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The Market Outlook for the Week Ahead, or It’s All About the Numbers

I know that not all of you are mathematicians, nor blessed with math degrees from UCLA, as I am. However, the future of your retirement funds relies on a few simple numbers. So, I will try to be gentle.

S&P tech stocks are trading at a 27 price earnings multiple. The S&P 500 Index, as a whole, trades at a 21 multiple. S&P value stocks, financials, and old-line recovery stocks like industrials and materials are trading at a 17 multiple.

Historically, companies with double the earnings power of the index trade at a 5-point premium to the main market. As long as this disparity exists, tech stocks will go down and value with go up.

However, we are getting close to a reversal. Allowing for market noise, I don’t see tech dropping more than 10% from here over the coming months. Then we will see the mother of all Q4 rallies taking it to new highs.

That explains why investors have been nibbling on tech lately, especially the best ones like NVIDIA (NVDA), Applied Materials (AMAT), and Salesforce (CRM). You also want to pick up big cap money machines like Alphabet (GOOG), Amazon (AMZN), Apple (AAPL), and Facebook (FB). Their LEAPS are begging for attention.

That means the downside from here is limited. Sorry Cassandras, no crashes here.

I am more convinced of this outcome than ever, given the substantial number of crashes and disasters, markets have weathered this year. These are truly Teflon markets. Last week, Bitcoin collapsed an amazing 55% in six weeks, wiping $1 trillion off the value of that market.

The fear had been that a crypto crash of this size would ignite a system contagion that would take everything down. A few years ago, it would have. But with massive Fed liquidity and unprecedented deficit spending, all we got was down 600 points one day and 600 up the next.

No crash here.

We’ve also had smaller crashes in sectors that were the most egregiously overpriced in February, like SPACS, meme stocks, and shares trading at 100 times sales with no earnings. Again, no harm no foul. It was a comeuppance that was well earned.

The big tell that I am right came screaming loud and clear last week from the US dollar, which hit a new 2021 low. A cheaper greenback means cheaper US stocks for foreign investors, which means they buy more of them. A weak buck also means that interest rates will stay lower for longer, which is great news for stocks, especially tech.

So, take it easy for the next few months. Keep positions small and rejoin the human race.

It seems odd going out into civilization and seeing live people walking around without masks. All the batteries on my watches are dead, as they have not been used for nearly two years, so they are getting replaced. I walked into my closet, and it was like adventuring into an archeological dig, with dozens of Turnbull & Asser shirts untouched by human hands. I’ve been living in Marine Corps sweats since 2019.

Bitcoin Crashes, down 33% on the day at the lows to $30,000, and off a heart-palpitating 55% from the April high. You wanted volatility, you got volatility! The problem for the rest of us is whether this will cause a real systemic financial crisis, with the Dow already down 560 at today’s low. Was Elon Musk the shoeshine boy giving tips at the market top?

Chip Shortage causes $110 Billion in US Car Industry Sales, in 2021 and will take years to address. Supply chains will need to be rebuilt. My neighbor just had to wait 11 months to take delivery of his Ford F-150.

China’s Industrial Production Slows, from 14.1% in March to only 9.8% in April. That gives us a hint to our own future, as the Middle Kingdom emerged from the pandemic a year before we did. Retail sales also disappointed. After rocketing in 2020, the Chinese economy started slowing at the beginning of this year. The dead cat bounce in the economy is over. If this continues, it's bad news for copper prices of which the Middle Kingdom is the largest producer. If (FCX) closes under $40, stop out of all short-term longs immediately.

Housing Starts Dive, as builders run out of materials at reasonable prices. It gave the Dow Average a punch in the nose worth $220. Single family homes took the big hit, down 13.4% to 1.08 million. Permits are still up 70% YOY from when Covid completely shut the industry down. This is the most inflationary sector of the economy right now but barely registers in the CPI numbers. Prices must go even higher for frustrated buyers which are accelerating their rate of increase. Builders are including contingency clauses that allow price rises after the sale, a first. The South has dominated in starts where the population is moving and took the biggest hit. Buy (LEN), (KBH), and (PHM) on dips.

Existing Home Sales Drop 2.7%, in April to 5.85 million units. Inventories are down 20% YOY to only an unimaginable two-month supply. There’s nothing for sale. With the strongest YOY price gains in history, there is nothing for sale. It’s all about high prices, high prices, high prices. Homes over $1 million are up an incredible 214% YOY. The 70-year migration from North to South continues, costing democrats 5 seats in the House. Millennials are entering their peak home-buying years and that $150,000 four-bedroom home in Savannah, GA doesn’t look so bad.

Bitcoin is the Most Crowded State in the World, according to a survey of investment managers. That may explain the 35% plunge in cryptocurrency since April. Is this the end of the Ponzi scheme? Technology and ESG stocks are the second and third most over-owned, which may explain their recent flaccid performance.

Why is the Gold Hedge Working this Time? The Barbarous relic is finally giving investors the insurance and the downside hedge they need, after failing to do so during the last correction in February. That’s because interest rates were spiking in the winter but aren’t now. Interest rates are the enemy of all no-yielding assets, like precious metals.

Fed Hints of Early Rate Rise, trashing both stocks and bonds. The big one could be here, a complete collapse of the US Treasury bond market. I’m already running the biggest (TLT) shorts ever. We should fall from the current $135 to $120 by yearend. Sell all (TLT) rallies.

Lumber Futures Collapse by 40%. There goes your inflation. Now if only Biden will end the Trump-era import duty on Canadian lumber. It gives a big boost to the “transitory” camp, arguing that this is just a one or two-month spike spawned by the cover recovery. Soaring lumber prices had been a key factor igniting new home prices.

Applied Materials Knocks the Cover off the Ball, reporting blowout earnings. The semiconductors equipment maker has been the best performing chip-related stock of 2021, up 72%. (AMAT) sees a structural chip shortage lasting for years. DRAMs are speeding up, while NAN is slowing down. Customers are placing orders years in advance for the first time ever. A new $7.5 billion stock buyback plan and 9% dividend increase were announced. Buy (AMAT) on the dips.

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 400% to 120,000 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 120,000 here we come!

My Mad Hedge Global Trading Dispatch profit reached 7.48% gain so far in May on the heels of a spectacular 15.67% profit in April. That leaves me 50% invested and 50% cash. We actually have a shot at reaching a double-digit performance for the seventh month in a row.

My 2021 year-to-date performance soared to 67.24%. The Dow Average is up 11.79% so far in 2021.

We got another major meltdown last week followed by an immediate recovery. I used the dip to reinitiate new positions in the (TLT), Goldman Sachs (GS), and Berkshire Hathaway (BRKB) to replace ones that expired on the Friday options expiration.

That brings my 11-year total return to 489.79%, some 2.00 times the S&P 500 (SPX) over the same period. My 11-year average annualized return now stands at an unbelievable 42.90%, easily the highest in the industry.

My trailing one-year return exploded to positively eye-popping 124.92%. I truly have to pinch myself when I see numbers like this. I bet many of you are making the biggest money of your long lives.

We need to keep an eye on the number of US Coronavirus cases at 33.1 million and deaths topping 590,000, which you can find here. Some 33.1 million Americans have contracted Covid-19.

The coming week will be a weak one on the data front.

On Monday, May 24, at 8:30 AM, the Chicago Fed National Activity Index is released.

On Tuesday, May 25, at 10:00 AM, the S&P Case Shiller National Home Price Index for March is announced.

On Wednesday, May 26 at 8:30 PM, MBA Mortgage Applications are revealed.

On Thursday, May 27 at 8:30 AM, the Weekly Jobless Claims are Published. We also get a second estimate for the red hot Q2 GDP.

On Friday, May 28 at 8:30 AM, the even hotter Personal Spending for April is disclosed. At 2:00 PM, we learn the Baker-Hughes Rig Count.

As for me, as this pandemic winds down, I am reminded of a previous one in which I played a role in ending.

After a 30-year effort, the World Health organization was on the verge of wiping out smallpox, a scourge that had been ravaging the human race since its beginning. I have seen Egyptian mummies at the Museum of Cairo that showed the scarring that is the telltale evidence of smallpox, which is fatal in 50% of cases.

By the early 1970s, the dread disease was almost gone but still remained in some of the most remote parts of the world. So, they offered a reward to anyone who could find live cases.

To join the American Bicentennial Mt. Everest Expedition in 1976, I took a bus to the eastern edge of Katmandu and started walking. That was the furthest roads went in those days. It was only 150 miles to basecamp and a climb of 14,000 feet.

Some 100 miles in, I was hiking through a remote village, which was a page out of the 14^th century, back when families threw buckets of sewage into the street. The trail was lined with mud brick two-story homes with wood shingle roofs, with the second story overhanging the first.

As I entered the town, every child ran to their windows to wave, as visitors were so rare. Every smiling face was covered with healing but still bleeding smallpox sores. I was immune, since I received my childhood vaccination, but I kept walking.

Two months later, I returned to Katmandu and wrote to the WHO headquarters in Geneva about the location of the outbreak. A year later, I received a letter of thanks at my California address and a check for $100 telling me they had sent in a team to my valley in Nepal and vaccinated the entire population.

Some 15 years later, while on customer calls in Geneva for Morgan Stanley, I stopped by the WHO to visit a scientist I went to school with. It turned out I had become quite famous, as my smallpox cases in Nepal were the last ever discovered.

The WHO certified the world free of smallpox in 1980. The US stopped vaccinating children for smallpox in 1972, as the risks outweighed the reward.

Today, smallpox samples only exist at the CDC in Atlanta frozen in liquid nitrogen at minus 346 degrees Fahrenheit in a high-security level 5 biohazard storage facility. China and Russia probably have the same.

That’s because scientists fear that terrorists might dig up the bodies of some British sailors who were known to have died of smallpox in the 19^th century and were buried on the north coast of Greenland remaining frozen ever since. If you need a new smallpox vaccine, you have to start from somewhere.

As for me, I am now part of the 34% of Americans who remain immune to the disease. I’m glad I could play my own small part in ending it.

Stay healthy.

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

On Mt. Everest, Smallpox-Free in 1976

Bitcoin

May 17, 2021

Diary, Newsletter, Summary

- Global Market Comments
  May 17, 2021
  Fiat Lux
  
  Featured Trade:
- (MARKET OUTLOOK FOR THE WEEK AHEAD, or WHY HISTORY RHYMES),
  (TLT), (SPY), (FCX), (MSFT), (DAL), (QQQ), (VIX), (DAL), (UUP)

The Market Outlook for the Week Ahead, or Why History Rhymes

Diary, Newsletter

The 19^th century humorist and writer, Mark Twain, said, “History never repeats itself, but it rhymes.” This is certainly one of those rhyming times.

Remember back in 2011 when the Dow hit a short-term peak at $12,300 in May of 2011? The Cassandras had a heyday. The bull market was over, stocks were imminently going to crash, and the next stop for the Dow was $3,000. Gold and bonds were the only safe places.

Those who drank the Kool-Aid missed the greatest investment opportunity of the century and are now driving for Uber cars to earn their crust of bread. Those who drank the Kool-Aid twice sold their homes as well ahead of the greatest real estate boom of all time.

Not that a correction wasn’t sorely needed, we needed to scare money out of what I call the “super liquidity” investments like Bitcoin, SPACS, and tech companies selling at 100 times sales with failing business models.

We also needed to put the fear of god into newbie day traders by teaching them that stocks go down as well as up. We’ve already made good progress on this front. With many of the “meme” stocks down by half or more since February, we are already making good progress on that front.

What will power the Dow to my now very prescient looking $40,000 target by yearend? The unwind of the 40-year-old bull market in bonds has barely just begun. Ten-year US Treasury bond yields ($TNX) have only appreciated from 0.32% to 1.68%, compared to 5.6% at the last 2007 peak. That means there are still many tens of trillions of dollars to shift out of bonds (TLT) and INTO STOCKS!

Once the current correction ends, money will pour back into the recent leaders, the economic cyclicals, including financials, commodities, industrials, and commodities.

Technology will stay in the penalty box for the foreseeable future until they become under-owned and cheap again. The good news here is that tech earnings are growing at such a prolific rate that the sector is losing two price earnings multiple points a month and will return to the bargain basement in the not-too-distant future.

The long term view here is that you want to rent growth, but own tech, which still has double the growth rate of everything else.

It all makes my 2021 $40,000 Dow Average target look like a piece of cake, and my 2030 goal of $120,000 positively conservative, cautious, and circumspect.

Notice that our 2,000 point-swan dive in the Dow last week lasted only three days, and then delivered the sharpest fall in the Volatility Index (VIX) in history, from $29 to $19 in only 24 hours. The writing is still on the wall. People want to BUY.

Inflation explodes, with the Consumer Price Index posting a ballistic 4.2% YOY rate, the fastest gain since 2009. The Fed believes this is a temporary surge, the markets not so much. Bonds take it on the nose. Keep selling rallies in the (TLT). We’re making a fortune here.

Volatility Index (VIX) soars to $29, almost doubling in a week. Call me when it tops $30. That’s the usual signal for a short-term stock market bottom. I’m relaxed because I’m going into this with 80% cash and have just made a huge fortune on bond shorts.

Value and cyclicals are still the Big Play. That was the message of the stock market on Friday’s wild day which saw an 11-basis point trading range in the ten-year US treasury bond. If you think the next big move in rates is up, then Cyclicals will roar, and techs will fade.

It’s all about buying what people are underweight and selling what they are overweight. I’m looking for cyclicals that have recently corrected. Stay tuned to this station.

US Inventories see solid gains as retailers load the boat for the biggest economic recovery of all time. March was up 1.3%. One of an endless series of data points pointing to the best business conditions in a century.

The Home Buying Frenzy continues, with the median price for a single-family home soaring by 16.2% to $319,200 in Q1, according to the National Association of Realtors. Record high prices are hitting all markets. The perfect upside storm continues.

Weekly Jobless Claims come in at 473,000, a new post-Covid low. Continuing claims fall to 3,655,000. The greatest economic recovery of all time continues.

Producer Prices leap in April, up 0.6% following a 1% gain in March. It is a natural follow-on from the hot CPI. The PPI tracks changes in production costs, and supply bottlenecks and shortages tied to the pandemic recovery have caused commodity prices to soar. Temporary or continuing, that is the big debate. Watch the bond market for clues.

Stanley Druckenmiller says Bonds are Toast, and The Dollar is Worse. I couldn’t agree more with my old friend and trading counterparty. Current Fed policies are now the most extreme in history and threaten the reserve status of the US dollar. Sell all rallies in the (TLT) and the (UUP).

My Ten Year View

My Mad Hedge Global Trading Dispatch profit reached 3.83% gain so far in May on the heels of a spectacular 15.67% profit in April. That leaves me 30% invested and 70% cash.

My 2021 year-to-date performance soared to 63.59%. The Dow Average is up 13.47% so far in 2021.

During the stock market meltdown, my hedges with shorts in the S&P 500 (SPY), NASDAQ (QQQ), and the United States Treasury Bond Fund (TLT) performed spectacularly well, leaving me up on the week. I managed to limit myself to only two stop losses, in Microsoft (MSFT) and Delta Airlines (DAL).

While everyone else was running around like chickens with their heads cut off, I was as relaxed as ever. Our worst case for May is that we will be only up single digits, instead of the double-digit gains of the past six months. That is not a bad “worst case” to have.

That brings my 11-year total return to 486.14%, some 2.00 times the S&P 500 (SPX) over the same period. My 11-year average annualized return now stands at an unbelievable 42.45%, easily the highest in the industry.

My trailing one-year return exploded to positively eye-popping 127.09%. I truly have to pinch myself when I see numbers like this. I bet many of you are making the biggest money of your long lives.

We need to keep an eye on the number of US Coronavirus cases at 33 million and deaths topping 586,000, which you can find here.

The coming week will be a weak one on the data front.

On Monday, May 17, at 9:45 AM, the New York Empire State Manufacturing Index for May will be out

On Tuesday, May 18, at 10:00 AM, the Housing Starts for April are announced.

On Wednesday, May 19 at 2:00 PM, Minutes from the last Federal Reserve FOMC Meeting are published.

On Thursday, May 20 at 8:30 AM, the Weekly Jobless Claims are published.

On Friday, May 21 at 10:00 AM, Existing Homes Sales for April are announced. At 2:00 PM, we learn the Baker-Hughes Rig Count.

As for me, we had a big 4.7 earthquake at Lake Tahoe last week. The healthy live trees vibrated and swayed. But all of the brittle dead trees killed by pine beetles during the draught snapped at the base and fell over.

Those blocked all the fire roads, so every emergency and public service organization on the lake was called up and sent up into the mountains with chain saws. That included me, a member of Lake Tahoe Search and Rescue.

I hiked up to 9,000 feet with a 50-pound load and went to work. We cut these enormous 100-foot conifers into one-foot rounds and then rolled them off the road. Everyone else on the job was under 40.

After a day of heavy lifting, I hiked down the mountain and collapsed into bed. I slept for 12 hours, which is why the Monday letter was late. They say 70 is the new 40. I am the proof of that.

So can 100 be the new 60? One can only hope.

How was your weekend?

Stay healthy.

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

20 Year Chart of Ten Year US Treasury Yields

May 10, 2021

Diary, Newsletter, Summary

Global Market Comments
May 10, 2021
Fiat Lux

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE SUSHI HITS THE FAN),
(SPY), (TLT), (TBT), (V), (UNP), (DAL), (MSFT), (GS), (JPM), (FCX)

The Market Outlook for the Week Ahead, or the Sushi Hits the Fan

Diary, Newsletter

During my senior year in High School, I had the good fortune to date the daughter of Richard Knerr, the founder of Wham-O, the inventor of Hula Hoops, Silly Putty, Super Balls, Frisbee’s, and Slip & Slides (click here).

At six feet, she was the tallest girl in the school, and at 6’4” I was an obvious choice.

After the senior prom and wearing my tux, I took her to the Los Angeles opening night of the new musical Hair. In the second act, the entire cast dropped their clothes onto the stage and stood there stark naked. The audience was stunned, shocked, embarrassed, and even gob-smacked.

Those were the reactions I saw on Friday, when the April Nonfarm Payroll Report was released showing a gain of only 266,000 jobs. A million had been expected.

So, how does that work? Red hot ADP private jobs and a year low in Weekly Jobless Claims, but a horrific monthly Payroll report?

They say economic data can be “noisy”. This time it was positively cacophonous. The fact is that these data points were never created to handle times like this, the most disruptive in history.

When the data are useless, all you have to do is take a walk down Main Street. There are “Help Wanted” signs at virtually every business.

The data dissonance created a wild day in the markets on Friday. Bonds soared, causing ten-year yields to dive to 1.48%. Then they rallied all the way back up to 1.58%.

That was seen as the end of the two-month long rally in bonds, so stock took off like a rocket. Essentially everything went up, both cyclicals, banks, AND tech.

All those bond shorts you have been nursing since March? They are about to explode to the upside. The next leg down in the year-old bear market in bonds is about to begin.

And what about that 266,000-payroll report? If you didn’t get a million jobs print in April, then you’ll almost certainly get it in May. Stocks could well keep rally until then. That’s how traders are seeing it.

Just another reason to buy.

By the way, I learned one of the great untold business stories from Richard Knerr. When the Hula Hoop was first launched in 1957, sales went ballistic. Some 25 million were sold in the first four months.

The Hula Hoop was made of a plastic tube stapled together with an oak cork made in England. Since demand seemed infinite, Wham-O ordered 50 million corks. Then the republican party claimed the toy was a communist conspiracy to destroy the youth of America as the swiveling of hips was deemed obscene. This was at the tail end of the McCarthy period.

Sales of Hula Hoops collapsed.

They cancelled the order for 50 million oak corks, which were thrown overboard mid-Atlantic. They are still floating out there somewhere today. Wham-O almost went bankrupt from the experience but was eventually saved by the Frisbee.

Richard Knerr died in 2008 at the age of 82. Wham-O was taken over by Mattel in 1995. For his obituary, please click here.

April Nonfarm Payroll Report is a huge disappointment, at 266,000 when up to one million was expected. April’s hiring boom goes bust. March was revised down massively, from 916,000 to 770,000. The headline Unemployment Rate rose to 6.1%. It was one of the most confusing reports in recent memory. Bonds rocketed, interest rates crashed, and tech stocks took off like a scalded chimp. Inflation expectations have been shattered. Leisure & Hospitality kicked in at 331,000. But Professional & Business Services collapsed by 111,000. The two million businesses that went under last year aren’t hiring. Much of the return to work has been by people who already have jobs.

Weekly Jobless Claims plunged to 488,000, one of the sharpest drops on record at 100,000. Go down any Main Street today and instead of a sea of plywood, it is plastered with “Help Wanted” signs. Productivity is soaring, while average labor costs are actually falling.

ADP Private Employment Report soars, up by 742,000 in April, the biggest gain since September. It makes the coming Friday Nonfarm Payroll Report look outstanding. The jobs market is booming, but competition for the top jobs is also fierce.

Europe’s Q1 GDP falls by 0.6%. That’s better than expected, but disastrous when compared to America’s spectacular 6.4% print. Blame the bumbled slow-motion vaccine rollout. European governments wasted time negotiating on price like it was just another government program, while the US poured billions into vaccine makers, no questions asked. European vaccines, like Astra Zeneca’s, were flawed. It’s amazing that a big government continent can’t perform a big government task, even when millions of lives depend on it.

US Factory Orders gain, up 1.1% in March, providing more evidence that stimulus is working. Most economists are expecting double-digit growth in Q2. Driving up to Lake Tahoe, the number of trucks on the road has doubled in the last month.

Personal Income Explodes, up 21.1% in March, the most since 1945 according to the Bureau of Economic Analysis. What the heck happened in 1945? $1,400 stimulus checks are clearly burning holes in the pockets of consumers. Expect all numbers to hit lifetime highs in the coming months. The sun, moon, and stars are all lining up and standard of living is soaring.

Chicago PMI rockets to a 40-year high, up to 72.1 versus an expected 65. It seems everyone is already trying to buy what I am trying to buy. My bet is that the stock market is wildly underestimating the coming onslaught of economic numbers and will go to new highs once it figures out the game.

Lumber Prices are becoming a big deal, soaring 70% in two months and a staggering 340% in a year, igniting inflation fears. It’s only a tiny fraction of our tiny spending but is adding $36,000 to the cost of a new home. Someone in four homes sold today are newly built, the highest ratio ever. Punitive Trump lumber tariffs against Canada years ago shut down a lot of production and now that we need it, it isn’t there.

IBM brings out the 2-Nanometer Chip, taking semiconductor technology to the next evolutionary level. Any smaller and electrons will be too big to squeeze through the gates. The current battle is over 7 nm technology. It promises to bring much faster computing at a lower price and will act as a temporary bridge to lightening quantum computing.

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 400% to 120,000 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 120,000 here we come!

My Mad Hedge Global Trading Dispatch profit reached 2.38% gain during the first week of May on the heels of a spectacular 15.67% profit in April.

I took profits in my long in Goldman Sachs (GS) and my short in the United States Treasury Bond Fund (TLT). I then plowed the cash into a new June short position in the (TLT) and a new short in the S&P 500 (SPY). That gave me a heart attack on my bond shorts when bond prices soared and then an immediate rebirth when they collapsed two points in the afternoon.

That leaves me 100% invested, as I have been for the last six months.

My 2021 year-to-date performance soared to 62.14%. The Dow Average is up 14.45% so far in 2021.

That brings my 11-year total return to 484.89%, some 2.00 times the S&P 500 (SPX) over the same period. My 11-year average annualized return now stands at an unbelievable 42.45%, easily the highest in the industry.

We need to keep an eye on the number of US Coronavirus cases at 32.7 million and deaths topping 581,000, which you can find here. New cases are in free fall, with only 12 here in Washoe County Nevada out of a population of 500,000. We could approach zero by the summer.

The coming week will be weak on the data front.

On Monday, May 10, at 9:45 AM, the April ISM New York Index is out. Roblox (RBLX) and BioNTech (BNTX) report earnings.

On Tuesday, May 11, at 10:00 AM, the NFIB Small Business Optimism Index for April is released. Palantir reports results (PLTR).

On Wednesday, May 12 at 2:00 PM, the US Core Inflation Rate for April is published. Softbank (SFTBY) reports results.

On Thursday, May 13 at 8:30 AM, the Weekly Jobless Claims are published. Walt Disney (DIS), Airbnb (ABNB), and Alibaba (BABA) report results.

On Friday, May 14 at 8:30 AM, Retail Sales for April are indicated. At 2:00 PM, we learn the Baker-Hughes Rig Count.

As for me, I’ve found a new series on Amazon Prime called Yellowstone. It is definitely NOT PG-rated, nor is it for the faint of heart. But it does remind me of my own cowboy days.

When General Custer was slaugherted during his last stand in Montana at the Little Big Horn in 1876, my ancestors spotted a great buying opportunity. They used the ensuing panic to pick up 50,000 acres near the Wyoming border for ten cents an acre.

Growing up as the oldest of seven kids, my parents never missed an opportunity to farm me out with relatives. That’s how I ended up with my cousins near Broadus, Montana for the summer of 1967.

When I got off the Greyhound bus in nearby Sheridan, I went into a bar to call my uncle. The bartender asked his name and when I told him “Carlat” he gave me a strange look.

It turned out that My uncle killed someone in a gunfight in the street out front a few months earlier, which was later ruled self-defense. It was the last public gunfight seen in the state, and my uncle hadn’t been seen in town since.

I was later picked up in a beat-up Ford truck and driven for two hours down a dirt road to a log cabin. There was no electricity, just kerosene lanterns and a propane-powered refrigerator.

Welcome to the 19^th century!

I was hired on as a cowboy, lived in a bunkhouse with the rest of the ranch hands, and was paid the princely sum of a dollar an hour. I became popular by reading the other cowboys' newspapers and their mail since they were all illiterate. Every three days, we slaughtered a cow to feed everyone on the ranch. I ate steak for breakfast, lunch, and dinner.

On weekends, my cousins and I searched for Indian arrowheads on horseback, which we found by the shoebox full. Occasionally, we got lucky finding an old rusted Winchester or Colt revolver just lying out on the range, a remnant of the famous battle 90 years before. I carried my own six-shooter to help reduce the local rattlesnake population.

I really learned the meaning of work and had callouses on my hands in no time. I had to rescue cows trapped in the mud (stick a burr under their tail), round up lost ones, and saw miles of fence posts. When it came time to artificially inseminate the cows with superior semen from Scotland, it was my job to hold them still. It was all heady stuff for a 16-year-old.

The highlight of the summer was participating in the Sheridan Rodeo. With my uncle, one of the largest cattle owners in the area, I had my pick of events. So, I ended up racing a chariot made from an old oil drum, team roping (I had to pull the cow down to the ground), and riding a Brahma bull. I still have a scar on my left elbow from where a bull slashed me, the horn pigment clearly visible.

I hated to leave when I had to go home and back to school. But I did hear that the winter in Montana is pretty tough.

It was later discovered that the entire 50,000 acres was sitting on a giant coal seam 50 feet thick. You just knocked off the topsoil and backed up the truck. My cousins became millionaires. They built a modern four-bedroom house closer to town with every amenity, even a big screen TV. My cousin built a massive vintage car collection.

During the 2000s, their well water was poisoned by a neighbor’s fracking for natural gas, and water had to be hauled in by truck at great expense. In the end, my cousin was killed when the engine of the classic car he was restoring fell on top of him when the rafter above him snapped.

It all did give me a window into a lifestyle that was then fading fast. It’s an experience I’ll never forget.

Stay healthy.

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

May 3, 2021

Diary, Newsletter, Summary

Global Market Comments
May 3, 2021
Fiat Lux

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE STAIR STEP MARKET IS HERE),
(SPY), (TLT), (MRK), (EL), (UNP), (PFE), (GM), (PYPL), (REGN), (ROKU)

The Market Outlook for the Week Ahead, or The Stair Step Market is Here

Diary, Newsletter, Research

The last six months have been the most successful in my 52 years of trading. The only thing that comes close were the last six months of 1989 when the Tokyo market went straight up and hit a 30-year peak.

Everything I tried worked. The trades I only thought about worked. And the 50 trade alerts I abandoned on the floor because the market moved too fast worked as well. That’s how I missed Facebook (FB) and Amazon (AMZN).

It is believed that if you set a team of monkeys loose, randomly hitting keys on typewriters, they would eventually produce Romeo and Juliet. In this market, they have been producing the entire works of Shakespeare on a daily basis.

It has been that good.

President Biden has been looking pretty good too, having presided over the best starting three-month stock market results since 1933. That is no accident. The massive stimulus and the remaking of the country he has proposed have Franklin Roosevelt’s New Deal-inspired handwriting all over them.

Yet, traders have been puzzled, perplexed, and befuddled by companies that announce the best earnings in history only to see their shares sell-off dramatically. However, the market has shown its hand.

We’ve now seen three quarters of tremendously improving earnings and stock dives. It’s a 12-week cycle that keeps repeating. Shares rally hard for six weeks into earnings, peak, and then go nowhere for six weeks. Wash, rinse, repeat, then go to new all-time highs.

But stocks don’t fall enough to justify getting out and back in again, especially on an after-tax basis. Therefore, it’s just best to lie back and think of England while your stocks do nothing.

If my analysis is correct, then it's best to imagine the rolling green hills of Kent and Wiltshire, the friendly neighborhood pub, and Westminster Cathedral until June. If you want to get aggressive, you might even sell short an out-of-the-money call option or two to protect your portfolio.

The Fed leaves rates unchanged, indicating that the economy is improving, but that interest rates are going nowhere. No surprise here. Jay Powell is still going for maximum dove. Strong Biden policy support and the rollout of the vaccine are major positives. $120 billion in bond buying continues. The Fed will keep interest rates at zero until the US economy reaches maximum employment by adding 8.4 million jobs. That could be a long wait as I suspect those jobs have already been destroyed by technology. Stocks popped on the news. The Bull lives!

Q1 GDP eExploded by 6.4%, and upward revisions are to come. That explains the 25% gain in the stock market during the first three months of the Biden administration, the best in 75 years. Coming quarters will show even stronger growth as the economy shakes off the pandemic and massive government spending kicks in. We will recover 2019 GDP peaks in the next quarter. Virtually, all economic data points will set records for the rest of 2021. Buy everything on dips.

Weekly Jobless Claims dive again to 553,000, a new post-pandemic low. One of a never-ending series of perfect data. It augurs well for next week’s April Nonfarm Payroll Report.

New Home Sales up a ballistic 20.7% YOY in March on the basis of a signed contract. This is in the face of rising home mortgage interest rates. The flight to the suburbs continues. Homebuilder stocks took off like a scalded chimp. Buy (LEN), (KBH), and (PHM) on dips.

Pending Home Sales fell 1.9%, far below expectations, but are still up 23% YOY. Higher prices and record low supply are the problems. The Midwest leads.

Amazon sales soar by 44% in Q1, producing some of the best earnings in American corporate history. Jeff is expecting sales to reach a staggering $110-$116 billion in Q2. That’s why he hired 500,000 last year, the most of any company since WWII. Prime subscribers have grown to 200 million, including me. Ad revenues jumped an eye-popping 77%. The shares of the huge pandemic winner leaped $140 on the news. It’s all another step toward my $5,000 target.

Tesla revenues explode for 74%, and earnings soar to an eye-popping $438 million. Sales are to double or more in 2021 and are up 104% YOY. Q1 is usually the slowest quarter of the year for the auto industry. Global demand is increasing far beyond production levels. It is ducking around chip shortages by designing in a new generation that is currently available. Production of high-end X and S Models has ceased to allow more focus on the profitable Y and 3 Models. Those will resume in Q3. The shares were unchanged on the news. Keep buying (TSLA) on dips. It’s headed for $10,000.

Copper hits new 10-year high, lighting a fire under Freeport McMoRan (FCX) which we are long. We still are in the early innings of a major commodity supercycle. The green revolution goes nowhere without increasing copper supplies tenfold. A copper shock is imminent.

US Capital Spending leaps ahead, up 0.9% in March and up 10.4% YOY. The stimulus spending is working. All is well in manufacturing land, which is 12% of the US economy.

Case-Shiller explodes to the upside, the National Home Prices Index soaring 12% in February. That’s the best report in 15 years. Phoenix (+17.4), San Diego (+17.0%), and Seattle (15.4%) continue to be the big winners. This was in the face of a 50-basis point jump in home mortgage interest rates during the month. The rush to buy homes is pulling forward future demand. The perfect storm continues.

The Fed could start tapering its $120 billion a month in bond purchases as early as October, believes the Blackrock’s (BLK) Rick Rieder. When it does, expect the sushi to hit the bond market. Keep piling on those bond shorts, as I have been doing monthly, and am currently running a triple short position. Keep selling short the (TLT) on every opportunity.

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 400% to 120,000 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 120,000 here we come!

My Mad Hedge Global Trading Dispatch profit reached 13.54% gain during April on the heels of a spectacular 20.60% profit in March.

I used the post-earnings dip in Microsoft (MSFT) to add a new position there. I also picked up some Delta Airlines (DAL) taking advantage of a pullback there.

That leaves me 100% invested, as I have been for the last six months.

My 2021 year-to-date performance soared to 57.63%. The Dow Average is up 11.8% so far in 2021.

That brings my 11-year total return to 480.18%, some 2.00 times the S&P 500 (SPX) over the same period. My 11-year average annualized return now stands at an unbelievable 42.05%, easily the highest in the industry.

My trailing one-year return exploded to positively eye-popping 133.91%. I truly have to pinch myself when I see numbers like this. I bet many of you are making the biggest money of your long lives.

We need to keep an eye on the number of US Coronavirus cases at 31.9 million and deaths topping 570,000, which you can find here.

The coming week will be big on the data front, with a couple of historic numbers expected.

On Monday, May 3, at 10:00 AM, the US ISM Manufacturing Index is published. Merck (MRK) and Estee Lauder (EL) report.

On Tuesday, May 4, at 8:00 AM, total US Vehicle Sales for April are out. Union Pacific (UNP) and Pfizer (PFE) report.

On Wednesday, May 5 at 2:00 PM, the ADP Private Employment Report is released. General Motors (GM) and PayPal (PYPL) report.

On Thursday, May 6 at 8:30 AM, the Weekly Jobless Claims are printed. Regeneron (REGN) and Roku (ROKU) report.

On Friday, May 7 at 8:30 AM, we learn the all-important April Nonfarm Payroll Report. At 2:00 PM, we learn the Baker-Hughes Rig Count.

As for me, I received calls from six readers last week saying I remind them of Earnest 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 works.

I visited his homes in Key West and Ketchum Idaho. His Cuban residence is high on my list, now that Castro is gone.

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 Earnest 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 glued to the tables.

Stay healthy.

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

Life is a Bed of Roses Right Now

March 29, 2021

Diary, Newsletter, Summary

Global Market Comments
March 29, 2021
Fiat Lux

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE WEEK THAT NEVER WAS),
(SPY), (TLT), (TBT), (TSLA), (CSCO), (ORCL), (INTC)

The Market Outlook for the Week Ahead, or The Week that Never Was

Diary, Newsletter, Research

Of course, WWII historians know well the man who never was, the popular name for Operation Mincemeat.

In 1943, British intelligence found a homeless man who died on the streets of London, dressed him up as a Royal Marine Major William Martin, and released his body from a submarine off the coast of Spain, a German ally.

Handcuffed to his wrist was a briefcase with highly detailed plans for the allied invasion of Greece and the Balkans. The Germans shifted ten divisions to defend the region.

When the allies invaded Sicily instead, it came completely out of the blue. The invading American and British forces found the island almost undefended and inadequately manned and supplied by Italian troops. The allies planned for three months to capture Sicily. Instead, they did it in a mere 38 days. Allied losses came in at a tenth of those expected, thanks to Royal Marine Major William Martin.

The analogy here is that last week, we witnessed the market that never was. Stocks went down, then up. Bonds went up, then down. Even Tesla was virtually unchanged. It all ended up as a big fat zero for traders.

What all of this means for us investors is a subject of heated discussion among strategists. Of course, the Cassandras are always out there arguing that this is all proof that markets are peaking and that the mother of all stock market crashes is just ahead of us.

I take a different tack.

I think we are well into a long-overdue “time” correction whereby stocks go sideways for weeks or months before resuming their heroic assault on new highs. The timing will be dictated by the frantic reversal of the bond market at a ten-year Treasury yield of 2.00%.

Investors will rotate from the newly expensive recovery plays like banks into the newly cheap, such as technology stocks. Notice the sudden recent interest in legacy companies like Oracle (ORCL), Intel (INTC), and Cisco Systems (CSCO), which completely missed the great 2020 tech rally.

All of this sets up perfectly for the barbell portfolio which I have been advocating all year.

If there is a selloff, it will be by things that normal people don’t own. Those include SPACS, anything the Reddit crowd chases, stay-at-home stocks, and very high-priced tech stocks with no earnings.

Much focus has been placed on the Taiwanese-owned Ever Given stuck in the Suez Canal. As a Middle Eastern war correspondent for many years, I spent endless hours debating with my compatriots over what closure of the canal would mean.

What hasn’t been mentioned was that the accident was not caused by a Chinese captain, but Egyptian pilot ships are required to take on to raise revenues, and bribes, for the impoverished country. This all happened in the middle of a sandstorm where visibility is near zero.

I can tell you right now that they won’t get the Ever Given off there until they start to unload containers and lift off some weight so the 200,000-ton ship can rise of its own accord. Good luck with that in the middle of the Sinai Desert. Why not just sell all the contents on Amazon and have them deliver it for free as part of their prime membership?

This is a debacle that will last weeks, if not months, and will cost $9 billion a day in international trade until it’s over. In the meantime, commercial shippers have asked for protection from pirates from the US Navy as they navigate the unfamiliar water around the tip of Africa.

The Mad Hedge Summit Videos are Up, from the March 9,10, and 11 confab. Listen to 27 speakers opine on the best strategies, tactics, and instruments to use in these volatile markets. The product discounts offered last week are still valid. Start, stop, and pause the videos at your leisure. Best of all, access to the videos is FREE. Access them all by clicking here, click on CURRENT SUMMIT REPLAYS in the upper right-hand corner, and then choose the speaker of your choice.

Weekly Jobless Claims dive by 100,000, to 684,000, a one-year low. The decline was led by Illinois and Ohio. Labor shortages are popping up around the country in skilled areas, but bars and restaurants are still lagging severely.

Huge Office Cuts are coming, with execs planning a permanent 20% cut. Better to give the money to shareholders. Downtowns across the country will change beyond all recognition. How do you turn an office into an apartment?

CP Rail buys Kansas City Southern, for $25 billion, further concentrating the north American rail industry. It’s a steal because an economy entering a decade-long boom moves lots of stuff. It’s also a great North/South international trade play, which is recovering strongly with the exit of our last president. I used to ride box cars on the old Canadian Pacific back in the sixties (you can’t hitch hike where there are no cars), and occasionally the engineers would let me drive. It suddenly makes Norfolk South (NSC) and Union Pacific (UNP) look very tempting.

Another Tesla $3,000 Target was issued by Ark’s Cathie Wood, an early investor. Cathie’s Ark Innovation Fund ETF was up 180% last year largely on the strength of a massive Tesla (TSLA) holding. Her bear case is a low of $1,500 by 2025, nearly triple the current price. She has only one more triple to go to get to my own $10,000 forecast.

Biden has $3 Trillion More to Spend on top of the just passed $1.9 trillion rescue package. It's all rocket fuel for the stock market, not so much for bonds. The money will be spent on a mix of old-line freeway and bridge repair along with new spending on decarbonizing the power grid and social measures. It will be financed by tax hikes on those earning over $400,000. Remember, Roosevelt hiked the maximum tax rate to 90% on the wealthy, where it stayed for 30 years, and Biden is old enough to remember.

Daily Air Travelers top 1.5 Million, for the first time in a year. The pandemic low was 200,000 a day. It’s an indication of how anxious Americans have become to travel, and how strong the imminent economic boom will be.

Intel to build two chip fabs for $20 billion in Arizona to address the current severe shortage. US construction is a positive as it helps reduce reliance on foreign supplies. Too bad it will still leave them five years behind (AMD), but it’s a major move in the right direction. It deals with everything investors wanted to hear and moves them solidly into the 10nm architecture market. Buy (INTC) on dips.

New Home Sales Dive, off 18.2% in February, now that the free money train has left the station. Weather was blamed as a factor, with giant snowstorms slamming much of the country. Shortage of supply is another big issue. Some big builders are basically out of inventory and are reduced to selling floor plans with extended completion dates.

US Dollar (UUP) hits a four-month high, with a major assist from rising US bond interest rates. Expect the rally to continue until ten-year yields hit 2.00%, then sell the daylights out of it. With the US money supply growing at a near exponential 30% annual rate, there’s no way the dollar strength can continue. When you increase the supply, you decrease the value, simple supply and demand. My first pick is to buy the Aussie (FXA) a call option on a global synchronized economic recovery.

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 400% to 120,000 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 120,000, here we come!

It’s amazing how well patience can help your performance. My Mad Hedge Global Trading Dispatch profit reached a super-hot 18.61% so far in March on the heels of a spectacular 13.28% profit in February.

It was a go-nowhere week in the market, so I limited myself to a single trade all week, a double short in the bond market (TLT) on top of a welcome $5 rally. The position turned immediately profitable.

I still have a deep in-the-money call spread Tesla (TSLA) that is profitable and expires in 14 trading days. That leaves me with 70% cash and a barrel full of dry powder.

This is my fifth double-digit month in a row. My 2021 year-to-date performance soared to 42.10%. The Dow Average is up 9.9% so far in 2021.

That brings my 11-year total return to 464.65%, some 2.08 times the S&P 500 (SPX) over the same period. My 11-year average annualized return now stands at an unbelievable 41.30%.

My trailing one-year return exploded to positively eye-popping 119.39%. I truly have to pinch myself when I see numbers like this. I bet many of you are making the biggest money of your long lives.

We need to keep an eye on the number of US Corona virus cases at 30.2 million and deaths topping 550,000, which you can find here.

Thankfully, death rates have slowed dramatically, but Obituaries are still the largest sector in the newspaper. At this point, some 47% of the US population has achieved immunity through vaccination or catching the disease. Herd immunity is near.

The coming week is a big one for jobs data.

On Monday, March 29, at 9:00 AM, the Dallas Fed Manufacturing Index for March is released.

On Tuesday, March 30, at 9:00 AM, the S&P Case Shiller National Home Price Index for January is published.

On Wednesday, March 31 at 8:15 AM, the ADP Challenger Private Employment Report for March is out. Pending Home Sales for February are indicated at 9:00 AM.

On Thursday, April 1 at 8:30 AM, the Weekly Jobless Claims are published.

On Friday, April 2 at 8:30 AM we get the Nonfarm Payroll Report for March. At 2:00 PM, we learn the Baker-Hughes Rig Count.

As for me, tax time is coming up and let me tell you, I have absolutely the best IRS story of all time.

It comes from my late, dear friend, Al Pinder, who I sat next to for ten years at the Foreign Correspondents of Japan in Tokyo, pounding away on antiquated Royal typewriters until our shoulders were as stiff as boards. Al then was the shipping correspondent for the New York Journal of Commerce newspaper.

Al was a colorful character, to say the least.

In the run up to WWII, Al took an extended vacation in Japan where he toured and photographed the country’s beaches, looking for the best landing sites for the US military in case war broke out.

To sneak the top-secret pictures out of the country, he bought a large steamer trunk and placed them a false bottom. Then he went to Tokyo’s red-light district in Yoshiwara, bought a dubious sex toy, an inflatable life-sized Japanese doll, and placed it on top.

When the trunk was searched, the customs officials found the doll, had a good laugh and passed him on. Al’s photos were the basis of Operation Olympic, the 1945 US invasion of Japan, made unnecessary by the dropping of the atomic bomb.

When the war broke out, Pinder parachuted into western China, where he acted as the liaison with Mao Zedong’s guerilla forces in Hunan province. In 1944, Al received a coded message from headquarters ordering him to intercept a top-secret airdrop from a DC3 in the middle of the night.

Knowing he would be mercilessly tortured by the Japanese if caught, he set up three signal fires in a triangle in a remote part of the desert and managed to find the parachute. Dodging enemy patrols all the way, he returned to his hideout in a mountain cave and opened the package.

In it was a letter from the IRS asking why he had not filed a tax return for the past three years.

I told this story at Al’s wake a few years ago and everyone had a good laugh. Al went on to run CIA operations in Japan during the fifties and sixties. When he passed away, there was a frantic search for a safe deposit box by American intelligence officials containing records of all CIA payoffs to Japan’s leading conservative party.

When the box was finally found, there was an enormous sigh of relief at the embassy. I still miss Al.

Stay healthy.

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