Global Market Comments
September 14, 2022
Fiat Lux
Featured Trade:
(WHAT EVER HAPPENED TO THE GREAT DEPRESSION DEBT?),
($TNX), (TLT), (TBT)
Tag Archive for: (TLT)
When I was a little kid during the early 1950s, my grandfather used to endlessly rail against Franklin Delano Roosevelt.
The WWI veteran, who was mustard gassed in the trenches of France and was a lifetime, died in the wool Republican, said the former president was a dictator and a traitor to his class, who trampled the constitution with complete disregard.
Republican presidential candidates Hoover, Landon, and Dewey would have done much better jobs.
What was worse, FDR had run up such enormous debts during the Great Depression that, not only would my life be ruined, so would my children’s lives.
As a six-year-old, this disturbed me deeply, as it appeared that just out of diapers, my life was already going to be dull, brutish, and pointless.
Grandpa continued his ranting until a three pack a day Lucky Strike non-filter habit finally killed him in 1977.
He insisted until the day he died that there was no definitive proof that cigarettes caused lung cancer, even though during his war, they referred to them as “coffin nails.”
He was stubborn as a mule to the end. And you wonder whom I got it from?
What my grandfather’s comments did do was spark in me a lifetime interest in the government bond market, not only ours, but everyone else’s around the world.
So, what ever happened to the despised, future destroying Roosevelt debt?
In short, it went to money heaven.
And here I like to use the old movie analogy. Remember, when someone walked into a diner in those old black and white flicks? Check out the prices on the menu on the wall. It says “Coffee: 5 cents, Hamburgers: 10 cents, Steak: 50 cents.”
That is where the Roosevelt debt went.
By the time the 20 and 30-year Treasury bonds issued in the 1930’\s came due, WWII, Korea, and Vietnam happened, and the great inflation that followed.
The purchasing power of the dollar cratered, falling roughly 90%. Coffee is now $1.00, a hamburger at McDonald’s is $5.00, and a cheap steak at Outback cost $12.00.
The government, in effect, only had to pay back 10 cents on the dollar in terms of current purchasing power on whatever it borrowed in the thirties.
Who paid for this free lunch?
Bond owners who received minimal and often negative real inflation-adjusted returns on fixed income investments for three decades.
In the end, it was the risk avoiders who picked up the tab. This is why bonds became known as “certificates of confiscation” during the seventies and eighties.
This is not a new thing. About 300 years ago, governments figured out there was easy money to be had by issuing paper money, borrowing massively, stimulating the local economy, creating inflation, and then repaying the debt in devalued future paper money.
This is one of the main reasons why we have governments, and why they have grown so big. Unsurprisingly, France was the first, followed by England and every other major country.
Ever wonder how the new, impoverished United States paid for the Revolutionary War?
It issued paper money by the bale, which dropped in purchasing power by two thirds by the end of conflict in 1783. The British helped too by flooding the country with counterfeit paper Continental money.
Bondholders can expect to receive a long series of rude awakenings sometime in the future.
No wonder Bill Gross, the former head of bond giant PIMCO, says he will get ashes in his stocking for Christmas next year.
The scary thing is that eventually, we will enter a new 30-year bear market for bonds that lasts all the way until 2049. However, after last month’s frenetic spike up in bond prices and down in bond yields, that is looking more like a 2022 than a 2019 position.
This is certainly what the demographics are saying, which predicts an inflationary blow-off in decades to come that could take short term Treasury yields to a nosebleed 12% high once more.
That scenario has the leveraged short Treasury bond ETF (TBT), which has just cratered down to $23, double to $46, and then soaring all the way to $200.
If you wonder how yields could get that high in a decade, consider one important fact.
The largest buyers of American bonds for the past three decades have been Japan and China. Between them, they have soaked up over $2 trillion worth of our debt, some 12% of the total outstanding.
Unfortunately, both countries have already entered very negative demographic pyramids, which will forestall any future large purchases of foreign bonds. They are going to need the money at home to care for burgeoning populations of old age pensioners.
So who becomes the buyer of last resort? No one, unless the Federal Reserve comes back with QE IV, V, and VI. QE IV, in fact, has already started.
There is a lesson to be learned today from the demise of the Roosevelt debt.
It tells us that the government should be borrowing as much as it can right now with the longest maturity possible at these ultra-low interest rates and spending it all.
With real, inflation adjusted 10-year Treasury bonds now posting negative yields, they have a free pass to do so.
In effect, the government never has to pay back the money. But they do have the ability to reap immediate benefits, such as through stimulating the economy with greatly increased infrastructure spending.
Heaven knows we need it.
If I were king of the world, I would borrow $5 trillion tomorrow and disburse it only in areas that create domestic US jobs. Not a penny should go to new social programs. Long-term capital investments should be the sole target.
Here is my shopping list:
$1 trillion – new Interstate freeway system
$1 trillion – additional infrastructure repairs and maintenance
$1 trillion – conversion of our energy system to solar
$1 trillion – construction of a rural broadband network
$1 trillion – investment in R&D for everything
The projects above would create 5 million new jobs quickly. Who would pay for all of this in terms of lost purchasing power? Today’s investors in government bonds, half of whom are foreigners, principally the Chinese and Japanese. Notice that I am not committing a single dollar in spending on any walls.
How did my life turn out? Was it ruined, as my grandfather predicted?
Actually, I did pretty well for myself, as did the rest of my generation, the baby boomers.
My kids did OK too. One son just got a $1 million, two year package at a new tech startup and he is only 30. Another is deeply involved in the tech industry, and my oldest daughter is working on a PhD at the University of California. My two youngest girls became the first ever female eagle scouts.
Not too shabby.
Grandpa was always a better historian than a forecaster. But he did have the last laugh. He made a fortune in real estate, betting correctly on the inflation that always follows big borrowing binges.
You know the five acres that sits under the Bellagio Hotel in Las Vegas today? That’s the land he bought in 1945 for $500. He sold it 32 years later for $10 million.
Not too shabby either.
32 Years of 30-Year Bond Yields
Not Too Shabby for $500
Global Market Comments
September 12, 2022
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or STUCK IN THE MIDDLE)
(SPY), (TSLA), (TLT), (USO), (VIX), (AAPL)
Buy fear, sell greed.
That is what has been my magic formula for making money over the past 50 years.
But what happens if you get nothing?
What happens if you are stuck in a big fat middle of a range? That seems to be the case now that the market is nailed to the (SPY) 4,000 level, which it turns out is exactly the middle of a four-month trading range.
The market fought the Fed for two months from June and won. It has lost since Jackson Hole. The market has only seen that degree of whipsaw four times since 1950.
It now appears that it is front running a very weak number for the Consumer Price Index on September 13. After that, we get a 75-basis point rate rise on September 20. Good cop first, then bad cop.
That leaves me twiddling my thumbs along with everyone else, waiting for the market to throw up on its shoes. We were almost getting there last week when the Volatility Index (VIX) clawed its way back to $27. Then it gave it all up, falling back to $22. Some $5 is just not enough spread with which to make a living, or worth executing a trade.
And here is the key to the market right now.
You’re not buying stocks for headlines you are seeing today, which are universally dire, cataclysmic, and predicting Armageddon.
You are buying for the headlines that will appear in a year. This will include:
Russia loses the Ukraine War
The price of oil (USO) collapses below $50 a barrel
The European energy crisis ends
Gasoline prices fall below $2.00 a gallon
Inflation falls below 4%
Interest rates stabilize around 3.50%-4.00%
Corporate earnings reaccelerate
We get another $1 trillion in corporate share buybacks
That sounds like one heck of a market to buy into. Why not buy now when everything is on sale, rather than in a year when it is expensive once again?
You don’t have to bet the ranch today. Just scale in, buying 10% of a position a day in your favorite names until you are fully invested. That way, you’ll get an average close to a bottom. You’ll at least get a seat on the train and won’t be left behind waving goodbye from the platform.
That means adding technology stocks to your portfolio, which will be the top-performing sector for the rest of this century.
The other thing you can do is to start getting rid of your defensive names. If you think oil is going below $50 in a year as I do, you don’t want to have a single oil name in your portfolio.
You want to own boring stocks in falling markets and exciting ones in rising markets.
You can’t get THE bottom. I can’t do it, so how are you going to?
There is one other factor that I guarantee you no one is looking at. Do you know anyone who bought a spec home for a quick flip lately? I bet not.
That means there is a lot of speculative capital looking for a new home and I bet that a lot of it is going into the stock market. The same is true with bitcoin.
I just thought you’d like to know.
Apple Rolls Out Next-Gen iPhone. The focus will be on larger phones with faster processors and a better camera. There may also be an inflationary $100 price increase. A new watch and Airpods are also expected. Buzz kill: every two years, this event usually marks a six-month high in the stock. Apple may no longer be the safest stock in the market.
Russia Cuts Gas Supplies to Europe until Ukraine sanctions are lifted. That took the Euro to a 20-year low of under 99 cents. You get into bed with the devil, and you pay the consequences. Russia must desperately need that trade with Europe.
Germany Fights Russia with Coal. Coal is enjoying a renaissance in Germany where it is being used to replace the total cut-off in Russian natural gas. In 2022, coal has jumped from 27% to 33% of electricity production, while gas has plunged from 18% to 11.7%. It goes against the country’s strong environmental principles and will only be used as a bridge towards greatly accelerated alternative energy efforts. Importing all the natural gas they can from the US also helps. It will greatly help Europe hold together this winter to face down the Russian energy war.
Home Equity is Shrinking, down $500 billion from the $11.5 trillion peak. It means less money is available to go into stocks. But we are nowhere near a crash, like we saw in 2008, when home equity nearly went to zero. No liar loans, exaggerated appraisals, or financial crisis this time. This housing recession will be about ice, not fire. There won’t be much of a housing crash when we’re still short 10 million homes. If you sell, your new mortgage will have double the interest rate. Ergo, don’t sell.
Weekly Jobless Claims Hit 3-Month Low, down 6,000 to 222,000. This number is not even close to an economic slowdown. In the wake of the decent nonfarm payroll report last week, it shows that employment is anything but slowing.
Tesla (TSLA) Triples China Deliveries after expanding the Shanghai factory. Elon Musk seems able to accomplish what others can’t, increasing production and sales in the face of rolling Covid lockdowns, heat waves, and materials shortages. Buy (TSLA) on dips.
California Sets a $22 Minimum Wage for fast food workers starting from 2023. It’s a catch-up with minimum wages that haven’t changed for 20 years and represents a broader issue for the rest of the country. Think this may be inflationary? Count on all of this going straight into product price rises. It may become cheaper to make your cheeseburgers at home.
The Bond Market Crashes, with ten-year US Treasury bond soaring 20 basis points to a 3.35% yield. The (TLT) hit a new 2022 low at $107.49. Bonds are reading the writing on the wall from Jackson Hole, even if stocks aren’t. Avoid (TLT).
Oil Crashes $4 on recession fears. Most Russian sales are now taking place 20% below the market to China and India. We may be approaching an interim low as winter approaches unless the Ukraine war ends.
A US Rail Strike Threatens as wage talks stall. A recession could be the result. Negotiators have until September 16 to reach a deal for 115,000 workers. A strike would also spike inflation. This could be our next black swan.
My Ten-Year View
When we come out the other side of pandemic and the recession, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With oil in a sharp decline, inflation falling, 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!
With markets now a snore, my September month-to-date performance ground up to +1.02%. I took profits in my last long in Microsoft (MSFT) going into a rare 100% cash position awaiting the next market entry point.
My 2022 year-to-date performance improved to +60.98%, a new high. The Dow Average is down -12% 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 +73.65%.
That brings my 14-year total return to +573.54%, some 2.48 times the S&P 500 (SPX) over the same period and a new all-time high. My average annualized return has ratcheted up to +44.98%, easily the highest in the industry.
We need to keep an eye on the number of US Coronavirus cases at 95.2 million, up 300,000 in a week and deaths topping 1,050,000 and have only increased by 2,000 in the past week. You can find the data here.
On Monday, September 12 at 8:30 AM, US Consumer Inflation Expectations for August is released.
On Tuesday, September 13 at 8:30 AM, the US Core Inflation Rate for August is out.
On Wednesday, September 14 at 7:00 AM, the Producer Price Index for August is published.
On Thursday, September 15 at 8:30 AM, Weekly Jobless Claims are announced. We also get Retail Sales for August.
On Friday, September 16 at 7:00 AM, the University of Michigan Consumer Sentiment is disclosed. At 2:00 the Baker Hughes Oil Rig Count are out.
As for me, when you’re 6’4” and 180 pounds, there is not a lot of things that can seriously toss you around. One is a horse, and another is a wave.
It was the latter that took me down to Newport Beach, CA to a beachfront house for my annual foray into body surfing. Newport Beach has some of the best waves in California.
This is the beach that made John Wayne a movie star.
John, whose real name was Marion Morrison, grew up in a Los Angeles suburb and won a football scholarship to the University of Southern California. While still a freshman in 1925, he went bodysurfing at Newport Beach with a carload of buddies. A big wave picked him up and smashed him down on the sand, breaking his right shoulder.
At football practice, there was no way a big lineman could block and tackle with a broken shoulder, so he was kicked off the team and lost his scholarship.
He still had to eat, so he resorted to the famed student USC jobs bulletin board, which I have taken advantage of myself (it’s where I got my LA coroner’s job).
The 6’4” Wayne was hired as a stagehand by up-and-coming movie director John Ford, himself also a former college football star. In 14 years, Wayne worked himself up from gopher, to extra, to a leading man in 1930, and then his breakout 1939 film Stagecoach.
During WWII, Wayne, too old, was confined to entertainment for the USO shows and making propaganda films while the rest of his generation was at the front. He never recovered from that humiliation and spent the rest of his life as a super patriot.
I saw John Wayne twice. My uncle Charles, who was the CFO of the Penn Central Railroad in the 1960s, made a fortune selling short the stock right before it went bankrupt (maybe that was legal then?). He bought a big beach house on California Balboa’s Island right next door to John Wayne’s.
One day, the family was cruising by Wayne’s house, and he was sitting on his front patio in a beach chair. Then one of our younger kids shouted out “he’s bald” which he was. Wayne laughed and waved.
The second time was in the early 1970s. I was walking across the lobby of the Beverly Hills Hotel with the movie star and Miss America runner-up Cybil Shephard on my arm. He walked right up to us and with a big smile said, “hello gorgeous”. He wasn’t talking to me.
I learned a lot about Wayne from my uncle, Medal of Honor winner Mitchell Paige, who was hired as the technical consultant for the 1949 film Sands of Iwo Jima and spent several months working closely with him. The lead character, Marine Sargent John Striker, was based on Mitch.
Film critics complained that Wayne couldn’t act, that he was just himself all the time. But I knew my uncle Mitch well, a humble, modest, self-effacing man, and Wayne absolutely nailed him to a tee.
The Searchers, made in 1958, and directed by John Ford, is considered one of the finest movies ever made. I show it to my kids every Christmas to remind them where they came from because we have an ancestor who was kidnapped in Texas by the Comanches and survived.
John Wayne was a relentless chain smoker, common for the day, and lung cancer finally caught up with him. His first bout was in 1965 when he was making In Harm’s Way, the worst war movie he ever made. His last film, The Shootist, made in 1978, was ironically about an old gunslinger dying of prostate cancer.
John Wayne hosted the 1979 Academy Awards rail thin, racked by chemotherapy and radiation treatments. He died a few months later after making an incredible 169 movies in 50 years.
John Wayne was one of those people you’re lucky to run into in life. He was a nice guy when he didn’t have to be.
As for those waves at Newport Beach, I can vouch they are just as tough as they were 100 years ago.
Stay healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
September 9, 2022
Fiat Lux
Featured Trade:
(SEPTEMBER 7 BIWEEKLY STRATEGY WEBINAR Q&A),
(MSFT), (NVDA), (RIVN), (AMZN), (POAHY), (SPWR), (FSLR), (CLSK), (FCX), (CCJ), (GOOG), (TLT), (TSLA)
Below please find subscribers’ Q&A for the September 7 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Silicon Valley in California.
Q: Do you think a snapback rally has started? If so, should we increase the size of the September Microsoft (MSFT) spread?
A: Absolutely not. There is no money in 7-day-to-expiration trades. That's why you never see them from me. If you are going to do a position, we’re now looking at October, which has five weeks to run; and I'm waiting for a better entry point. One day does not make a bull market. We also have the volatility index at $25, which is not a good entry point either, so don’t double up on Microsoft here, and avoid 7-day options trades unless you want to be a day trader.
Q: What is your target for the year-end S&P 500?
A: I’m still looking at 4,800. I think we could bottom sometime in the next few weeks—the worst case is the beginning of October—and then it’ll be straight up for the rest of the year. Once we go from discounting the next CPI, which is out on Tuesday the 13th, then we have sort of a no man's land and in October, we start discounting the midterm election, which at the moment is looking like a Democratic win on all fronts.
Q: Amazon (AMZN) has been losing money over the past 2 quarters due to fuel expenses. Is the solution investment in new electric delivery trucks?
A: Yes. In fact, Amazon owns 25% of Rivian (RIVN), and their initial order was to manufacture 100,000 all-electric delivery trucks for Amazon. That has always been the basis for investing in Rivian. It’s been a fantastic investment for Amazon as a stock so far, and when Amazon goes all electric you can bet they’ll power that largely with solar energy. Then they will be out of the energy business entirely; they’ll be producing their own energy and then consuming it, which is the most efficient way to use alternatives, cutting out about 10 different middlemen.
Q: Will the UK pound perform well with this new prime minister?
A: No, the pound is being driven down by rising US interest rates and the energy crisis in Europe, and in fact, I think no matter who the prime minister is, they’re going to have a really difficult time with the economy because of Brexit, which I believe over the long term will reduce British standards of living by half. I don’t know much about the new prime minister as she was in diapers when I was living in England, but it’s a terrible place to invest for the foreseeable future for all of those reasons.
Q: Is it time to buy Tesla (TESLA) for a trade?
A: Well you know me, I’m a perfectionist always trying to buy the bottom. I’m waiting for the market to throw up on its shoes, which it just hasn’t done this year. And I did make a killing on that last move down to $210. We then went up to $310. So, I'm sitting here, 100% cash, waiting to go 100% into Tesla again. It just seems to be a money-making machine for me, and the good news about the company just keeps coming every day.
Q: What strategy would you recommend for income?
A: I would go short dated. 2-year papers now paying 3.5%. I would not go long dated at all, that would be just throwing your money away. Locking in a 3.5% yield for 10 or 20 years would be a perfect money destruction machine. So, go to 2 years, which is essentially going to cash. At least you’ll get the 3.5% with no volatility.
Q: Prediction for the midterms?
A: I’m looking for a Democratic sweep. I analyzed all 33 Senate seats last night that are up for grabs and the Democrats could pick up 2 or even 3 seats. The weak candidates the Republican party has put forward in the most important states are performing very poorly in both fundraising and the polls.
Q: When do you think would be a good time to buy a house for your personal residence?
A: I would say the next time they start to cut interest rates in a couple of years. That is when housing takes off again. I was actually researching this just yesterday—the worst housing crisis we had in 100 years, you had a bear market for houses that only lasted 2 years. That was of course the 2008-2009 disaster driven by massive overbuilding of speculative housing. We haven't had that happen this time. And in fact, we’re short 10 million houses because the capacity cutbacks that happened in ‘08 and ‘09 never recovered. So, I’m kind of thinking, you don’t get crashes in real estate prices now, you get flatlines, and then they take off again because everybody in the world now has 2.75% interest rates and if they sell their house and move their cost-of-living doubles because their mortgage interest rate doubles. So we’re all kind of trapped in our houses now and can’t sell because the alternatives are so much more expensive. That takes enormous pressure off the real estate market, which leans in favor of the flat market thesis.
Q: Do you still love Nvidia (NVDA)?
A: I still love Nvidia. They’ll make up the China losses in no time. And by the way, guess who else uses Nvidia chips? The HIMARS missiles, where demand has suddenly rocketed from 3,000 to 14,000 missiles a year, which is more than the Chinese were ever going to use, and we’re using those up very rapidly by giving them to Ukraine. Every time one of those missiles gets fired uses a whole batch of Nvidia AI cards. So use this dip to load the boat, you’re looking at 20% of downside and maybe 300% of upside on Nvidia on a three-year view. NVIDIA is now down 58% from its high so averaging anywhere around here is fine.
Q: Can you suggest a hedge for the next 4-6 weeks?
A: The only hedge that works is cash. I’ve tried a million hedging strategies over the last 50 years, and the only thing you can rely on is cash. And by the way, cash actually pays you money now. You can earn 2% in interest or more if you’re going to deposit it with a broker.
Q: With electricity shortages already happening, what electricity infrastructure company would you be looking at for investing in the future of EVs?
A: I’ve been investing based on exploding electric power costs myself for the last 15 years. A lot of my plays like SunPower (SPWR) and First Solar (FSLR) have already had enormous moves. That said, I’d use any weakness in the market to buy those on dips because one thing we know for sure is that alternative electricity demand is going to be soaring over the next several years as oil and gas are phased down to zero. And of course, the whole sector got a huge push from Vladimir Putin, who’s massively bringing forward the shift to alternative because he’s using carbon-based energy as a weapon of war against us now.
Q: What’s a good entry point on Nvidia?
A: I tell people to start scaling. A perfect scale would be, let’s say, if you want to put $100,000 into Nvidia, break it up into 10 $10,000 pieces, put in $10,000 today and $10,000 every day until you have a full position, and then you get a nice low average. This is what the companies themselves do when they’re buying their own stock—they just buy small pieces every day to minimize the market impact.
Q: How do you see the Euro?
A: Down 10% in another year, because Jay Powell is going to keep raising interest rates. And even if he doesn’t and the next rate rise is the last one, we’re still going to have interest rates 3.5% higher than everyone else in the world for at least 1 or 2 years, so you could easily get another 10% against all the currencies and maybe more. The outlook for foreign currencies: grim. Outlook for dollar: great.
Q: What about the Porsche (POAHY) IPO?
A: I always avoid IPOs because they get overhyped at the beginning, prices get too high, and then when the restrictive stock comes off, everybody dumps. So wait. I did that with Tesla. Tesla was overhyped—it had a $15 IPO price that went straight up to $30 on opening day. I waited for it to back off to the original IPO price and that’s when I went in and split-adjusted that price which today is $2.35.
Q: Wouldn’t it be good to pick up the speculator houses that aren’t really selling even 50% down with a 5% mortgage?
A: If you could get them 50% down, that would be great; but I don't think any place in the country has seen a 50% drawdown yet—maybe 5% or 10%. The markets that will have the biggest drops will be rural markets that saw the biggest increases, and I’m thinking specifically about Boise, Idaho, where prices doubled in two years, and then they’ll give up a major piece of that. That's where you’ll see the biggest declines the fastest. But, for your bigger quality markets like New York and San Francisco, they went down maybe 5% at worst, and then they go back up again. The only selling you have now is demographic selling, where people die, get married, have more kids and need to change houses for those reasons.
Q: On the electric power side, any thoughts about Clean Sparks (CLSK)?
A: I would be careful not to buy things just because they are “electrical”. You have to be discriminating in your alternative power plays because a lot of these will never make money. In the case of (CLSK), they have yet to make any money and the stock is down 90%. They are in low-margin businesses. Buying electric power and reselling it for charging stations is not a high-margin business. You’re in competition with your local utilities and unless you have something special about your business model, like putting them in shopping malls like Tesla does, the added value there is not that great. I would look very carefully at their business plans and figure out if they’re actually going to make money doing this. Tesla has the perfect model— a giant 20,000 charging station network that only Tesla cars can use, and they’re making the cars that use the power and the panels that generate it and the batteries that store it. It’s a fully integrated vertical model. Remember, anything entering alternative anything now is competing against Tesla, which has a 15-year head start and a dominant market share. So, that is the issue there.
Q: What is the risk of a European crisis and how is that going to affect the US?
A: It is going to affect the US, and we don’t have to wait for a crisis—there's one happening now. I looked at the numbers this morning, and the average British household is looking at a $4,000 annual power bill this year against a per capita income of $47,000 pretax, and their taxes are much higher than ours. Moreover, this is for a country that is a net energy producer. It’s going to be double that cost in energy-consuming countries in eastern Europe and Germany. About ⅓ of all US exports go to Europe, so yes it will affect us but we’ll have to see how it plays out.
Q: What’s your forecast for profit margins for next year?
A: I’m looking for S&P 500 earnings of 10% for 2023. That may be one reason why stocks keep failing to break down.
Q: Would a price cap on oil prices raise the price of oil?
A: No, it’s having the opposite effect, making oil go down; and you’re seeing this at the free market price, which is the price at which Russia is selling their oil to China and India. That’s happening at a 20% discount to market, so all the Russian oil going to China now is happening at $12 below the current spot price for oil, which is around $82.
Q: How about Nuclear energy plays?
A: Yeah, we did put out one recommendation for Cameco (CCJ) in the spring. I’m still buying that on the dips. Germany resuscitated three nuclear power plants, California one, and Japan is doing the same. Of course, France is sitting pretty—they already have 75% of their electric power coming from nuclear. Who ever knew the French would outsmart the Germans? But betting your energy future on Russia was a terrible idea, and only happened because a lot of key German politicians were bribed by Russians. So yes, oil is dropping and you should expect it to continue.
Q: Did we just see the peak in interest rates for the year?
A: No, at a minimum we’re looking at 3.50% on the yield. We were 3.35% yesterday but could easily overshoot to 3.60% or 3.70% which is why I’m being a little cautious jumping in on the long side here.
Q: When is the time to do LEAPS on Freeport McMoRan (FCX)?
A: Soon. If we can double bottom at around $24, that would be great LEAP territory because I expect in 2 to 3 years this will be a $100 stock and a good LEAPS to do here. If we get down to $24, then you really want to look hard at doing something like a $30/$32, because then you could get like a 500% return on that maybe a year or two out. The leverage in LEAPS is astronomical as many of you discovered with my (TLT) put LEAPS last year. If you want more specific information about LEAPS, please sign up for my Concierge service.
Q: When will you send out LEAP recommendations?
A: On a cataclysmic capitulation selloff day—that is the time to do them.
Q: If Tesla does attempt to raise more capital with new share issues, will that drive the price down?
A: Yes, that's usually what happens, but Elon Musk is a great market timer, and you can bet that he’ll wait for a massive run-up in the stock first before he does this. Every one of these capital races he’s done has been after a massive run-up in the stock and then it tends to cap the stock for 6 months after that. You can safely buy it now because Elon doesn’t think the stock has topped out yet, since he hasn’t announced any new secondary equity issues yet.
Q: What is the actual cause of the surge in natural gas prices?
A: The complete shutoff of natural gas flows from Russia to Europe, especially Germany, which used to get 55% of its total natural gas from Russia.
Q: What is your take on the current Ukraine situation?
A: Ukraine is winning—they’re doing it slowly. The US has quadrupled production of the HIMARS missiles, from 3,000 a year to 14,000 a year, and that has made all the difference in the world. Ukraine has been able to take the upper hand in this war because of literally just 16 vehicles we gave them to fire these missiles. My guess is it goes on for another year, there's a coup in Russia, Putin gets assassinated or deposed, giving us a new government in Russia, and Ukraine gets all its old territory back, joining NATO and the EC.
Q: Thoughts on Google (GOOGL)?
A: Good long-term hold but could be an antitrust target in the near future.
Q: Some say energy will be in critical shortage for many years. Why are you long-term bearish on energy/oil?
A: You have to separate the two; I’m long-term bullish on energy, which is why I built this massive solar system. But oil will be illegal within a decade—that you can count on. Demand will go to zero. It won’t be governments that do this, it’ll be the market. By the way, we’ve already gone to zero once before. If you look at the Spring of 2020, we had negative $37 in the futures market on oil. This is not some far-out thing—the zero prices will just come back. On the way to zero though, you will get several doubles, triples, and quadruples in the price. The smaller the market becomes, the more volatile the price becomes; oil is no exemption from that. That’s why Elon Musk says we need to increase our oil production for the short term to get ourselves on the way to zero—you have to do the transition. The problem is that nobody wants to make 30-year investments in a product that is going to be banned in eight years, hence the shortages.
Q: What's a flight-to-safety asset right now?
A: There are three: Cash, cash, and cash.
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
Teslas are Great, but they are not Crash Proof
Global Market Comments
September 1, 2022
Fiat Lux
Featured Trade:
(LOOKING AT THE LARGE NUMBERS)
(TLT), (TBT) (BITCOIN), (MSTR), (BLOK), (HUT)
Global Market Comments
August 29, 2022
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or IT’S TIME FOR PAIN)
(SPY), (QQQ), (TLT), (VIX), (TSLA)
Please don’t call me anymore.
I don’t want to hear from you, not even for a second!
I’ve deleted your email from my address book, unfriended you from Facebook, and already forgotten your telephone number.
For you have committed the ultimate sin.
You have asked me if the market is going to crash in September one too many times. This is for a market that over the last 100 years has gone up 80% of the time.
I wouldn’t mind if it were just you. But hundreds of you? Really?
Hardly an hour goes by without me getting an email, text message, or phone call telling me that you just heard from another guru saying that we are going into another Great Depression, 1929-style stock market crash, and financial Armageddon.
Enough already!
These permabear gurus have been the bane of my life for the last 54 years, even 60 years if you count the time I traded stocks in my dad’s brokerage account when I was a paper boy.
First, there was Joe Granville (RIP), the first Dr. Doom, who in 1982 predicted that the Dow Average would crater from 600 to 300. Instead, it went up 20 times to 12,000. Joe never did change his mind.
Next came one-hit wonder Elaine Gazarelli at Lehman Brothers who accurately predicted the 1987 crash, which delivered a one-day 20% haircut for the Dow. She kept on endlessly predicting crashes after that which never showed up. In the end, the Dow went up 18 times. At least Elaine’s Lehman Brothers stock went to zero.
Then we got another Dr. Doom, Dr. Nouriel Roubini, who turned bearish going into the 2008-2009 Great Recession when the Dow took a 54% hickey. Did the eminent doctor ever turn bullish? Not that I’ve heard, and the Dow went up 6X from that bottom.
So, here we are today. Fed governor Jay Powell has just suggested that he may keep interest rates higher for longer and that we may be in for some pain. That took the Dow down 1,000, with high-growth technology stocks leading the charge to the downside.
And what do I get, but an email from a subscriber saying he just heard from another guru saying that Powell’s comments confirm that we are not headed for a Roaring Twenties but a whimpering twenties, and that the Dow is plunging to 3,000.
Give me a break!
I have a somewhat different read on Powell’s comments.
Not only will they bring a PEAK in interest rates much sooner, but they also move forward the first CUT in interest rates in three years as well. That is what long term investors and hedge funds are looking for, not the last move in the current trend, but the first move in the next trend.
That’s what all the long-term money is doing, which accounts for 90% of market ownership.
That’s what the smart money is doing.
The Volatility Index (VIX) rocketed to $26 on Friday. Call me when it gets to $30. Then I might get interested.
In the meantime, the dumb money is selling.
It helps a lot that the principal drivers of Powell’s high interest rate are rolling over fast. Residential real estate is in the process of becoming a major drag on the economy. Used car have gone from an extreme shortage to a glut in two months. I never did sell that 1968 Chevy Corvair. The online jobs market has suddenly gone from bid to offered.
I am praying that Powell’s comments bring us a 4,000 Dow point selloff and a double bottom at (SPY) $362. For that will set up another 20%-30% worth of money-making opportunities by yearend.
If that happens, I am going to book the Owner’s Suite on the Queen Mary II for a Transatlantic cruise, the Orient Express, and a week at the Cipriani Hotel in Venice.
But wait!
I’ve already booked the owners suite on the Queen Mary II, the Orient Express, and the Cipriani Hotel, thanks to this summer’s Tesla (TSLA) trades.
How do you upgrade Q1 class?
I guess I’ll just have to get creative.
Fed Governor Powell pees on Stock Market Parade from the greatest possible height, giving an extremely hawkish speech at Jackson Hole. “Some Pain” is ahead. The market took the hint and sold off 1,000 points in a heartbeat ending at the lows, with technology taking the greatest hit. That puts a 75-basis point rate hike back on the table for September together with a major market correction. Have a nice flight back to DC Jay. That leaves me quite happy with my one put spread in the (SPY) and 90% cash.
Inflation is in Free Fall. It’s not just gasoline, but every product that uses energy. That has rapidly cut the prices of airline tickets, rental cars, butter, and even chicken breasts. Used cars have gone from a shortage to a glut in months. New job offers are fading rapidly. I’m looking for a 4% inflation rate by year-end….and a soaring stock market.
California Bans Internal Combustion Engine Sales by 2035. It’s a symbolic gesture because the market will move beyond them well before 13 years. Both (GM) and Ford (F) said they’re going all EV. I went all-EV in 2010 and saved a bundle.
QT Accelerates Next Thursday to $95 billion a month and you may wonder why stock markets aren’t crashing. QT will come to 1% of the outstanding $9 trillion Fed balance sheet per month and continue at that rate for the indefinite future. At that rate, the Fed balance sheet won’t be unwound until 2032. Many more factors will arrive to move stocks up or down before then. In order words, the Fed is trying to take $9 trillion out of the system with no one noticing. They may succeed.
Biden Cancels $10,000 in Student Debt per Borrower, and $20,000 for Pell Grants. Some 9 million borrowers will have their loans wiped clean. It is a positive for the economy and minimally inflationary as a lot of these college graduates went into low-paying jobs like teaching or government service. Biden is delivering for the people who voted for him. What a shocker! Too bad I already paid my loan in full. How much did a four-year education cost me? $3,000! It’s my most rapidly appreciating asset.
Pending Home Sales Dive 1% in July on a signed contract basis and are down 19.9% YOY. Only the west saw an increase. Some eight of nine months have shown declines. Homes are sitting on the market longer and sellers are pulling back. Anyone who sells now loses their 2.75% mortgage and won’t get it back.
US Vehicle Prices Hit Record High, despite soaring interest rates. The average transaction price rose to $46,259, up 11.5% YOY. Inventory shortages continue to limit sales, with August expected to reach 980,000 units, down 2.6% YOY. It makes big-ticket EVs even more competitive.
Toll Brothers Orders Plunge 60% in Q2, as demand for luxury homes vaporize. It expects to be down 15% for the full year. It could take 18 months for these dire numbers to be in the general economy. Tol (TOL) dominates in the “move up market” where prices average $1 million or more and is especially dependent on home mortgages.
New Home Sales Crash 12.6%, in July, the worst number since the Great Recession 2008 level. The housing recession is here for sure, but how bad will it get when we have a shortage of 10 million homes?
OPEC+ Maneuvers for Supply Cut to halt the dramatic 35% price decline. The futures market is discounting much greater declines, which the Saudis describe as “broken.” You are on the other side of this trade.
My Ten-Year View
When we come out the other side of pandemic and the recession, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With oil prices and inflation now rapidly declining, 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!
With some of the market volatility (VIX) now dying, my August month-to-date performance appreciated to +4.87%.
My 2022 year-to-date performance ballooned to +59.70%, a new high. The Dow Average is down -12.8% 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 +73.75%.
That brings my 14-year total return to +572.26%, some 2.56 times the S&P 500 (SPX) over the same period and a new all-time high. My average annualized return has ratcheted up to +44.83%, easily the highest in the industry.
We need to keep an eye on the number of US Coronavirus cases at 94 million, up 300,000 in a week and deaths topping 1,043,000 and have only increased by 2,000 in the past week. You can find the data here.
On Monday, August 29 at 8:30 AM EDT, the Dallas Fed Manufacturing Index for August is released.
On Tuesday, August 30 at 7:00 AM, the S&P Case Shiller National Home Price Index for August is out. The monthly cycle of job reports starts with JOLTS at 7:00 AM.
On Wednesday, August 31 at 7:15 AM, ADP Private Sector Employment for July is published.
On Thursday, September 1 at 8:30 AM, Weekly Jobless Claims are announced. US GDP for Q2 is released.
On Friday, September 2 at 7:00 AM, the Nonfarm Payroll Report for August is disclosed. At 2:00 the Baker Hughes Oil Rig Count is out.
As for me, back in the early 1980s, when I was starting up Morgan Stanley’s international equity trading desk, my wife Kyoko was still a driven Japanese career woman.
Taking advantage of her near-perfect English, she landed a prestige job as the head of sales at New York’s Waldorf Astoria Hotel.
Every morning, we set off on our different ways, me to Morgan Stanley’s HQ in the old General Motors Building on Avenue of the Americas and 47th street and she to the Waldorf at Park and 34th.
One day, she came home and told me there was this little old lady living in the Waldorf Towers who needed an escort to walk her dog in the evenings once a week. Back in those days, the crime rate in New York was sky high and only the brave or the reckless ventured outside after dark.
I said, “Sure, What was her name?”
Jean MacArthur.
I said, "THE Jean MacArthur?"
She answered “yes.”
Jean MacArthur was the widow of General Douglas MacArthur, the WWII legend. He fought off the Japanese in the Philippines in 1941 and retreated to Australia in a night PT Boat escape.
He then led a brilliant island-hopping campaign, turning the Japanese at Guadalcanal and New Guinea. My dad was part of that operation, as were the fathers of many of my Australian clients. That led all the way to Tokyo Bay where MacArthur accepted the Japanese in 1945 on the deck of the battleship Missouri.
The MacArthurs then moved into the Tokyo embassy where the general ran Japan as a personal fiefdom for seven years, a residence I know well. That’s when Jean, who was 18 years the general’s junior, developed a fondness for the Japanese people.
When the Korean War began in 1950, MacArthur took charge. His landing at Inchon harbor broke the back of the invasion and was one of the most brilliant tactical moves in military history. When MacArthur was recalled by President Truman in 1952, he had not been home for 13 years.
So it was with some trepidation that I was introduced by my wife to Mrs. MacArthur in the lobby of the Waldorf Astoria. On the way out, we passed a large portrait of the general who seemed to disapprovingly stare down at me taking out his wife, so I was on my best behavior.
To some extent, I had spent my entire life preparing for this job.
I had stayed at the MacArthur Suite at the Manila Hotel where they had lived before the war. I knew Australia well. And I had just spent a decade living in Japan. By chance, I had also read the brilliant biography of MacArthur by William Manchester, American Caesar, which had only just come out.
I also competed in karate at the national level in Japan for ten years, which qualified me as a bodyguard. In other words, I was the perfect after-dark escort for Midtown Manhattan in the early eighties.
She insisted I call her “Jean”; she was one of the most gregarious women I have ever run into. She was grey-haired, petite, and made you feel like you were the most important person she had ever run into.
She talked a lot about “Doug” and I learned several personal anecdotes that never made it into the history books.
“Doug” was a staunch conservative who was nominated for president by the Republican party in 1944. But he pushed policies in Japan that would have qualified him as a raging liberal.
It was the Japanese that begged MacArthur to ban the army and the navy in the new constitution for they feared a return of the military after MacArthur left. Women gained the right to vote on the insistence of the English tutor for Emperor Hirohito’s children, an American quaker woman. He was very pro-union in Japan. He also pushed through land reform that broke up the big estates and handed out land to the small farmers.
It was a vast understatement to say that I got more out of these walks than she did. While making our rounds, we ran into other celebrities who lived in the neighborhood who all knew Jean, such as Henry Kissinger, Ginger Rogers, and the UN Secretary-General.
Morgan Stanley eventually promoted me and transferred me to London to run the trading operations there, so my prolonged free history lesson came to an end.
Jean MacArthur stayed in the public eye and was a frequent commencement speaker at West Point where “Doug” had been a student and later the superintendent. Jean died in 2000 at the age of 101.
I sent a bouquet of lilies to the funeral.
Global Market Comments
August 22, 2022
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE PARTY IS OVER)
(SPY), (QQQ), (TLT), (VIX)
