Global Market Comments
April 10, 2023
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD,
or MAD HEDGE CLOCKS 46.38% PROFIT IN Q1)
(TSLA), (USO), (WMT), (AAPL), (GLD), (GOLD), (SLV),
(UUP), (TLT), (UBI), (NVDA), (MU), (AMAT), (CCJ)
CLICK HERE to download today's position sheet.
How much pain to take?
That is the question plaguing traders and portfolio managers alike around the world. For the average bear market is only 9.7 months long and we are already 16 months into the present one.
Even the longest postwar bear market was only 2.5 years, or 30 months, the 2000-2002 Dotcom Bust, and we are nowhere near that level of economic hardship. Back then, companies posted losses for several quarters in a row, and many ceased to exist (Webvan, Alta Vista, Pets.com).
That means we only have a few more months of pain to take before another decade-long bull market resumes, or 8 months if the bear stretches to a full two years.
That is unless the new bull was actually born last October, which is entirely possible. Certainly, the stock market thinks so, with its refusal to drop on even the worst of news.
Inflation at 6%? Who cares.
A Fed that hates the stock market? Couldn’t give a damn.
Pathetic earnings growth? Call me when it’s over.
This indifference chalked up the deadest trading week I can remember, putting the Volatility Index (VIX) firmly back into “Do Nothing Land” under 20%.
So investors are cautiously putting cash into stocks on every dip, even minor ones, confident that they will be higher by yearend. If a black swan arrives in the meantime, or a political crisis boils out of control, tough luck if you can’t take a joke.
All of which is focusing a lot more attention on gold (GLD), which moved within 2% of a new all-time high last week. I am always looking for cross-asset class confirmations of current trends and the barbarous relic has certainly been one of those.
I have been bullish on gold since I put out LEAPS on Barrick Gold (GOLD) and silver (SLV) last October. They have since performed spectacularly well. The move into precious metals confirms the following. That the Fed tightening cycle will end imminently. Interest rates will fall, and the US dollar (UUP) will weaken. Everything else flows from there.
You are even seeing this in US Treasury Bond yields, with the ten-year plunging to 3.30%, a one-year low. The (TLT) hit $109 last week. Aren’t bonds supposed to be held back by the looming default by the US government?
I’m starting to wonder if the debt ceiling crisis is this generation’s Y2K. At worst, your toaster may show the wrong year but nothing further. Or maybe the pent-up demand for bonds and high yields is so great that it overwhelms all other considerations?
My 2023 year-to-date performance is now at an incredible +46.38%. The S&P 500 (SPY) is up only a miniscule +7.0% so far in 2023. My trailing one-year return maintains a sky-high +103.2% versus +7.0% for the S&P 500.
That brings my 15-year total return to +643.57%, some 2.71 times the S&P 500 (SPY) over the same period. My average annualized return has blasted up to +48.26%, another new high.
I executed no trades during the holiday-shortened week, content to run my ten profitable positions into the April 21 options expiration. If a strategy ain’t broke, don’t fix it. If I see something I like, I’ll take profits on an existing position and replace it with a new one.
Nonfarm Payroll Report Holds Up, at 236,000 in March, the lowest since December 2020. It shows that high interest rates still have not impacted the jobs market. February was revised up to 326,000. The headline Unemployment Rate dropped back to a 50-year low at 3.5%. Average Hourly Earnings dropped to 4.2% YOY, a two-year low, showing that inflation is in retreat. Leisure & Hospitality led at 74,000 followed by Government at 47,000.
Weekly Jobless Claims Drop, to 228,000, down 18,000 as recession fears rise. High interest rates are finally taking their toll, with a banking crisis thrown in for good measure.
Open Jobs Tighten, The June JOLTS survey of job openings fell to 10.698 million, down from 11.3 million last month and well below expectations of 11 million. Is this the calm before the storm when job openings disappear? This report is highly negative for the US dollar.
Tesla (TSLA) Posts Record EV Deliveries, Deliveries grew 36% from a year ago, below the 50% growth Elon Musk promised for the year on the last earnings call, but Musk has a habit of overpromising. The expansion is still a healthy sign that consumers are spending. Any pullback in Tesla is a gift for shareholders.
Oil (USO) Production Cut Sends Price Soaring, with OPEC+ including Russia has pledged a total of 3.66-million-barrel oil output cut which is nearly 3.7% of global demand. The jump in oil price will only accelerate global inflation and force the Fed into a tougher predicament. The Saudi – US cooperation is at its lowest ebb.
Walmart’s (WMT) Automation Effort Goes Into Overdrive, Walmart said it expects around 65% of its stores to be serviced by automation by 2026. The company said around 55% of packages that it processes through its fulfillment centers will be moved to automated facilities and unit cost average could improve by around 20%. This is the first step to getting rid of human employees. Eventually, the government will need to deliver universal basic income (UBI).
Gold and Miners Threaten New All-Time Highs, suggesting that a collapse in interest rates is imminent. So is an economic recovery and a resurgence of monetary expansion. Russian and China continue to be major buyers to evade sanctions. Keep buying (GLD) and (GOLD) on dips.
Apple (AAPL) Cash Hoard Soars to $165 Billion, as the cash flow king of all time goes from strength to strength. This will be one of the top targets in any tech rebound, which may be imminent. But you’re have to compete with apple to buy the shares, which is a huge buyer of its own stock.
Chip Stocks are On Fire, clocking the best sector of any in Q1. Too far, too fast, say I, but I’ll be in there buying with both hands on any serious dips. This is no future without (NVDA), (MU), and (AMAT) playing a major role.
Stock Dividends Hit New All-Time Highs, at $146.8 billion, up 7% YOY. As interest rates rose, companies had to raise dividends to keep up. The economy is also far stronger those most realize, with many analysts believing we should have entered a recession a long time ago. A high dividend also gives downside protection in bear markets.
Uranium Demand is Surging with the Nuclear Renaissance. And now the US is restarting plutonium production for the first time in 20 years, a uranium derivative. The 20-year supply we bought from the old Soviet Union has run out with a scant chance of renewal. The Los Alamos Labs in New Mexico is seeking to hire 1,200 engineers to build a brand-new factory from scratch. Buy (CCJ) on dips. And buy Los Alamos real estate if you can get a security clearance.
Keep Buying 90-Day T-Bills, now pushing a 5% risk-free yield. The regional banking crisis highlights another reason. If your bank or broker goes under, your cash deposits can be tied up in bankruptcy for three years. If you own US government securities, they can be ordered and transferred out in days to another institution. You can also buy them directly from the US government free of fee. Just thought you’d like to know.
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 10 at 7:30 AM EST, the Consumer Inflation Expectations are out.
On Tuesday, April 11 at 6:00 AM, the NFIB Business Optimism Index is announced.
On Wednesday, April 12 at 7:00 AM, the US Core Inflation Rate and Consumer Price Index are printed.
On Thursday, April 13 at 8:30 AM, the Weekly Jobless Claims are announced. The Producer Price Index is also released.
On Friday, April 14 at 8:30 AM, the US Retail Sales are released.
As for me, I covered the Persian Gulf for Morgan Stanley for ten years during the 1980s when medieval sheikdoms still living in the 14th century were suddenly showered with untold wealth. Needless to say, the firm, which we called Morgan Stallion, had a few ideas on what they should do about it.
I was picked as the emissary to the region because I had already been visiting the Middle East for 20 years and had been doing business there for 15 years. My press visa to cover the Iran-Iraq War was still valid.
In addition, I had already developed a reputation for being wild, reckless, and up for anything to enjoy a thrill or make a buck. In addition, with all the wars, terrorist attacks, and revolutions underway, everyone but me was scared to death to go near the place.
In other words, I was perfect for the job.
Being a veteran combat pilot proved particularly useful. I used to fly down on Kuwait Airlines and I still have a nice collection of the cute little Arabic artifacts they used to hand out in first class. Once in Abu Dhabi, I rented a local plane and hopped from one sheikdom to the next drumming up business. Once, I landed on a par five fairway at a private golf course just to give a presentation to a nation’s ruler.
My last stop was always Kuwait, where I turned the plane back in and met the CIA station chief for lunch to fill him in on what I had learned. It was all considered part of the job. When Iraq invaded Kuwait in 1991, I was their first call.
Of course, flying across vast expanses of the Arabian desert is not without its risks. Whenever you fly a single-engine plane you are betting your life on an internal combustion engine, never a great idea. I always carried an extra gallon bottle of water in case of a forced landing. The survival time without water is only three days.
Whenever I refueled, I filtered the 100LL aviation gas through a chamois cloth to keep out water and sand. Still, I was pretty good at desert survival, growing up near Indio California in the Lower Colorado Desert and endlessly digging my grandfather’s pickup truck out of the sand.
Once my boss tried to ban me from a trip to the Middle East because the US Navy had bombed Libya. I assured him that something as minor as that didn’t even move the needle on the risk front, at least in my lifetime.
The problem with the Persian Gulf was that they had all the money in the world and no way to spend it. An extreme Wahabis religion was strictly adhered to, and alcohol was banned. But you could have four wives and I enjoyed some of the best fruit juice in my life.
So my clients came to rely on me for diversions. The Iran-Iraq War was taking place then. I took them up in my plane to 10,000 feet and we watched the aerial war underway 50 miles to the north. The nighttime display of rockets, machine gun fire, and explosions was spectacular.
During one such foray, the wind shifted dramatically as a sandstorm rolled in. Suddenly I was landing in a 50-knot crosswind instead of a 10-knot headwind. A quick referral to the aircraft manual confirmed that the maximum crosswind component for the plane was 27 knots.
Oops!
Then I got a bright idea. I radioed the tower and asked for permission to land on the taxiway at a 90-degree angle to the main runway. After some hesitation, they responded, “If you’re willing to try it”. They knew my only alternative was to ditch at sea with two high-ranking gentlemen who couldn’t swim.
The tower very kindly talked me down with radar vectors and at the last possible second, with the altimeter reading 20 feet, the taxiway popped into view. With such a stiff wind I was able to pancake the plane down in yards, slam it on the runway, and then immediately shut the engine down. I asked for a tow, not wanting to risk the windstorm flipping the plane over.
My passengers thanked me profusely.
When Iraq invaded Kuwait in 1991, I lost most of my friends there. They were either killed, kidnapped and held for ransom, or volunteered as translators for US forces. I never saw them again.
I didn’t return to the Middle East until 2019 when I took two teenage girls to Egypt to introduce them to that part of the world. They wore hijabs, rode camels, and opened their eyes. I even set up some meetings with an educated Arab woman.
I will probably go back someday. I still haven’t seen the ruins at Petra in Jordan, nor ridden the Hijaz Railway, which Lawrence of Arabia blew up in 1918. But I have an open invitation from the king there.
I knew his dad.
Good Luck and Good Trading
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
April 7, 2023
Fiat Lux
Featured Trade:
(A NOTE ON ASSIGNED OPTIONS, or OPTIONS CALLED AWAY),
(TLT), (TSLA)
CLICK HERE to download today's position sheet.
Since many of you are still running up to ten deep in the money options spreads, it’s time to review how to handle options called away.
The higher the yield on a security, the greater the call away risk. With ten year US Treasury yields now at 4.00% the call away risk is heightened.
Let’s say you call away an option the day before the ETF goes ex dividend. That enables you to collect an entire quarter’s 88 basis point payout in a day. A measly 88 basis points may not be much for you, but it is a lot for a highly leveraged hedge fund.
Our next options expiration is Friday, April 21 in 10 trading days.
In the run-up to every options expiration, which is the third Friday of every month, there is a possibility that any short options positions you have may get assigned or called away.
The first notice you may get of options called away is a shocking out-of-the-blue margin call of $1 million or more.
If that happens, there is only one thing to do: fall down on your knees and thank your lucky stars. You have just made the maximum possible profit for your position instantly.
Most of you have short option positions, although you may not realize it. For when you buy an in-the-money vertical option spread, it contains two elements: a long option and a short option.
The short options, which are owned by somebody else, can get “assigned,” or “called away” at any time, as it is owned by a third party, the one you initially sold the put option to when you initiated the position.
You have to be careful here because the inexperienced can blow their newfound windfall if they take the wrong action, so here’s how to handle it correctly. I’ll use a recent trade as an example.
Let’s say you get an email from your broker telling you that your call options have been assigned away. I’ll use the example of the Tesla (TSLA) December 2022 $140-$150 in-the-money vertical BULL CALL spread.
For what the broker had done in effect is allow you to get out of your call spread position at the maximum profit point 9 days before the December 16 expiration date. In other words, what you bought for $8.80 two weeks ago is now $10.00!
All you have to do is call your broker and instruct them to exercise your long position in your (TSLA) December 2022 $140 calls to close out your short position in the (TSLA) December 2022 $150 calls.
This is a perfectly hedged position, with both options having the same expiration date, the same amount of contracts in the same stock, so there is no risk. The name, number of shares, and number of contracts are all identical, so you have no exposure at all.
Calls are a right to buy shares at a fixed price before a fixed date, and one option contract is exercisable into 100 shares.
To say it another way, you bought the (TSLA) at $140 and sold it at $150, paid $8.80 for the right to do so, so your profit is $1.20, or ($1.20 X 100 shares X 12 contracts) = $1,440. Not bad for a 9-day limited risk play.
Sounds like a good trade to me.
Weird stuff like this happens in the run-up to options expirations like we have coming.
A call owner may need to buy a long (TSLA) position after the stock market close, and exercising his long December $140 call is the only way to execute it.
Adequate shares may not be available in the market, or maybe a limit order didn’t get done by the market close.
There are also thousands of algorithms out there that may arrive at some twisted logic that the puts need to be exercised.
Many require a rebalancing of hedges at the close every day which can be achieved through option exercises.
And yes, options even get exercised by accident. There are still a few humans left in this market to blow it by writing shoddy algorithms.
And here’s another possible outcome in this process.
Your broker will call you to notify you of an option called away, and then give you the wrong advice on what to do about it. They’ll tell you to take delivery of your long stock and then post additional margin to cover the risk.
Either that or you can just sell your shares on the following Monday and take on a ton of risk over the weekend. This generates a boatload of commission for the brokers but impoverishes you.
There may not even be an evil motive behind the bad advice. Brokers are not investing a lot in training staff these days because as soon as someone learns something useful, they take a job elsewhere for more money. It doesn’t pay. In fact, I think I’m the last one they really did train.
Avarice could have been an explanation here but I think stupidity and poor training and low wages are much more likely.
Brokers have so many legal ways to steal money that they don’t need to resort to the illegal kind.
This exercise process is now fully automated at most brokers but it never hurts to follow up with a phone call if you get an exercise notice. Mistakes do happen.
Some may also send you a link to a video of what to do about all this.
If any of you are the slightest bit worried or confused by all of this, come out of your position RIGHT NOW at a small profit! You should never be worried or confused about any position tying up YOUR money.
Professionals do these things all day long and exercises become second nature, just another cost of doing business.
If you do this long enough, eventually you get hit. I bet you don’t.
Calling All Options!
Global Market Comments
April 6, 2023
Fiat Lux
Featured Trade:
(REITERATION OF MY $1,000 TARGET)
(TSLA)
CLICK HERE to download today's position sheet.
When I heard that the February 28 Tesla Investors Day in Austin, TX was boring, I was highly suspicious. I thought that might be a journalist’s snap judgment with a strong background in creative writing.
Engineers and scientists might have a different take, I thought. So, I listened to the entire 3 ½ hours and copied all the important charts.
What I heard was nothing less than earth-shaking, groundbreaking, and revolutionary, and won’t cost more than we would spend otherwise. All we have to do is spend more intelligently.
Elon Musk unveiled his Master Plan 3 and unleashed a cornucopia of new data which only an immense amount of research can produce. This will require all forms of transportation to be electric powered within 20 years, except for interplanetary rockets.
As anyone who has been through an advanced physics course can tell you, internal combustion engines are woefully inefficient, converting only 25% of their energy into forward motion, and 20% if you include materials energy costs. But then, that was the best the 19th century could do and it worked for 151 years (Nicolaus Otto built the first gasoline-powered internal combustion engine in Germany in 1872).
Electric motors in Teslas operate closer to a 50% efficiency rating, cutting energy demand by half right there.
To move the world to an all-electric economy will cost about $10 trillion, or about 10% of world GDP. Average that out at 0.5% per year and it will take about 20 years. Adding up car and storage batteries, that means 24 terawatts worth of batteries will need to be manufactured. There are one trillion watts per terawatt.
By comparison, the sun produces 1 gigawatt of energy per square kilometer per day, or 509,600 terawatts. That means an all-electric economy dependent on batteries equivalent to less than 0.1% of the sun’s daily output. In other words, it’s miniscule.
In fact, the world is already decarbonizing far faster than people realize.
There are currently 2 billion cars and trucks in the world, 85 million a year are manufactured, and some 16 million in the US. Global EV production came to 10.6 million vehicles in 2022, an increase of 22%.
Some 60% of new electricity generation installed last year came from alternatives. That’s because in terms of power output alternatives are 40% cheaper than oil, coal, or natural gas. That’s being generous as it does not include the health care costs of carbon-based energy, which make several hundred thousand people per year ill in the US alone (asthma, lung cancer, etc.).
This means that a heck of a lot of lithium is going to be needed. Soft, white lithium is number three on the periodic table (you’re talking to a chemist here), is a great oxidizer, and is anything but rare. What IS rare? Environmental controls and cheap labor.
This is why the bulk of lithium is produced by China and South America where it literally sits on the surface. This is all easily scalable to meet future demand. In fact, moving to an alternatives-based world uses far less mining than the existing conventional one.
The shortage is not in lithium supply but in lithium processing. The world’s largest lithium consumer should know. Musk recently announced they would move into lithium processing.
Home heating is another challenge. Existing heat pumps, which I have, do a great job heating in winter and cooling in summer in southern and western states where the weather is mild. These use only one-third of the energy used to heat homes with oil and natural gas. States facing subzero temperatures are another story. This problem can be solved with a fundamental redesign of the heat pump hardware.
Here was a big surprise for me. EVs are not going to create an exponential demand for lithium. Once you get up to a total installed base of 40 million batteries, recycling becomes the primary source of lithium as batteries age out. They can then be reprocessed into new batteries. This eventually caps lithium demand. Future cars will use far less silicon carbide, further reducing its demand by 75%, saving $1,000 a car.
Musk is dumping the traditional 12-volt lead acid battery all Teslas have now which accounts for 87% of all start failures. Instead, he is adding a second small lithium-ion one and redesigning the electrics to take 48 volts. This means lighter weight cables can handle more power at less cost. Musk hopes to force the entire auto industry to move to a 48-volt standard, which should have been done decades ago.
The world’s 4 million Teslas now drive 123 million miles a day and represent the largest AI neural network on the planet. If a car in Florida makes a left turn, all the cars in the rest of the country learn from that experience.
Tesla now has 80,000 chargers in the US, including 40,000 superchargers, which can charge up 450 miles per hour and give you a full charge in 40 minutes. Tesla charged cars with 7 terawatts of power in 2022 and per kilowatt costs have dropped by 40%, with charge times down 30%. Tesla is well on its way to becoming the largest electric power utility in the United States.
Tesla’s current manufacturing capacity is 2 million cars a year across four factories (Fremont, CA, Austin, TX, Berlin, Germany, and Shanghai, China). While it took Tesla 12 years to make its first million vehicles, the 4th million took only seven months. As of today, it is cheaper to own a Tesla than the world’s biggest selling car, the Toyota Corolla, given their total lifetime costs. Work out the cost of charging a Tesla and you are paying the equivalent of 25 cents a gallon for gasoline unless you are at my house, in which case it is free.
The Gigafactory in Sparks, NV, which mass produces lithium-ion battery packs, is currently being doubled in size. In Texas, Tesla is buying wind power from the grid and offering Tesla owners a flat rate for charging of $30 a month because the cost is so low.
There are great hopes for the Cybertruck, for which Tesla has 1.5 million orders, myself included. The final price for the three-motor version will be about $100,000, the same as for a model X. The Cybertruck will have a brand new third-generation platform on which all future Tesla models will be based. It will also include the 48-volt electrical design.
Tesla’s price cuts have been wildly successful, allowing it to gain market share at its competitors' expense. Tesla is really just passing on the recent collapse in commodity prices. So far in 2023, Lithium prices have fallen by 20% and copper 15%. Tesla prices will continue to fall, especially when the new $25,000 Model 2 is brought to market in 2024. That will really decimate the competition.
Tesla has also taken the plunge into the insurance industry, charging drivers on their actual driving history, which they already collect. If you drive like a little old lady, it can run as little as $180 a month. If you drive like Mad Max, it’s more, but not as much as a conventional car insurance company.
Rates change monthly depending on your driving record. Parked in a garage gives you a perfect score of 90 and it drops from there. It’s all about reducing the total cost of a Tesla car. Not such a bad deal if you let their computer do all the driving.
What will Tesla disrupt next?
All in all, it was a breathtaking presentation, which Elon delivered coolly and calmly. It is with the greatest enthusiasm that I reiterate my $1,000 per share price target.
To watch the Tesla Investor Day in its entirety on YouTube, please click here.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
April 3, 2023
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or GOLDILOCKS IS BACK!)
(TSLA), (BAC), (C), (JPM), (IBKR), MS), (BRK/B), (FCX), (TLT)
CLICK HERE to download today's position sheet.
After a three-week vacation, sanity has returned.
In a mere 15 trading days, the stock market has leaped from “the end of the financial system as we know it” to “happy days are here again.”
It was a week that brought us a major recovery of domestic cyclicals, with banks and commodities leading and technology bringing up the rear. Market breadth is broadening and winners are outnumbering losers. The Volatility Index ($VIX) completed a round trip, from $19 to $31, then back down again to $19.
Trading volumes of banks have plummeted 90% from their peaks. The Russell 2000 was the top gaining index of the week, which is 25% made up of small financials.
I’ve always been a numbers guy and to me, hard data rules all. Earnings that were widely expected to be terrible because of the coming recession are coming in better than expected. The actual fact is that the US economy is growing at a 2.5% annualized rate, slightly below the long-term average of 3%.
No recession here!
Last week, we learned the harsh reality of the Silicon Bank failure in congressional hearings. Once venture capitalist Peter Theil started the rumors, the bad news spread like wildfire. That day, some $40 billion left the bank, withdrawn instantly through the bank’s convenient cell phone app. The next day, $100 billion was scheduled for withdrawal….which the bank didn’t have.
There was no pleading from Mr. Potter to leave your cash in the bank to help the broader community. The money left with the speed of light. If Janet Yellen had not stepped in to guarantee deposits, every small bank in the country would have been cleaned out of cash the following week.
It makes one worry about what other manifestations of modern technology our financial system is unable to cope with. AI maybe, the development of which Elon Musk called for a halt to ensure our own survival. Maybe that was AI at work at (SVB)?
I am happy to say that Mad Hedge clocked the best month in two years, up +20.85%. Every time I do this, people ask me how. Here are a few key points that were screaming at me on meltdown day on Monday, March 13, when I loaded the boat with bank stocks, call spreads, and LEAPS.
1) Trading volume in banks rose tenfold
2) All banks were being dumped indiscriminately, with the best dropping as fast as the worst
3) Some 90% of stocks were down on the day. It was a classic one-way day.
4) Key technical levels in the S&P 500 held at $3,750
5) The Volatility Index spiked to $31
6) The usual merchants of doom appeared on TV and predicted the end of the world so they could buy stocks cheaper
When the sun, moon, and planets align, I strike. The market doesn’t ask twice.
Most importantly, having spent seven days a week for 55 years studying the fundamentals and the market, I knew they in no way justified the magnitude of the crash we were getting. What the market was really giving us was a gift, the best quality stocks at huge discounts. Whenever the market offers you a gift, you take it.
I did with both hands.
I went into this crash with 80% cash, a great position of strength. That comes from not overtrading, chasing marginal trades, or taking on positions because there is nothing else to do, all beginner mistakes and own goals. I live by the philosophy that a dollar at a market top is worth $10 at a market bottom. That was certainly the case this time.
It also helped that I know the Treasury Secretary Janet Yellen well, as I was once one of her students at UC Berkeley. I was in regular contact with her office the weekend Silicon Valley crash happened, and I knew she would do the right thing.
She did.
Every time we get one of these events, Mad Hedge followers make about 20%. This time was no different.
March closed out at +20.85%. My 2023 year-to-date performance is now at an incredible +46.62%. The S&P 500 (SPY) is up a miniscule +7.73% so far in 2023. My trailing one-year return maintains a sky-high +104.40% versus -22.75% for the S&P 500.
That brings my 15-year total return to +643.81%, some 2.80 times the S&P 500 (SPY) over the same period. My average annualized return has recovered to +48.29%, another new high.
I executed only three trades last week, taking profits on my bond short (TLT) and rolling it into a new long bond position, and buying Freeport McMoRan (FCX).
Silicon Valley Bank Sells to First Citizens Bancshares (FCNCA), whose shares rocketed by an incredible 72% on the news. First Citizens is buying about $72 billion worth of SVB assets from the FDIC at a discount of $16.5 billion. The FDIC gave (FCNCA) an unheard-of $70 billion line of credit to do the deal. (SVB) management sold $84 million worth of stock in the two years leading up to the bankruptcy, including $3 million by the CEO, which will almost certainly get clawed back. It certainly doesn’t pass the smell test.
Q4 GDP Comes in at 2.6% and is likely to continue at the same rate in Q1. A solid Christmas selling season was a big help. Someone forgot to tell the economy it was supposed to be in a recession. That’s down from 3.2% in Q3 2022. Maybe this is why stocks won’t go down?
Commercial Real Estate is in Trouble, says JP Morgan, falling 37% last year on a total return basis. Those pressures are set to mount as commercial real estate, already dealing with higher interest rates and fewer workers showing up at offices, deals with the regional banking fallout.
Manhattan Office Vacancies Hit Record High, a victim of the work-from-home trend and fears of a coming recession. More than 16% of a total of 470 million square feet was empty in Q1. Average rents are flat at $76.96 a square foot.
Home Ownership Premium Highest Since 2006, when compared to rentals. The spread assumes a new homeowner took out a mortgage yesterday, which few have. That’s up 71% in three years compared to annual rental growth of 6.3%. The failure of home prices to drop is part of the problem, which they won’t with a 10 million unit national structural shortage.
Europe Bans Internal Combustion Engines, from 2035. An exemption was allowed for German cars that run on carbon-neutral fuels, like hydrogen. Half of the world’s oil demand is about to disappear.
A Severe Short Squeeze in Copper is Developing, leading to a massive price spike later in 2023. A Chinese economic recovery and exploding EV growth are the reasons. Copper is the only industrial metal up this year, some 6%. The rest are all down on recession fears. Is the red metal now recession-proof? Buy (FCX) on Dips.
Lithium Prices Have Dropped by Half, in the past four months, following a ballistic 1,300% price increase in the previous two years. Australia is the world’s largest producer of lithium. China and Chile follow, thanks to cheap labor, lax regulation, and lack of environmental controls.
Alibaba to Break Up into six different companies, which may independently list sometime in the future. Such a move usually brings a doubling in value for the $255 billion Chinese tech giant and (BABA) rose 15% on the news. It also makes it easier for the government in Beijing to exert control. Avoid (BABA) as China is still not out of the woods yet.
S&P Case Shiller Loses Gains in January in their National Home Price Index, dropping from a 5.6% annual gain to only 3.8%. Prices have been dropping for seven straight months. San Francisco was down 8% YOY, while Seattle gave up 5%. Miami gained 14%, Tampa 11%, and Atlanta 8%.
AI Could be a $7 Trillion Business in ten years, according to Goldman Sachs. I think it could be more. AI is touted to be the next big shift in technology after the evolution of the internet, mobile, and the cloud. It will make every company you own more valuable. Buy (NVDA) on dips.
Solar Could Have a Big Year in 2023, driven by huge government subsidies and soaring electricity costs. The real net break-even cost against keeping your existing gas or oil-fired system is four years. Can’t afford it? Get the government to give you a 30% tax credit bolstered by Biden’s Inflation Reduction Act. I’ve taken $250,000 in such tax credits over the last eight years. (ENPH) looks like a “BUY” here off of a 47% four-month correction. All the others have already run, like (FSLR), or are too diluted by other businesses, like (GE).
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 3 at 7:30 AM EST, the ISM Manufacturing Index is out.
On Tuesday, April 4 at 6:00 AM, the JOLTS Job Openings Report is announced.
On Wednesday, April 5 at 7:00 AM, the ADP private Employment Report for March is printed.
On Thursday, April 6 at 8:30 AM, the Weekly Jobless Claims are announced.
On Friday, April 7 at 8:30 AM the Nonfarm Payroll Report for March is released.
As for me, few Americans know that 80% of all US air strikes during the Vietnam War originated in Thailand. At their peak in 1969, there were more US troops serving in Thailand than in South Vietnam itself.
I was one of those troops.
When I reported to my handlers at the Ubon Airbase in northern Thailand for my next mission, they had nothing for me. They were waiting for the enemy to make their next move before launching a counteroffensive. They told me to take a week off.
The entertainment options in northern Thailand in those days were somewhat limited. Phuket and the pristine beaches of southern Thailand where people vacation today were then overrun by cutthroat pirates preying on boat people and would kill you for your boots.
Life was cheap in Asia in those days, especially your life. Any trip there would be a one-way ticket.
There were the fleshpots of Bangkok and Chang Mai. But I would likely contract some dreadful disease there. I wasn’t really into drugs, figuring whatever my future was, it required a brain. Besides, some people’s idea of a good time there was throwing a hand grenade into a crowded disco. So, I, ever the history buff, decided to go look for The Bridge Over the River Kwai.
Men of my generation knew the movie well, about a company of British soldiers who were the prisoners of bestial Japanese. At the end of the movie, all the key characters die as the bridge is blown up.
I wasn’t expecting much, maybe some interesting wreckage. I knew that the truth in Hollywood was just a starting point. After that, they did whatever they had to do to make a buck.
The fall of Singapore was one of the great Allied disasters at the beginning of WWII. Japanese on bicycles chased Rolls Royce armored cars and tanks the length of the Thai Peninsula. Two British battleships, the Repulse and the Prince of Wales, were sunk due to the lack of air cover with a great loss of life. When the Japanese arrived at Singapore, the defending heavy guns were useless as they pointed out to sea.
Some 130,000 men surrendered, including those captured in Malaysia. There were also 686 American POWs, the survivors of US Navy ships sunk early in the war. Most were shipped north by train to work as slave labor on the Burma Railway.
The Japanese considered the line strategically essential for their invasion of Burma. By building a 258-mile railway connecting Bangkok and Rangoon, they could skip a sea voyage of 2,000 miles in waters increasingly dominated by American submarines.
Some 12,000 Allied troops died of malaria, beriberi, cholera, dysentery, or starvation, along with 90,000 impressed Southeast Asian workers. That earned the line the fitting name: “Death Railway.”
The Burma railway was one of the greatest engineering accomplishments in human history, ranking alongside the Pyramids of Egypt. It required the construction of 600 bridges and viaducts. It crossed countless rivers and climbed steep mountain ranges. The work was all done in 100-degree temperatures with high humidity in clouds of mosquitoes. And it was all done in 18 months.
One of those captured was my good friend James Clavell, who spent the war at Changi Prison, now the location of Singapore International Airport. Every time I land there, it gives me the creeps.
Clavell wrote up his experiences in the best-selling book and movie King Rat. He followed up with the Taipan series set in 19th century Hong Kong. We lunched daily at the Foreign Correspondents Club of Japan when he researched another book, Shogun, which became a top TV series for NBC.
So I navigated the Thai railway system to find remote Kanchanaburi Province where the famous bridge was said to be located.
My initial surprise was that the bridge was still standing, not destroyed as it was in the film. It was not a bridge made of wood but concrete and steel trestles. Still, you could see the scars of allied bombing on the foundations, which tried many times to destroy the bridge from the air.
That day, the Bridge Over the River Kwai was a quiet, tranquil, peaceful place. Farmers wearing traditional conical hats made of palm leaves and bamboo strips called “ngob’s” crossed to bring topical fruits and vegetables to market. A few water buffalo loped across the narrow tracks. The river Kwai gurgled below.
Once a day, a train drove north towards remote locations near the Burmese border where a bloody rebellion by the indigenous Shan people was underway.
The wars seemed so far away.
The only memorial to the war was a decrepit turn-of-the-century English steam engine badly in need of repair. There were no tourists anywhere.
So I started walking.
After I crossed the bridge, it wasn’t long before I was deep in the jungle. The ghosts of the past were ever present, and I swear I heard voices. I walked a few hundred yards off the line and the detritus of the war was everywhere: abandoned tools, rusted-out helmets, and yes, human bones. I didn’t linger because the snakes here didn’t just bite and poison you, they swallowed you whole.
After the war, the Allies used Japanese prisoners to remove the dead for burial in a nearby cemetery, only identified by their dog tags. Most of the “coolies” or Southeast Asian workers were left where they fell.
Today, only 50 miles of the original Death Railway remain in use. The rest proved impossible to maintain, because of shoddy construction, and the encroaching jungle.
There has been talk over the years of rebuilding the Burma Railway and connecting the rest of Southeast Asia to India and Europe. But with Burma, today known as Myanmar, a pariah state, any progress is unlikely.
Maybe the Chinese will undertake it someday.
Every Christmas vacation, when my family has lots of free time, I sit the kids down to watch The Bridge Over the River Kwai. I just wanted to pass on some of my experiences, teach them a little history, and remember my old friend Cavell.
Good Luck and Good Trading,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Walking the Bridge Over the River Kwai in 1976
The Bridge Over the River Kwai Today
1976 Death Railway Steam Engine
A Thai Farmer
Mad Hedge Technology Letter
March 29, 2023
Fiat Lux
Featured Trade:
(THE FORCE MULTIPLIER)
(MSFT), (TSLA), (CHATGPT)
Is artificial intelligence already on the ropes?
Tesla CEO Elon Musk and a group of artificial intelligence experts have called for a six-month freeze of developing systems that are more powerful versions than the just-released OpenAI GPT-4 system.
GPT-4 quickly impressed early users and has achieved remarkable gains in the short term.
With its ability to simplify coding, rapidly create a website from a simple sketch, and pass exams with high marks takes fractions of a second.
In an open letter, Musk and the experts point to potential risks for society and humanity as a whole.
This would be significantly detrimental to Microsoft’s stock if the development of AI is halted.
No doubt that part of this is Elon Musk not satisfied that his $100 million donation to this “nonprofit” has been parlayed into a Microsoft for-profit smash-and-grab takeover of the asset.
Malfunctioning AI is something that would be a horror story for everyone on the planet.
The creator of OpenAI Sam Altman has also expressed concern about the societal backlash and volume of misinformation that could become one of those nasty unintended side effects.
Some other disruptions include both economic and political disruptions, and researchers are asking developers to work with regulators to create standards for AI development and integration.
Among the names behind the letter are those of Stability AI CEO Emad Mostake and researchers at Alphabet-owned DeepMind.
The letter comes two days after Europol joined organizations that share ethical and legal concerns about the widespread use of advanced artificial intelligence such as ChatGPT and warn of possible misuse of the system in phishing attempts, disinformation, and cybercrime.
Since its launch last year, ChatGPT has taken the world by storm and has accelerated the development of large-scale language models and companies to integrate generative AI models into their products.
This logically caused a wave of negative comments in addition to positive comments, as a significant part of the scientific community believes that this technology is not yet ready for such widespread use.
Artificial intelligence can cause serious damage, and the big players are increasingly more secretive about what they're doing. That makes it harder to protect the public from any harm that may ever manifest itself.
This news is on the heels of investment bank Goldman Sachs forecasting that as many as 300 million full-time jobs around the world could be automated in some way by the newest wave of artificial intelligence.
They predicted in a recent report that 18% of work globally could be computerized, with the effects felt more deeply in advanced economies than emerging markets.
Fighting the richest man in the world has its drawbacks.
ChatGPT has already destroyed the meaning of going to university for most of the students out there.
Generative AI is the force multiplier that tech has waited for and delaying it with the potential of stopping it would hurt tech shares and put a cap on future returns.
This battle could be the one that defines humanity and is definitely the fight that will define tech market valuations 5 or 10 years from now.
If this technology gets stopped, there is no other force multiplier in the works that could replace something as powerful as this generative artificial intelligence.
