Those who were bemoaning the lack of market volatility certainly had their wishes fulfilled last week and then some. Volatility attacked the $30 level remorselessly like a hoard of barbarians. But it didn’t close there.
We actually got three Omicrons last week, the virus kind, the Fed kind, and the jobs variety, with the November Nonfarm Payroll report coming in at a paltry 210,000. Yet, the Headline unemployment rate cratered to a new post-pandemic low, from 4.6% to 4.2%. Go figure.
The Fed’s move amounts to a sudden dramatic lean towards a hawkish stance. The word “transitory” has hopefully been banished from the Fed lexicon for good.
The final flush on Friday no doubt cleansed the market like a colonoscopy, vaporizing any bad positions from yearend reports. That’s why the reopening stocks like hotels, cruise lines, airlines, and casinos were sold down so hard and bounced back with equal vigor.
Last week’s violence cleared the way for the yearend rally to continue, with the final destination a close at the year’s top tic all-time high.
Of course, everyone knows interest rates are rising except the bond market, where prices seemed to magically levitate, keeping interest rates low. Rumors of hedge funds covering shorts to bury losses abound. This is the trade that everyone universally got wrong.
I think the incredible move on Friday was due to hedge funds stampeding to cover money-losing short positions ahead of embarrassing yearend reports.
From here on, trading should get easier as the smarter money departs for Hawaii, the Caribbean, Aspen, or in this case Lake Tahoe, where the pristine waters and ski slopes beckon. Volume and volatility should bleed out from here.
I’m sticking with my long tech, long financials, and short bond strategy until payday, which should be soon.
The Nonfarm Payroll Report Disappoints in November, coming in at 210,000. Over 600,000 was expected. The Headline Unemployment Rate fell to 4.2%, a new post pandemic low. There was a lot of confusing and contradictory data this month. Professional & Business Services added 90,000, Couriers & Messengers 26,800, and Leisure & Hospitality 23,000. But total Employment added 1.1 million. Government lost 25,000 jobs.
How Real is Omicron? On Friday, the market viewed it as a delta variant 2.0. I don’t think so. If anything, it shows how effective the global early response system has become to new variants. South Africa caught omicron with only a handful of cases and the borders started closing immediately. There is no indication that Omicron can’t be stopped by vaccination. It will only kill the anti-vaxers. It means we’re safer, not more at risk, and the economic recovery and the bull market should continue.
Oil Plunges Down 13% in a Day, breaking $70, as fears of a new variant-caused recession run rampant. It was a “sell everything” selloff.
Biden Says No Travel Restrictions or Lockdowns, in response to the new Covid Omicron variant. Therefore, no negative response for the stock market. It was worth a 350-point rally yesterday.
Pending Home Sales Soar by 7.5% in October. The Midwest showed the strongest sales, reflecting a mass migration to cheaper homes from the coasts.
ADP Comes in Red Hot at 534,000. Services dominated and Leisure & Hospitality picked up a massive 136,000. Large companies led the hiring binge. It augers well for the Friday Nonfarm Payroll Report.
More Taper Sooner was the bottom line on Powell’s comments last week. The Fed governor said in testimony in front of the Senate Banking Committee that inflation is no longer “transitory”, implying that hotter inflation numbers are to come. Yikes! Finally, a nod to reality! Stocks tanked 600 points on the comment. Bonds should crash but strangely are holding up. Watch this space. The news could give us a tradable bottom for all asset classes.
ISM Manufacturing Improves, from 60.8 to 61.1 in November. It’s more proof that the economy is expanding.
Weekly Jobless Claims Still Hot at 222,000, and continuing claims fell below 2 million, a new post-pandemic low. No recession here.
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 at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The American 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 the pandemic-driven meltdown on Friday, my December month-to-date performance plunged to -4.58%. My 2021 year-to-date performance took a haircut to 72.18%. The Dow Average is up 13.00% so far in 2021.
I used the collapse in interest rates to add a 20% position in financial stocks, Goldman Sachs (GS), and Bank of America (BAC). I got hammered with my existing short in bonds, with the ten-year yield plunging to an eye-popping 1.37%.
That brings my 12-year total return to 494.73%, some 2.00 times the S&P 500 (SPX) over the same period. My 12-year average annualized return has ratcheted up to 41.22% easily the highest in the industry.
We need to keep an eye on the number of US Coronavirus cases at 49 million and rising quickly and deaths topping 788,000, which you can find here.
The coming week will be all about the inflation numbers.
On Monday, December 6, nothing of note takes place as we move into the yearend slowdown.
On Tuesday, December 7 at 5:30 AM EST, the US Balance of Trade is released for October. We will remember Pearl Harbor Day when the US Navy lost 3,000 men.
On Wednesday, December 8 at 5:15 AM, the JOLTS Job Openings for October are published.
On Thursday, December 9 at 8:30 AM, the Weekly Jobless Claims are disclosed.
On Friday, December 10 at 5:30 AM EST the US Inflation Rate for November is printed. At 2:00 PM, the Baker Hughes Oil Rig Count is out.
As for me, occasionally I tell close friends that I hitchhiked across the Sahara Desert alone when I was 16 and am met with looks that are amazed, befuddled, and disbelieving, but I actually did it in the summer of 1968.
I had spent two months hitchhiking from a hospital in Sweden all the way to my ancestral roots in Monreale, Sicily, the home of my Italian grandfather. My next goal was to visit my Uncle Charles, who was stationed at the Torreon Air Force base outside of Madrid, Spain.
I looked at my Michelin map of the Mediterranean and quickly realized that it would be much quicker to cut across North Africa than hitching all the way back up the length of Italy, cutting across the Cote d’Azur, where no one ever picked up hitchhikers, then all the way down to Madrid, where the people were too poor to own cars.
So one fine morning found me taking deck passage on a ferry from Palermo to Tunis. From here on, my memory is hazy and I remember only a few flashbacks.
Ever the historian, even at age 16, I made straight for the Carthaginian ruins where the Romans allegedly salted the earth to prevent any recovery of a country they had just wasted. Some 2,000 years later, it worked as there was nothing left but an endless sea of scattered rocks.
At night, I laid out my sleeping bag to catch some shut-eye. But at 2:00 AM, someone tried to bash my head in with a rock. I scared them off but haven’t had a decent night of sleep since.
The next day, I made for the spectacular Roman ruins at Leptus Magna on the Libyan coast. But Muamar Khadafi pulled off a coup d’état earlier and closed the border to all Americans. My visa obtained in Rome from King Idris was useless.
I used to opportunity to hitchhike over Kasserine Pass into Algeria, where my uncle served under General Patton in WWII. US forces suffered an ignominious defeat until General Patton took over the army 1n 1943. Some 25 years later, the scenery was still littered with blown-up tanks, destroyed trucks, and crashed Messerschmitt’s.
Approaching the coastal road, I started jumping trains headed west. While officially the Algerian Civil War ended in 1962, in fact, it was still going on in 1968. We passed derailed trains and smashed bridges. The cattle were starving. There was no food anywhere.
At night, Arab families invited me to stay over in their mud brick homes as I always traveled with a big American Flag on my pack. Their hospitality was endless, and they shared what little food they had.
As a train pulled into Algiers, a conductor caught me without a ticket. So, the railway police arrested me and on arrival took me to the central Algiers prison, not a very nice place. After the police left, the head of the prison took me to a back door, opened it, smiled, and said “si vou plais”. That was all the French I ever needed to know. I quickly disappeared into the Algiers souk.
As we approached the Moroccan border, I saw trains of camels 1,000 animals long, rhythmically swaying back and forth with their cargoes of spices from central Africa. These don’t exist anymore, replaced by modern trucks.
Out in the middle of nowhere, bullets started flying through the passenger cars splintering wood. I poked my Kodak Instamatic out the window in between volleys of shots and snapped a few pictures.
The train juddered to a halt and robbers boarded. They shook down the passengers, seizing whatever silver jewelry and bolts of cloth they could find.
When they came to me, they just laughed and moved on. As a ragged backpacker I had nothing of interest for them.
The train ended up in Marrakesh on the edge of the Sahara and the final destination of the camel trains. It was like visiting the Arabian nights. The main Jemaa el-Fna square was amazing, with masses of crafts for sale, magicians, snake charmers, and men breathing fire.
Next stop was Tangiers, site of the oldest foreign American embassy, which is now open to tourists. For 50 cents a night, you could sleep on a rooftop under the stars and pass the pipe with fellow travelers which contained something called hashish.
One more ferry ride and I was at the British naval base at the Rock of Gibraltar and then on a train for Madrid. I made it to the Torreon base main gate where a very surprised master sergeant picked up half-starved, rail-thin, filthy nephew and took me home. Later, Uncle Charles said I slept for three days straight. Since I had lice, Charles shaved my head when I was asleep. I fit right in with the other airmen.
I woke up with a fever, so Charles took me to the base clinic. They never figured out what I had. Maybe it was exhaustion, maybe it was prolonged starvation. Perhaps it was something African. Possibly, it was all one long dream.
Afterwards, my uncle took for to the base commissary where I enjoyed my first cheeseburger, French fries, and chocolate shake in many months. It was the best meal of my life and the only cure I really needed.
I have pictures of all this which are sitting in a box somewhere in my basement. The Michelin map sits in a giant case of old, used maps that I have been collecting for 60 years.
Stay Healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
The Mediterranean in 1968
