Our Bond Shorts are at Risk, thanks to a US Budget Deficit in Free Fall. I shall mourn this development as the loss of a close relative, particularly a rich uncle who writes me a check once a month, as selling short bonds and betting that interest rates will rise has been a huge moneymaker for me for years.
Since November, we have captured an eye-popping $42 points of downside in the United States Treasury Bond Fund (TLT). In two years, we have seized a mind-blowing $67 points. Don’t thank me, I’m just doing what you paid me to do.
While Trump was president, the national debt exploded by $4 trillion, a dream come true for bond short sellers. Trump spent a lifetime sticking lenders with hefty bills and the US government is no exception.
But all good things must come to an end. Since Biden became president, the annual budget deficit has vaporized, from $3.1 trillion in Trump's final year to a mere $360 billion for the first seven months of fiscal 2022, and we could approach zero by yearend.
An exploding economy and record employment have sent tax revenues soaring. The unemployment rate has shrunk from 25% to 3.6%. And taxpayers still had to pay a gigantic bill for last year’s monster capital gains in the stock market.
Covid spending, in the hundreds of billions last year, has been whittled down to near nothing. Biden has also been unable to get many spending bills through the Senate, where he lacks a clear majority.
Pare down government spending in a major way and you get new support for the bond market, the first since Clinton balanced the budget in 1999. Some investors are wondering if the 3.12% peak for the ten-year US Treasury bond seen last week could even be the top for this cycle. With the futures market already pricing in a 200 basis points in rate hikes this year, it’s entirely plausible.
I think we may have a shot at a 3.50% yield by next year. That equates to a (TLT) of around $100. But let’s face it, we are approaching the tag ends of this trade. Time to find better fish to fry. NVIDIA (NVDA) at $120 or Apple (AAPL) at $135 anyone?
We are seeing the same scenario play out at the state level. California saw a staggering $75 billion surplus last year. Among the luxuries Sacramento is considering are gas tax rebates for California drivers, undergrounding 20,000 miles of powerlines to prevent wildfires, and construction of a second transbay BART line.
Of course, all of this surplus wealth is temporary, as it always is. But “Laissez le bon temps roller.”
https://www.madhedgefundtrader.com/wp-content/uploads/2022/01/john-thomas-pilot-e1661438842642.png354450Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2022-05-17 11:02:372022-05-17 12:21:11Our Bond Shorts Are At Risk
(MARKET OUTLOOK FOR THE WEEK AHEAD, or SIFTING THROUGH THE WRECKAGE),
(SPY), (TLT), (TBT), (GOOGL), (AAPL), (MSFT), (BRKB), (NVDA), (JPM), (BAC), (WFC), ($BTCUSD)LA),
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2022-05-16 10:04:552022-05-16 16:08:34May 16, 2022
I have many superpowers, but one of the most useful ones is picking market bottoms. It looks like another one is at hand.
The past week has been one of epic wreckage in the stock market. It’s as if Hurricanes Sandy and Katrina both hit at the same time and were followed by a good old California earthquake.
Your favorite share prices have gone from mildly irritating to disappointing to absolutely gobsmackingly awful in only five months.
As a result, some of the best buying opportunities of the decade are setting up, the kind that you will be able to will on to your grandchildren. This is when mortgages get paid off, college debt is retired, and retirements financed.
There are a couple of key measurements here to watch. When the number of stocks above their 200-day moving averages falls below 20%, it always signifies an important market bottom. At the Thursday low, we were at 15% for the (SPY) and 12% for NASDAQ. It’s just another technical indicator among the hundreds, but a useful one, nonetheless.
Another one that helps is that on Friday, we also saw the first 90% advancing day since June 2020. All correlations went to one last week, meaning that all asset classes went down in unison.
That puts the bottom for the S&P 500 at $3,800 with an initial upside target of $4,200. We are way overdue for an 8%-12% relief rally. If I am wrong, we are only dropping another 200 points, or 5%.
Except that this time, it’s different.
At $3,600, down 25% from the January high, the market will have fully discounted a fairly severe recession that isn’t going to happen. Amazing as it may seem, some of the stocks having the biggest falls are still seeing earnings grow nicely. They are simply being sold because they are widely owned. That snares them in all of the algorithm-driven high-frequency trading that is going on.
I know I’ve said this a million times, but you use markets like this to buy Rolls Royces at Volkswagen prices. I’m talking about Alphabet (GOOGL), Microsoft (MSFT), and Apple (AAPL).
These companies are solid as the Rock of Gibraltar, with massive cash flows, huge cash balances, unassailable moats, and steady, if not spectacular earnings prospects. People have not suddenly abandoned Google as a search engine, Microsoft still has a near-monopoly in PC operating software, and Apple will sell more new and more expensive iPhones than ever.
The other baby that is being thrown out with the bathwater here are the banks. Recession fears have given these shares a haircut by a third by recession fears that damage the credit quality of their loan books.
What if there is no recession? Then the bear market in banks goes up in a puff of smoke. It helps that this time, there is no liquidity or capital crisis to be seen whatsoever. Add JP Morgan (JPM), Bank of America (BAC), and Wells Fargo (WFC) to your growing “BUY” lists.
Buying the best stocks with a recession already baked in the price? Sounds like a winner to me.
As for the smaller tech stocks, I’d take a pass, at least for now. Most of these companies, which never made any money, now have shares down 70% to 90% and are not coming back. They provided to be perfect money destruction machines. Never confuse “gone down a lot” with “cheap.” Take away the punch bowl and suddenly the party becomes very boring.
The Mad Hedge Market Timing Index certainly earned its weight in gold last week. We saw a multi-year low of 6 on Thursday and I was sending out trade alerts to “BUY” as fast as I could write them. A 1,200-point snap-back rally ensued, setting up a bottom that could last for weeks, if not forever.
The other great thing to come out of this selloff is that we learned what a fantastic leading indicator of risk-taking Bitcoin has become. While the S&P 500 plunged by 20%, Bitcoin absolutely cratered by 60%. We saw the correlation on both the upside and the downside.
Bitcoin is basically the (SPY) X 3. Ignore Bitcoin at your peril, even if you think the whole thing is a scam. And keep reading your Mad Hedge Bitcoin Letter.
Was this the grand finale? Big tech stocks like Apple (AAPL) and Microsoft (MSFT) stubbornly held their ranges for months, supporting the market as a whole. That ended last week on no news with the decisive breakdown of the key names. Apple has lost a staggering $350 billion in market cap in a week. Does this signal the final washout of this correction? It could. The Volatility Index (VIX) has ceased rising, and bonds have begun a short-covering countertrend rally.
Jay Powell warns of more 50-basis point rate rises if the economic conditions justify it. He also can’t guarantee a soft landing for the economy. Thanks for telling us precisely nothing. The comments were made on NPR Radio’s marketplace program and immediately tanked Dow futures by 100 points.
Core Inflation moderates slightly, down from 8.5% to 8.3% in April, sparking a stock market rally. That is 0.2% lower than last month’s 8.5% print, hence the bond rally. It was the first decline in the inflation rate in seven months. The probability of a peak in inflation is increasing.
Producer Price Index soars 11.0% YOY and 0.5% in April alone. It is a red-hot number showing that inflation is getting worse. The Producer Price Index (PPI) program measures the average change over time in the selling prices received by domestic producers for their output.
Goldman Sachs quit the SPAC Market, citing unmanageable liability. More likely, they don’t want to get stuck with illiquid longs on SPACS they brought to the market. I warned you this was a roach motel market; you can check in but you can never check out. I have to admit that I never believed in this asset class for two seconds, regarding it as nothing more than a license to steal money from investors.
Bitcoin drops below $28,000, taking the cryptocurrency down to more than half its November peak. It’s acting more like a small-cap tech stock every day, not the thing to be right now. With the Fed shrinking liquidity at a record rate, this is not a favorable backdrop either.
Another crypto bites the dust, as the free fall continues. Tether, a stablecoin tied to the US dollar, has fallen to 69% of its face value. It turns out that backing by the US government is more reliable than support from a PO Box in the Cayman Islands. Expect more to fail. Avoid crypto at all cost.
Ford to unload 8 million Rivian shares, once a lockup expires. Other pick institutional blocks are waiting in the wings. The EV truck is smoking hot on the road, but the shares have been dead as a doorknob, down 85% from the peak and 16% on the day. Avoid (RIVN) while the sector is death warmed over.
Biden mulling dropping Chinese Tariffs to make a dent in inflation. It might help a bit. It just depends on what we might get in return. Such a move wouldn’t exactly protect American workers, a top Biden priority. Relations with China are still fraught at best.
US Dollar blasts through to 20-year high, but a cooling inflation number on Wednesday may signal the top. Soaring interest rates, a strong economy, and a weak Europe and Japan are the drivers. There’s a short play here someday, but not yet.
Housing Supply improves for the first time in three years. Supply of mid-sized single-family loans takes the lead. Inventories are showing smallest declines in a year. Finally, the buyers get a break….now that prices are falling. Almost all new loans are 5/1 ARMS.
Air Ticket Prices are through the roof and were the biggest single factor keeping the CPI inflation figure sky-high yesterday. Buyers cite as reasons a long time since visiting relatives, desperation to get outdoors, and a rush to travel before the next Covid wave hits. It may be a one-time pop only, as used car prices were in previous months.
30-Year Fixed Rate Mortgages Top 5.5% in the fastest rate rise in history. The housing market is still hot, now fueled by exploding adjustable-rate mortgages 1.5% cheaper. Refi’s, however, have gone to zero.
My Ten-Year View
When we come out the other side of pandemic, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still historically cheap, oil peaking out soon, and technology hyper accelerating, there will be no reason not to. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The America coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 240,000 here we come!
With some of the greatest market volatility seen since 1987, my May month-to-date performance recovered to +0.91%. Friday was up +5.12%, the biggest one-day gain in the 14-year history of the Mad Hedge Fund Trader.
My 2022 year-to-date performance exploded to 31.09%, a new high. The Dow Average is down -12.67% so far in 2022. It is the greatest outperformance on an index since Mad Hedge Fund Trader started 14 years ago. My trailing one-year return maintains a sky-high 58.48%.
I used last week’s meltdown to cover shorts in the (SPY) and bonds (TLT) and to buy new longs in technology like (AAPL), (NVDA), and (BRKB). I would have sent out more trade alerts if I had more time and didn’t have Covid and a 102 degrees temperature.
That brings my 14-year total return to 543.65%, some 2.40 times the S&P 500 (SPX) over the same period and a new all-time high. My average annualized return has ratcheted up to 43.78%, easily the highest in the industry.
We need to keep an eye on the number of US Coronavirus cases at 82.5 million, up 300,000 in a week, and deaths topping 1,000,000 and have only increased by 2,000 in the past week. You can find the data here.
On Monday, May 16 at 8:30 AM EST, the New York Empire State Manufacturing Index is released. On Tuesday, May 17 at 8:30 AM, Retail Sales for April are released.
On Wednesday, May 18 at 8:30 AM, Housing Starts and Building Permits for April are published.
On Thursday, May 19 at 8:30 AM, Weekly Jobless Claims are disclosed. Existing Home Sales for April are printed.
On Friday, May 20 at 8:30 AM, the Baker Hughes Oil Rig Count is out.
As for me, the 1980s found me heading the Japanese equity warrant trading department for Morgan Stanley in London, a unit which eventually produced 80% of the company’s equity division profits. It was like running a printing press for $100 bills.
My east end kids in their twenties were catapulted from earning $10,000 a year to a half million. After buying West End condos, the latest Ferrari or Jaguar, and picking up fashion model girlfriends, they ran out of ideas on how to spend the money.
Maybe it was time to upgrade from pints of Fosters at the local pub to fine French wines?
The problem was that no one knew what to buy. Bordeaux alone produced 5,000 labels, and Burgundy a further 7,000. France had 360 appellations in 11 major wine-growing regions. Worse yet, all the names were in French!
Following a firmwide search, it was decided that I should become the in-house wine connoisseur. After all, I was from a wine-growing region in California, spoke French, and was part-French. How could they lose?
As with everything I do, I intensively threw myself into research. It turns out that the insurance exchange, Lloyds of London, was suffering the first of its claims in its history. US asbestos-related insurance claims were exploding. Then, a giant offshore natural gas rig, Piper Alpha, blew up. Suddenly Lloyd’s syndicates were getting their first-ever cash calls.
These syndicates were sold to members as guaranteed risk-free cash flow. Suddenly many members had to come up with $250,000 each in months. No one was ready. How did many meet their cash calls? By selling off 100-year-old wine cellars through auctions at Sotheby’s in London.
Now let me tell you about the international wine auction business. Single cases of the first growth wines, like the 1983 Chateaux Laffite Rothchild, are traded on open markets like any other investment. They appreciate in value like bonds, about 5% a year. However, mixed cases filled with odds and ends from different wineries and different years, have no investment value and traded at enormous discounts.
I found my market!
In short order, I put together a syndicate of 20 new wine consumers and went to work.
To separate out the sheep from the goats, I relied on a wine guide that The Economist magazine included at the back of every wallet diary. As each auction catalog came out, I rated every bottle in the mixed cases coming for sale. I then showed up at the bi-monthly auctions and bought every case.
It wasn’t long before I became the largest buyer of wine at Sotheby’s, picking up 20 cases per auction. The higher the Japanese stock market rose, the more money the traders made, and the more they had to spend on better French wines.
It wasn’t long before Morgan Stanley became famed for being a firm of wine authorities. Our guys were getting invited to high-end dinners just so they could pick the wines, including me.
Sotheby’s took note, and set me up with their in-house wine expert, the famed Serena Sutcliffe. I became her favorite customer. Serena knew everyone in Bordeaux. Who is the most popular person in any wine-growing area? Not the one who makes the wine but the one who sells it.
It wasn’t long before Serena set me up with private tours of the top Bordeaux wineries. I’m talking about Laffite Rothchild, Haut-Brion, Yquem (once owned by US Treasury Secretary C. Douglas Dillon), Chateaux Margaux, and Pomerol. I then flew the two of us down to Bordeaux in my twin-engine Cessna 340 for the wine tasting opportunity of a lifetime. I came back full up, with about 10 cases per flight.
I was guided through ancient, spider web-filled, fungus-infused caves and invited to drink their prime stock. Let me tell you that the 1873 Laffite Rothchild is to die for but is bested by the 1848 Chateaux Yquem.
The stories I heard were incredible. During WWII, one winery dumped its entire stock in a nearby pond to keep the Germans from getting it. But the labels floated to the surface. After the war, they fished out the bottles. But they couldn’t identify them until they opened the bottles, where the vintage was printed on the cork. It was free fishing for years for the locals and there are probably a few bottles still in there.
In sommelier school, you have to taste 5,000 wines to graduate. They tell you up front that it will change your life. After my experience as the biggest wine buyer in London for five years, I can tell you this is true.
One of my treasured buys was a bottle of 1952 Laffite Rothchild, the year I was born. Then it was only 40 years old and went down well with a fine dinner of Beef Wellington. I had the bottle for years until a cleaning lady found it on a shelf after a party and put it in the recycling bin.
A few months ago, I was at the Marin French Antique Show browsing for hidden treasures. What did I find but an empty case of 1985 Romanee Conti, the greatest Burgundy of France. The vendor had no idea what he had. To him, it was just a wood box. I offered him $10. He said thanks. It now adorns a place of honor in my own wine cellar to remind me of this grand experience.
And if we ever meet for dinner, don’t bother with the wine list. I’ll be making the pick.
Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Fill Her Up with Bordeaux
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2022-05-16 10:02:312022-05-16 16:08:50The Market Outlook for the Week Ahead, or Sifting Through the Wreckage
My worst-case scenario for the S&P 500 this year was a dive of 20%. We are now off by 14%. And of course, most stocks are down a lot more than that.
Which means that we are getting close to the tag ends of this move. The kind of wild, daily 1,000-point move up and down we saw last week is typical of market bottoms.
Some $7 trillion in market capitalization lost this year. That means we could be down $10 trillion from a $50 trillion December high before this is all over. That’s a heck of a lot of wealth to disappear from the economy.
So, it may make sense to start scaling into the best quality names on the bad days in small pieces, like Apple (AAPL), Alphabet (GOOGL), Microsoft (MSFT), and NVIDIA (NVDA).
Whatever pain you may have to take what follows, the twofold to threefold gain that will follow over the next five years will make it well worth it. Is a 20% loss upfront worth a long-term gain of 200%? For most people, it is.
Bonds may also be reaching the swan song for their move as well. The United States Treasury Bond Fund (TLT) at $113 has already lost a gobsmacking $42 since the November $155 high.
The markets have already done much of the Fed’s work for it, discounting 200 basis points of an anticipated 350 basis points in rate rises in this cycle. Therefore, I wouldn’t get too cutesy piling on new bond shorts here just because it worked for five months.
Yes, there is another assured 50 basis point rise in six weeks towards the end of June. Jay Powell has effectively written that in stone. We might as well twiddle our fingers and keep playing the ranges until then. We have in effect been sent to the trading leper colony.
The barbarous relic (GLD) seems to be looking better by the day. Q1 saw a massive 551 metric tonnes equivalent pour into gold ETF equivalents, an increase of 203%. Of course, we already know of the step-up in Russian and Chinese demand to defeat western sanctions.
But the yellow metal is also drawing more traditional investment demand. Gold usually does poorly during rising interest rates. This time, it's different. An inflation rate of 8.5% minus an overnight Fed rate of 1.0%, leaving a real inflation rate of negative -7.5%. That means gold has 7.5% yield advantage over cash equivalents.
Gold’s day as an inflation hedge is back!
The April Nonfarm Payroll Report came in near-perfect at 459,000, holding the headline Unemployment Rate at 3.5%. It’s proof that a recession is nowhere near the horizon. A record 2 million workers have recovered jobs during the last four months and 6.6 million over the past 12.
Warren Buffet is Buying Stocks, some $51 billion in Q1. That includes $26 billion into California energy major Chevron (CVX), followed by a big bet on Occidental Petroleum (OXY). These are clearly a bet that oil will remain high for at least five more years. That has whittled his cash position down from $147 billion to only $106 billion. Buffet likes to keep a spare $100 billion on hand so he can take over a big cap at any time. Warren clearly eats his own cooking, buying $26 billion worth of his own stock in 2021. If you can’t afford the lofty $4,773 price for the “A” shares, try the “B” shares at $322.83, which also offer listed options on NASDAQ and in which Mad Hedge Fund Trader currently has a long position.
Elon Musk Crashes His Own Stock, selling $8.4 billion worth last week. His Twitter purchase has already been fully financed, so what else is he going to buy. The move generates a massive Federal tax bill, but Texas, his new residence, is a tax-free state. It continues a long-term trend of billionaires piling fortunes in high tax states, like Jeff Bezos in Washington, and then realizing the gains in tax-free states.
Adjustable-Rate Mortgages are Booming, replacing traditional 30-year fixed-rate mortgage at a rapid pace. Interest rates are 20% lower, but if rates skyrocket to double digits or more in five years, you have a really big problem. ARMs essentially take the interest rate risk off the backs of the lenders and place it firmly on the shoulders of the borrowers.
Travel Stocks are On Fire, with all areas showing the hottest numbers in history. Average daily hotel rates are up 20% YOY, stayed room nights 52%, airfares 39%, and airline tickets sold 48%. Expect these numbers to improve going into the summer.
JOLTS Hits a Record High, with 11.55 million job openings in March, up 205,000 on the month. There are now 5.6 million more jobs than people looking for them. No sign of a recession here. It augurs for a hot Nonfarm Payroll report on Friday.
Natural Gas Soars by 9% in Europe as the continent tries to wean itself off Russian supplies. In the meantime, US producers are refusing to boost output for a commodity that may drop by half in a year, as it has done countless times in the past. If the oil majors are avoiding risk here, maybe you should too.
My Ten-Year View
When we come out the other side of pandemic, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still historically cheap, oil peaking out soon, and technology hyper accelerating, there will be no reason not to. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The America coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 240,000 here we come!
With some of the greatest market volatility seen since 1987, my May month-to-date performance lost 4.27%. My 2022 year-to-date performance retreated to 25.91%. The Dow Average is down -9.3% so far in 2022. It is the greatest outperformance on an index since Mad Hedge Fund Trader started 14 years ago. My trailing one-year return maintains a sky-high 56.62%.
On the next capitulation selloff day, which might come with the April Q1 earnings reports, I’ll be adding long positions in technology, banks, and biotech. I am currently in a rare 50% cash position awaiting the next ideal entry point.
That brings my 13-year total return to 538.47%, some 2.30 times the S&P 500 (SPX) over the same period. My average annualized return has ratcheted up to 43.36%, easily the highest in the industry.
We need to keep an eye on the number of US Coronavirus cases at 81.9 million, up 500,000 in a week, and deaths topping 998,000 and have only increased by 5,000 in the past week. You can find the data here.
The coming week is a big one for jobs reports.
On Monday, May 9 at 8:00 AM EST, US Consumer Inflation Expectations are released. On Tuesday, May 10 at 7:00 AM, the NFIB Business Optimism Index is confirmed.
On Wednesday, May 11 at 8:30 AM, the Core Inflation Rate for April is printed.
On Thursday, May 12 at 8:30 AM, Weekly Jobless Claims are disclosed. Conoco Phillips (COP) reports. We also get the Producer Price Index. On Friday, May 13 at 8:30 AM, the University of Michigan Consumer Price Index for May is disclosed. At 2:00 PM, the Baker Hughes Oil Rig Count is out.
As for me, not just anybody is allowed to fly in Hawaii. You have to undergo special training and obtain a license endorsement to cope with the Aloha State’s many aviation challenges.
You have to learn how to fly around an erupting volcano, as it can swing your compass by 30 degrees. You must master the fine art of getting hit by a wave on takeoff since it will bend your wingtips forward. And you’re not allowed to harass pods of migrating humpback whales, a sight I will never forget.
Traveling interisland can be highly embarrassing when pronouncing reporting points that have 16 vowels. And better make sure your navigation is good. Once a plane ditched interisland and the crew was found months later off the coast of Australia. Many are never heard from again.
And when landing on the Navy base at Ford Island, you were told to do so lightly, as they still hadn’t found all the bombs the Japanese had dropped during their Pearl Harbor attack.
You are also informed that there is one airfield on the north shore of Molokai you can never land at unless you have the written permission from the Hawaii Department of Public Health. I asked why and was told that it was the last leper colony in the United States.
My interest piqued, the next day found me at the government agency with application in hand. I still carried my UCLA ID which described me as a DNA researcher which did the trick.
When I read my flight clearance to the controller at Honolulu International Airport, he blanched, asking if a had authorization. I answered that yes, I did, I really was headed to the dreaded Kalaupapa Airport, the Airport of no Return.
Getting into Kalaupapa is no mean feat. You have to follow the north coast of Molokai, a 3,000-foot-high series of vertical cliffs punctuated by spectacular waterfalls. Then you have to cut your engine and dive for the runway in order to land into the wind. You can only do this on clear days, as the airport has no navigational aids. The crosswind is horrific.
If you don’t have a plane, it is a 20-mile hike down a slippery trail to get into the leper colony. It wasn’t always so easy.
During the 19th century, Hawaiians were terrified of leprosy, believing it caused the horrifying loss of appendages, like fingers, toes, and noses, leaving bloody open wounds. So, King Kamehameha I exiled them to Kalaupapa, the most isolated place in the Pacific.
Sailing ships were too scared to dock. They simply threw their passengers overboard and forced them to swim for it. Once on the beach, they were beaten a clubbed for their positions. Many starved.
Leprosy was once thought to be the result of sinning or infidelity. In 1873, Dr. Gerhard Henrik Armauer Hansen of Norway was the first person to identify the germ that causes leprosy, the Mycobacterium leprae.
Thereafter, it became known as Hanson’s Disease. A multidrug treatment that arrested the disease, but never cured it, did not become available until 1981.
Leprosy doesn’t actually cause appendages to drop off as once feared. Instead, it deadens the nerves and then rats eat the fingers, toes, and noses of the sufferers when they are sleeping. It can only be contracted through eating or drinking live bacteria.
When I taxied to the modest one-hut airport, I noticed a huge sign warning “Closed by the Department of Health.” As they so rarely get visitors, the mayor came out to greet me. I shook his hand but there was nothing there. He was missing three fingers.
He looked at me, smiled, and asked, “How did you know?”
I answered, “I studied it in college.”
He then proceeded to give me a personal tour of the colony. The first thing you notice is that there are cemeteries everywhere filled with thousands of wooden crosses. Death is the town’s main industry.
There are no jobs. Everyone lives on food stamps. A boat comes once a week from Oahu to resupply the commissary. The government stopped sending new lepers to the colony in 1969 and is just waiting for the existing population to die off before they close it down.
Needless to say, it is one of the most beautiful places on the planet.
The highlight of the day was a stop at Father Damien’s church, the 19th century Belgian catholic missionary who came to care for the lepers. He stayed until the disease claimed him and was later sainted. My late friend Robin Williams made a movie about him but it was never released to the public.
The mayor invited me to stay for lunch, but I said I would pass. I had to take off from Kalaupapa before the winds shifted.
It was an experience I will never forget.
Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
https://www.madhedgefundtrader.com/wp-content/uploads/2022/05/airport-of-no-return.png588882Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2022-05-09 09:02:202022-05-09 11:21:14The Market Outlook for the Week Ahead, or Headed for the Leper Colony
The once smoking hot semiconductor industry and its stock prices have rolled over.
First, let me refresh some memories of how we got here in the first place.
During the pandemic and lockdowns, it was thought that semiconductor companies were the winners as consumers, unable to leave their homes, were forced to huddle inside glued to their screens.
Never had the world’s demand for electronics been so elevated and the bringing forward of economic overperformance is now on the downtrend.
It appears that chip companies will be unable to follow up that performance with an encore.
November 2021 represented the short-term high-water mark for chip companies as many stocks in the best of breed have cratered by 50% since then.
AMD (AMD) has dropped to $97 from $155 and the price action is emblematic of boom-bust cycles that chip companies are infamous for.
Now the short-term future doesn’t seem as rosy as it once was and the current uncertainty has delayed investments as chip companies have read the tea leaves and given up capital investments like new chip factories.
Top dog Nvidia (NVDA) which produces CPUs and is at the core of every cutting-edge technology in the world has also been stung by its share price dropping around 30% since the peak in November 2021.
This isn’t the death of the chip industry, and the share price will need to digest the confluence of bad news.
Chip companies are also highly volatile in their price action with the same type of pullback in Apple or Microsoft 3X less volatile.
Peeling back the layers, what is the situation closer to the ground?
The US Central Bank turning on the hawkish turbo boosters mean that many parts of the equity market are feeling their impulsive reaction.
No doubt the Fed has been behind the curve for almost a year, but that’s another topic.
Their sudden reversal means they have no choice but to bring forward a recession by hiking rates faster than expectations and the losers in this is growth tech.
At the consumer level, higher inflation means that sticker prices for electronics have trended higher for various items.
Not only that, the inflation across the board and deep hits to the overall cost of living have taken purchasing power out of the pockets of the median US shopper.
The math simply doesn’t work out if shoppers are paying more for gas, groceries, and housing, they are simply less inclined to refresh their phones, iPads, TVs, and so on.
Other big-ticket items on the chopping block are products like appliances.
There is a major guzzler of chips like washing machines, fridges, and heating and cooling systems that all require sensors.
The semiconductor market is cyclical. When the economy is thriving, it is doing well because when consumers are confident, they tend to spend on the incremental device.
Adding insult to industry is that the tightening of capital markets will make borrowing more expensive and the path to profits narrower.
Just as critical, no CEO or CFO likes to discover that the cost of capital has jumped to a prohibitive rate, because these are the tool they tap to build multi-billion dollar factories.
Holding off on investments sacrifices long-term growth and capacity for short-term balance sheet strength.
Without too much pretentious banter, high interest rates mean relatively less profit.
Much of the decline is starting to get priced into the stock prices of NVDA and AMD.
I believe investors should be dollar cost averaging as these stocks fall possibly another 5-10%.
I would be shocked if these stocks fall another 20% from here.
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(MARKET OUTLOOK FOR THE WEEK AHEAD, or WATCH OUT FOR THE RECESSION WARNINGS) (TLT), (TSLA), (FB), (CRSP), (TDOC), (GILD), (EDIT), (SQ), (INDU), (NVDA), (GS)
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The drumbeat of a coming recession is getting louder and louder.
There is no doubt that the traditional signals of a slowing economy are already flashing yellow, if not bright red.
Rocketing interest rates are the most obvious one, with ten-year US Treasury bonds yield soaring from 1.33% to 2.71% in a mere four months. This is why investors pulled a gut-punching $87 billion out of bond funds in Q1.
If the Fed continues with a quarter point rise at every meeting for the rest of the year, we might escape this cycle without a recession. If the Fed ramps up to a half point rate at every meeting as was discussed last week a recession becomes a sure thing.
Imminent positive real yields for the first time in a decade also threaten to draw money out of stocks and into bonds.
I happen to be in the non-recessionary camp and the reason is very simple. Companies are making too much damn money. This is especially true for technology companies, which account for some 75% of the profits made in the US. If anything, their profits are accelerating, although at a lower rate than seen in 2021.
Certainly, the tech companies themselves aren’t buying the recession scenario. They are hiring and investing as if the economic boom will continue forever. Tesla alone has completed two new factories in the past month, in Berlin, Germany and Austin, Texas, each capable of producing a half million vehicles a year. Tesla’s existing factories are all expanding capacity.
Sitting here in Silicon Valley, I can tell you that the job market is as hot as ever. Those who have jobs, like my own kids, are besieged with multiple job offers. It seems the standard time to keep a job these days is a year, after which one takes the next upgrade, promotion, and batch of stock options.
But the stock market seems hell-bent on discounting a recession anyway. You see this in the most economically sensitive sectors of the market, banks, semiconductors, and transport, which have just clocked a miserable month. If I am right (I’m always right), and there is no recession, these will be the sectors that lead the recovery.
Until the market makes up its mind, the disciplined among us will have to while away our time constructing lists of companies to buy for the rebound. That’s when the next leg of the bull market resumes.
We find out when this happens on Wednesday when the next batch of inflation data is released, which is likely to be diabolical.
Quantitative Tightening to Start as Soon as May, according to Fed Governor Brainard. That means our central bank will start selling its vast $9 trillion in bond holding in two months, a huge market negative. Bonds tanked. The Fed only quit quantitative easing in March.
Tesla Blows Away Q1 Sales, shipping 310,000 vehicles, far above expectations. This is despite supply chain problems, soaring interest rates, and the Ukraine War. Sky-high gasoline prices helped a lot, which is driving buyers into Tesla showrooms in drives. All other competitors are falling farther behind, unable to obtain parts and commodities which Tesla locked up long ago. This puts Tesla well on its way to its 1.5 million production goal for this year. Keep buying (TSLA) on dips. My long-term target is $10,000 a share.
The Metaverse May be Worth $13 Trillion by 2030, says Citibank. The same is so for Web 3.0, which includes virtual worlds, like gaming and applications in virtual reality. Citi’s broad vision of the metaverse includes smart manufacturing technology, virtual advertising, online events like concerts, as well as digital forms of money such as cryptocurrencies like I’ll be looking for the best plays.
Biotech May Be Staging a Comeback, after spending a year in hell, taking some shares down 80%-90%. Investors are also nibbling at the sector as a recession and bear market plays, as these companies keep growing regardless of the economic cycle. Buy (CRSP), Teledoc (TDOC), Gilead Sciences (GILD), ad Editas Medicine (EDIT) on dips.
US Bonds Just Suffered their Worst Quarter in a Half Century, with yields rocketing from 1.33% to 2.71%, and Mad Hedge was triple short most of the way down. Bear LEAPS holders, which are many of you, made fortunes. We could stall around current levels until the Fed delivered both barrels of a shot gun, two back-to-back half point rate rises from the Fed.
30-Year Fixed Rate Mortgage Rates Top 5.00%, trashing the home builders. If you thought buying a home was tough, its worst now. So far, no impact on home prices.
US Dollar Hits New Two-Year High. It’s all about rising interest rates. Expect a stronger greenback to come before the turn. The coming QT will put a two-step turbocharger on the move.
German Battery Sales Soar By 67%, to residential buyers to cope with pending energy shortages. Germany already has 2.2 million solar installations out of a population of 83 million. It’s a very smart move as batteries powered by solar panels can remove you from the grid entirely, as I have amply proven with my own installation. It may be the permanent solution to over-dependence on Russian energy supplies.
Tesla Moving into Bitcoin Mining, in partnership with Blockstream and Block, formerly Square (SQ). Tesla will supply the electric power with its massive 3.8-megawatt solar array. That is the size of a large nuclear power plant. The mining facility is designed to be a proof of concept for 100% renewable energy bitcoin mining at scale. If Elon Musk likes Bitcoin maybe you should too.
The Bank of Japan Now Owns 7% of the Japanese Stocks Market. The central bank had to buy the shares after it had already bought all the bonds in the country to support the economy. So, what happens when the policy flips from QE to QT? How about unloading $371 billion worth of shares on the market. This would e a neat trick since so much of the country’s shares are locked up in corporate cross holdings. Methinks I’ll be steering clear of Japanese stocks for the foreseeable future.
My Ten-Year View
When we come out the other side of pandemic, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still historically cheap, oil peaking out soon, and technology hyper accelerating, there will be no reason not to. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The America coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 240,000 here we come!
My March month-to-date performance retreated to a modest 0.38%. My 2022 year-to-date performance ended at a chest-beating 27.23%. The Dow Average is down -4.20% so far in 2022. It is the greatest outperformance on an index since Mad Hedge Fund Trader started 14 years ago. My trailing one-year return maintains a sky-high 68.89%.
On the next capitulation selloff day, which might come with the April Q1 earnings reports, I’ll be adding long positions in technology, banks, and biotech. I am currently in a rare 100% cash position awaiting the next ideal entry point.
That brings my 13-year total return to 539.79%, some 2.10 times the S&P 500 (SPX) over the same period. My average annualized return has ratcheted up to 44.36%, easily the highest in the industry.
We need to keep an eye on the number of US Coronavirus cases at 80.3 million, up only 100,000 in a week and deaths topping 985,000 and have only increased by 2,000 in the past week. You can find the data here.Growth of the pandemic has virtually stopped, with new cases down 98% in two months.
On Monday, April 11 at 8:00 AM EST, Consumer InflationExpectations are released.
On Tuesday, April 12 at 8:30 AM, the Core Inflation Rate for March is announced.
On Wednesday, April 13 at 8:30 AM, the Producer Price Index for March is printed.
On Thursday, April 14 at 7:30 AM, the Weekly Jobless Claims are printed. We also get Retail Sales for March.
On Friday, April 8 at 8:30 AM, NY Empire State Manufacturing Index for March. At 2:00 PM, the Baker Hughes Oil Rig Count is out.
As for me, back in 2002, I flew to Iceland to do some research on the country’s national DNA sequencing program called deCode, which analyzed the genetic material of everyone in that tiny nation of 250,000. It was the boldest project yet in the field and had already led to several breakthrough discoveries.
Let me start by telling you the downside of visiting Iceland. In the country that has produced three Miss Universes over the last 50 years, suddenly you are the ugliest guy in the country. Because guess what? The men are beautiful as well, the decedents of Vikings who became stranded here after they cut down all the forests on the island for firewood, leaving nothing with which to build long boats. I said they were beautiful, not smart.
Still, just looking is free and highly rewarding.
While I was there, I thought it would be fun to trek across Iceland from North to South in the spirit of Shackleton, Scott, and Amundsen. I went alone because after all, how many people do you know who want to trek across Iceland? Besides, it was only 150 miles or ten days to cross. A piece of cake really.
Near the trailhead, the scenery could have been a scene from Lord of the Rings, with undulating green hills, craggy rock formations, and miniature Icelandic ponies galloping in herds. It was nature in its most raw and pristine form. It was all breathtaking.
Most of the central part of Iceland is covered by a gigantic glacier over which a rough trail is marked by stakes planted in the snow every hundred meters. The problem arises when fog or blizzards set in, obscuring the next stake, making it too easy to get lost. Then you risk walking into a fumarole, a vent from the volcano under the ice always covered by boiling water. About ten people a year die this way.
My strategy in avoiding this cruel fate was very simple. Walk 50 meters. If I could see the next stake, I proceeded. If I couldn’t, I pitched my tent and waited until the storm passed.
It worked.
Every 10 kilometers stood a stone rescue hut with a propane stove for adventurers caught out in storms. I thought they were for wimps but always camped nearby for the company.
I was 100 miles into my trek, approached my hut for the night, and opened the door to say hello to my new friends.
What I saw horrified me.
Inside was an entire German Girl Scout Troop spread out in their sleeping bags all with a particularly virulent case of the flu. In the middle was a girl lying on the floor soaking wet and shivering, who had fallen into a glacier fed river. She was clearly dying of hypothermia.
I was pissed and instantly went into Marine Corp Captain mode, barking out orders left and right. Fortunately, my German was still pretty good then, so I instructed every girl to get out of their sleeping bags and pile them on top of the freezing scout. I then told them to strip the girl of her wet clothes and reclothe her with dry replacements. They could have their bags back when she got warm. The great thing about Germans is that they are really good at following orders.
Next, I turned the stove burners up high to generate some heat. Then I rifled through backpacks and cooked up what food I could find, force-fed it into the scouts and emptied my bottle of aspirin. For the adult leader, a woman in her thirties who was practically unconscious, I parted with my emergency supply of Jack Daniels.
By the next morning, the frozen girl was warm, the rest were recovering, and the leader was conscious. They thanked me profusely. I told them I was an American “Adler Scout” (Eagle Scout) and was just doing my job.
One of the girls cautiously moved forward and presented me with a small doll dressed in a traditional German Dirndl which she said was her good luck charm. Since I was her good luck, I should have it. It was the girl who was freezing the death the day before.
Some 20 years later I look back fondly on that trip and would love to do it again.
Anyone want to go to Iceland?
Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Iceland 2002
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