federal Open Market Committee meeting are published. NVIDIA earnings are released after the market closes.

On Thursday, February 22 at 8:30 AM EST, the Weekly Jobless Claims are announced. Existing Home Sales are Released.

On Friday, February 23 at 2:30 PM the Baker Hughes Rig Count is printed.

As for me, the first thing I did when I received a big performance bonus from Morgan Stanley in London in 1988 was to run out and buy my own airplane.

By the early 1980s, I’d been flying for over a decade. But it was always in someone else’s plane: a friend’s, the government’s, a rental. And Heaven help you if you broke it!

I researched the market endlessly, as I do with everything, and concluded that what I really needed was a six-passenger Cessna 340 pressurized twin turbo parked in Santa Barbara, CA. After all, the British pound had just enjoyed a surge against the US dollar so American planes were suddenly a bargain. It had a maximum range of 1,448 miles and therefore was perfect for flying around Europe.

The sensible thing to do would have been to hire a professional ferry company to fly it across the pond. But what’s the fun in that? So, I decided to do it myself with a copilot I knew to keep me company. Even more challenging was that I only had three days to make the trip, as I had to be at my trading desk at Morgan Stanley on Monday morning.

The trip proved eventful from the first night. I was asleep in the back seat over Grand Junction, Colorado, when I was suddenly awoken by the plane veering sharply left. My co-pilot had fallen asleep, running the port wing tanks dry and shutting down the engine. He used the emergency boost pump to get it restarted. I spent the rest of the night in the co-pilot’s seat trading airplane stories.

The stops at Kansas City, MO, Koshokton, OH, and Bangor, ME proved uneventful. Then we refueled at Goose Bay, Labrador in Canada, held our breath, and took off for our first Atlantic leg.

Flying the Atlantic in 1988 is not the same as it is today. There were no navigational aids and GPS was still top secret. There were only a handful of landing strips left over from the WWII summer ferry route, and Greenland was still littered with Mustangs, B-17s, B24s, and DC-3s. Many of these planes were later salvaged when they became immensely valuable. The weather was notoriously bad. And a compass was useless, as we flew so close to the magnetic North Pole the needle would spin in circles.

But we did have NORAD, or America’s early warning system against a Russian missile attack.

The practice back then was to call a secret base somewhere in Northern Greenland called “Sob Story.” Why it was called that I can only guess, but I think it has something to do with a shortage of women. An Air Force technician would mark your position on the radar. Then you called him again two hours later and he gave you the heading you needed to get to Iceland. At no time did he tell you where HE was.

It was a pretty sketchy system, but it usually worked.

To keep from falling asleep the solo pilots ferrying aircraft all chatted on a frequency of 123.45 MHz. Suddenly, we heard a mayday call. A female pilot had taken the backseat out of a Cessna 152 and put in a fuel bladder to make the transatlantic range. The problem was that the pump from the bladder to the main fuel tank didn’t work. With eight pilots chipping in ideas, she finally fixed it. But it was a hair-raising hour. There is no air-sea rescue in the Arctic Ocean.

I decided to play it safe and pick up extra fuel in Godthab, Greenland. Godthab has your worst nightmare of an approach, called a DME Arc. You fly a specific radial from the landing strip, keeping your distance constant. Then at an exact angle, you turn sharply right and begin a decent. If you go one degree further, you crash into a 5,000-foot cliff. Needless to say, this place is fogged 365 days a year.

I executed the arc perfectly, keeping a threatening mountain on my left while landing. The clouds mercifully parted at 1,000 feet and I landed. When I climbed out of the plane to clear Danish customs (yes, it’s theirs), I noticed a metallic scraping sound. The runway was covered with aircraft parts. I looked around and there were at least a dozen crashed airplanes along the runway. I realized then that the weather here was so dire that pilots would rather crash their planes than attempt a second go.

When I took off from Godthab, I was low enough to see the many things that Greenland is famous for polar bears, walruses, and natives paddling in deerskin kayaks. It was all fascinating.

I called into Sob Story a second time for my heading, did some rapid calculations, and thought “damn”. We didn’t have enough fuel to make Iceland. The wind had shifted from a 70 MPH tailwind to a 70 MPH headwind, not unusual in Greenland. I slowed down the plane and configured it for maximum range.

I put out my own mayday call saying we might have to ditch, and Reykjavik Control said they would send out an orange bedecked Westland Super Lynch rescue helicopter to follow me in. I spotted it 50 miles out. I completed a five-hour flight and had 15 minutes of fuel left, kissing the ground after landing.

I went over to Air Sea Rescue to thank them for a job well done and asked them what the survival rate for ditching in the North Atlantic was. They replied that even with a bright orange survival suit on, which I had, it was only about 50%.

Prestwick, Scotland was uneventful, just rain as usual. The hilarious thing about flying the full length of England was that when I reported my position, the accents changed every 20 miles. I put the plane down at my home base of Leavesden and parked the Cessna next to a Mustang owned by rock star Randy Newman.

I asked my ferry pilot if ferrying planes across the Atlantic was always so exciting. He dryly answered “Yes.” He told me in a normal year about 10% of the planes go missing.

I raced home, changed clothes, and strode into Morgan Stanley’s office in my pin-stripped suit right on time. I didn’t say a word about what I just accomplished.

The word slowly leaked out and at lunch, the team gathered around to congratulate me and listen to some war stories.

Good Luck and Good Trading,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

Flying the Atlantic in 1988

Looking for a Place to Land in Greenland

Landing on a Postage Stamp in Godthab Greenland

On the Ground in Greenland

No Such a Great Landing

Flying Low Across Greenland

Gassing Up in Iceland

Almost Home at Prestwick

Back to London in 1988

February 12, 2024

Diary, Newsletter, Summary

Global Market Comments
February 12, 2024
Fiat Lux

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD, or RAISING MY YEAREND TARGET TO (SPX) $6,000)
(AAPL), (GOOGL), (META) (MSFT), (AMZN), (V), (PANW), (CCJ), (ARM), (USO), (XOM), (OXY), (INDA), (INDY), (FXI), (BABA), (NVDA), (TSA), (RCL)

The Market Outlook for the Week Ahead, or Raising my Yearend Target to (SPX) $6,000

Diary, Newsletter

When I announced my year-end target for the S&P 500 on the first of January, I knew it was cautious. That provided for only a 15% gain for 2024. Yet here we are a mere six weeks into the New Year, and we only have 10.4% to go.

That is with the six lead stocks, which account for 30% of the entire stock market capitalization, seeing earnings grow up to 300% annually. With that kind of growth, even $6,000 is looking overly conservative, even allowing for no multiple expansion whatsoever.

The top six stocks are over 11% YTD, while half of all S&P 500 stocks are down. A few friends of mine who are still alive and have been in the market for as long as I have never seen a market this concentrated. They are amazed, befuddled, and aghast, as am I.

And if you do want to buy big tech, you’re going to have to compete with the big tech companies themselves to do so. The buyback machine continues full speed ahead, with Apple (AAPL) Hoovering up $20.5 billion of its own shares, Alphabet (GOOGL) $16.1 billion, Meta (META) 6.3 billion, and Microsoft (MSFT) $4 billion.

I am a firm believer that markets will do whatever they have to do to screw the most people. So far this year it has done an admirable job doing just that, going up in a straight line with everyone underinvested and with $8 trillion on the sideline.

This is how markets will continue screwing most people. It keeps going up a little bit more. The NVIDIA earnings announcement due out on February 21 could be the ideal turning point.

Then the market suffers a ferocious correction, maybe 10% in a short period. Traders panic and dump all their positions. Then the (SPX) turns around at about $4,800 on a dime and then rockets all the way up to $6,000, frustrating investors once again.

I just thought you’d like to know.

I am usually cautious about ultra bears, but I picked up an interesting view last week about how long it may take the Chinese economy to recover.

During the US house bust from 2007 to 2012, the United States had 3 million excess unwanted homes weighing on the market like a dead weight, or about a seven-month oversupply. That was enough excess to cause the Great Recession, a 52% crash in the S&P 500, and the demise of thousands of American companies, including Lehman Brothers and Bear Stearns.

Today, China has a staggering 50 million excess homes in a population only four times larger than ours. That is a 15-year oversupply for the market. That means China could suffer a decade and a half of subpar growth and lagging stock markets. Don’t touch Chinese stocks even though they offer attractive single-digit multiples.

Why do you care? Because China is the world’s largest consumer and importer of most commodities, food, and energy. The stocks that specialize in these areas could be facing a long-term drag from the Middle Kingdom unless it is offset somewhere else.

The Chinese are only now discovering that the principal driver of their economic growth for the past 30 years has been US investment. President Xi has managed to scare that away with a hostile attitude towards America and saber-rattling over Taiwan. Last year for the first time the US imported more from Mexico than from China, where many companies have re-shored.

Wonder why crude oil (USO), (XOM), (OXY) is at $68 a barrel when the US economy is growing at a 3.1% rate? This is the reason. It is also a strong argument in favor of investing in India, which I discussed last week. Buy the (INDA) and the (INDY), not the (FXI) or (BABA).

In the meantime, you’ve got to love ARM Holdings PLC, whose earnings announcement triggered a heroic 56% one-day move up in the stock. They execute sub-designs for almost every AI chip out there. That’s what a 3% float in the stock gets you. Anyone who has any doubts about the durability of the AI story should take a look at what happened to (ARM) last week.

So far in February, we are up +1.78%. My 2024 year-to-date performance is also at -2.50%. The S&P 500 (SPY) is up +5.03% so far in 2024. My trailing one-year return reached +60.44% versus +33.13% for the S&P 500.

That brings my 16-year total return to +674.13%. My average annualized return has retreated to +51.20%.

Some 63 of my 70 trades last year were profitable in 2023.

I am maintaining longs in (MSFT), (AMZN), (V), (PANW), and (CCJ).

Reheating is Becoming an Issue, with a strong US economy and record-low unemployment rate possibly prompting the Fed to delay interest rate cuts. The stock market has been running on steroids on the expectation of imminent cuts. This is a new market risk and could unleash a thunderstorm on our parade.

CPI Revised Down, in December, from 0.3% to 0.2%. The deflationary economy is back! Stocks loved it, with the S&P 500 catapulting to $5,000. That’s why I revised my yearend target up to $6,000.

Early Retirements are Soaring, thanks to a stock market at new all-time highs. Baby boomers can now afford to “take this job and shove it.”

NVIDIA Enters New Custom Chip Market, potentially adding another $30 billion in revenues. The dominant global designer and supplier of AI chips aim to capture a portion of an exploding market for custom AI chips and to protect itself from the growing number of companies interested in finding alternatives to its products. Buy (NVDA) on dips.

Morgan Stanley Upgrades NVIDIA to an $800 Target. An exceptional supply-demand imbalance in the artificial intelligence-chip sector, as well as a massive shift in spending toward emerging technology, is likely to persist over the near term. Buy (NVDA) on dips.

ARM Holdings (ARM) Soars by 41%, off a spectacular forecast-based demand for designed-up AI chips. UK-based Arm makes money through royalties, when companies pay for access to build Arm-compatible chips, usually amounting to a small percentage of the final chip price. Arm said its customers shipped 7.7 billion Arm chips during the September quarter.

Tesla (TSLA) Looking to Cut Jobs, and reduce costs, as is the rest of Silicon Valley. The move could mark the bottom of the stock. Elon Musk is the master job cutter, axing 80% of the Twitter staff on takeover.

Meta (META) Gains $196 Billion in Market Cap in One Day, off the back of record sales, tripled earnings, and reduced costs.

Construction Spending Gains, up 0.9% in December, the best since October. Watch the industry reaccelerate as interest rates fall.

Royal Caribbean Beats, with record bookings in an industry I have recently become intensely interested in. (RCL) is grabbing market share from land-based vacations, as Millennials are finally discovering cheap cruise vacations, where it is often cheaper than to stay in a motel with all you can eat. Only a few cruises were lost to the Red Sea War. (RCL) just launched Icon of the Seas, the world’s largest cruise ship.

My Ten-Year View

On Monday, February 12, the US Consumer Inflation Expectations are announced.

On Tuesday, February 13 at 8:30 AM EST, the Core Inflation Rate will be released.

On Wednesday, February 14 at 2:00 PM, the Producer Price Index is published. The Federal Reserve announces its interest rate decision.

On Thursday, February 15 at 8:30 AM, the Weekly Jobless Claims are announced. We also get Retail Sales.

On Friday, February 16 at 2:30 PM, the January Building Permits are published, along with the University of Michigan Consumer Sentiment. At 2:00 PM the Baker Hughes Rig Count is printed.

As for me, it was in 1986 when the call went out at the London office of Morgan Stanley for someone to undertake an unusual task. They needed someone who knew the Middle East well, spoke some Arabic, was comfortable in the desert, and was a good rider.

The higher-ups had obtained an impossible-to-get invitation from the Kuwaiti Royal family to take part in a camel caravan into the Dibdibah Desert. It was the social event of the year.

More importantly, the event was to be attended by the head of the Kuwait Investment Authority, who ran over $100 billion in assets. Kuwait had immense oil revenues, but almost no people, so the bulk of their oil revenues were invested in western stock markets. An investment of goodwill here could pay off big time down the road.

The problem was that the US had just launched air strikes against Libya, destroying the dictator, Muammar Gaddafi’s royal palace, our response to the bombing of a disco in West Berlin frequented by US soldiers. Terrorist attacks were imminently expected throughout Europe.

Of course, I was the only one who volunteered.

My managing director didn’t want me to go, as they couldn’t afford to lose me. I explained that in reviewing the range of risks I had taken in my life, this one didn’t even register. The following week found myself in a first-class seat on Kuwait Airways headed for a Middle East in turmoil.

A limo picked me up at the Kuwait Hilton, just across the street from the US embassy, where I occupied the presidential suite. We headed west into the desert.

In an hour, I came across the most amazing sight - a collection of large tents accompanied by about 100 camels. Everyone was wearing traditional Arab dress with a ceremonial dagger. I had been riding horses all my life, camels not so much. So, I asked for the gentlest camel they had.

The camel wranglers gave me a tall female, which was more docile and obedient than the males. Imagine that! Getting on a camel is weird, as you mount them while they are sitting down. My camel had no problem lifting my 180 pounds.

They were beautiful animals, highly groomed, and in the pink of health. Some were worth millions of dollars. A handler asked me if I had ever drunk fresh camel milk, and I answered no. They didn’t offer it at Safeway. He picked up a metal bowl, cleaned it out with his hand, and milked a nearby camel.

He then handed me the bowl with a big smile across his face. There were definitely green flecks of manure floating on the top, but I drank it anyway. I had to, lest my host would lose face. At least it was white. It was body temperature warm and much richer than cow’s milk.

The motion of a camel is completely different from a horse. You ride back and forth in a rocking motion. I hoped the trip was short, as this ride had repetitive motion injuries written all over it. I was using muscles I had never used before. Hit your camel with a stick and they take off at 40 miles per hour.

I learned that a camel is a super animal ideally suited for the desert. It can ride 100 miles a day, and 150 miles in emergencies, according to TE Lawrence, who made the epic 600-mile trek to Aquaba in only four weeks in the height of summer. It can live 15 days without water, converting the fat in its hump.

In ten miles, we reached our destination. The tents went up, clouds of dust rose, the camels were corralled, and the cooking began for an epic feast that night.

It was a sight to behold. Elaborately decorated huge three-by-five wide bronze platers were brought overflowing with rice and vegetables, and every part of a sheep you can imagine, none of which was wasted. In the center was a cooked sheep’s head with the top of the skull removed so the brains were easily accessible. We all ate with our right hands.

I learned that I was the first foreigner ever invited to such an event, and the Arabs delighted in feeding me every part of the sheep, the eyes, the brains, the intestines, and the gristle. I pretended to love everything and laid back and thought of England. When they asked how it tasted I said it was great. I lied.

As the evening progressed, the Johnny Walker Red came out of hiding. Alcohol is illegal in Kuwait, and formal events are marked by copious amounts of elaborate fruit juices. I was told that someone with a royal connection had smuggled in an entire container of whiskey and I could drink all I wanted.

The next morning I was awoken by a bellowing camel and the worst headache in the world. I threw a rock at him to get him to shut up and he sauntered over and peed all over me.

The things I did for Morgan Stanley!

Four years later, Iraq invaded Kuwait. Some of my friends were kidnapped and held for ransom, while others were never heard from again.

The Kuwaiti government said they would pay for the war if we provided the troops, tanks, and planes. So they sold their entire $100 million investment portfolio and gave the money to the US.

Morgan Stanley got the mandate to handle the liquidation, earning the biggest commission in the firm’s history. No doubt, the salesman who got the order was considered a genius, earned a promotion, and was paid a huge bonus.

I spent the year as a Marine Corps captain, flying around assorted American generals and doing the odd special opp. I got shot down and still set off airport metal detectors. No bonus here. But at least I gained an insight and an experience into a medieval Bedouin lifestyle that is long gone.

They say success has many fathers. This is a classic example.

You can’t just ride out into the Kuwait desert anymore. It is still filled with mines planted by the Iraqis. There are almost no camels left in the Middle East, long ago replaced by trucks. When I was in Egypt in 2019, I rode a few mangy, pitiful animals held over for the tourists.

When I passed through my London Club last summer, the Naval and Military Club on St. James Square, whose portrait was right at the front entrance? None other than that of Lawrence of Arabia.

It turns out we were members of the same club in more ways than one.

Stay healthy,

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

John Thomas of Arabia

Checking Out the Local Camel Milk

This One Will Do

Traffic in Arabia

February 9, 2024

Diary, Newsletter, Summary

Global Market Comments
February 9, 2024
Fiat Lux

Featured Trade:

(FEBRUARY 7 BIWEEKLY STRATEGY WEBINAR Q&A),
(LLY), (FXI), (TSM), (BABA), (PLTR), (MSBHF), (SMCI), (JPM), (INDY), (INDA), (TSLA), (BYDDF), (NFLX), (META), (UNG)

February 7 Biweekly Strategy Webinar Q&A

Diary, Newsletter

Below please find subscribers’ Q&A for the February 7 Mad Hedge Fund Trader Global Strategy Webinar, broadcast from Silicon Valley, CA.

Q: Have you ever flown an ME-262?

A: There's only nine of the original German jet fighters left from WWII in museums. One hangs from the ceiling in the Deutsches Museum in Munich (click here for the link), I have been there and seen it and it is truly a thing of beauty. You would have to be out of your mind to fly that plane, because the engines only had a 10 hour life. That's because during WWII, the Germans couldn't get titanium to make jet engine blades and used steel instead, and those fell apart almost as soon as they took off. So, of the 1,443 ME-262’s made there’s only nine left. The Allies were so terrified of this plane, which could outfly our own Mustangs by 100 miles per hour, that they burned every one they found. That’s also why there are no Japanese Zeros.

Q: Thoughts on Palantir (PLTR) long term?

A: I love it, it’s a great data and security play. Right now, markets are revaluing all data plays, whatever they are. But it is also overvalued having almost doubled in a week.

Q: What do you make of all these layoffs in Silicon Valley? What does this mean for tech stocks?

A: It means tech stocks go up. The tech stocks for a long time have practiced over-employment. They were growing so fast, they always kept a reserve of about 10% of extra staff so they could be put them to work immediately when the demand came. Now they are switching to a new business model: fire everybody unless you absolutely have to have them right now, and make everybody you have work twice as hard. That greatly increases the profitability of these companies, as we saw with META (META), which had its profits triple—and that seems to be the new Silicon Valley business model. If you're one of the few 100,000 that have been laid off in Silicon Valley, eventually the economy will grow back to where they can absorb you. That's how it's going to play out. In the meantime, go take a vacation somewhere, because you're not going to get any vacations once you get a new job.

Q: I have had shares of Alibaba (BABA) since 2020 and the stock has been in free fall since. Should I take the 80% loss or hold?

A: Well, number one, you need to learn about risk control. Number two, you need to learn about stop losses. I stop out when things go 10% against me; that's a good level. At 80%, you might as well keep the stock. You've already taken the loss and who knows, China may recover someday. It's not recovering now because no foreigners want to invest in China with all the political risk and invasion risk of Taiwan. After all, look at what happened to Russia when they invaded Ukraine—that didn't work out so well for them.

Q: On the Chinese economy (FXI), is the poorer performance due to the decision to move to a war economy? The move in the economic front was described in Xi's speech to the CCP in January of 2023.

A: The real reason, which no one is talking about except me, is the one child policy, which China practiced for 40 years. What it has meant is you now have 40 years of missing consumers that were never born. And there is no solution to that, at least no short-term solution. They're trying to get Chinese people to have more kids now, and you're seeing three and four child families for the first time in 40 years in China. But there is no short-term fix. When you mess with demographics, you mess with economic growth. We warned the Chinese this would happen at the time, and they ignored us. They said if they hadn't done the one child policy, the population of China today would be 1.8 billion instead of 1.2 billion. Well, they’re kind of damned no matter what they do so there was no good solution for them. Of course, threatening to invade your neighbors is never good for attracting foreign investment for sure. Nobody here wants to touch China with a 10-foot pole until there’s a new leader who is more pacifist.

Q: What do you think of Eli Lilly (LLY)?

A: I absolutely love it. If there's a never-ending bull market in fat Americans, which is will go on forever, they're one of two companies that have the cure at $1,000 a month. On the other hand, the stock has tripled in the last 18 months, so it’s kind of late in the game to get in.

Q: Are there any stocks that become an attractive short in the event of a Taiwan invasion, such as Taiwan Semiconductor (TSM)?

A: All stocks become attractive shorts in the event of another war in China. You don't want to be anywhere near stocks and the semis will have the greatest downside beta as they always do. You don't want to be anywhere near bonds either, because the Chinese still own about a trillion dollars’ worth of our bonds. Cash and T-bills suddenly looks great in the event of a third war on top of the two that we already have in Gaza and Ukraine.

Q: What do you think about the prospects of the Japanese stock market now?

A: I think the big move is done; it finally hit a new high after a 34-year wait. The next big move in Japan is when the Yen gets stronger, and that is bad for Japanese stocks, so I would be a little cautious here unless you have some great single name plays like Warren Buffett does with Mitsubishi Corp. (MSBHF). So that's my view on Japan—I'm not chasing it after being out for 34 years. Why return? The companies in the US are better anyway.

Q: What is the deal with Supermicro Computer (SMCI)? It went up 23 times in a year to $669 after not clear $30 for a decade.

A: The answer is artificial intelligence. It is basically creating immense demand for the entire chip ecosystem, including high end servers, which Supermicro makes. It also has the benefit of being a small company with a small float, hence the ballistic move. It was too small to show up on my radar. I’ll catch the next one. There are literally thousands of companies like (SMCI) in Silicon Valley.

Q: Will JP Morgan (JPM) bank shares keep rising, or will they fall when the Fed cuts rates?

A: (JPM) will keep rising because recovering economies create more loan demand, allow wider margins, and cause default rates to go down. It becomes a sort of best case scenario for banks, and JP Morgan is the best of the breed in the banking sector. It also benefits the most from the concentration of the US banking sector, which is on its way from 4,000 banks to 6 with help from the US government.

Q: Is India a good long-term play? Which of the two ETFs I recommend are the better ones?

A: Yes, India is a good long-term play. You buy both iShares India 50 (INDY) and the iShares MSCI India (INDA), which I helped create yonks ago. India is the new China, and the old China is going nowhere. So, yes, India definitely is a play, especially if the dollar starts to weaken.

Q: Do you expect to pull back in your market timing index?

A: Yes, probably this month. Have I ever seen it go sideways at the top for an extended period? No, I haven't. On the other hand, we’ve never had a new thing like artificial intelligence hit the market, nor have we seen five stocks dominate the entire market like we're seeing now. So, there are a lot of unprecedented factors in the market now which no one has ever seen before, therefore they don't know what to do. That is the difficulty.

Q: Does India have an in-country built EV, and what is their favorite EV in India?

A: No, but Tesla (TSLA) is talking about building a factory there. And I would have to say BYD Motors (BYDDF) because they have the world’s cheapest EV’s. There is essentially no car regulation in India except on imports. Car regulation and safety requirements is what keeps the BYDs out of the United States, and it's kept them out for the last 15 years. So that is the issue there.

Q: What do you think about META as a dividend play?

A: I think META will go higher, but like the rest of the AI 5, it is desperately in need of a pull back and a refresh to allow new traders to come in.

Q: Why does Netflix (NFLX) keep going up? I thought streaming was saturated—what gives?

A: Netflix won the streaming wars. They have the best content and the best business strategy; and they banned sharing of passwords, which hit my family big time since it seemed like the whole world was using my Netflix password. And no, I'm not going tell you what my password is. I’ve already paid for Griselda enough times. Seems there is a lot of demand for strong women in my family. Netflix they seem to be enjoying a near monopoly now on profits.

Q: Has the NASDAQ come too far too fast, and does it have more to run?

A: Well it does have more to run, but needs a pull back first. I'm thinking we'll get one this month, but I'm definitely not shorting it in the meantime.

Q: Have you ordered your Tesla (TSLA) Cybertruck?

A: I actually ordered it two years ago and it may be another two year wait; with my luck the order will come through when I'm in Europe and I'll miss it. Some of my friends have already gotten deliveries because they ordered on day one. They love it.

Q: What happened to United States Natural Gas (UNG)?

A: A super cold spell hit the Midwest, froze all the pipes, and nobody could deliver natural gas just when the power companies were screaming for more gas. That created the double in the price which you should have sold into! Usually, people don't need to be told to take a profit when something doubles in 2 weeks, but apparently there are some out there as I've been here getting emails from them. Further confusing matters further is that (UNG) did a 4:1 reverse split right at this time. They have to do this every few years or the 35% a year contango takes the price below $1.00 and shares can’t trade below $1.00 on the New York Stock Exchange.

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 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

February 5, 2024

Tech Letter

Mad Hedge Technology Letter
February 5, 2024
Fiat Lux

Featured Trade:

(THE NEW TECH DARLING META)
(META), (GOOGL)

The New Tech Darling Meta

Tech Letter

Meta (META) is no joke.

They put any sense of concern to bed with its brilliant performance this past quarter.

They are the new poster child of tech as they blew away every meaningful metric that so-called analysts grade tech on.

They are even the newest dividend stock which might be the most absurd part of their performance.

Growth is their new forte and the $200 billion rise in market valuation in one day is the stuff of legends.

How did they make this happen?

Revenue jumped 25% in the quarter from $32.2 billion a year earlier, as the online ad market continued to rebound.

Meanwhile, the company’s expenses decreased 8% year over year to $23.73 billion, and its operating margin more than doubled to 41%, a clear sign that cost-cutting measures are bolstering profitability.

Net income more than tripled to $14 billion, or $5.33 per share, from $4.65 billion, or $1.76 per share, a year earlier.

Meta said it will pay investors a dividend of 50 cents a share on March 26. That comes after cash and equivalents swelled to $65.4 billion at the end of 2023 from $40.7 billion a year earlier. The company also announced a $50 billion share buyback.

Sales in Meta’s Reality Labs unit passed $1 billion in the quarter, though the virtual reality unit recorded $4.65 billion in losses.

I found it highly positive that Meta took getting lean very seriously as they really gutted staff numbers to the delight of the balance sheet.

Talking to many people in the know, META has been overstaffed for quite some time so much so that many at Meta had nothing to do all day.

The 22% year-over-year decrease in staff levels is a sign of things to come and this is just the start.

In the next few years, I do believe that Meta will shave down staff levels to what would amount to 85% less than COVID levels.

Part of Meta’s financial recovery over the past year was driven by Chinese retailers, which have increased spending to reach users across the globe.

Management said advances in artificial intelligence have helped reinvigorate the ad business, which is growing faster than rival Google’s. In Alphabet

’s earnings report Tuesday, the company said Google ad revenue increased 11% from a year earlier, a slower expansion than analysts were expecting.

Meta will continue to invest in AI and in building up its computing infrastructure.

This is the new META and they finally got all their ducks in a row.

Emphasizing what matters is what the stock wanted and they delivered in droves.

They get a green check mark for cutting costs, reducing headcount, spiking operating leverage, tripling profits, improving ad business, moving along the AI business, and delivering a new dividend.

That was just one quarter and if they can keep hammering away on these selective items, then META stock will be one of the best buy-the-dip stocks in the entire equity market.

Meta has been a stock I have wanted to get into for a while and entry points are few and far between.

The individual performance suggests that tech is stronger than first believed and might I say even cheap with all this untapped growth on the horizon.

February 5, 2024

Diary, Newsletter, Summary

Global Market Comments
February 5, 2024
Fiat Lux

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD, or WELCOME TO THE DOTCOM BUBBLE PART II),
(NVDA), (MSFT), (AMZN), (META), (GOOGLE), (FDX)

The Market Outlook for the Week Ahead, or Welcome to Dotcom Bubble Part II

Diary, Newsletter

I remember back in 1990 when I was first starting my hedge fund in London England, one of the very first. I hired two Ph.D.’s in Mathematics from Cambridge University, and we started inventing one the first purely quantitative approaches to the stock market. We were playing around with statistical probability arbitrage and Monte Carlo simulations, things like that.

One day, one of my guys said he needed to buy a software patch from a company in Los Angeles. I said “Sure" thinking we could pay up and overnight some floppy discs via a new company called Federal Express (FDX). He said no need, he could simply download them.

I said what?!

Andrew proceeded to connect to the Internet with our screechy landline modem and pay for the software with my American Express card. I watched in utter amazement as the time bar turned green and we got our patch.

I thought “Holly Smokes!”

I immediately realized that this technology was going to change the global economy beyond all recognition and send the stock market soaring. I also realized that I had to move my company out of our leafy West London neighborhood to the peach orchards of Silicon Valley as soon as possible to get in on the ground floor. I did this over a weekend care of, you guessed it, Federal Express. Thank goodness my guys were single.

I then called the Head of Research at Normura Securities in Tokyo and informed him of the incredible power of the Internet, and that in five years, Normura would distribute all of its research online, completely eliminating paper. He said I was out of my mind. I was wrong. In the end, it took Nomura ten years to move to online-only research, vastly improving the profitability of the company.

Over the last month, I have realized that we are seeing a repeat of that magical 1990 “aha” moment. We are only one year into Dotcom Bubble Part II, which has several more years to run. Remember when Fed Chairman Alan Greenspan warned of “irrational exuberance” in December 1996? Technology stocks rocketed for 3 ½ more years, wiping out several hedge funds on the short side along the way.

Think of it as 1997 again. Now, if I can only get my 1997 hair back!

Need any further convincing? Today, graphics card maker NVIDIA (NVDA) is selling at a forward multiple of 20X earnings. In 2000, this type of stock (Cisco Systems, Yahoo, Dell Computer) was selling for 100 times earnings. Add a 2X multiple expansion and a 5X multiple expansion and you get a 10X growth in the lead stock prices in coming years.

The net, net of all this is that the most expensive stocks in the market are not really expensive, but the cheapest. Overbought? Technically insane? Doubled in a year?

Buy em!

For AI, five will continue dominating the market for the foreseeable future. The top five AI stocks are showing an average 60% profit gain in Q1. The remaining S&P 494 are showing a 10% loss. It is a 1990s Dotcom Bubble repeat in miniature. These stocks have gained $5 trillion in market value in only three months, and there is more to come.

What are these companies doing right? They developed the greatest new income streams in history, while at the same time carrying out the most ferocious cost-cutting efforts. The effect on profits is astronomical. It’s like they spent the last 10-40 years preparing for this one moment. Look no further than Meta (META), which cut staff from 87,000 to 67,000, tripling net income to $14 billion, and doubling the share price.

It will be a recurring story.

On a completely different topic, hedge funds are pouring into India once again as the next China. It has the world’s best demographic curve, with an average age of only 20 years old, meaning that in 20 years it will have the most big spending consumers. It has the world’s fastest-growing Services PMI. It is also the most populous country in the world, topping 1.4 billion, exceeding China.

Apple (AAPL), Tesla (TSLA), and many other Western companies are looking to expand there. You always follow direct investment as the head of JP Morgan’s investment division once told me. Buy the (INDA) and the (INDY).

So far in February, we are up +2.04%. My 2024 year-to-date performance is also at -2.24%. The S&P 500 (SPY) is up +5.10% so far in 2024. My trailing one-year return reached +60.43% versus +20.48% for the S&P 500.

That brings my 16-year total return to +674.39%. My average annualized return has recovered to +51.21%.

Some 63 of my 70 trades last year were profitable in 2023.

I am maintaining longs in (MSFT), (AMZN), (V), (PANW), and (CCJ).

The Fed Turns Dovish, with all members expecting the next move to be a rate cut. It’s just a matter of how much, and how soon, but March was taken off the table. All bearish content from the Fed statement was removed. A classic “Buy the rumor, sell the news type of move. Look for a multi-week to one-month correction in tech, then a new rally.

US Treasury Borrowing to Hit $760 Billion in Q1, some $55 billion less than expected. Q2 then drops to only $202 billion. Bonds rallied on the good news. Buy (TLT) on dips.

S&P Case Shiller National Home Price Index Falls, in November for the first time in nine months. Detroit reported the highest year-over-year gain among the 20 cities, with prices rising 8.2% in November, followed again by San Diego with an 8% increase. Seattle and San Francisco reported the largest monthly declines, falling 1.4% and 1.3%, respectively. This was back when mortgage rates were peaking at 8.0%.

Saudi Arabia Cuts Oil Production Targets, cratering prices and destroying the entire energy sector. Lack of demand, especially from China, is the reason. New US output is fuel on the fire. Production will be throttled back a million barrels to 12 million barrels a day as a long-term goal. It couldn’t happen to a nicer bunch of people.

Microsoft Beats estimates the steady growth of its Azure cloud business, but the shares dropped. Revenue in the second quarter, which ended Dec. 31, rose 18% to $62 billion, while profit was $2.93 a share, the company said in a statement Tuesday. Azure cloud-services sales gained 30%. Buy (MSFT) on dips.

Biden to Announce Massive Chip Subsidies, to head off a coming shortage driven by AI. The coming announcements are aimed at kick-starting the manufacturing of advanced semiconductors that power smartphones, artificial intelligence, and weapons systems. The $43.5 billion to be spent also has national security implications in moving semiconductor manufacturing from China back to the US. Buy all semiconductor plays. It’s free money for them.

It's the 16th Year Anniversary of the Mad Hedge Fund Trader, and what a long and winding road it has been. Going into the 2008 crash, several investors pulled out of a new hedge fund I was starting because of cash calls so I decided to go into the newsletter business instead. Thanks for your 16 years of your support. We now publish 24 newsletters a week and run summits every three months with a global staff of 15.

My Ten-Year View

When we come out the other side of any 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, February 5, at 8:30 AM EST, the ISM Services PMI is announced.

On Tuesday, February 6 at 8:30 AM, the Total Household Debt is released by the Federal Reserve Bank of New York.

On Wednesday, February 7 at 2:00 PM, the US Imports and Exports are published. We also get the latest car data.

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

On Friday, February 9 at 2:00 PM the Baker Hughes Rig Count is printed.

As for me, I’ll never forget when my friend, Don Kagin, one of the world’s top dealers in rare coins, walked into my gym one day and announced that he made $1 million that morning. I enquired “How is that, pray tell?”

He told me that he was an investor and technical consultant to a venture hoping to discover the long-lost USS Central America, which sunk in a storm off the Atlantic Coast in 1857, heavily laden with gold from the California gold fields. He just received an excited call that the wreck had been found in deep water off the US east coast.

I learned the other day that Don had scored another bonanza in the rare coins business. He had sold his 1787 Brasher Doubloon for $7.4 million. The price was slightly short of the $7.6 million that a 1933 American $20 gold eagle sold for in 2002.

The Brasher $15 doubloon has long been considered the rarest coin in the United States. Ephraim Brasher, a New York City neighbor of George Washington, was hired to mint the first dollar-denominated coins issued by the new republic.

Treasury Secretary Alexander Hamilton was so impressed with his work that he appointed Brasher as the official American assayer. The coin is now so famous that it is featured in a Raymond Chandler novel where the tough private detective, Phillip Marlowe, attempts to recover the stolen coin. The book was made into a 1947 movie, “The Brasher Doubloon,” starring George Montgomery.

This is not the first time that Don has had a profitable experience with this numismatic treasure. He originally bought it in 1989 for under $1 million and has made several round trips since then. The real mystery is who bought it last? Don wouldn’t say, only hinting that it was a big New York hedge fund manager who adores the barbarous relic. He hopes the coin will eventually be placed in a public museum. In 2021, the Brasher Doubloon sold at auction for $9.36 million.

Mad Hedge followers should start paying more attention to gold which I believe just entered another decade-long bull market, thanks to falling US interest rates. You can’t go wrong buying LEAPS in the top two miners, Barrack Gold (GOLD) and Newmont Mining (NEM).

Who says the rich aren’t getting richer?