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The Market Outlook for the Week Ahead, or Facing Harsh Reality

There comes a time in every trader’s life when it’s time to face harsh reality and admit that you’re just dead wrong.

As much as I thought a I had strong case for the best stocks to move sideways before continuing their upward drive, the markets decided otherwise. One thing I have learned over my half-century of trading is that you never argue with Mr. Market. He is always right.

So it was with some dismay that on Friday, I watched NVIDIA (NVDA) shares slice through its 50-day moving average at $840 like a hot knife through butter putting the shares into a free-fall. Virtually the next print was the low of the day at $760, down 10% on the day.

There was no new news about (NVDA). Its prospects look as bright as ever, and there are a series of conferences of earnings reports over the coming month to remind us of that. But sometimes, the market just doesn’t care.

(NVDA) has had a great run, up some 144% since October. During this time, I executed a dozen profitable long-side trades. But when you’re that aggressive you know in advance that the last trade is going to kill you and that is the case today. (NVDA) is falling because of the sheer weight of its price.

New flash: while (NVDA) is still the cheapest big tech stock in the market, cheap stocks can get cheaper as we all know.

With the advantage of 20/20 hindsight, I should have been paying more attention to the Magnificent Seven 50-day moving averages which have been falling like dominoes. First went Tesla (TSLA) in February and Apple in March. The S&P 500 (SPY) gave it up on Monday and Microsoft (MSFT) on Wednesday. Amazon (AMZN), (META), and (NVDA) were the last to go on Friday.

Sure you can blame the April 19 option expiration when traders were loaded to the hilt with expiring longs with all these stocks they had to dump. The dreaded month of May, when traders go to die, and the summer doldrums are just two weeks away. Algorithms poured gasoline on the fire exaggerating the moves, as they always do. But still, wrong is wrong.

And there’s my mea culpa for 2024. I am human after all. I’m not right all the time, I just act like it. If the horrific market action last week has one silver lining, it’s that it sets up the next great trades, for which there will be many. With my Mad Hedge AI Market Timing Index down to a lowly 31 that may not be far off.

Your next question is “How far down is down?” In the worst-case scenario, the 200-day moving average is in play for all of these. That is pegged at $463 for the S&P 500, $569 for (NVDA), $377 for (MSFT), $150 for (AMZN), and $308 for (META). (AAPL) and (TSLA) already lost their 200-days a long time ago. In other words, the market is in the process of giving up all its 2024 gains and then some.

Sure, the 200 days are all rising sharply so it's unlikely we’ll hit these dire numbers. Still, it's best to prepare your boss for the worst and then let serendipity work its magic.

Remarkably, my commodity and precious metal stocks, where I had eight of ten long positions, stuck to the script and moved sideways instead of down. If you throw bad news on a stock and it refuses to fall, you buy the hell out of it. So that will be my next move in the market, once I clean all the mud off my face and pull the arrows out of my rear.

Those of us who have been trading gold for a long time, I’ve been doing it for 50 years and 60 if you count the Kennedy silver dollars I collected, will tell you that this new bull market in the barbarous relic is a very strange one.

None of the traditional factors that drive gold up are present. Interest rates have lately been rising, not falling. ETF financial demand fell all last year, and much of that money was diverted to Bitcoin. Retail demand, especially from Asia, has also been falling off a cliff. Gold miners have in no way been leading the price of the yellow metal because of their excess leverage as they usually do. But gold has seen a 34% rally off the October low.

Go figure.

It turns out that central bank buying has increased dramatically, especially from China, enough to offset all the other no-shows. The conflict in the Middle East is also drawing in more flight to safety demand. The good news is that the Chinese buying will continue. The bad news is that this might be a precursor to the invasion of Taiwan as it flees the Western financial system.

What does all this mean? When the traditional demand for gold returns, interest rates, ETFs, and retail, the price of gold will move a lot higher. The barbarous relic can easily reach $2,800 this year and possibly $3,000. The miners will play catch up. Buy (GLD) on dips and silver (SLV) as well, which has a lot of catching up to do.

I just thought you’d like to know.

So far in April, we are down a heartbreaking -6.69%. My 2024 year-to-date performance is at +14.47%. The S&P 500 (SPY) is up +2.68% so far in 2024. My trailing one-year return reached +33.69% versus +29.71% for the S&P 500.

That brings my 16-year total return to +676.63%. My average annualized return has recovered to +50.94.

Some 63 of my 70 round trips were profitable in 2023. Some 20 of 28 trades have been profitable so far in 2024.

I stopped out of my long in Tesla last week at cost, expecting further downside, which happened. A week early the position had been at max profit. I let my April longs expire at a max profit on April 19 in Freeport McMoRan (FCX), Occidental Petroleum, ExxonMobile (XOM), Wheaton Precious Metals (WPM), and Gold (GLD).

That leaves me with my remaining May longs in (TLT) and (FCX) a double long in (NVDA) and 60% in cash.

Volatility Index ($VIX) Hits Six-Month High, on threats of a New Iran War, Oil Supply Cut-offs, and topping stocks. It’s been a long and dry desert crossing, but we are finally back to reach the $20 handle. The volatility trade is back. For a double bonus, the Mad Hedge Market Timing Index also dropped below 50 for the first time since October. Options traders will love it!

Junk Bonds See Biggest Outflows in a Year, as the Federal Reserve’s hawkish approach to inflation makes investors wary, sending yields soaring to 6.33%. Yields won’t peak until the Fed actually cuts rates. Buy (JNK) and (HYG) on dips.

Netflix (NFLX) Adds 9.33 Million New Subscribers, nearly double analyst forecasts, including my five kids who aren’t allowed to share my password anymore. But the shares dropped on weak Q2 guidance. Netflix has rebounded from a slowdown in 2021 and 2022 to grow at its fastest rate since the early days of the coronavirus pandemic. That is due in large part to its crackdown on people who were using someone else’s account. The company estimated more than 100 million people were using an account for which they didn’t pay.

Mortgage Rates Top 7.0% for the first time in 2024, adding dead weight to the housing market. Most borrowers are now taking out adjustable 5/1 ARMS and then praying for a Fed rate cut later this year.

Existing Home Sales Dive by 4.3% in March to 4.19 million units on a sign-contract basis. Inventories rose 4.47% to a 3.2-month supply, up 14% YOY. The median price of an existing home sold in March was $393,500, up 4.8% from the year before. Regionally, sales fell everywhere except in the North, where they rose 4.2% month-to-month. Sales fell hardest in the West, down 8.2%. Prices are highest in the West.

Housing Starts Plunge, down 14.5% in March. Permits for future construction of single-family houses fell to a five-month low. Residential investment rebounded in the second half of 2023 after contracting for nine straight quarters, the longest such stretch since the housing market collapse in 2006. But the recovery appears to be losing steam.

China Surprises with Q1 GDP Growth at 5.3%, but who knows how real these numbers really are? They don’t line up with individual data like international trade. Peak China is behind us. Avoid (FXI).

Tariff Wars Heat Up, US President Joe Biden is threatening China again, and this time he wants to triple the China tariff rate on steel and aluminum imports. On Wednesday, the president will visit the United Steelworkers headquarters in Pittsburgh and has vowed his saber-rattling is not just empty threats. His rhetoric on China could make relations between the US and the Middle Kingdom that much frostier as we enter into the heart of the US election race.

Biden Boosts the Cost of Alaska Oil Drilling Leases, from $10,000 to $160,000, the first increase since 1920. There is also a bump in the royalty on extracted oil, from 12.25% to 16.27%. The government is no longer giving away oil found on its land for free. Coddling of the oil companies is over. Oil companies will no longer bid for cheap oil leases with the intention of sitting on them for decades. The US is currently the largest oil (USO) producing country in history at 13 million barrels/day and hardly needs any subsidies, which date back to the Great Depression. Buy energy stocks on dips, like (XOM) and (OXY), which are posting record profits.

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, April 22, at 7:00 AM EST, the Chicago Fed National Activity Index is announced.

On Tuesday, April 23 at 8:30 AM, New Home Sales are released.

On Wednesday, April 24 at 2:00 PM, Mortgage applications come out.

On Thursday, April 25 at 8:30 AM, the Weekly Jobless Claims are announced.

On Friday, April 26 at 8:30 AM, Consumer Expectations. At 2:00 PM, the Baker Hughes Rig Count is printed.

As for me, I spent a decade flying planes without a license in various remote war zones because nobody cared.

So, when I finally obtained my British Private Pilot’s License at the Elstree Aerodrome, home of the WWII Mosquito twin-engine bomber, in 1987, it was cause for celebration.

I decided to take on a great challenge to test my newly acquired skills. So, I looked at an aviation chart of Europe, researched the availability of 100LL aviation gasoline in Southern Europe, and concluded that the farthest I could go was the island nation of Malta.

Caution: new pilots with only 50 hours of flying time are the most dangerous people in the world!

Malta looms large in the history of aviation. At the onset of the Second World War, Malta was the only place that could interfere with the resupply of Rommel’s Africa Corps, situated halfway between Sicily and Tunisia. It was also crucial for the British defense of the Suez Canal.

So, Malta was mercilessly bombed, at first by Mussolini’s Regia Aeronautica, and later by the Luftwaffe. By April 1942, the port at Valletta became the single most bombed place on earth.

Initially, Malta had only three obsolete 1934 Gloster Gladiator biplanes to mount a defense, still in their original packing crates. Flown by volunteer pilots, they came to be known as “Faith, Hope, and Charity.”

The three planes held the Italians at bay, shooting down the slower bombers in droves. As my Italian grandmother constantly reminded me, “Italians are better lovers than fighters.” By the time the Germans showed up, the RAF had been able to resupply Malta with as many as 50 infinitely more powerful Spitfires a month, and the battle was won.

So Malta it was.

The flight school only had one plane they could lend me for ten days, a clapped-out, underpowered single-engine Grumman Tiger, which offered a cruising speed of only 160 miles per hour. I paid extra for an inflatable life raft.

Flying over the length of France in good weather at 500 feet was a piece of cake, taking in endless views of castles, vineyards, and bright yellow rapeseed fields. Italy was a little trickier because only four airports offered avgas, Milan, Rome, Naples, and Palermo. Since Italy had lost the war, they never experienced a postwar aviation boom as we did.

I figured that if I filled up in Naples, I could make it all the way to Malta nonstop, a distance of 450 miles, and still have a modest reserve.

Flying the entire length of Italy at 500 feet along the east coast was grand. Genoa, Cinque Terra, the Vatican, and Mount Vesuvius gently passed by. There was a 1,000-foot-high cable connecting Sicily with the mainland that could have been a problem, as it wasn’t marked on the charts. But my US Air Force charts were pretty old, printed just after WWII. But I spotted them in time and flew over.

When I passed Cape Passero, the southeast corner of Sicily, I should have been able to see Malta, but I didn’t. I flew on, figuring a heading of 190 degrees would eventually get me there.

It didn’t.

My fuel was showing only a quarter tank left and my concern was rising. There was now no avgas anywhere within range. I tried triangulating VORs (very high-frequency omnidirectional radar ranging).

No luck.

I tried dead reckoning. No luck there either.

Then I remembered my WWII history. I recalled that returning American bombers with their instruments shot out used to tune in to the BBC AM frequency to find their way back to London. Picking up the Andrews Sisters was confirmation they had the right frequency.

It just so happened that buried in my pilot’s case was a handbook of all European broadcast frequencies. I looked up Malta, and sure enough, there was a high-powered BBC repeater station broadcasting on AM.

I excitedly tuned in to my Automatic Direction Finder.

Nothing. And now my fuel was down to one-eighth tanks and it was getting dark!

In an act of desperation, I kept playing with the ADF dial and eventually picked up a faint signal.

As I got closer, the signal got louder, and I recognized that old familiar clipped English accent. It was the BBC (I did work there for ten years as their Tokyo correspondent).

But the only thing I could see were the shadows of clouds on the Mediterranean below. Eventually, I noticed that one of the shadows wasn’t moving.

It was Malta.

As I was flying at 10,000 feet to extend my range, I cut my engines to conserve fuel and coasted the rest of the way. I landed right as the sun set over Africa.

While on the island, I set myself up in the historic Excelsior Grand Hotel. Malta is bone dry and has almost no beaches. It is surrounded by 100-foot cliffs. I paid homage to Faith, the last of the three historic biplanes, in the National War Museum in Valetta.

The other thing I remember about Malta is that CIA agents were everywhere. Muammar Khadafy’s Libya was a major investor in Malta, recycling their oil riches, and by the late 1980s owned practically everything. How do you spot a CIA agent? Crewcut and pressed, creased blue jeans. It’s like a uniform. What they were doing in Malta I can only imagine.

Before heading back to London, I had to refuel the plane. A truck from air services drove up and dropped a 50-gallon drum of avgas on the tarmac along with a pump. Then they drove off. It took me an hour to hand pump the plane full.

My route home took me directly to Palermo, Sicily to visit my ancestral origins. On takeoff to Sardinia, wind shear flipped my plane over, caused me to crash, and I lost a disk in my back.

But that is a story for another day.

Who says history doesn’t pay!

Stay Healthy,

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

“Faith”

The Andrews Sisters

Spitfire

Grumman Tiger

April 18, 2024

Diary, Newsletter, Summary

Global Market Comments
April 18, 2024
Fiat Lux

Featured Trade:

(APRIL 16 BIWEEKLY STRATEGY WEBINAR Q&A),
(GLD), (GLD), (GE), (GM), (NVDA), (TSLA), (ARKK), (MS), (GS)

April 16 Biweekly Strategy Webinar Q&A

Diary, Newsletter

Below please find subscribers’ Q&A for the April 16 Mad Hedge Fund Trader Global Strategy Webinar, broadcast from Key West, Florida.

Q: If Elon Musk died, would you sell Tesla (TSLA)?

A: Yes. A lot of Tesla’s success is because Elon Musk alone can push people to do the impossible, only because he’s the largest shareholder and therefore is in complete control of all of the dozen or so Tesla major operations. Certainly, nobody else would be crazy enough to invest in so many businesses at once, like SpaceX, like the storage business, SolarCity, Nueralink, and AI, and get away with it. But then, very few people are willing to work 24 hours/day, 7 days/week either. Musk is also the world’s greatest risk-taker with his own money. So Elon Musk is a large part of the Tesla added value; if you take him away, it just becomes another General Electric (GE) (or worse, General Motors (GM)).

Q: Are geopolitical risks in the Middle East a threat to the stock market?

A: No. Several people commented in my Monday morning letter that I didn’t even mention the Middle East, and that’s because it has no market impact beyond a day. Nobody could care less. All we can do is feel sorry for all the civilians who are dying on both sides. In my lifetime, every geopolitical crisis has been a “BUY” in the stock markets, and in all risk assets. In the old days, it used to take them a month or two to figure it out, now it takes a few hours, so you just get one down day, everybody buys into that low, and markets continue up. Far more impact on the market these days is the inflation rate because that's what the Fed is looking at and they’re the ones who have their hands on the interest rate throttle. And even if inflation does stay where it is now, they’ll still have to eventually cut rates because otherwise the half of the economy that is dependent on interest rates will be destroyed. The other technology half doesn’t really care because they’re all positive cash flow, so they benefit from high interest rates.

Q: How do you select your spread prices?

A: I look at the bid-offer spread in the market, I send you a screenshot of that bid-offer spread, and then I move 5 or 10 cents off the bid side of the market. Normally, if you tighten the spread at the bid side, you will get filled on that order, and if you don’t, just leave it in there, and the second the market trends down you’ll get filled, or if you leave it the next day you’ll get filled. Remember that the second I put out a trade alert, algorithms take it up to the offered side of the market, but algorithms have to go 100% cash by the end of the day and dump all their positions, so if you leave an order in until the end of the day, often you get filled unless there’s been a major market move.

Q: Will gold continue higher?

A: Yes it will. For a start, it isn’t selling off with other risk assets in the recent correction. (GLD) only dropped $10 from an intra-day high of $225, and even though the Fed may not be cutting interest rates today, their next move will be a cut, even if that's in 3, 6, or 9 months. So, people are buying gold for that reason. Also, historically, it’s cheap relative to other asset classes such as stocks and bonds. On top of that, you have China and Russia buying record amounts of gold to bypass the Western financial system. They’ve done that for many years and it’s finally created a big short position on the market. Oh, and they’re not making gold anymore—the amount of gold being mined has been declining now a decade as the costs of mining gold rise.

Q: Why is inflation staying so high?

A: One of the reasons is that there were huge gaps in the supply/demand system due to COVID-19 still being addressed three years after the fact. That created price spikes and all kinds of unexpected consequences. Also, a lot of the government stimulus, or “COVID money,” hasn’t been spent yet; it’s still out there at the contract level and is still being committed. Even if you signed a contract two years ago, it can take two years to get a major construction project started with the planning, design, etc. Rule of thumb in dealing with all governments: everything happens slowly. All over the country, there are construction projects starting using the Federal stimulus money, so that also creates inflation when you have $3 trillion in new spending. That’s what your local traffic jam is all about. Here in Key West, they are rebuilding the Atlantic side waterfront, and that has to cost billions of dollars, far beyond what the locals could afford. But the major component of inflation, which is labor, is flatlining now. We are seeing a lot of one-time-only increases in pay going through, and then there won’t be any after that for a long time. Rising rents are a big problem now.

Q: Can you explain the market timing index?

A: The profit predictor updates itself every time we do a mouse click for all the different algorithms to kick in and generate a new number, and every piece of research we send out has an updated market timing index in it. So, if you get all of our services with Mad Hedge Hot Tips, the Global Trading Dispatch, the Trade Alerts, etc., we’re sending out at least ten updates a day for the market timing index. Suffice it to say, the more services you buy, the more updates you get on the market timing index.

Q: Will (USO) oil sell off on peace in the Middle East?

A: Well actually we’re seeing that today—we’re getting a selloff on the highs after Israel did not launch a tit-for-tat retaliation on the missile attacks from Iran. On the day they do, you will see prices go back up again. But the goal here is to dial back responses. The rule of thumb in defense for the US is: when somebody attacks you, you attack back with twice the force. That way you discourage any further retaliation from the enemy. That certainly is how our nuclear response is designed, and it’s pretty successful because only the US has the ability to execute unlimited increases in military response.

Q: Is Starlink a Tesla company?

A: Starlink is owned by SpaceX, which is an independent company owned by Elon Musk and several venture capitalists, but of course, Elon Musk is the largest shareholder. Space X is worth about $180 billion these days with several large government contracts. It’s why Elon Musk became a US citizen (foreigners are not allowed to launch our top-secret military satellites).

Q: How far-in-the-money do you go in your spread purchases?

A: It’s totally driven by the volatility of the individual stock. If you have a boring stock, you only go 5% in the money in order to earn enough money to make it worth it. If you have high volatility stocks like Tesla (TSLA) or Nvidia (NVDA) which both have options implied in the mid-40%s, you can get away with 20% in-the-money and still make a decent profit one month out. As you can tell, I tend to gravitate towards the highest volatility stocks in the market that are liquid.

Q: Will the 10% staff cut at Tesla hurt the stock?

A: Staff cuts mean bigger profits because you’re reducing the overhead by 10%. Staff cuts in almost every other technology company have been positive for the stocks for this reason. So I would say no, and Tesla has bigger problems than staff cuts like the nuclear winter going on in EV sales.

Q: Why won’t Nvidia (NVDA) go down?

A: Well, it’s because it has such a lead against all competitors. And, you know, in any other industry you’d just go hire the staff or buy the division in order to get it to hold in the market—you can’t do that with Nvidia because they’re all rich and have stock options priced at the $1 or $2 level to lock them in for life. The CEO Jensen Huang is now the sixth richest man in the world.

Q: Why have bonds failed to rally with the rest of the market?

A: Because the Fed isn’t cutting interest rates any time soon and bonds are dependent on the level of interest rates, which means they will rise once the Fed does cut.

Q: Should I buy Goldman Sachs Group (GS) on their great earnings report?

A: Yes, trading volumes look good for the rest of the year and that is how brokerage houses make their crust of bread. Buy Morgan Stanley (MS) too. It’s a better quality company with less dependence on trading revenues and more on fee income. After all, they hired me!

Q: Should I buy Cathie Woods’s Ark Innovation ETF (ARKK) fund here?

A: Absolutely not. Highly leveraged funds and the most leveraged stocks are the last thing you buy on market tops. That is a market bottom play, and the last real market bottom we had was in October.

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, select your subscription (GLOBAL TRADING DISPATCH, TECHNOLOGY LETTER, or Jacquie's Post), then click on 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

2024 Key West Thinking of the Next Trade Alert

April 17, 2024

Tech Letter

Mad Hedge Technology Letter
April 17, 2024
Fiat Lux

Featured Trade:

(AI AND LOWER EMPLOYEE WAGES)
(TSLA)

AI And Lower Employee Wages

Tech Letter

Students hoping to become bankers shouldn’t study finance, they should dive into programming.

This is the big takeaway from how investment banks are run these days.

Gone are the moments when finance degrees were the hottest commodity, now it is all about generative AI.

Artificial intelligence (AI) could replace the equivalent of 300 million full-time jobs, a report by investment bank Goldman Sachs says.

It could replace a quarter of work tasks in the US and Europe but may also mean new jobs and a productivity boom.

And it could eventually increase the total annual value of goods and services produced globally by 7%.

Generative AI, able to create content indistinguishable from human work, is "a major advancement", the report says.

Silicon Valley is keen to promote investment in AI in not only the United States but in a way that will ultimately drive productivity gains across the global economy.

The report notes AI's impact will vary across different sectors - 46% of tasks in administrative and 44% in legal professions could be automated but only 6% in construction and 4% in maintenance, it says.

Journalists will therefore face more competition, which would drive down wages unless we see a very significant increase in the demand for such work.

Consider the introduction of GPS technology and platforms like Uber (UBER). Suddenly, knowing all the streets in London had much less value - and so incumbent drivers experienced large wage cuts in response, of around 10% according to our research.

The result was lower wages, not fewer drivers.

Over the next few years, generative AI is likely to have similar effects on a broader set of creative tasks.

According to research cited by the report, 60% of workers are in occupations that did not exist in 1940.

However, other research suggests technological change since the 1980s has displaced workers faster than it has created jobs.

Nobody understands how the technology will evolve or how firms will integrate it into how they work.

Lower wages and higher output are a perfect recipe for higher technology share prices and that is exactly what we will get.

Currently, we are experiencing a mild pullback from the AI mania, but that is simply because it got too far ahead of its skis.

I am quite disappointed in the price action in a stock like Tesla (TSLA) which announced a major cut to its global workforce to trim costs.

The staff cut of 10% could result in exactly what I mentioned more output for less pay, but in terms of hiring more workers, they have decided to force fewer workers to do more.

This type of management behavior doesn’t usually pan out well, because it usually leads to an employee rebellion and cratering employee satisfaction.

They will certainly be a major investor in AI chips to outfit their EV cars, but they have signaled to investors that they are experiencing trouble reaching that “2^nd wave” of incremental buyers for their car.

Tech as a whole is not in trouble, but individual companies will find an imbalance treatment to their stock.

The AI pixie dust might have leveled off in the short term, and the broader tech market is being dragged down by a confluence of headwinds like spiking interest rates, geopolitical strive, beaten-up consumers, and diminishing addressable market revenue.

I do believe in the AI hype, but these trends don’t go up in a straight line and need time to digest which often results in short-term pullbacks.

April 15, 2024

Diary, Newsletter, Summary

Global Market Comments
April 15, 2024
Fiat Lux

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD, or VOLATILITY IS BACK!)
(REMEMBERING TRINITY)
(TLT), (TSLA), (NVDA), (FCX),
(XOM), (WPM), (GLD), (FXI), (FXY), (USO), (GOOGL)

The Market Outlook for the Week Ahead, or Volatility is Back!

Diary, Newsletter

Those who expected markets to go up forever were given a rude awakening last week with a swift slap across the face with a wet kipper. The Volatility Index ($VIX) soared from $12 to $19 and higher highs will unfold this week. The Mad Hedge Market Timing Index dropped below 50 for the first time since October and lower lows beckon.

For those of us who earn our crust of bread off of volatility, its return is like a gift from the gods. The long desert has been crossed and the fresh mountain springs beckon just ahead.

What prompted this ($VIX) melt-up is that many traders and investors are finally throwing in the towel on ANY interest rate cuts in 2024. In a mere four months, we have gone from an expectation of six rate cuts to zero. Not helping matters is that the “May” thing, as in “Sell and Go away” is only two weeks away. After an overcooked Q1, we may be headed into a summer that is the next great Ice Age.

At least that is the assumption we have to make from a trading point of view for the short-term. While this represents a worst-case scenario, I don’t expect bonds to drop much from here, maybe a couple of points, as future interest rate cuts are a certainty. All that has happened is that our rate cuts have been moved out from two months to five months. The next move in interest rates is still down.

At some point, there will be a great bond trade out there, but definitely, not yet!

Watching the market action last week, it was especially impressive how well NVIDIA (NVDA) held up.

NVIDIA is so far ahead of the competition that no one will catch up for years. What the (NVDA) bears don’t get is that the company has a moat so wide it is impossible to cross. Their enormous lead in software is the result of crucial platform decisions made 20 years ago. The key staff are all locked up with ultra-cheap equity options with strike prices around $1-$2.

Virtually everyone has now raised their upside targets for the stock over $1,000/share and there are $1,400 figures out there. That’s because, with a price-earnings multiple of only 30X, it is still the cheapest Big Tech stock in the market. By comparison, its biggest customer, (META) is at 34X, AI Leader (MSFT) is at 38X, and (AMZN) is at a stratospheric 63X.

Efforts by Alphabet (GOOGL) to break into the AI chip business are feeble at best. This is a business that has a very long learning curve with very high capital costs.

Every 15% correction in (NVDA) over the last two years has been a strong “BUY”. It really owns the AI design business. It’s looking at $250-$500 BILLION in sales growth over the next several years.

Santa Clara-based NVIDIA designs and manufactures high-end, top-performing graphics cards or GPUs. There is probably one in your PC. They are essential in the artificial intelligence, automobile, PC, supercomputing, cybersecurity, and gaming industries. As a design company only company NVIDIA represents pure intellectual added value. Its chips are manufactured in Taiwan.

They are also crucial for national defense. The Biden administration recently banned NVIDIA from exporting high-end chips and their manufacturing equipment to China, which they were using to build sophisticated weapons to use against us. Last week China banned NVIDIA chips in a typical tit-for-tat gesture.

We have had a spectacular week here at Mad Hedge Fund Trader.

So far in April, we are up +5.20%. My 2024 year-to-date performance is at +14.47%. The S&P 500 (SPY) is up +7.22% so far in 2024. My trailing one-year return reached +46.01% versus +36.12% for the S&P 500.

That brings my 16-year total return to +691.20%. My average annualized return has recovered to +51.84%.

Some 63 of my 70 round trips were profitable in 2023. Some 20 of 26 trades have been profitable so far in 2024.

We got a rare dip last week, which I used to rush into four new May positions, double positions in (NVDA) and additional ones in (FCX) and (TLT). I will let my existing April longs expire at a max profit in four days on April 19 in Freeport McMoRan (FCX), Occidental Petroleum (OXY), ExxonMobile (XOM), Wheaton Precious Metals (WPM), Tesla (TSLA), and Gold (GLD).

I am in a rare 100% invested position with no cash given the massive upside breakout in commodity, precious metals, and energy we have witnessed. This is going to be a great month.

Consumer Price Index Comes in Hot at 0.4% for March, the same rate as in February according to the Bureau of Labor Statistics, knocking stocks down 500 points. Housing and transportation were the big badges. Hopes of a June interest rate cut have been dashed. September is now the earliest. Avoid (TLT).

Producer Price Index Comes in Cold at 0.2% for March. On a 12-month basis, the PPI rose 2.1%, the biggest gain since April 2023, indicating pipeline pressures that could keep inflation elevated. Stocks rallied 200 points.

US Dollar Rockets on Hot CPI, hitting a new 34-year high against the Japanese yen at ¥151.55. Bank of Japan's intervention to support the yen is expected. Yen shorts in the futures market hit a five-month high. Avoid (FXY).

China Continues Record Gold Buying, soaking up record amounts. Central banks bought a record 1,082 metric tonnes of gold in 2023. The Bank of China bought a record 735 tonnes of gold in 2023, two-thirds of which were purchased through covert third-party middlemen. An additional 1,411 tonnes, likely to bypass a collapsing Yuan, and a whopping 228 tonnes in January 2024 alone. This is what delivered the barbarous relic’s decisive upside breakout from a three-year trading range. This dwarf’s the record 1,082 metric tonnes of gold global central banks bought in 2023. The world gold market has been taken short and prices will continue to rise.

Gold Derivatives are Now Wagging the Dog. There are 187,000 metric tonnes of gold above ground worth a mere $14.4 billion which price is 50 times that figure in paper derivatives, like ETFs, futures contracts, and options. A metric tonne of gold today is worth $77 million. That increases the barbarous relic’s volatility once it breaks out of long-term trading ranges, which it has just done. With new volatility eventually, some bodies have to float to the surface. The bad news is that this may also be a signal that China will invade Taiwan. Buy (GLD) on dips.

Oil (USO) Spikes on New Iran War Threats, sending Brent to $92, a new 2024 high. Gold (GOLD) and silver (WPM) have gone ballistic as well. Hang on for higher highs.

JP Morgan Misses on Earnings, tanking the shares by $10. The firm earned $23.1 billion in net interest income in the first three months of 2024, up 11% from a year earlier. The bank’s NII haul ended a streak of seven quarters where it posted record levels of the metric. The bank cited deposit margin compression — tightening of profits between what the bank earns on loans and pays out on deposits — and lower deposit balances in the consumer business for the sequential decline. Buy (JPM) on dips.

China’s International Trade Collapses. Exports from China slumped 7.5% year-on-year last month by value, the biggest fall since August last year. They had risen 7.1% in the January-February period.

Hong Kong's major indexes extended losses to more than 2%.

Chinese exporters are continuing to slash prices to maintain sales amid stubbornly weak domestic demand. Avoid (FXI).

Tesla Cancels Model 2, a key part of the bull story for (TSLA). Elon Musk says “Not so fast” and instead highlights the company’s move into robotic self-driving cars. Don’t be so dismissive, as Waymo completed an eye-popping 100,000 robotic taxi rides in San Francisco in December, many with thrilled first-time users. The stock held up incredibly well on awful news indicating that it believes Elon and not the media. Buy (TSLA) on dips.

My Ten-Year View

On Monday, April 15, at 7:00 AM EST, the US Retail Sales are announced.

On Tuesday, April 16 at 8:30 AM, US Housing Starts are released.

On Wednesday, April 17 at 2:00 PM, the Beige Book notes from the previous Fed meeting are published

On Thursday, April 18 at 8:30 AM, the Weekly Jobless Claims are announced. At 10:00 AM, Existing Home Sales are out.

On Friday, April 19 at 2:00 PM, the Baker Hughes Rig Count is printed.

As for me, with the spectacular popularity of the Oppenheimer movie, I thought I’d review my own nuclear past. When the Cold War ended in 1992, the United States judiciously stepped in and bought the collapsing Soviet Union’s entire uranium and plutonium supply.

For good measure, my client George Soros provided a $50 million grant to hire every Soviet nuclear engineer. The fear then was that starving homeless scientists would go to work for Libya, North Korea, or Pakistan, which all had active nuclear programs at the time.

They ended up here instead. I just might be that the guy standing next to you in line at Safeway with a foreign accent who knows how to design a state-of-the-art nuclear bomb.

That provided the fuel to run all US nuclear power plants and warships for 20 years. That fuel has now run out and chances of a resupply from Russia are zero. The Department of Defense attempted to reopen our last plutonium factory in Amarillo, Texas, a legacy of the Johnson administration.

But the facilities were deemed too old and out of date, and it is cheaper to build a new factory from scratch anyway. What better place to do so than Los Alamos, which has the greatest concentration of nuclear expertise in the world?

Los Alamos is a funny sort of place. It sits at 7,320 feet on a mesa on the edge of an ancient volcano so if things go wrong, they won’t blow up the rest of the state. The homes are mid-century modern built when defense budgets were essentially unlimited. As a prime target in a nuclear war, there are said to be miles of secret underground tunnels hacked out of solid rock.

You need to bring a Geiger counter to garage sales because sometimes interesting items are work castaways. A friend almost bought a cool coffee table which turned out to be a radioactive part of an old cyclotron. And for a town designing the instruments to bring on the possible end of the world, it seems to have an abnormal number of churches. They’re everywhere.

I have hundreds of stories from the old nuclear days passed down from those who worked for J. Robert Oppenheimer and General Leslie Groves, who ran the Manhattan Project in the early 1940s. They were young mathematicians, physicists, and engineers at the time, in their 20s and 30s, who later became my university professors. The A-bomb was the most important event of their lives.

Unfortunately, I couldn’t relay this precious unwritten history to anyone without a security clearance. So, it stayed buried with me for a half century, until now.

Some 1,200 engineers will be hired for the first phase of the new plutonium plant, which I got a chance to see. That will create challenges for a town of 13,000 where existing housing shortages already force interns and graduate students to live in tents. It gets cold at night and dropped to 13 degrees F when I was there.

I actually started in the nuclear biz during the early 1970s when my math professor recommended me for a job there. In those days, mathematicians had only two choices. Teach or work for the Defense Department. As I was sick of school, I chose the latter.

That led me to drive down a bumpy dirt road in Mercury, Nevada to the Nuclear Test Site where underground testing was still underway. There were no signs. You could only find the road marked by four trailers occupied by hookers who did a brisk business with the nearly all-male staff. My fondest memory was the skinny dipping that took place after midnight in a small pool when the MPs were on break.

I was recently allowed to visit the Trinity site at the White Sands Missile Test Range, the first outsider to do so in many years. This is where the first atomic bomb was exploded on July 16, 1945. The 20-kiloton explosion set off burglar alarms for 200 miles and was double to ten times the expected yield.

Enormous steel targets hundreds of yards away were thrown about like toys (they are still there). Half the scientists thought the bomb might ignite the atmosphere and destroy the world but they went ahead anyway because so much money had been spent, 3% of US GDP for four years. Of the original 100-foot tower, only a tiny stump of concrete is left (picture below).

With the other visitors, there was a carnival atmosphere as people worked so hard to get there. My Army escort never left me out of their sight. Some 79 years after the explosion, the background radiation was ten times normal, so I couldn’t stay more than an hour.

Needless to say, that makes uranium plays like Cameco (CCJ), NextGen Energy (NXE), Uranium Energy (UEC), and Energy Fuels (UUUU) great long-term plays, as prices will almost certainly rise and all of which look cheap. US government demand for uranium and yellow cake, its commercial byproduct, is going to be huge. Uranium is also being touted as a carbon-free energy source needed to replace oil.

At Ground Zero in 1945

What’s Left of a Trinity Target 200 Yards Out

Playing With My Geiger Counter

Atomic Bomb No.3 Which was Never Used

What’s Left from the Original Test

Good Luck and Good Trading,

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

April 8, 2024

Diary, Newsletter, Summary

Global Market Comments
April 8, 2024
Fiat Lux

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE WINDFALL YEAR),
(FCX), (TLT), (TSLA), (NVDA), (FCX),
(XOM), (WPM), (GLD), (CCJ), (META), (AMZN),
(AN EVENING WITH TRAVEL GURU ARTHUR FROMMER)

The Market Outlook for the Week Ahead, or The Windfall Year

Diary, Newsletter

This year seems to be the year of the windfall.

In January, we loaded up on Big Tech (AMZN), (MSFT), which then went ballistic.

In February, we doubled up on NVIDIA (NVDA), which then nearly doubled.

In March, spotting the shift into commodities, energy, and precious metals we loaded the boat with gold Freeport McMoRan (FCX), gold (GLD), silver (WPH), and oil (XOM), (OXY), which launched into torrid two-week straight up moves which continue. And for good measure, we dove into NVIDIA one more time.

Even the trades I thought about and talked about but never executed took off like a scalded chimp, such as uranium producer Cameco (CCJ), up 30% in weeks.

And while you’d think that trades like this would generate the performance of a lifetime, in fact, I begrudgingly admit I'm lagging behind the index this year. It’s incredibly annoying when after working 12 hours a day seven days a week, the indexers, the investors who sit on their hands all day and do nothing, are making more money than I am.

That’s because I put out a handful of ill-timed short positions in the S&P 500 (SPY) and Freeport McMoRan (FCX) which cut my numbers by half.

You may ask why I suffered the madness of putting out shorts when we are in a bull market and that everything is going straight up every day! That’s because I am the Mad Hedge Fund Trader, not the Mad Long-Term Investor. And hedge funds are always supposed to have balanced longs and shorts. I can tilt this by keeping only one short position against a basket of longs. But even those single longs have proved painfully expensive.

The issue here is that the market is not breathing as it normally does. There is no ebb and flow to let you in and out of positions. Sectors flatline, then launch into bull moves that take them up almost every day for months. That is an impossible market to trade.

I have only seen this twice during my lifetime: during the Great Japanese Stock Bubble of the 1980s and the Dotcom Bubble of the 1990s, which means we are in another one of these great bubbles, which will probably be the last of my lifetime.

The previous two great bubbles went on for five years. Greed can last a long time. If you count the October 26, 2023 low as the start of the new bull market, we have 4 ½ years to run in this one. What is more likely is that the pandemic low in April of 2020 was the start of this new bull market and we have averaged a 25% a year return in stocks since then. That means we have at least another year to run…. or more.

Valuations are at the high end of their recent range at 21 times S&P 500 earnings. But during the 1990’s bubble, the market average reached an earnings multiple in the 30s, and technology stocks reached a stratospheric 100 times earnings.

And today, earnings are still rising, sometimes quite sharply, such as the case with (NVDA) and (META). It’s when earnings are falling but stocks are still rising that you have to worry, as happened in 1999 and the first four months of 2000. In the 1980s in Tokyo, nobody ever looked at earnings.

Another frustration with trading today is the collapse of market volatility from $22 to $12 over the past year. That means we are getting paid half of what we were a year ago for the same options trade. You can make up for this loss of volatility by getting more aggressive with strike prices or maturities, but then that increases the number of stop losses.

And that’s the way it is.

You trade the market you have, not the one you want. But what do I know? I’ve only been doing this for 55 years.

I just thought you’d like to know.

NVIDIA Quarterly Earnings

So far in March, we are down -1.44%. My 2024 year-to-date performance is at +6.67%. The S&P 500 (SPY) is up +7.93% so far in 2024. My trailing one-year return reached +41.09% versus +38.92% for the S&P 500.

That brings my 16-year total return to +684.56%. My average annualized return has recovered to +51.57%.

Some 63 of my 70 round trips were profitable in 2023. Some 13 of 19 trades have been profitable so far in 2024.

I stopped out of my short position in Freeport McMoRan (FCX) last week. Markets that go straight up are hard to trade. I also came off my long in (TLT) close to cost. I initiated new longs in Tesla (TSLA) and NVIDIA (NVDA). I let my existing longs run in Freeport McMoRan (FCX), Occidental Petroleum, ExxonMobile (XOM), Wheaton Precious Metals (WPM), and Gold (GLD).

I am 70% invested and 30% in cash given the massive upside breakout in commodity, precious metals, and energy we have witnessed.

Nonfarm Payroll Jumps by 303,000 in March, almost double what was expected. The headline unemployment rate drops 0.1% to 3.8%. Wages rose 0.3% for the month and 4.1% from a year ago, both in line with Wall Street estimates. Health care led with 72,000 new jobs, followed by government (71,000), leisure and hospitality (49,000), and construction (39,000). Interest rate cuts fade into the future.

Weekly Jobless Claims Jump to 221,000, up 9,000, a two-month high. The weekly claims report from the Labor Department on Thursday also showed fewer people remaining on jobless rolls towards the end of March, suggesting that laid-off workers continued to find work, though not as easily as two years ago. There were 1.36 job openings for every unemployed person in February compared to 1.43 in January. Worker shortages persist in industries like construction.

Investors are Piling into Cash, with Money-Market funds getting $82 billion in the week through Wednesday. Investors are still flocking to cash funds, and history suggests redemptions won’t begin until a year after the Federal Reserve starts cutting interest. 5.35% for 90-day US Treasury Bond yields are still a huge draw for the cautious.

Commodities Trading Firms Harvest Record Profits, some $104 billion in 2023. The surprise increase from 2022, when the fallout from the war in Ukraine pushed up prices and supercharged profits, was driven by a wave of new entrants into the sector — including tech-focused traders and hedge funds — and rising returns from power trading activities. The figures reflect profits from the entire sector, including independent traders, banks, hedge funds, and national oil companies. This year will be even better.

Oil Continues to Bubble of Tight Supplies, supported by geopolitical tensions in the Middle East, concerns over tightening supply, and expectations about demand growth as economies improve. I’m keeping my longs in (XOM) and (OXY) and looking to pick up (COP) and (FANG).

US Dollar to Stay Higher for Longer, as a result of the higher for longer Fed tilt on interest rates. High-yielding currencies are always the strongest. The buck is up 3.3% this year against a currency basket.

Toyota Sales Soar by 20% in Q1, closely followed by Honda at 17.3%. General Motors delivered a pitiful 1.5% decline. Hybrids are the name of the day, outselling EVs and ICE cars. Toyota played it safe and won, at least for now.

Disney Wins Proxy Fight with Nelson Peltz, retaining complete control of the board. It’s a defeat for Peltz and a stamp of approval for the company’s board and CEO Bob Iger’s efforts to turn around the company. Nelson can now sell his shares for a big profit, up 30%.

PCE Comes in Hot at 0.3% for February, and 2.8% YOY, taking bonds. Personal Consumption Expenditures give an early read on inflation trends that the Fed loves. The economy is clearly much hotter than traders understand. Consumer spending shot up 0.8% on the month, well ahead of the 0.5% estimate. Personal income increased 0.3%, slightly softer than the 0.4% estimate.

Tesla Sales are Disastrous as expected, coming in at only 386,810, down 8.5% YOY. Shares drop as much as 6.7%, extending the biggest rout in the S&P 500. Analysts slashed projections in recent days, but not by enough. The Berlin factory was shut down and competition in China is ramping up. Still, Tesla produced 46,561 more cars than it sold in the quarter. For what it’s worth, BYD sales in China were even worse. The bottom for (TSLA) is fast approaching.

My Ten-Year View

On Monday, April 8, at 7:00 AM EST, the US Consumer Inflations Expectations are announced.

On Tuesday, April 9 at 8:30 AM, the NFIB Business Optimism Index will be released.

On Wednesday, April 10 at 11:00 AM, the Core Inflation Rate for March is published

On Thursday, April 11 at 8:30 AM, the Weekly Jobless Claims are announced. The final read of the Q2 US GDP is also out.

On Friday, April 12 at 8:30 AM, the Producer Price Index is out. At 2:00 PM, the Baker Hughes Rig Count is printed.

As for me, since many of you are now planning long overdue summer vacations, I thought I would pass on what I learned from the ultimate travel guru of all time.

After all, who knows how long it will be until the next pandemic? The next decade, next year, or next week?

When I backpacked around Europe in 1968, I relied heavily on Arthur Frommer’s legendary paperback guide, Europe on $5 a Day, which then boasted a cult-like following among impoverished, but adventurous Americans. The charter airline business was then booming, plunging airfares, and suddenly Europe came within reach of ordinary Americans like me.

Over the following years, he directed me down cobblestoned alleyways, dubious foreign neighborhoods, and sometimes converted WWII air raid shelters, to find those incredible travel deals. When he passed through town some 50 years later, I jumped at the chance to chat with the ever-cheerful worshipped travel guru.

Frommer believes there are three sea change trends going on in the travel industry today. Business is moving away from the big three travel websites, Travelocity, Orbitz, and Priceline, who have more preferential lucrative but self-enriching side deals with airlines than can be counted, towards pure aggregator sites that almost always offer cheaper fares, like Kayak.com, Sidestep.com, and Fairchase.com.

There is a move away from traditional 48-person escorted bus tours towards small group adventures, like those offered by Gap Adventures, Intrepid Tours, and Adventure Center, that take parties of 12 or less on culturally eye-opening public transportation.

There has also been a huge surge in programs offered by universities that turn travelers into students for a week to study the liberal arts at Oxford, Cambridge, and UC Berkeley. His favorite was the Great Books program offered by St. John’s University in Santa Fe, New Mexico.

Frommer says that the Internet has given a huge boost to international travel, but warns against user-generated content, 70% of which is bogus, posted by the hotels and restaurants touting themselves.

The 94-year-old Frommer turned an army posting in Berlin in 1952 into a travel empire that publishes 340 books a year, or one out of every four travel books on the market. I met him on a swing through the San Francisco Bay Area (his ticket from New York was only $150), and he graciously signed my tattered, dog-eared original 1968 copy of his opus, which I still have.

Which country has changed the most in his 60 years of travel writing? France, where the citizenry has become noticeably more civil since losing WWII. Bali is the only place where you can still actually travel for $5/day, although you can see Honduras for $10/day. Always looking for a deal, Arthur’s next trip is to Chile, the only country in the world he has never visited.

With the advent of AI, Arthur has been met with an onslaught of new competition. Recently, Amazon (AMZN) has been flooded with hundreds of new travel books written entirely by algorithms. They have no human author who’s ever visited the country in question and are written entirely from existing information found on the Internet. But they’re cheap.

You can easily spot them from their wishy-washy non-committal language and factual errors and omissions. For example, I recently found a travel book about Ukraine that neglected to mention that there was a war going on there and that its cities were being bombed by Russians daily.

Not for me.

Good Luck and Good Trading,

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