Global Market Comments
January 6, 2023
Fiat Lux
Featured Trades:
(TESTIMONIAL)
(PLAYING THE SHORT SIDE WITH VERTICAL BEAR PUT SPREADS), (TLT)
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Global Market Comments
January 4, 2023
Fiat Lux
2023 Annual Asset Class Review
A Global Vision
FOR PAID SUBSCRIBERS ONLY
Featured Trades:
(SPX), (QQQ), (IWM) (AAPL), (XLF), (BAC) (JPM), (BAC), (C), (MS), (GS),
(X), (CAT), (DE),(TLT), (TBT), (JNK), (PHB), (HYG), (MUB), (LQD), (FXE), (EUO),
(FXC), (FXA), (YCS), (FXY), (CYB), (DIG), (RIG), (USO), (DUG), (UNG), (USO),
(XLE), (AMLP),(GLD), (DGP), (SLV), (PPTL), (PALL), (ITB), (LEN), (KBH), (PHM)
I am once again writing this report from a first-class sleeping cabin on Amtrak’s legendary California Zephyr.
By day, I have two comfortable seats facing each other next to a panoramic window. At night, they fold into two bunk beds, a single and a double. There is a shower, but only Houdini could navigate it.
I am anything but Houdini, so I foray downstairs to use the larger public hot showers. They are divine.
We are now pulling away from Chicago’s Union Station, leaving its hurried commuters, buskers, panhandlers, and majestic great halls behind. I love this building as a monument to American exceptionalism.
I am headed for Emeryville, California, just across the bay from San Francisco, some 2,121.6 miles away. That gives me only 56 hours to complete this report.
I tip my porter, Raymond, $100 in advance to make sure everything goes well during the long adventure and to keep me up to date with the onboard gossip.
The rolling and pitching of the car is causing my fingers to dance all over the keyboard. Microsoft’s Spellchecker can catch most of the mistakes, but not all of them.
As both broadband and cell phone coverage are unavailable along most of the route, I have to rely on frenzied Internet searches during stops at major stations along the way to Google obscure data points and download the latest charts.
You know those cool maps in the Verizon stores that show the vast coverage of their cell phone networks? They are complete BS.
Who knew that 95% of America is off the grid? That explains so much about our country today.
I have posted many of my better photos from the trip below, although there is only so much you can do from a moving train and an iPhone 14 Pro Max.
Here is the bottom line which I have been warning you about for months. In 2023, we will probably top the 84.63% we made last year, but you are going to have to navigate the reefs, shoals, and hurricanes. Do it and you can laugh all the way to the bank. I will be there to assist you to navigate every step.
The first half of 2023 will be all about trading. After that, I expect markets to go straight up.
And here is my fundamental thesis for 2023. After the Fed kept rates too low for too long, then raised them too much, it will then panic and lower them again too fast to avoid a recession. In other words, a mistake-prone Jay Powell will keep making mistakes. That sounds like a good bet to me.
Let me give you a list of the challenges I see financial markets are facing in the coming year:
The Ten Key Variables for 2023
1) When will the Fed pivot?
2) How much of a toll will the quantitative tightening take?
3) How soon will the Russians give up on Ukraine?
4) When will buyers return to technology stocks from value plays?
5) Will gold replace crypto as the new flight to safety investment?
6) When will the structural commodities boom get a second wind?
7) How fast will the US dollar fall?
8) How quickly will real estate recover?
9) How fast can the Chinese economy bounce back from Covid-19?
10) How far will oil prices keep falling?
The Thumbnail Portfolio
Equities – buy dips
Bonds – sell buy dips
Foreign Currencies – buy dips
Commodities – buy dips
Precious Metals – buy dips
Energy – stand aside
Real Estate – buy dips
1) The Economy – Bouncing Along the Bottom
Whether we get a recession or not, you can count on markets fully discounting one, which it is currently doing with reckless abandon.
Anywhere you look, the data is dire, save for employment, which may be the last shoe to fall. Technology companies seem to be leading us in the right direction with never-ending mass layoffs. Even after relentless cost-cutting though, there are still 1.5 tech job offers per applicant, which is down from last year’s three.
The Fed is currently predicting a weak 0.5% GDP growth rate for 2023, the same feeble rate we saw for 2022. What we might get is two-quarters of negative growth in the first half followed by a sharp snapback in the second half.
Whatever we get, it will be one of the mildest recessions or growth recessions in American economic history. There is no hint of a 2008-style crash. The banking system was shored up too well back then to prevent that. Thank Dodd/Frank.
So far, so good.
A Rocky Mountain Moose Family
2) Equities (SPX), (QQQ), (IWM) (AAPL), (XLF), (BAC) (JPM), (BAC), (C), (MS), (GS), (X), (CAT), (DE)
Since my job is to make your life incredibly easy, I am going to narrow my equity strategy for 2023.
It's all about falling interest rates.
When interest rates are high, as they are now, you only look at trades and investments that can benefit from falling interest rates.
In the first half, that will be value plays like banks, (JPM), (BAC), (C), financials (MS), (GS), homebuilders (KBH), (LEN), (PHM), industrials (X), capital goods (CAT), (DE).
As we come out of any recession in the second half, growth plays will rush to the fore. Big tech will regain leadership and take the group to new all-time highs. That means the volatility and chop we will certainly see in the first half will present a generational opportunity to get into the fastest-growing sectors of the US economy at bargain prices. I’m talking Cadillacs at KIA prices.
A category of its own, Biotech & Healthcare should do well on their own. Not only are they classic defensive plays to hold during a recession, technology and breakthrough new discoveries are hyper-accelerating. My top three picks there are Eli Lily (ELI), Abbvie (ABBV), and Merck (MRK).
Block out time on your calendars because whenever the Volatility Index (VIX) tops $30, I am going pedal to the metal, and full firewall forward (a pilot term), and your inboxes will be flooded with new trade alerts.
There is another equity subclass that we haven’t visited in about a decade, and that would be emerging markets (EEM). After ten years of punishment by a strong dollar, (EEM) has also been forgotten as an investment allocation. We are now in a position where the (EEM) is likely to outperform US markets in 2023, and perhaps for the rest of the decade.
Frozen Headwaters of the Colorado River
3) Bonds (TLT), (TBT), (JNK), (PHB), (HYG), (MUB), (LQD)
Amtrak needs to fill every seat in the dining car to get everyone fed on time, so you never know who you will share a table with for breakfast, lunch, and dinner.
There was the Vietnam Vet Phantom Jet Pilot who now refused to fly because he was treated so badly at airports. A young couple desperately eloping from Omaha could only afford seats as far as Salt Lake City. After they sat up all night, I paid for their breakfast.
A retired British couple was circumnavigating the entire US in a month on a “See America Pass.” Mennonites are returning home by train because their religion forbade automobiles or airplanes.
The national debt ballooned to an eye-popping $30 trillion in 2021, a gain of an incredible $3 trillion and a post-World War II record. Yet, as long as global central banks are still flooding the money supply with trillions of dollars in liquidity, bonds will not fall in value too dramatically. I’m expecting a slow grind down in prices and up in yields.
The great bond short of 2021 never happened. Even though bonds delivered their worst returns in 19 years, they still remained nearly unchanged. That wasn’t good enough for the many hedge funds, which had to cover massive money-losing shorts into yearend.
Instead, the Great Bond Crash will become a new business. This time, bonds face the gale force headwinds of three promised interest rate hikes. The year-end government bond auctions were a complete disaster.
Fed borrowing continues to balloon out of control. It’s just a matter of time before the last billion dollars in government borrowing breaks the camel’s back.
That makes a bond short a core position in any balanced portfolio. Don’t get lazy. Make sure you only sell a rally lest we get trapped in a range, as we did for most of 2021.
A Visit to the 19th Century
4) Foreign Currencies (FXE), (EUO), (FXC), (FXA), (YCS), (FXY), (CYB)
With a major yield advantage over the rest of the world, the US dollar has been on an absolute tear for the past decade. After all, we have the world’s strongest economy.
That is about to end.
If your primary assumption is that US interest rates will see a sharp decline sometime in 2023, then the outlook for the greenback is terrible.
Currencies are driven by interest rate differentials and the buck is soon going to see the fastest shrinking yield premium in the forex markets.
That shines a great bright light on the foreign currency ETFs. You could do well buying the Australian Dollar (FXA), Euro (FXE), Japanese yen (FXE), and British Pound (FXB). I’d pass on the Chinese yuan (CYB) right now until their Covid shutdowns end.
5) Commodities (FCX), (VALE), (DBA)
Commodities are the high beta play in the financial markets. That’s because the cost of being wrong is so much higher. Get on the losing side of commodities and you will be bled dry by storage costs, interest expenses, contangos, and zero demand.
Commodities have one great attribute. They predict recessions earlier than any other asset class. When they peaked in March of 2022, they were screaming loud and clear that a recession would hit in early 2023. By reversing on a dime on October 14, they also told us that the recovery would begin in July of 2023.
You saw this in every important play in the sector, including Broken Hill (BHP), Peabody Energy (BTU), Freeport McMoRan (TCX), and Alcoa Aluminum (AA). Excuse me for using all the old names.
The heady days of the 2011 commodity bubble top are about to replay. Now that this sector is convinced of a substantially weaker US dollar and lower inflation, it is once more a favorite target of traders.
China will still demand prodigious amounts of imported commodities once its pandemic shutdown ends, but not as much as in the past. Much of the country has seen its infrastructure built out, and it is turning from a heavy industrial to a service-based economy, much like the US. Investors are keeping a sharp eye on India as the next major commodity consumer.
And here’s another big new driver. Each electric vehicle requires 200 pounds of copper and production is expected to rise from 1 million units a year to 25 million by 2030. Annual copper production will have to increase three-fold in a decade to accommodate this increase, no easy task, or prices will have to rise.
The great thing about commodities is that it takes a decade to bring new supply online, unlike stocks and bonds, which can merely be created by an entry in an excel spreadsheet. As a result, they always run far higher than you can imagine.
Accumulate all commodities on dips.
Snow Angel on the Continental Divide
6) Energy (DIG), (RIG), (USO), (DUG), (UNG), (XLE), (AMLP)
Energy was the top-performing sector of 2022. But remember, you will be trading an asset class that is eventually on its way to zero sooner than you think. However, you could have several doublings on the way to zero. This is one of those times.
The real tell here is that energy companies are bailing on their own industry. Instead of reinvesting profits back into their future exploration and development, as they have for the last century, they are paying out more in dividends and share buybacks.
Take the money and run.
There is the additional challenge in that the bulk of US investors, especially environmentally friendly ESG funds, are now banned from investing in legacy carbon-based stocks. That means permanently cheap valuations and share prices for the energy industry.
Energy now counts for only 5% of the S&P 500. Twenty years ago, it boasted a 15% weighting.
The gradual shutdown of the industry makes the supply/demand situation infinitely more volatile.
Unless you are a seasoned, peripatetic, sleep-deprived trader, there are better fish to fry.
And guess who the world’s best oil trader was in 2022? That would be the US government, which drew 400 million barrels from the Strategic Petroleum Reserve in Texas and Louisiana at an average price of $90 and now has the option to buy it back at $70, booking a $4 billion paper profit.
The possibility of a huge government bid at $70 will support oil prices for at least early 2023. Whether the Feds execute or not is another question. I’m advising them to hold off until we hit zero again to earn another $18 billion. Why we even have an SPR is beyond me, since America has been a large net energy producer for many years now. Do you think it has something to do with politics?
To understand better how oil might behave in 2023, I’ll be studying US hay consumption from 1900-1920. That was when the horse population fell from 100 million to 6 million, all replaced by gasoline-powered cars and trucks. The internal combustion engine is about to suffer the same fate.
7) Precious Metals (GLD), (DGP), (SLV), (PPTL), (PALL)
The train has added extra engines at Denver, so now we may begin the long laboring climb up the Eastern slope of the Rocky Mountains.
On a steep curve, we pass along an antiquated freight train of hopper cars filled with large boulders.
The porter tells me this train is welded to the tracks to create a windbreak. Once, a gust howled out of the pass so swiftly that it blew a passenger train over on its side.
In the snow-filled canyons, we saw a family of three moose, a huge herd of elk, and another group of wild mustangs. The engineer informs us that a rare bald eagle is flying along the left side of the train. It’s a good omen for the coming year.
We also see countless abandoned 19th century gold mines and the broken-down wooden trestles leading to huge piles of tailings, relics of previous precious metals booms. So, it is timely here to speak about the future of precious metals.
Fortunately, when a trade isn’t working, I avoid it. That certainly was the case with gold last year.
2022 was a terrible year for precious metals until we got the all-asset class reversal in October. With inflation soaring, stocks volatile, and interest rates soaring, gold had every reason to fall. Instead, it ended up unchanged on the year, thanks to a 15% rally in the last two months.
Bitcoin stole gold’s thunder until a year ago, sucking in all of the speculative interest in the financial system. Jewelry and industrial demand were just not enough to keep gold afloat. That is over now for good and that is why gold is regaining its luster.
Chart formations are starting to look very encouraging with a massive head-and-shoulders bottom in place. So, buy gold on dips if you have a stick of courage on you, which I hope you do.
Higher beta silver (SLV) will be the better bet as it already has been because it plays a major role in the decarbonization of America. There isn’t a solar panel or electric vehicle out there without some silver in them and the growth numbers are positively exponential. Keep buying (SLV), (SLH), and (WPM) on dips.
Crossing the Great Nevada Desert Near Area 51
8) Real Estate (ITB), (LEN), (KBH), (PHM)
The majestic snow-covered Rocky Mountains are behind me. There is now a paucity of scenery, with the endless ocean of sagebrush and salt flats of Northern Nevada outside my window, so there is nothing else to do but write.
My apologies in advance to readers in Wells, Elko, Battle Mountain, and Winnemucca, Nevada.
It is a route long traversed by roving banks of Indians, itinerant fur traders, the Pony Express, my own immigrant forebearers in wagon trains, the Transcontinental Railroad, the Lincoln Highway, and finally US Interstate 80, which was built for the 1960 Winter Olympics at Squaw Valley.
Passing by shantytowns and the forlorn communities of the high desert, I am prompted to comment on the state of the US real estate market.
Those in the grip of a real estate recession take solace. We are in the process of unwinding 2022’s excesses, but no more. There is no doubt a long-term bull market in real estate will continue for another decade, once a two year break is completed.
There is a generational structural shortage of supply with housing which won’t come back into balance until the 2030s. You don’t have a real estate crash when we are short 10 million homes.
The reasons, of course, are demographic. There are only three numbers you need to know in the housing market for the next ten years: there are 80 million baby boomers, 65 million Generation Xers who follow them, and 86 million in the generation after that, the Millennials.
The boomers (between ages 58 and 76) have been unloading dwellings to the Gen Xers (between ages 46 and 57) since prices peaked in 2007. But there are not enough of the latter, and three decades of falling real incomes mean that they only earn a fraction of what their parents made. That’s what caused the financial crisis. That has created a massive shortage of housing, both for ownership and rentals.
There is a happy ending to this story.
Millennials now aged 26-41 are now the dominant buyers in the market. They are transitioning from 30% to 70% of all new buyers of homes. They are also just entering the peak spending years of middle age, which is great for everyone.
The Great Millennial Migration to the suburbs and Middle America has just begun. Thanks to the pandemic and Zoom, many are never returning to the cities. That has prompted massive numbers to move from the coasts to the American heartland.
That’s why Boise, Idaho was the top-performing real estate market, followed by Phoenix, Arizona. Personally, I like Reno, Nevada, where Apple, Google, Amazon, and Tesla are building factories as fast as they can.
As a result, the price of single-family homes should continue to rise during the 2020s, as they did during the 1970s and the 1990s when similar demographic forces were at play.
This will happen in the context of a labor shortfall, soaring wages, and rising standards of living.
Rising rents are accelerating this trend. Renters now pay 35% of their gross income, compared to only 18% for owners, and less, when multiple deductions and tax subsidies are considered. Rents are now rising faster than home prices.
Remember, too, that the US will not have built any new houses in large numbers in 16 years. The 50% of small home builders that went under during the Financial Crisis never came back.
We are still operating at only a half of the 2007 peak rate. Thanks to the Great Recession, the construction of five million new homes has gone missing in action.
There is a new factor at work. We are all now prisoners of the 2.75% 30-year fixed rate mortgages we all obtained over the past five years. If we sell and try to move, a new mortgage will cost double today. If you borrow at a 2.75% 30-year fixed rate, and the long-term inflation rate is 3%, then, over time, you will get your house for free. That’s why nobody is selling, and prices have barely fallen.
This winds down towards the end of 2023 as the Fed realizes its many errors and sharply lowers interest rates. Home prices will explode…. again.
Quite honestly, of all the asset classes mentioned in this report, purchasing your abode is probably the single best investment you can make now after you throw in all the tax breaks. It’s also a great inflation play.
That means the major homebuilders like Lennar (LEN), Pulte Homes (PHM), and KB Homes (KBH) are a buy on the dip.
Recent Reno Real Estate Statistics
Crossing the Bridge to Home Sweet Home
9) Postscript
We have pulled into the station at Truckee amid a howling blizzard.
My loyal staff has made the ten-mile trek from my estate at Incline Village to welcome me to California with a couple of hot breakfast burritos and a chilled bottle of Dom Perignon Champagne, which has been resting in a nearby snowbank. I am thankfully spared from taking my last meal with Amtrak.
After that, it was over legendary Donner Pass, and then all downhill from the Sierras, across the Central Valley, and into the Sacramento River Delta.
Well, that’s all for now. We’ve just passed what was left of the Pacific mothball fleet moored near the Benicia Bridge (2,000 ships down to six in 50 years). The pressure increase caused by a 7,200-foot descent from Donner Pass has crushed my plastic water bottle. Nice science experiment!
The Golden Gate Bridge and the soaring spire of Salesforce Tower are just around the next bend across San Francisco Bay.
A storm has blown through, leaving the air crystal clear and the bay as flat as glass. It is time for me to unplug my MacBook Pro and iPhone, pick up my various adapters, and pack up.
We arrive in Emeryville 45 minutes early. With any luck, I can squeeze in a ten-mile night hike up Grizzly Peak and still get home in time to watch the ball drop in New York’s Times Square on TV.
I reach the ridge just in time to catch a spectacular pastel sunset over the Pacific Ocean. The omens are there. It is going to be another good year.
I’ll shoot you a Trade Alert whenever I see a window open at a sweet spot on any of the dozens of trades described above, which should be soon.
Good luck and good trading in 2023!
John Thomas
The Mad Hedge Fund Trader
The Omens Are Good for 2023!
Global Market Comments
December 16, 2022
Fiat Lux
Featured Trade:
(DECEMBER 14 BIWEEKLY STRATEGY WEBINAR Q&A),
(JPM), (BAC), (C), (WFC), (UNG), (RIVN), (SPY), (TLT), (TBT), (TSLA), (NVDA), (CRM), (FCX)
Below please find subscribers’ Q&A for the December 14 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Silicon Valley in California.
Q: Is it time to short the S&P 500 (SPY), or go into cash?
A: I vote for cash. Number 1. We’ve just had a tremendous run in the market. The 200-day moving average at $405 is proving to be massive resistance, and you could get a bunch of profit-taking in January on all the positions people bought up in October. They’ve made a ton of money on that, and they may be deferring to profit-taking, hoping for the Santa Clause rally to continue and to take advantage of all that time decay over the holidays—so, high risk. Risk-reward right now is terrible, so I don’t want to do anything. I’m 100% cash, and I’ll stay that way until the New Year unless something exceptional happens in the markets—you never know what might happen. And I watch markets 24/7, vacation or not because it's in my blood.
Q: What about Financials?
A: Wait until the next dip and then go for call spreads which deliver max profits in sideways markets. JP Morgan (JPM), Bank of America (BAC), Citigroup (C) and you might take a look at Wells Fargo (WFC) next time around, but they always seem to be getting into trouble.
Q: What do we do about interest rates here?
A: Look for the 10-year Treasury bond (TLT) yield to drop to about 2.50% in 2023, about the first half of 2023—maybe by June or so. We did just have a round of profit-taking, but we’re adding on dips.
Q: What do you think about the US sending patriot batteries to Ukraine?
A: The problem is the MIM-104 Patriot SAM system is kind of old—about 41 years old—and it’s been outrun by the new technologies developed by the Ukraine war. Also, 1,000 drones at $1,000 each would be cheaper than 1 patriot missile for $4 million. Sending swarms of hundreds of super cheap drone bombs to attack targets has only been developed over the past six months and you only need one to get through to destroy the target for which the patriot would be useless. Patriot is really designed to shoot down incoming Russian intercontinental ballistic missiles with nuclear warheads with one hour of notice and highly predictable trajectories. We used them a lot in the Gulf War in 1991, and we gave many to Israel which used them to great effect when defending big cities. But they were only firing against slow WWII German-style V2 rockets which Saddam Hussein literally copied off of Wikipedia. If you want to see how effective the new drone strategy is, watch competitive drone racing (https://www.youtube.com/watch?v=HNRiMgNnuVE ), or robot wars (http://www.robotwars.tv ), or any of these other online programs where you have drones controlled by humans doing exactly what I’m talking about. Also, 1,000 drones at $1,000 each would be cheaper than 1 patriot missile for $ million.
Q: What’s your Rivian (RIVN) target by the January options expiration?
A: I have no idea, but Elon Musk has had the impact of destroying not only Tesla but the entire EV sector, so Rivian is a great company clearly being dragged down by Tesla. But also, a joint venture to make trucks in Europe was also put on hold with Mercedes. And of course, nobody wants to spend money ahead of a recession. Buy (RIVN) two-year LEAPS.
Q: Why is the US buying Natural Gas (UNG) in Massachusetts from Russia when we have so much already in this country?
A: The US does not have a national natural gas pipeline system, so you can have excesses in Texas where it’s produced meet shortages in Massachusetts where it’s consumed. Somebody found a loophole to get Russian gas into the US using offshore shell companies which I’m sure will be closed instantly once that delivery is made. Suffice it to say that the sanctions on Russia are tightening, are having a deeper effect and forcing them to pull out of Ukraine sooner than we expect. That may be the pivotal black swan of 2023—that Russia gives up on Ukraine, which would be a huge positive for all markets.
Q: When will we be using nuclear fusion?
A: I have been following nuclear fusion for 50 years, ever since I worked at the Nuclear Test Site in Nevada—it’s long been the holy grail for alternative energy. I talked to the teams every once in a while, since they live next door. The positive developments we saw in England last week are a big breakthrough, but you’re looking for at least 30 years until we get functional economic nuclear fusion power plants. So, we only have to stay alive for 30 more years (and keep climate change from killing us all off in the meantime) before we get carbon-free energy in an unlimited supply. Having said that, from the time they developed a functional commercial nuclear powerplant using Uranium in 1957 from the initial use of the atomic bomb in 1945, was only 12 years and that had to be equally as daunting. So, I may be wrong, and there may be other breakthroughs coming our way, but you don’t control 150 million degrees easily—that's what’s necessary with fusion. The amounts of power input required are also staggering, like all the power that San Francisco uses in a day, just to produce marginal bits of electricity. And the deuterium fuel needed (H2, or heavy hydrogen) in large quantities would not exactly be cheap either. But in 30 years every city should get its own min sun to provide unlimited electricity. So there’s your science lecture of the day, from a long-term fusion follower. For a more detailed explanation please click here at https://www.energy.gov/science/doe-explainsnuclear-fusion-reactions
Q: Is Tesla (TSLA) a buy here?
A: Absolutely, for the long term, but I would not be amazed to see $110 print first. Number one, there’s a major short play going on here too building huge amounts of buying power, and Number two, we’re flushing out a lot of long-term profit takers for tax loss selling as we go with the year-end to offset 2022 losses in other stocks. Buying Tesla at 27X earnings multiple, and next year’s 19X multiple when it was at 100X just a year ago is kind of unbelievable. An onslaught of new Tesla positives will hit the market in 2023. The new Cybertruck comes out and there is a two-year waiting list out the gate and deposits in hand for 100,000 vehicles. The company is generating such enormous cash flows that it is like to carry out $10 billion in share buybacks, especially with the price this low. There are no real competitors on the horizon, except for a handful with minimal production at big losses outside of China.
Q: Is the demise of FTX the end of crypto?
A: I would say yes, which is why we stopped producing our Bitcoin newsletter. It could take 30 years for this thing to recover. It’s another Japanese stock market type situation, where it literally takes three decades to recover, and by then new technologies will far surpass it. The confidence in anything crypto has been totally destroyed by the FTX scandal—it’s the final nail in the coffin. And there are better things to do—I’d rather be buying NVIDIA (NVDA) or Tesla (TSLA) than crypto. There are too many great trades after a bear market.
Q: Is Blackrock (BLK) in trouble?
A: Not in a million years, and I’d be buying it on any dip. They’re an incredibly well-run company, buy on dips. They have one gated REIT which thei disclosed well in advance that is drawing all the adverse publicity. In bear markets, traders always believe the worst.
Q: Why would you not sell Nvidia (NVDA)?
A: Well, we dumped all our tech stocks in January, so we did sell there. But I try not to go against long-term trends, and the long-term trends for Nvidia is a double or triple from here since they are the 8-pound gorilla in the high-end chip business.
Q: Why is cybersecurity (PANW), (CRWD) so unloved in this environment?
A: They are over-owned. When everybody owns something, you can have the greatest story in the world and it doesn’t go up because you need new buyers for things to go up, and the Cybersecurity story is pretty well known. That’s why it won’t go down either, people are not selling because they believe in the long-term story of cyber security—and quite correctly so, and I might add at the bottom of the ranges.
Q: Isn’t Warren Buffet’s age a worry regarding Berkshire Hathaway (BRKB)?
A: No, the replacement management team that has been there for 20 years, is generating great results. Warren is basically just the front-end mouthpiece for Berkshire Hathaway, just like I’m the front-end mouthpiece for the Mad Hedge Fund Trader and isn't really involved in day-to-day decisions. That’s how Berkshire was able to step up its technology exposure during the teens. When he goes, the stock might drop 5% from algorithm and uninformed sales, but no more.
Q: What do you think of the iShares 20 Plus Year Treasury Bond ETF (TLT) versus the ProShares UltraShort 20+ Year Treasury (TBT)?
A: Avoid the (TBT) because it’s a 2x—you have extra management fees, and extra dealing costs—it’s better just to buy (TLT) on a 2x margin than it is shorting the (TBT) which is already a 2x. I’m looking for $120-$130 in the (TLT) by mid-2023, which is also a great LEAPS candidate.
Q: Is the market rethinking technology multiples here which are IBIDTA based?
A: It has already rethought the technology multiples because they have collapsed. They have dropped, in Tesla’s case 100X to 19X, which looks like a pretty serious piece of rethinking to me, so yes absolutely. Where is the final level? My theory always has been that when tech falls to a market multiple, which for the S&P 500 right now is 18.5X, that is your final bottom in tech multiples which means they may have more to go down. And what might really happen is you may have a situation where the market multiples start to rise again and get back up to the 20’s, tech falls, and they meet somewhere in the low 20s. That’s your final bottom for tech, and then you buy it to own for the next 10 years.
Q: When do you think the Fed will start lowering rates?
A: It will be a second-half affair. First of all, they have to raise rates by 50 basis points on Wednesday, then raise them again in February by 50 and again in March by 25, and then leave them alone for 3 months. Then we will have a recession, or dramatically lower inflation by then, or both. And then they’ll have room to start cutting, which sets a calendar of about June where they start several 75 basis point CUTS. Remember, markets discount things 6-9 months in advance, which is why we had that $20 rally in the (TLT) that started in February. There’s your calendar. So far, it’s working.
Q: Will you give a buy signal on Tesla (TSLA)?
A: More like a Hail Mary on Tesla, hoping that it’s the bottom. When you get these capitulation selloffs, which is what we’re getting on Tesla, there is absolutely no way of predicting where the final number is, because you’re dealing with human emotions here, which are totally unpredictable and are panicking. I’d rather wait, give the first 10% of the move to the next guy, and then play the new trend from there. But I think Tesla could be one of the top performers of 2023. Especially if you get down to like $110 or so, something unbelievable—you know, get Tesla to market multiple, that means it’s got to drop another $30 essentially, and in this environment, it could do that. It could keep going down every day for the rest of this year because a lot of these big reversals tend to happen at year ends. When you get the last Tesla bull out of there, that’s when it goes up. After that, it’s all short covering.
Q: Do you think it will be 50 or 75 basis points?
A: It’s a coin toss for whether it’s 50 or 75. Knowing Jay Powell as I do, I’d go for 50, but with harsh talk. I think he wants to shock us, wants to kill off this stock market rally, wants to kill off any hope you can get one more price rise through the system before we hit a recession. A 50 basis points would be a real shocker and, by the way, would also give us easily a 1000-point selloff, which we could then use to buy into for the new year.
Q: Could Tesla reach $600?
A: Yes, I think it could. Remember, the fundamental story for Tesla is still on track. They are still growing at a 40% rate, while the rest of Detroit is going nowhere. All of their leads are overwhelming, and the really telling aspect for the future of Tesla is that Apple gave up on its autonomous driving program. Every other car company in the world is going to come to the same decision, except for maybe Google. So yes, the bull case is absolutely there, you just have to wait for the current capitulation to flush out, and then it becomes a buy for years.
Q: Does the adoption of a digital currency impact the economy?
A: No, I think anything digital money is on hold for the foreseeable future as the FTX disaster unfolds.
Q: Do you like Salesforce (CRM)?
A: Yes, long-term. It’s also in a capitulation “catch a falling knife” stage. Wait for that to finish—better to buy it on the way up than on the way down is all I can say.
Q: Will there be any restrictions on copper mining (FCX)?
A: Not that I can think of—we’re looking at an enormous shortage of copper going forward and a future copper shock. Most of this is produced in emerging markets that have no environmental restrictions, which is why it happens there, like Chile. So yes, looking for new copper sources will be one of the big plays of this decade.
Q: Do you think the market will bottom in 2023?
A: Yes, if it hasn’t already.
To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in to www.madhedgefundtrader.com, go to MY ACCOUNT, click on GLOBAL TRADING DISPATCH, then WEBINARS, and all the webinars from the last 12 years are there in all their glory.
Good Luck and Stay Healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Peleliu in 1978 with a Japanese 8 Inch Gun
Global Market Comments
December 13, 2022
Fiat Lux
Featured Trade:
(WHAT EVER HAPPENED TO THE GREAT DEPRESSION DEBT?),
($TNX), (TLT), (TBT)
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)
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
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, 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
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)
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
