There can be too much of a good thing.
Inflation is dramatically falling, with Core PCE down to an amazing 2.6% YOY rate in December. At the same time, GDP growth came in at an incredible 3.3% in Q4 and 2.5% for all of 2023. The long-term average is 3.0%. It’s about as close to a Goldilocks scenario as we’ll ever get.
The problem arises when the economy gets TOO healthy right when the Fed is considering its first interest rate CUTS in four years. That could lead our nation’s central bank to postpone cuts or not to announce them at all.
That would suddenly put the three-month-old bull market on ice, perhaps indefinitely, which has given us one of the worst whipsaw markets I have ever seen. Sector leadership has changed three times so far in 2024. First, there was the AI 5, (MSFT), (META), (GOOGL), (AMZN), and (NVDA). Next came stocks that benefit the most from falling interest rates, financials, precious metals, base metals, industrials, bonds, and foreign currencies.
To say this would be a tough market to trade would be an understatement, evidenced by my multiple stop losses this month. The remedy for this is to shrink your portfolio, sit back, and wait for the market to tell you what to do. I have to say that with the Volatility Index ($VIX) camped out at the $12 handle, options are not offering a lot for you to chew on either.
If you are looking for any further proof that technology is accelerating far faster than we can understand, I shall recall for your edification my last weekend.
After my youngest went off to college, I had to get her headboard refinished because she spent two years in bed looking at her computer while enrolled in high school during COVID-19. She had completely worn the finish off but got all A’s.
So I went to Yelp to look for a furniture restoration business. I clicked on one restorer who had good reviews and lots of pictures, described the job, and included pictures. Within 60 seconds, I received not one bid for the job but four, as Yelp had put the job out for bid across its entire network. One offered to do the job the next day for $100.
Learning how easy it is to refinish furniture, I put a second job out for bid, a small beat-up desk which I picked up at an estate sale for $20. I learned that this was a 100-year-old Craftsman desk highly sought after by collectors worth $2,500. Absolutely, yes, it was worth the $750 cost of a total stripped-down restoration.
I’m thinking “poor furniture restorers”, but what they are losing in the price, they make up in volume. Their craft is in fact a dying one and they can charge whatever they want.
And now you know why I go to estate sales.
What kind of homework is my daughter getting these days? As a Computer Science major at the University of California, she was handed a box of calculators smashed with a hammer. Over a weekend, she was required to invent a tool that identified the good chips from the bad, write code to reprogram the chips, and then glue the good calculators back together.
By Sunday afternoon she had a box full of working but somewhat ugly calculators, thanks to my donation of Gorilla Glue. And this for a sophomore! Needless to say, I didn’t see much of my daughter last weekend, except when she came downstairs to do her laundry.
Next week, they have to fix cell phones.
Gulp! I doubt I could even get into the UC today, even though I graduated Magna Cum Laude 50 years ago. Such is life with college students.
Watch out! The future is happening fast!
So far in January, we are down -4.33%. My 2024 year-to-date performance is also at -4.33%. The S&P 500 (SPY) is up +1.14% so far in 2024. My trailing one-year return reached +54.54% versus +21.14% for the S&P 500.
That brings my 15-year total return to +672.30%. My average annualized return has retreated to +51.06%.
Some 63 of my 70 trades last year were profitable in 2023.
I am maintaining longs in (MSFT), (AMZN), (V), (PANW), and (CCJ).
US GDP Rocketed by 2.5% in 2023, cementing its position as the strongest major economy in the world. Q4 came in at a hot 3.3%. We’re going from soft landing to no landing at all. Unfortunately, the report also put our bond trade to sleep.
Inflation Falls, with the Core PCE index easing to 2.9% last month, the lowest since 2021. That’s in the face of consumer spending posting the biggest back-to-back increase in nearly a year. This is very positive for bond bulls. Buy (TLT) LEAPS on dips.
The Roaring Twenties are Back, says investment guru and old friend Ed Yardeni. He draws parallels with the runaway stock prices that followed the 1918 Spanish flu pandemic, which killed millions. Of course, you had a 10:1 margin during the twenties which made speculation much easier. Are same-day options any worse?
New Homes Sales Recover, on a falling interest rate push, up 8.0% to 664,000. Sales, however, can be volatile on a month-to-month basis. Sales increased 4.4% on a year-on-year basis in December.
Netflix Soars on Big Subscriber Beat, up 8.6% on an add of 13 million new subscribers. It moved solidly into more sports content with the World Wrestling Entertainment deal. Buy (NFLX) on dips, which clearly won the streaming wars. I can’t get enough of The Rock, who is a genuinely nice guy.
Microsoft Tops $3 Trillion Valuation, cementing its hold on the AI lead. (MSFT) has been a top Mad hedge holding for years which we are currently long. Buy (MSFT) on dips which may have another $100 in it this year.
Freeport McMoRan Kills it, with an earnings upside blowout, taking the stock up 5%. CEO Richard Adkerson, a long-time Mad Hedge subscriber, says any problems are short-term. Political problems in Chile and Peru are an issue, which generates 40% of the world’s copper. Electrification of the US economy will continue to be a driving theme.
Mortgage Rates Plunge to 8-Month Low. The average fixed-rate 30-year mortgage fell to 6.60% as of Thursday from 6.66% the week prior, Freddie Mac said in its weekly report on home loan borrowing costs. The next Golden Age of Housing is here.
China Markets Dive, on news that the central bank was forced into the currency markets to support the yuan. Stock markets didn’t like it a bit, down 2.7% on the day. Overseas funds have sold roughly $1.6 billion in Chinese equities so far this year, with investor confidence bruised by signs of a slowdown in the world's second-largest economy. Offshore yuan tomorrow-next forwards jumped to a more than two-month high of 4.25 points late on Monday, reflecting signs of tighter liquidity conditions. Avoid China (FXI) like some stale egg foo young.
“Oppenheimer” Sweeps the Oscars, with a record 13 nominations. It’s a movie where I knew half the characters in real life from my work at the Nuclear Test site in Nevada. It was another opportunity to discuss advanced nuclear physics over dinner with my kids. Click here for the full list. The winners will be announced on March 10.
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 29, the Dallas Fed Manufacturing Index was announced.
On Tuesday, January 30 at 8:30 AM EST, the S&P Case Shiller National Home Price Index is released. We also get the JOLTS Job Openings Report.
On Wednesday, January 31 at 2:00 PM, the ADP Private Jobs Opening Report is published. The Federal Reserve announces its interest rate decision.
On Thursday, February 1 at 8:30 AM, the Weekly Jobless Claims are announced.
On Friday, February 2 at 2:30 PM, the December Nonfarm Payroll Report and Unemployment Rate is published. At 2:00 PM the Baker Hughes Rig Count is printed.
As for me, I received calls from six readers last week saying I remind them of Ernest Hemingway. This, no doubt, was the result of Ken Burns’ excellent documentary about the Nobel prize-winning writer on PBS last week.
It is no accident.
My grandfather drove for the Italian Red Cross on the Alpine front during WWI, where Hemingway got his start, so we had a connection right there.
Since I read Hemingway’s books in my mid-teens I decided I wanted to be him and became a war correspondent. In those days, you traveled by ship a lot, leaving ample time to finish off his complete work.
I visited his homes in Key West, Florida, and Ketchum, Idaho. His Cuban residence is high on my list, now that Castro is gone. His home in Cuba is on the menu.
I used to stay in the Hemingway Suite at the Ritz Hotel on Place Vendome in Paris where he lived during WWII. I had drinks at the Hemingway Bar downstairs where war correspondent Ernest shot a German colonel in the face at point-blank range. I still have the ashtrays.
Harry’s Bar in Venice, a Hemingway favorite, was a regular stopping-off point for me. I have those ashtrays too.
I even dated his granddaughter from his first wife, Hadley, the movie star Mariel Hemingway, before she got married, and when she was still being pursued by Robert de Niro and Woody Allen. Some genes skip generations and she was a dead ringer for her grandfather. She was the only Playboy centerfold I ever went out with. We still keep in touch.
So, I’ll spend the weekend watching Farewell to Arms….again, after I finish my writing.
Oh, and if you visit the Ritz Hotel today, you’ll find the ashtrays are now glued to the tables.
As for last summer, stayed in the Hemingway suite at the Hotel Post in Cortina d’Ampezzo Italy where he stayed in the 1950s to finish a book. Maybe some inspiration will rub off on me.
Good Luck and Good Trading,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
