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The Market Outlook for the Week Ahead, or My New Theory of Equities

After 54 years of trading, and 60 if you count my paper boy days, I have never seen the conventional wisdom be so wrong about the markets.

There was near universal sentiment that we would crash come January. Instead, with have only seen four down days this year. The shorts got slaughtered.

So it’s clear that something brand new is going on here in the markets. I call it “My New Theory of Equities.”

I always have a new theory of equities. That’s the only way to stay ahead of the unwashed masses and live on the cutting edge. After all, I don’t have to run faster than the bear, just faster than the competition to keep you making money.

So here is my new theory.

Many strategists are bemoaning the loss of the free money that zero interest rates made available for the last decade. They are convinced that we will never see zero interest rates again.

But guess what? Markets are acting like free money is about to return, and a lot faster than you think. Free money isn’t gone forever, it is just taking a much-needed vacation.

What if free money comes from somewhere else? You can forget about free money from the government. Fear of inflation has ended that source, unless we get another pandemic, which is at least a decade off.

No, I found another source of free money, and that would be exponentially growing technology profits. Those who don’t live in Silicon Valley are ignorant of the fact that technology here is hyper accelerating and tech companies are becoming much more profitable.

You know those 80,000 tech workers who just got laid off? They all averaged two job offers each from the thousands of startup companies operating from garages and extra bedrooms all around the Bay Area. As a result, the Silicon Valley unemployment rate is well under 2%, nearly half the national average.

I bet you didn’t know that there are over 100 industrial agricultural startups here growing food in indoor ultraviolet lit lowers. It turns out that these use one tenth of the inputs of a conventional input, like water and fertilizer in half the time.

There are hundreds of solar startups in play, many venture capital financed by Saudi Arabia. While the kingdom has a lot of oil, they have even more sunshine. And what are they going to do with all that oil? Use solar generated electricity to convert it to hydrogen to sell to us as “green” energy.

Solar itself will just be a bridge technology to fusion, which you may have heard about lately. What happens when energy becomes free? It boggles the mind. This appears to be a distant goal now. But remember that we went from atomic bombs to nuclear power plants in only 12 years, the first commercially viable one supplying electricity to Pittsburgh in 1957 (click here for the link).

The future happens fast, far faster than we realize. Always.

Here is another anomaly for you. While these massive tech layoffs have been occurring, Weekly Jobless Claims have plunged to a two-year low from 240,000 to only 186,000.

That is because tech workers aren’t like you and me. When they get laid off the first thing, they do is cheer, then take a trip to Europe. They are too wealthy to qualify for unemployment benefits, so they never apply. When they get home, they immediately get new jobs that pay more money with extra stock options.

I know because I have three kids working in Silicon Valley and enjoy a never-ending stream of inside dope.

This means that you need to be loading the boat with tech stocks on every major dip for the rest of your life, or at least my life. The profit opportunities are exponential.

This creates a new dilemma.

You can pick up the easy doubles and triples now just though buying listed companies. But many of the hundred and thousand baggers haven’t even been created yet. That’s where newly unemployed tech workers are flocking to. That’s where you’ll find the next Tesla (TSLA) at $2 trade.

How will you find those? Don’t worry, that’s my job. After all, I found the last Tesla at $2, minting many new millionaires along the way.

My trading performance certainly shows the possibilities of this My New Theory of Equities, which so far in January has tacked on a robust +19.94%. My 2023 year-to-date performance is the same at +19.94%, a spectacular new high. The S&P 500 (SPY) is up +7.32% so far in 2023.

It is the greatest outperformance on an index since Mad Hedge Fund Trader started 15 years ago. My trailing one-year return maintains a sky-high +95.09%.

That brings my 15-year total return to +617.13%, some 2.66 times the S&P 500 (SPX) over the same period and a new all-time high. My average annualized return has ratcheted up to +46.87%, easily the highest in the industry.

Last week, I took profits on my longs in Tesla (TSLA) and Occidental Petroleum (OXY). That leaves me 90% in cash, with one lonely 10% short in the (QQQ). Markets are wildly overextended here; the Volatility Index ($VIX) is at a two-year low at $18, and my own Mad Hedge Market Timing Index is well into “SELL” territory at 70.

My invitation on the long side is wearing thin.

And while I’m at it, let me introduce one of my favorite secret economic indicators.

I call it the “Flat Tire Indicator”.

It goes something like this. The stronger the economy, the more trucks you have driving to new construction sites to build factories and homes. That means more trucks wearing out the roads, creating more potholes, and bouncing more nails out the back.

Tadah! You get more flat tires.

I am not citing this as some Ivory Tower, pie-in-the-sky academic theory. I spent the morning getting a flat tire on my Tesla Model X fixed. This wasn’t just any old tire I could pick up on sale at Big O Tires. It was a Pirelli Scorpion Zero 265/35 R22 All Season staggered racing tire.

Still, Tesla did well. From the time I typed in my request on the Tesla app on my smartphone to the time the repair was completed at my home, only 45 minutes had elapsed.

Still, $500 for a tire Elon? Really?

Elon Musk Ambushed the shorts, with a Massive Short Squeeze Hitting Tesla, up 80% in three weeks and far and away the top-performing major stock of 2023. Tesla now accounts for an incredible 7% of the entire options market. Bearish hedge funds are panicking. It’s dragging the rest of big tech with it. I think we are due for a rest around the Fed interest rates decision in three days. I warned you about an onslaught of good news coming out about Tesla. It has arrived!

Will This Week See the Last Interest Rate Hike, in this cycle on February 1? That’s what stocks seem to be discounting now, with the major indexes up almost every day this year. And even next week may only deliver a 25-basis point hike.

The Fed’s Favorite Inflation Indicator Fell in December, Core PCE up only 4.4% YOY. It’s fanned the tech flames for a few more days. The University of Michigan is calling for only 3.9%.

Q4 GDP is Up 2.9%, far higher than expected. This is becoming the recession that may not show. New car sales went ballistic and there were huge orders for Boeing. Bonds sold off on the news.

Recession Risk Falls, from a 98% probability to only 73% according to an advanced model from JP Morgan Bank. Other models say it’s dropped to only 50%. A soft landing is now becoming the conventional view. The view is most clearly seen in high-yield bonds which have recently seen interest rates plunge. This may become the recession that never happens.

Tech Layoffs Top 75,000, or 2% of the tech workforce. Most get two job offers on hitting the street from the thousands of garage startups percolating in San Francisco Bay Area garages, taking the Silicon Valley unemployment rate below 2%. All tech is losing is the froth it picked up during the pandemic. As I tell my kids, you want to work in the industry where 2% of the US population spin off 35% of America’s profits. Buy big tech on the coming dips.

Tesla Price Cuts Crush the EV Industry, in a clear grab by Elon for market share, already at 65% globally. Teslas are now the cheapest EVs in the world on a per mile basis, and with the new federal subsidies they now qualify for the discount rises to 35%. (GM), (F), and Volkswagen can’t match the cuts because they are already hemorrhaging money on EVs and lack the parts to appreciably boost production. Keep buying (TSLA) on dips, which is up $8 this morning.

Tesla Beats, on both earnings and guidance. It’s looking for 1.8 million vehicles sold in 2023 versus 2022 sales of 1.31 million. Elon is still planning on 50% annual growth over the foreseeable future. The shares jumped an incredible 12% on the news. The Cybertruck will roll out at the end of this year, and I am on the list. The recent price cuts were hugely successful, killing the EV competition, and could take 2023 production to 2 million. It all makes (TSLA) a strong buy and long-term hold on the next $20 dip.

China is Taking Over the Auto World and is the only country that outsold the US in EVs. The Middle Kingdom exported more than 2.5 million cars last year, taking it just behind Germany. The country is targeting 8 million exports by 2030, double Japan’s. What is not said is that most of these will go to low waged emerging countries without auto regulations, safety standards, or even laws. No Chinese cars were sold in the US, far and away the world’s largest market at 15 million units last year in a global market of 67.6 million.

Pending Home Sales Jump in December, up 2.5%, providing more green shoots for the real estate market. This is on a signed contracts-only basis, the best in 14 months. The January numbers will get a huge boost from dramatically lower mortgage rates.

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, January 30 a6 7:30 AM EST, the Dallas Fed Manufacturing Index is announced. NXP Semiconductor (NXPI) reports.

On Tuesday, January 31 at 6:00 AM, the S&P Case Shiller National Home Price Index is updated. Caterpillar (CAT) reports.

On Wednesday, February 1 at 7:00 AM EST, the JOLTS Private Sector Job Openings are released. The Fed Interest Rate Decision is disclosed. Meta (META) reports.

On Thursday, February 2 at 8:30 AM EST, the Weekly Jobless Claims are announced. Apple (AAPL), Amazon (AMZN), and Alphabet (GOOGL) report.

On Friday, February 3 at 8:30 AM EST, the January Nonfarm Payroll Report is printed. Regeneron (REGN) reports.

At 2:00 the Baker Hughes Oil Rig Count is out.

As for me, when Anne Wijcicki founded 23andMe in 2007, I was not surprised. As a DNA sequencing pioneer at UCLA, I had been expecting it for 35 years. It just came 70 years sooner than I expected.

For a mere $99 back then they could analyze your DNA, learn your family history, and be apprised of your genetic medical risks. But there were also risks. Some early customers learned that their father wasn’t their real father, learned of unknown brothers and sisters, that they had over 100 brothers and sisters (gotta love that Berkeley water polo team!) and other dark family secrets.

So, when someone finally gave me a kit as a birthday present, I proceeded with some foreboding. My mother spent 40 years tracing our family back 1,000 years all the way back to the 1086 English Domesday Book (click here).

I thought it would be interesting to learn how much was actually fact and how much fiction. Suffice it to say that while many questions were answered, alarming new ones were raised.

It turns out that I am descended from a man who lived in Africa 275,000 years ago. I have 311 genes that came from a Neanderthal. I am descended from a woman who lived in the Caucuses 30,000 year ago, which became the foundation of the European race.

I am 13.7% French and German, 13.4% British and Irish, and 1.4% North African (the Moors occupied Sicily for 200 years). Oh, and I am 50% less likely to be a vegetarian (I grew up on a cattle ranch).

I am related to King Louis XVI of France, who was beheaded during the French Revolution, thus explaining my love of Bordeaux wines, Chanel dresses, and pate foie gras.

Although both my grandparents were Italian, making me 50% Italian, I learned there is no such thing as a pure Italian. I come it at only 40.7% Italian. That’s because a DNA test captures not only my Italian roots, plus everyone who has invaded Italy over the past 250,000 years, which is pretty much everyone.

The real question arose over my native American roots. I am one sixteenth Cherokee Indian according to family lore, so my DNA reading should have come in at 6.25%. Instead. It showed only 3.25% and that launched a prolonged and determined search.

I discovered that my French ancestors in Carondelet, MO, now a suburb of Saint Louis, learned of rich farmland and easy pickings of gold in California and joined a wagon train headed there in 1866. The train was massacred in Kansas. The adults were massacred, and all the young children adopted into the tribe, including my great X 5 Grandfather Alf Carlat and his brother, then aged four and five.

When the Indian Wars ended in the 1870s, all captives were returned. Alf was taken in by a missionary and sent to an eastern seminary to become a minister. He then returned to the Cherokees to convert them to Christianity. By then Alf was in his late twenties so he married a Cherokee woman, baptized her, and gave her the name of Minto, as was the practice of the day.

After a great effort, my mother found a picture of Alf & Minto Carlat taken shortly after. You can see that Alf is wearing a tie pin with the letter “C” for his last name of Carlat. We puzzled over the picture for decades. Was Minto French or Cherokee? You can decide yourself.

Then 23andMe delivered the answer. Aha! She was both French and Cherokee, descended from a mountain man who roamed the western wilderness in the 1840s. That is what diluted my own Cherokee DNA from 6.50% to 3.25%. And thus, the mystery was solved.

The story has a happy ending. During the 1904 World’s Fair in St. Louis (of Meet me in St. Louis fame), Alf, then 46 placed an ad in the newspaper looking for anyone missing a brother from the 1866 Kansas massacre. He ran the ad for three months and on the very last day his brother answered and the two were reunited, both families in tow.

Today, it costs $169 to get you DNA analyzed, but with a much larger data base it is far more thorough. To do so click here at https://www.23andme.com

My DNA has Gotten Around

It All Started in East Africa

1880 Alf & Minto Carlat, Great X 5 Grandparents

My New Coincident Economic Indicator

January 27, 2023

Diary, Newsletter, Summary

Global Market Comments
January 27, 2023
Fiat Lux

Featured Trade:

(JANUARY 25 BIWEEKLY STRATEGY WEBINAR Q&A),
(RIVN), ($VIX), (SPX), (UUP), (NVDA), (TLT), (LLY), (AAPL), (RTX), (LMT), (USO), (OXY), (TSLA), (UNG), (MSFT)

CLICK HERE to download today's position sheet.

January 25 Biweekly Strategy Webinar Q&A

Diary, Newsletter

Below please find subscribers’ Q&A for the January 25 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Silicon Valley in California.

Q: What do you think about LEAPS on Rivian (RIVN)?

A: Yes, I would do those, but a smaller position with closer strike prices. Go to the maximum maturity 2 years out and be conservative—bet on only a 50% rise in the stock. I’m sure it’ll double, but with the LEAPS you’ll have tremendous upside leverage, like 10 to 1, so don’t get greedy. Go for the 500% profit in 2 years rather than the 1,000%, because it is still a startup, and we need economic recovery for startups to get traction. If anything, Tesla (TSLA) will drag this stock back up as it dragged it down. They all move together.

Q: What’s the number of contracts on your $100,000 model portfolio?

A: Our model portfolio basically assumes we have 10 positions of $10,000 each totaling $100,000 in value. You can then change the number of contracts to suit your own private portfolio—take on as much or as little risk as you want. If you’re new. I recommend trading on paper first to make sure you can make money before you use the real thing.

Q: I’m new to this service. What’s the difference between the long-term portfolio and the short-term portfolio?

A: A long term portfolio is a buy-and-forget portfolio, with maybe a 5- or 10-year view. We only change it and make adjustments twice a year so we can average back into the new positions and take profits on the old ones. The main part of this service is usually front-month, and that’s where we take advantage of anomalies in the options market and market timing to make profits 95% of the time. And a big part of the short-term portfolio is cash; we often go 100% cash when there are no trades to be had. It’s actually more valuable knowing when not to trade than when to trade. If you have any more questions, just email customer support at support@madhedgefundtrader.com and we’ll address them individually.

Q: Is it time for a CBOE Volatility Index ($VIX) trade?

A: I hate trading ($VIX). I only do it from the short side; when you get down to these low levels it can flatline for several months, and the time decay eats you to death. I only do it from the short side, and then only the 5% of the time that we’re peaking in ($VIX). The big money is made on the short side, that’s how virtually the entire options trading industry trades this.

Q: Would you be loading up with LEAPS in February?

A: No, it’s the worst time to do LEAPS. You do LEAPS at long-term market bottoms like we had in October, and then we issued 12 different LEAPS. If you get a smaller pullback, there may be LEAPS opportunities, but only in sectors that are near all-time lows, like gold or silver. It depends on the industry and where we are in the market, but basically, you’re looking to do LEAPS at lows for the year because the leverage is so enormous, and so are the potential profits.

Q: Is the increasing good performance a result of your artificial intelligence? Learning from past mistakes?

A: Partly yes, and partly my own intelligence is improving. Believe it or not, when you go from year 54 to 55 in experience in the markets, you understand a lot more about the markets. Sometimes you just get lucky being on the right side of black swan events. Of course, knowing when the market is especially sensitive and prone to black swans is also a handy skill to have.

Q: Is it too late to get into Freeport McMoRan (FCX)?

A: Yes, I wouldn’t touch (FCX) until we get at least a $10 selloff, which we may get in February, so I think the long term target for (FCX) is $100. The stock has nearly doubled since the LEAPS went out in October from $25 a share to almost $50, so that train has left the station. Better off to wait for the next train or find another stock, there are a lot of them.

Q: Where do you park cash in the holding pattern?

A: Very professional hedge fund managers buy 90-day T-bills, because if you keep your cash in your brokerage account—their cash account—and they go bankrupt, it’ll take you 3 years to get your money back in a bankruptcy proceeding. If you own 90-day T-bills and your broker goes bankrupt, they’re required by law to just hand over the T-bills to you immediately. You take delivery of the T-bills, you park them at another brokerage house, and you keep them there. There is no loss of the use of funds.

Q: What about Long term US dollar (UUP)?

A: We go down for 10 years. Falling interest rates are poison for a currency; our rates are probably going to be falling for the next several years.

Q: Thoughts on Tesla (TSLA)?

A: Short term way overbought, we almost got up 60% from the low in weeks, but that’s Tesla, that’s just how it trades. It is the best performing major stock in the market this year. I wouldn’t be looking to go back into it until we drop back, give up half of that gain, get back down to about $135—then it would be a good options trade and a good LEAPS.

Q: Would you be taking profits in Nvidia (NVDA)?

A: I would take like half here and look to buy it back on the next dip because I think Nvidia’s got higher highs ahead of it.

Q: I can’t get a password for the website.

A: Please contact customer support on the homepage and they will set you up immediately. If not, you can call them at (347) 480-1034.

Q: Would you be selling long term positions?

A: No I would not, because if you sell a long term position they’re very hard to get back into; and I’m expecting $4,800 in the (SPX) by the end of the year. Everything goes up by the end of the year, even things you hate. So no, selling is what you did a year ago, now you’re basically looking for chances to get back in.

Q: Would you hold Tesla (TSLA) over this earnings report?

A: No, I sold my position yesterday, at 70% of its maximum potential profit. I don't need substantial selloff; I’m just going to go right back in again.

Q: Have you heard anything about Tesla silicon roof tiles tending to catch fire?

A: No I have not, but if your house got struck by lightning or if someone fired a bullet at it, that might do the trick. Otherwise, you need a huge input of energy to get silicon to catch on fire as it’s a pretty stable element. And if it was already happening on a large scale, you know the media would be absolutely all over it—the media loves to hate Tesla and loves to hate Elon Musk. That certainly would draw attention if it were happening; what's more likely is that fake news is spreading rumors that are not true. That's been a constant problem with Tesla from the very beginning.

Q: Would you open the occidental spread here today?

A: I would, but I would use strike prices $5 lower. I'd be doing the February $50-$55 vertical bull call spread to give yourself some extra protection, given that the general market itself is so high.

Q: Should I be shorting Apple (APPL) here?

A: No, but the smart thing to do is to sell the $160 calls because I don’t think we’ll get up to $160. You could take any extra premium income, and if you don’t get hit this month, keep doing it every month until you are hit, and then you can take in quite a lot of premium income by the time we get to new highs in Apple, possibly as much as $10 or $15. So, that would be a smart thing to do with Apple.

Q: What's your favorite in biotech and big pharma?

A: Eli Lilly (LLY), which just doesn't seem to let anybody in.

Q: If China were to shut down again, would it hurt the stock market?

A: Yes, but not much. The much bigger falls would be in Chinese stocks (which have already doubled since October) not ours.

Q: Thoughts on biotech?

A: Biotech is the new safety trade that will continue. Also, they’re having their secular ramp-up in technology and new drugs so that is also a good long-term bull call on biotech.

Q: What’s the dip in iShares 20+ Year Treasury Bond ETF (TLT)?

A: $4 points at a minimum, $5 is a nice one, $6 would be fantastic if you can get it.

Q: Could we get a trade-up in oil (USO)?

A: Yes, maybe $5 or $10 a barrel. But it’s just that, a trade. Long term, oil still goes to zero. Short term, China recovery gives a move up in oil and that's why we went long (OXY).

Q: You talk about California NatGas being dead, but California gets 51% of its electricity from natural gas, up from 48% in 2018.

A: Yes, but that counts all of the natural gas that gets brought in from other states. In fact, if you look at the longer-term trend over the last 20 years, coal has gone to zero, nuclear is going to zero, hydro has remained the same at about 10%. NatGas has been falling and green sources like wind and solar, have been rising quite substantially. And now, approximately 25% of all the homes in California get solar energy, or 8.4 million homes, and it is now illegal to put gas piping into any new construction. New York is doing the same. That means it will be illegal to do new natural gas installations in a third of the country. So, I think that points to lower natural gas consumption, and in fact, the 22-year target is to take it to zero, which might be optimistic but you never know. All they need is a smallish improvement in solar technology, and that 100% from green sources is doable by 2045, not only for California but for everybody. All energy plays are a trade only, not an investment.

Q: Any thoughts on the implications for the US and Germany providing tanks to Ukraine?

A: You can throw Poland in there, which is also contributing a tank division—so a total of 58 M1 Abrams tanks are going to Ukraine. By the way, I did command a Marine Corps tank battalion for two weeks on my reserve duty, so I know them really well inside and out. They are powered by a turbine engine, have a suspension as soft as a Cadillac, a laser targeting system accurate to three miles even for beginners, and fire recycled uranium shells that can cut through anything like a knife through butter. The answer is the war gets prolonged, and eventually forces Russia into a retreat or a negotiation. Even though the M1 is an ancient 47-year-old design, its track record against the Russian T72 is pretty lopsided. In the first Gulf War, the US destroyed 5,000 T72s and the US lost one M1 tank because he parked on a horizon, which you should never do with a tank. And every driver of a T72 knows that track record. So that explains why Russian tanks have been running out of gas, sugaring their gas tanks, sabotaging their diesel engines, and doing everything they can to avoid combat because of massive fatal design flaws in the T72. We only need to provide about 50 or 60 of the M1 tanks as a symbolic gesture to basically scare the entire Russian tank force away.

Q: Why do you think Elon kept selling Tesla? Did he think it would go lower?

A: Elon thinks the stock’s going to $10,000, but he needed up-front cash to build out six remaining Tesla factories, and for that, he needed about $40 billion, which is why he sold $40 billion worth of stocks last year when it was peaking. He also is sensitive to selling at tops; it’s better to sell stock in with Tesla at an all-time high than at an all-time low, so he clearly times the market to meet his own cash flows.

Q: What about military contractors?

A: I know Raytheon (RTX) and Lockheed Martin (LMT) have a two-year backlog in orders for javelin missiles and stingers, which are now 47-year-old technology that has to be redesigned from scratch. The US just placed an order for a 600% increase in artillery shells for the 155 mm howitzer. I thought we’d never use these again, which is why US stocks for ammunition got so low. But it looks like we have more or less a long term or even permanent customer in Ukraine for everything we can produce, in old Vietnam-era style technologies. How about that? I’m telling the military to give them everything we’ve got because everything we’ve got is obsolete.

Q: When should we buy Microsoft (MSFT)?

A: On the next 10% dip. It’s the quality stock in the US.

Q: Do you place an order to close the spread at profit as soon as you have filled in the trade?

A: You can do that, but it’s kind of a waste of time. Wait until we get close to the strikes; most of the big companies we deal in, you don't get overnight 10% or 20% moves, although it does happen occasionally.

Q: Natural Gas (UNG) prices are collapsing.

A: Correct, because the winter energy crisis in Europe never showed and spring is just around the corner.

Q: On the Tesla (TSLA) LEAPS, what about the January 2025 $600-$610 vertical bull call spread

A: That is way too far out of the money now. I would write that off and go back into it but do something like a January 2025 $180-$190. It has a much higher probability of going in the money, and still an extremely high return. It would be something like 500% if you get in down at these levels.

Q: How do you see Bitcoin short term/long term?

A: I think the loss of confidence in the asset has been so damaging that it may not come back in my lifetime. It could be another Tokyo situation where it takes 30 years to recover, or only recovers when the entire sector gets taken over by the big banks. So, I don’t see any merit in the crypto trade, probably forever. Once you lose confidence in the financial markets, it’s impossible to get it back. And it turns out that every one of these mainline trading platforms was stealing from the customers. No one ever comes back from that in the financial markets.

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

Good Luck and Stay Healthy,

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

At 29 Palms in my M1 Abrams Tank in 2000

January 23, 2023

Diary, Newsletter, Summary

Global Market Comments
January 23, 2023
Fiat Lux

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD, or WHERE IS THE BEAR MARKET?),
(GOLD), (GLD), (WPM), (SLV), (BRK/B), (TSLA), (OXY)

CLICK HERE to download today's position sheet.

The Market Outlook for the Week Ahead, or Where is the Bear Market?

Diary, Newsletter

The Pivot has started.

Not by the Fed, which is not expected to begin lowering interest rates by the summer or fall.

It's the stock market that has pirouetted, from bear to bull last October. The higher stocks rise in this miraculous, coming-from-nowhere rally, the more credibility this rally gains.

If a new bull market has well and truly begun, then there are an awful lot of portfolios out there that have the wrong stocks. Repositioning this late in the game could take the indexes to new all-time highs by yearend.

Some portfolio managers are whistling past the graveyard right now.

The Fed pivot may also take place ahead of schedule. The marketplace has shaved the February 1 interest rate hike from 50 basis points to only 25, which explains stocks’ recent virility.

My trading performance certainly shows the possibilities, which so far has tacked on a robust +20.65%. My 2023 year-to-date performance is the same at +20.65%, a spectacular new high. The S&P 500 (SPY) is up +1.86% so far in 2023.

It is the greatest outperformance on an index since Mad Hedge Fund Trader started 15 years ago. My trailing one-year return maintains a sky high +107.27%.

That brings my 15-year total return to +617.84%, some 2.8 times the S&P 500 (SPX) over the same period and a new all-time high. My average annualized return has ratcheted up to +47.22%, easily the highest in the industry.

Last week, I rode into the Friday options expiration with my 5X weighting in bonds, as well as additional longs in (TSLA), (GOLD), (WPM), and (BRK/B). Both my remaining positions are profitable, including longs in (TSLA) and (OXY) with 80% cash for a 20% net long position.

Stocks are not the only asset class on a tear because of an earlier than expected Fed easing.

Precious metals have been going virtually straight up. For the first time since the US went off the gold standard 50 years ago, gold (GLD) outperformed the S&P 500 in Q4, and silver (SLV) did even better.

Not only does gold benefit from falling inflation and interest rates, the end of the Fed’s quantitative tightening (QT) will provide a further steroid shot as well.

Sanctions against Russia and China have sent central bank purchases of the barbarous relic to new all-time highs. And you might speculate that the possible Russian use of nuclear weapons is also driving your gold northward, but you would be wrong. You may find this shocking, but Ukraine has their own nukes and if Russia attacked, Moscow would be radioactive that week.

The bottom line here is that the yellow metal could well remain strong all year and be a top performer.

Bonds continued their on again, off again rally. The prospects of falling interest rates pushes them up and then fears of a summer default push them back down again, some $2.50 for the (TLT) last week.

One thing is certain. If the Treasury is pushed into default the Fed definitely WILL NOT be raising interest rates. They won’t need to crush the economy. The House of Representatives will be doing their job for them.

The least appreciated piece of news last week was the report that China’s population fell for the first time in 50 years, thanks to a massive famine. I remember it like it was yesterday as I was there. Believe me, there are no substitutes for food. It took me a king’s ransom and some banned western books just for me to procure a single egg.

This will affect us all as there will be a sudden shortage of customers in the global economy in about 20 years. You may think that 20 years is a long time off, but the best run companies will start planning and investing for this now.

If you don’t think a shrinking population is bad for business, just ask Japan, where they’re not making Japanese anymore. Japan has suffered the worst performing stock market for the last 32 years and is still showing a negative return.

That was a nice bail!

Remember, demographics is destiny. Check out the population pyramid charts below.

The Fed May Retreat to 25 Basis Point, in their February 1 rate hike, according to a Reuters poll. It might explain why stocks have been so hot in January.

Treasury Secretary Warns of Coming US Bond Default, saying the government runs out of money by June. Bonds plunged $2.00 on the news. The House of Representatives need to raise the debt ceiling before then, or the Treasury will cease paying interest on the $31.4 trillion national debt. This is for money already spent by administrations going back to the 1980’s. Rising interest rates have already taken America’s debt service from 5% to 10% of the total budget.

This Year Won’t Be as Bad as Last, or so hope the bulls that have been piling into stocks since January 3. The weakness in tech stocks actually understates the ballistic moves in value, metals, and financial stocks, which Mad Hedge is long. Things are better than they appear. That’s what six months of deflation will do.

China Reopening Accelerates and may well head off a global recession. Letting everyone get covid and achieving heard immunity turned out to be the key. It’s demolished the entire January selloff scenario.

Wholesale Prices Drop 0.5% in December versus an expected 0.1% in another big step toward the unwind of inflation. The energy sub index fell by 7.9%. I am looking like a 4% inflation rate by yearend.

Builder Sentiment Rose 4 Points in December according to the National Association of Homebuilders. It’s the first positive data point for housing in ages. Could this be the beginning of the big turn?

Mortgage Rates Plunge to 6.04% for the 30-year fixed, sparking a 28% gain week to week. A massive rally in the bond market is the big incentive, taking ten-year Treasury bonds to 6.37%, a new five month low. Inventory remains low. Mortgage rates could easily shed another 100 basis points by summer just on falling to the traditional premium over Treasuries, which is why housing stocks like (LEN), PHM), and (KBH) have been on fire.

Business Inventories up 0.4%, right in line with expectations. Retail Sales are falling, as is Consumer Spending. Department store sales were down 6.5%, once unimaginable to see during the Christmas season.

Netflix Blows it Away with 6.7 million new subscribers., taking the stock up 7%, and 125% from the May low. It’s proof that the FANG’s are not dead yet and that the predicted Q4 earnings shortfall may be overstated. CEO Reed Hastings semi-retires. Don’t touch (NFLX) as this train has left the station. There are better fish to fry.

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, January 23 nothing of note is announced. Baker Hughes (BKR) reports earnings from the oil patch.

On Tuesday, January 24 at 8:45 AM EST, the S&P Global PMIs for December is out. Johnson & Johnson (JNJ) and Microsoft (MSFT) report earnings.

On Wednesday, January 25 at 7:30 AM, the Crude Oil Stocks are announced. Tesla (TSLA) and Boeing (BA) report earnings.

On Thursday, January 26 at 8:30 AM, the Weekly Jobless Claims are announced. Retail Sales for November are printed. We also get US Q4 GDP. Visa (V) and Intel (INTC) report earnings.

On Friday, January 27 at 5:30 AM, the Personal Income & Spending for December is disclosed. American Express (AXP) and Chevron (CVX) report earnings. At 2:00, the Baker Hughes Oil Rig Count is out.

As for me, I didn’t know what to expect when I landed on the remote South Pacific Island of Yap in 1979, one of the Caroline Islands, but I was more than pleasantly surprised.

Barely out of the Stone Age, Yap lies some 3,000 miles west of Hawaii. It was famed for the ancient lichen covered stone money that dotted the island which had no actual intrinsic value.

The value was in the effort that went into transporting them. With some cylindrical pieces larger than cars, geologists later discovered that they had been transported some 280 miles by outrigger canoe from the point of origin sometime in the distant past. Since Yap had no written language, there are no records about them, only folktales.

I often use the stone money of Yap as an example of the arbitrariness of fiat money. Who’s to say which is more valuable; a 500-pound piece of rock or a freshly printed $100 Benjamin from the US Treasury?

You decide.

The natives were a gentle and friendly people. They wore grass skirts purely for the benefit of Western visitors. They preferred to walk around as nature made them.

There was no hotel on the island at the time, so I was invited to stay with a local chief (picture below).

One of my hosts asked if I was interested in seeing a Japanese zero fighter. Yap wasn’t invaded by the US during WWII because it was bypassed by MacArthur on his way to the Philippines. The Japanese troops were repatriated after their war, but most of their equipment was left behind. It was still there.

So it was with some anticipation that I was led to a former Japanese airfield that had been abandoned for 35 years. There, still in perfect formation, was a squadron of zeroes. The jungle had reclaimed the field and several planes had trees growing up through their wings.

The natives had long ago stripped them of anything of value, the machine guns, nameplates, and Japanese language instruments. But the airframes were still there exposed to the elements and too fragile to move.

During my stay, I came across an American Peace Corp volunteer desperate for contact with home. A Jewish woman in her thirties, she had been sent there from New York City to teach English and seemed to have been forgotten by the agency.

I volunteered for the Peace Corps. myself out of college, but it turned out they had no need of biochemists in Fiji, so I was interested in learning about her experience. She confided in me that she had tried wearing a grass skirt to blend in but got ants on the second day. We ended up spending a lot of time together and I got a first-class tour of the island.

Suffice it to say that she was thrilled to run into a red-blooded American male. I wish I had taken a picture of her, but the nearest color film processing was back in Honolulu, and I had to be judicious in my use of film.

The highlight of the trip was a tribal stick dance put on in my honor around an evening bonfire among much yelping and whooping. It was actually a war dance performed with real war clubs and their furiousness was impressive.

I had the fleeting thought that I might be on the menu. Cannibalism had been practiced here earlier in the century. During the war when starvation was rampant, several of the least popular Japanese soldiers went missing, their bodies never found. When men come screaming at you with a club in the night, your imagination runs wild.

Alas, I could only spend a week on this idyllic island. I was on a tight schedule courtesy of Air Micronesia, and deadlines beckoned. Besides, there was only one plane a week off the island.

It was on to the next adventure.

A Few New Friends

Large Denomination Stone Money

My Accommodation

A Neglected Japanese Zero

China

Japan

December 12, 2022

Diary, Newsletter, Summary

Global Market Comments
December 12, 2022
Fiat Lux

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD, or HOW MARKETS WORK),
(SPY), (TLT), (TSLA), (GLD), (XOM), (OXY), (FXI), (JPM)

The Market Outlook for the Week Ahead, or How Markets Work

Diary, Newsletter, Research

Last week, I spoke about the “smart” market and the “dumb” market.

Looking across asset class behavior over the last couple of years, it’s become evident, there is another major driver.

Liquidity.

Hedge fund legend George Soros was an early investor in my hedge fund because he was looking for a pure Japan play. But I learned a lot more from him than he from me.

No shocker here: it’s all about the money.

Follow the flow of funds and you will always know where to invest. If you see a sustainable flow of money into equities, you want to own stocks. The same is true with bonds.

There is a corollary to this truism.

The simpler an idea, the more people will buy it. One can think of many one or two-word easy-to-understand investment themes that eventually led to bubbles: the Nifty Fifty, the Dotcom Boom, Fintech, Crypto Currencies, and oil companies.

Spot the new trend, get in early, and you make a fortune (like me and Soros). Join in the middle, and you do OK. Join the party at the end and it always ends in tears, as those who joined crypto a year ago learned at great expense.

If I could pass on a third Soros lesson to you, it would be this. Anything worth doing is worth doing big. This is why you have seen me frequently with a triple position in the bond market, or the double short I put on with oil companies two weeks ago, clearly just ahead of a meltdown.

Which brings me back to liquidity.

There are only two kinds of markets: liquidity in and liquidity out. Liquidity was obviously pouring into markets from 2009. This is why everything went up, including both stocks and bonds. That liquidity ended on January 4, 2022. Since then, liquidity has been pouring out at a torrential rate and everything has been going down.

So, what happened on October 14, 2022?

The hot money, hedge funds, and you and I started betting that a new liquidity in cycle will begin in 2023 and continue for five, or even ten years. This is why we have made so much money in the past two months.

Notice that liquidity out cycles are very short when compared with liquidity in cycles, one to two years versus five to ten years. That’s because populations expand creating more customers, technology advances creating more products and services, and economies get bigger.

When I first started investing in stocks, the U.S. population was only 189 million, the GDP was $637 billion, and if you wanted a computer, you had to buy an IBM 7090 for $3 million. Notice the difference with these figures today: $25 trillion for GDP, a population of 335 million, and $99 for a low-end Acer laptop, which has exponentially more computer power than the old IBM 7090.

What did the stock market do during this time? The Dow Average rocketed by 54 times, or 5,400%. And you wonder why I am so long term bullish on stocks. The people who are arguing that we will have a decade of stock market returns are out of their minds.

Which reminds me of an anecdote from my Morgan Stanley days, in my ancient, almost primordial past. In September 1982, I met with the Head of Investments at JP Morgan Bank (JPM), Mr. Carl Van Horn. I went there to convince him that we were on the eve of a major long term bull market and that he should be buying stocks, preferably from Morgan Stanley.

Every few minutes he said, “Excuse me” and left the room to return shortly. Years later, he confided in me that whenever he left, he placed an order to buy $100 million worth of stock for the bank’s many funds every time I made a point. That very day proved to be the end of a decade-long bear market and the beginning of an 18-year bull market that delivered a 20-fold increase in share prices.

But there is a simpler explanation. Liquidity in markets are a heck of a lot more fun than liquidity out ones, where your primary challenge is how to spend your newfound wealth.

I vote for the simpler explanation.

Yes, this is how markets work.

My performance in December has so far tacked on another robust +4.85%. My 2022 year-to-date performance ballooned to +88.53%, a spectacular new high. The S&P 500 (SPY) is down -17.0% 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 +92.92%.

That brings my 14-year total return to +601.09%, some 2.73 times the S&P 500 (SPX) over the same period and a new all-time high. My average annualized return has ratcheted up to +46.23%, easily the highest in the industry.

I took profits in my oil shorts in (XOM), (OXY), (SPY), and (TSLA). I am keeping one long in (TSLA), with 90% cash for a 10% long position.

Producer Prices Come in High, up 0.3% in November, driven by rising prices for services. It sets up an exciting CPI for Tuesday morning.

Emerging Markets Saw Massive Inflows in November, some $37.4 billion, the most since June 2021. Chinese technology stocks were two big beneficiaries, down 80%-90% from their highs. This could be one of the big 2023 performers if the US dollar and interest rates continue to fall. Buy (EEM) on dips.

Oil is in Free Fall, with 57 fully loaded Russian tankers about to hit the market. Nobody wants it ahead of a recession. All mad hedge short plays in energy are coming home. When will the US start refilling the Strategic Petroleum Reserve?

Turkey Blocks Russian Oil at the Straights of Bosporus, checking insurance papers, which are often turning out to be bogus. Insurance Russian tankers are now illegal in western countries. Many of these tankers are ancient, recently diverted from the scrapyard and in desperate need of liability insurance. Oil spills are expensive to clean up. Just ask any Californian.

Tesla Cuts Production in China, some 20% at its Shanghai Gigafactory for its Model Y SUV, or so the rumor goes. The short sellers are back! These are the kind of rumors you always hear at market bottoms.

US Unemployment to Peak at 5.5% in Q3 of 2023, according to a survey from the University of Chicago Business School. A tiny handful expects a higher 7.0% rate. Some 85% of economists polled expect a recession next year. After that, the Fed will take interest rates down dramatically to bring unemployment back down. No room for a soft landing here.

Home Mortgage Demand Plunges in another indicator of a sick housing market, which is 20% of the US economy. New applications are down a stunning 86% YOY despite a dive in the 30-year rate to 6.41%, but nobody is selling. Refis are now nonexistent.

Gold Continues on a Tear, hitting new multi-month highs. With interest rates certain to plummet in 2023 as the Fed reacts to a recession, Gold could be one of the big trades for next year. Buy (GLD), (GDX), and (GOLD) on dips.

Services PMI Hits New Low for 2022 at a recessionary 46.2. Nothing but ashes in this Christmas stocking. It didn’t help bonds, which sold off two points yesterday.

Demand Collapse Hits China (FXI), with US manufacturing there down 40% and many factories closing early for the New Year. Container traffic from the Middle Kingdom is down 21% over the past three months, astounding ahead of Christmas.

My Ten-Year View

On Monday, December 12 at 8:00 AM, the Consumer Inflation Expectations for November is published.

On Tuesday, December 13 at 8:30 AM EST, the Core Inflation Rate for November is out

On Wednesday, December 14 at 11:00 AM EST, the Federal Reserve Interest rates decision is announced. The Press Conference follows at 11:30.

On Thursday, December 15 at 8:30 AM EST, the Weekly Jobless Claims are announced. Retail Sales for November are printed.

On Friday, December 16 at 8:30 AM EST, the S&P Global Composite Flash PMI for December is disclosed. At 2:00 PM, the Baker Hughes Oil Rig Count is out.

As for me, in 1978, the former Continental Airlines was looking to promote its Air Micronesia subsidiary, so they hired me to write a series of magazine articles about their incredibly distant, remote, and unknown destinations.

This was the only place in the world where jet engines landed on packed coral runways, which had the effect of reducing engines lives by half. Many had not been visited by Westerners since they were invaded, first by the Japanese, then by the Americans, during WWII.

That’s what brought me to Tarawa Atoll in the Gilbert Islands, and island group some 2,500 miles southwest of Hawaii in the middle of the Pacific Ocean. Tarawa is legendary in the US Marine Corps because it is the location of one of the worst military disasters in American history.

In 1942, the US began a two-pronged strategy to defeat Japan. One assault started at Guadalcanal, expanded to New Guinea and Bougainville, and moved on to Peleliu and the Philippines.

The second began at Tarawa, and carried on to Guam, Saipan, and Iwo Jima. Both attacks converged on Okinawa, the climactic battle of the war. It was crucial that the invasion of Tarawa succeed, the first step in the Mid-Pacific campaign.

US intelligence managed to find an Australian planter who had purchased coconuts from the Japanese on Tarawa before the war. He warned of treacherous tides and coral reefs that extended 600 yards out to sea.

The Navy completely ignored his advice and in November 1943 sent in the Second Marine Division at low tide. Their landing craft quickly became hung up on the reefs and the men had to wade ashore 600 yards in shoulder-high water facing withering machine gun fire. Heavy guns from our battleships saved the day but casualties were heavy.

The Marines lost 1,000 men over three days, while 4,800 Japanese who vowed to keep it at all costs, fought to the last man.

Some 35 years later, it was with a sense of foreboding that I was the only passenger to debark from the plane. I headed for the landing beaches.

The entire island seemed to be deserted, only inhabited by ghosts, which I proceeded to inspect alone. The rusted remains of the destroyed Marine landing craft were still there with their twin V-12 engines, black and white name plates from “General Motors Detroit Michigan” still plainly legible.

Particularly impressive was the 8-inch Vickers canon the Japanese had purchased from England, broken in half by direct hits from US Navy fire. Other artillery bore Russian markings, prizes from the 1905 Russo-Japanese War transported from China.

There were no war graves, but if you kicked at the sand human bones quickly came to the surface, most likely Japanese. There was a skull fragment here, some finger bones there, it was all very chilling. The bigger Japanese bunkers were simply bulldozed shut by the Marines. The Japanese are still in there. I was later told that if you go over the area with a metal detector it goes wild.

I spend a day picking up the odd shell casings and other war relics. Then I gave thanks that I was born in my generation. This was one tough fight.

For all the history buffs out there, one Marine named Eddie Albert fought in the battle who, before the war, played “The Tin Man” in the Wizard of Oz. Tarawa proved an expensive learning experience for the Marine Corps, which later made many opposed landings in the Pacific far more efficiently and with far fewer casualties. And they paid much attention to the tides and reefs, developing Underwater Demolition Teams, which later evolved into the Navy Seals.

The true cost of Tarawa was kept secret for many years, lest it speak ill of our war planners, and was only disclosed just before my trip. That is unless you were there. Tarawa veterans were still in the Marine Corps when I got involved during the Vietnam War and I heard all the stories.

As much as the public loved my articles, Continental Airlines didn’t make it and was taken over by United Airlines (UAL) in 2008 as part of the Great Recession airline consolidation.

Tarawa is still visited today by volunteer civilian searchers looking for soldiers missing in action. Using modern DNA technology, they are able to match up a few MIAs with surviving family members every year. I did the same in Guadalcanal.

As much as I love walking in the footsteps of history, sometimes the emotional price is high, especially if you knew people who were there.

Stay healthy,

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

Tarawa November 1943

Broken Japanese Cannon

Armstrong 8-Inch Cannon 1900

US Landing Craft on the Killer Reef

How to Get to Tarawa

Roving Foreign Correspondent on Tarawa in 1978

Second Marine Division WWII Patch

December 5, 2022

Diary, Newsletter, Summary

Global Market Comments
December 5, 2022
Fiat Lux

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE GOOD MARKET AND THE BAD MARKET)
(TLT), (XOM), (OXY), (TSLA), (SPY), (BABA), (BIDU), (KBH), (PHM), (LEN), (AAPL)

The Market Outlook for the Week Ahead, or the Good Market and the Bad Market

Diary, Newsletter, Research

I usually write my Monday strategy letters in the middle of the night in my mind, from 2:00 AM to 3:00 AM, because my feet are too hot, too cold, or because my hip hurts. Then I go back to sleep. If I remember half of it the next morning, then I get a great letter.

I often like to refer to old proven market nostrums and show how true they really are. One of my favorites is the concept of the “good” market and the “bad” market.

The good market is the one for bonds. Vastly more research goes into bonds than stocks because that’s where the respectable, safe, widows and orphan money goes. Global bond markets are also far bigger, worth about $120 trillion. Bond traders usually began their journey at Harvard or Wharton, speak with clipped upper-class accents, and belong to exclusive private clubs that would never let you in for lunch, even with an invitation from a member.

Suffice it to say that the bond market is always right. Their relaxed lifestyle can be explained by the fact that they really only have two variables to look at, Fed policy and the actual supply and demand for money. Working in the bond market is almost like a sinecure, sending you a paycheck every month because you are entitled to it.

The stock market is the complete opposite.

While the bond market was polishing the teacher’s apple at the head of the class, the stock market was smoking cigarettes in the bathroom, endlessly catching detention. The stock market is also smaller, worth about $50 trillion. While bond traders are attending their Rotary meetings, stock traders binge drink and tear up the roads with their new Porsches and Ferraris.

Needless to say, stock traders are always wrong.

That’s because they face a hopeless dilemma. While bond traders have to contemplate only two variables, stock traders have to deal with millions. They have to cope with the hundreds of input variables per company that affect their earnings, and there are over 3,000 companies that trade in the US alone.

To illustrate the point, look at the recent market action.

Both markets have been driven by the same massive liquidity created by the government since 2009. The bond market peaked in August 2020 when it saw the free lunch of ultra-low interest rates soon ending. Stocks didn’t peak until January 2021, some 17 months later. It’s clear that stock traders suffer from a severe learning disorder.

And they’re doing it again.

After a 49% swan dive over two years plus, bonds bottomed on October 14. Stocks may not finally bottom until the spring, six months after bonds. Bonds are now betting that the recession has already begun, we just haven’t seen it in the data yet. Stocks are betting that the recession doesn’t start until 2023, if at all. That’s why it’s been going up.

As for me, I have traded both stocks AND bonds. That’s because before there were stocks, there were bonds as the only thing to trade. As you may recall, stocks were moribund in the 1970s. On top of that, you can add foreign exchange, precious metals, commodities, and volatility. There essentially isn’t anything I haven’t traded.

My performance in December has so far tacked on another robust +3.37%. My 2022 year-to-date performance ballooned to +87.05%, a spectacular new high. The S&P 500 (SPY) is down -13.61% 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 +104.88%.

That brings my 14-year total return to +599.61%, some 2.60 times the S&P 500 (SPX) over the same period and a new all-time high. My average annualized return has ratcheted up to +46.12%, easily the highest in the industry.

I took profits in my triple weighting in bonds last week (TLT), booking some serious profits. All my remaining positions are profitable, shorts in (XOM), (OXY), (TSLA), (SPY), and one long in (TSLA), with 50% cash for a 30% net short position. We’ve just had a great run and the time to pay the piper is fast approaching.

With an +87.05% profit in hand this year, I don’t get a lot of complaints. However, I have been getting some lately because my trade alerts can be hard to get into.

Of course, it can be challenging to execute when 6,000 subscribers are trying to get into the same position at the same time. But when the entire world joins in, that raises the difficulty to a whole new level.

That is what happened with my trade alert to BUY the (TLT) on November 18. It was the trade alert around the world and the next day, bonds rocketed by $3.50. I laddered in with more positions with higher strike prices getting to a triple long in the bond market. When your trade alerts have a 95% success rate, that is what happens. It is the price of being right, which is better than the alternative.

When I first entered this trade, I thought the ten-year US Treasury yield would plunge from 4.46% to 2.50% by June 2023, taking the (TLT) from $91 to $120.

With the (TLT) at $108 on Friday and the ten-year yield at 3.50%, we are already halfway there. If I AM right and bond yields drop to 2.50%, the 30-year fixed mortgage rate will also drop below 4.00% and you can forget about any real estate crash. That's why the homebuilders (LEN), (KBH), and (PHM) are up 30%-40% since October.

With the ballistic moves in some Chinese stocks over the last two weeks (Alibaba (BABA) up 58%, Baidu ((BIDU) adding 47%, I have received a surge in inquiries about the prospects of the US going to war with the Middle Kingdom.

I have been asked this question continuously for the last 50 years, by several Presidents of the United States on down, and my answer is always the same.

There is not a chance.

The reason is very simple. The Chinese can’t feed themselves. They have not been able to do so for 100 years. With a population of 1.2 billion, the Chinese will never be able to feed themselves.

That means the Chinese are highly dependent on international trade to finance their food imports. When trade is vibrant, China prospers.

When it doesn’t, they start stacking up the bodies like cordwood for mass cremation, as happened when China suffered its last major famine. I know because I was there in the 1970s, and I’ll never forget that smell. As you quickly learn during a famine, there is no substitute for food.

So, what are the chances of China bombing their food supply? I’d say zero. A disruption of even a few months and people start to go hungry. Will they bluff, bluster, and obfuscate for domestic consumption? Every day of the year and that is what they are doing now.

As for buying Chinese stocks, I think I’ll pass for now. There are just too many great American ones on sale. The Chinese moves above are only taking place after horrific declines, 78% for (BABA), and 81% for (BIDU).

And before I go on to the data points, I want to recall a funny story.

One day in London 40 years ago, one of my junior traders at Morgan Stanley walked in with a big smile on his face. He had just gotten a great deal on a Ferrari Testarossa, which then retailed at $360,000, a lot of money for a 25-year-old East Ender in those days.

I thought to myself, “There are no great deals on Ferraris.”

A few months later, he totaled the Ferrari after a late night of binge drinking and racing on London’s damp streets, breaking the vehicle cleanly in half. The insurance company determined that his car was in fact two different Ferraris with two different VIN numbers that had been welded together. The car had split apart at the welds.

Some clever entrepreneur took the intact front end of a rear-ended car and the pristine back half of a car with destroyed hood and made one whole good Ferrari. Since my trader had only insured one car and not two, the insurance company refused to honor the claim.

All I can say is “Beware of friends bearing false Ferraris.”

Nonfarm Payroll Report Comes in Hot in November at 263,000, socking markets for 500 points. A December rate hike of 75 basis points has been firmly put back on the table. The Headline Unemployment Rate stays at a near-record high 3.7%. Average Hourly Earnings were up an inflationary 0.6%. Wages are up 5.1% YOY. The dollar soared on the prospect of higher rates for longer.

JOLTS Job Openings Report Comes in Weaker at 10.33 million in October, down 353,000 from September. High interest rates are finally taking their toll. There are still 1.7 job openings per applicant.

Key Inflation Read Drops, the Personal Consumption Expenditures Price Index falling 0.2% in October, excluding food and energy. It sets up a weak CPI on December 13, which would be very stock market positive.

Powell Turns Dovish, well, sort of, indicating that smaller interest rate hikes could start in December. The comments were made at a Brookings Institution meeting on Wednesday. Stocks rallied big on the news.

US to Ease Venezuela Sanctions, allowing Chevron to resume pumping there for six months after a three-year hiatus. It’s an out-of-the-blue big negative for oil prices. Venezuelan oil production has plunged from 2.1 million barrels a day to only 679, 000 thanks to gross mismanagement of the economy. But beggars can’t be choosers on the energy front. Good thing I’m running a double short in the sector. It’s the last think OPEC plus wanted to hear.

Don’t Expect a Housing Crash, as the financial system was vastly stronger than it was in 2008. A mild recession is already priced in, and bank balance sheets are rock solid. Buy the homebuilders on the next dips now coming off from horrific earnings, (KBH), (PHM), and (LEN).

Don’t Expect an iPhone 14 for Christmas, as pandemic-driven production shutdowns and Foxconn riots in China crimp supplies. It could be a longer wait if you want the new deep purple color. Avoid (AAPL) for now. I expect another big tech dive in 2023.

China Riots Tank Market, raising the specter of extended supply chain problems, especially for Apple (AAPL). Oil was especially hard hit as China is its largest buyer, hitting a two-year low and giving up all 2022 gains. China seems to be sacrificing its older generation, not giving them priority for vaccinations which don’t work anyway. This isn’t going away in a day. Transition to India will take a decade.

Case Shiller Plunges, the National Home Price Index Taking a 1.2% hit in September to 10.6%. Miami, Tampa, and Charlotte, NC showed the biggest YOY increases. You know the reasons why.

Home Rentals to Stay Sticky at Record Levels, with gains at 25-35% over the past 24 months. Homebuyers frozen out of the market by record-high interest rates are forced to rent at any price.

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. With the economy decarbonizing 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 will be far more efficient and profitable than the old. Dow 240,000 here we come!

On Monday, December 5 at 8:00 AM EST, the ISM Nonmanufacturing PMI for November is out.

On Tuesday, December 6 at 8:30 AM, the Mad Hedge Traders & Investors Summit begins. Click here to register.

On Wednesday, December 7 at 7:30 AM, the Crude Oil Stocks are announced. It’s pearly Harbor Day.

On Thursday, December 8 at 8:30 AM, the Weekly Jobless Claims are announced. We also get the Producer Price Index for November.

On Friday, December 9 at 8:30 AM, the Producer Price Index for November. At 2:00, the Baker Hughes Oil Rig Count is out.

As for me, I am sitting here in front of the fire at my place in the Berkeley Hills and it is freezing cold and pouring rain outside. Heaven knows we need it.

I’m going to San Francisco later today to do some Christmas shopping. It’s not the ideal time but in my hopelessly busy schedule, this was the only day this year allocated for this chore.

For some reason, last night I recalled my days as an Ivy League Princeton professor, which I hadn’t thought about for decades.

When Morgan Stanley was a private partnership, before it went public in 1987, the firm represented the cream of the US establishment. There wasn’t anyone in business, industry, or politics you couldn’t reach through one of the company’s endless contacts. We referred to it as the “golden Rolodex.”

One day in the early 1980s, a managing director asked me a favor. Since he had landed me my job there, I couldn’t exactly say no. He had committed to teaching a graduate night class in International Economics at his alma mater, Princeton University, but a scheduling conflict had prevented him from doing so.

Since I was then the only Asian expert in the firm, could I take it over for him? If I had extra time to kill, I could always spend it in the Faculty Club.

I said “sure.”

So, the following Wednesday found me at Penn Station boarding a train for the leafy suburb about an hour away. On the way down, I passed the locations of several Revolutionary War battles. When we pulled into Princeton, I realized why they called these places “piles”. The gray stone ivy-covered structures looked like they had been there a thousand years.

My students were whip-smart, spoke several Asian languages, and asked a ton of questions. Many came from the elite families who owned and ran Asia. I understood why my boss took the gig.

I turned out to be pretty popular at the faculty Club, with several profs angling for jobs at Morgan Stanley. Rumors of the vast fortunes being made there had leaked out.

Princeton was weak in my field, DNA research. But as the last home of Albert Einstein, it was famously strong in math and physics. Many of the older guys had worked with the famed Berkeley professor, Robert Oppenheimer, on the Manhattan Project.

I was still a mathematician of some note those days, so someone asked me if I’d like to meet John Nash, the inventor of Game Theory, which won him a Nobel Prize in Economics in 1994. Nash’s work on partial differential equations became the basis for modern cryptography. I was then working on a model using Game Theory to predict the future of stock markets. It still works today and is the basis the Mad Hedge Market Timing Algorithm.

Weeks later found me driven to a remote converted farmhouse in the New Jersey countryside. On the way, I was warned that Nash was a bit “odd,” occasionally heard voices speaking to him, and rarely came to the university.

I later learned that his work in cryptography had driven him insane, given all the paranoia of the 1950s. Having worked in that area myself, that was easy to understand. His friends hoped that by arguing against his core theories, he would engage.

When I was introduced to him over a cup of tea, he just sat there passively. I realized that I was going to have to take the initiative so as a stock market participant, I immediately started attacking Game Theory. That woke him up and started the wheels spinning. It hadn’t occurred to him that game theory could be used to forecast stock prices.

His friends were thrilled.

I later went on to meet many Nobel Prize winners, as the Nobel Foundation was an early investor in my hedge fund. Whenever a member of the Swedish royal family comes to California, I get an invitation to lunch for the Golden State’s living Nobel laureates. It turns out that 20% of all the Nobel Prizes awarded since its inception live here. Last time, I sat next to Milton Friedman, and I argued against HIS theories.

The other thing I remembered about my Princeton days is my discovery of the “professor's dilemma.” Sometimes a drop-dead gorgeous grad student would offer to go home with me after class. I was happily married in those days with two kids on the way, so I respectfully declined, despite my low sales resistance.

No away games for me.

Stay healthy,

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

The Nobel Prize

November 28, 2022

Diary, Newsletter, Summary

Global Market Comments
November 28, 2022
Fiat Lux

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