Tag Archive for: (USO)

Mad Hedge Fund Trader

The Market Outlook for the Week Ahead, or The Big Pull Forward

,

Somehow, the summer got moved this year.

For here it is September, and the stock market is behaving like it is only July. July was different from normal as well, going straight up almost every day when it is usually asleep. This year, July acted like May, when you’re supposed to sell and go away.

If you’re thoroughly confused by all of this, so am I. The historic cyclicality of the markets, the ebb and flow of share prices according to the calendar, has gone out the window. But then, what isn’t confusing these days?

I went to buy a green drink from Whole Foods on Friday and the counter was closed because of staff shortages. Whole Foods unable to sell a green drink?

I tried to climb the Matterhorn this summer but was told that the guides weren’t taking anyone up because of the extreme heat. The mountain was literally melting, dropping rocks on the heads of climbers. No climbing the Matterhorn in Switzerland? I went to the Dolomites instead where you climb ice-free shear rock faces.

I tried to get into the Pantheon in Rome this summer and was met with a five-hour line. The Sistine Chapel in the Vatican was worse. When I first went there in the 1960’s the place was empty. The fact is that Italy now has more tourists than Italians. Oh, and the pope is from Argentina.

Has the world gone mad?

What has happened is that there has been a great pull forward that took place in financial markets during the first half of the year. I’ve seen this before. When a conclusion becomes obvious, everyone jumps on the bandwagon and brings everything forward.

So from January to July stock markets saw the blatantly obvious future that inflation would fall, interest rates decline, the US dollar weaken, and commodities and precious metals would rise. That’s why the “Magnificent Seven” led.

What happens next?

Now shares have to wait until these predictions actually happen before they can move any further. Markets have moved as far as they can on faith alone. Next, we need facts. This could take weeks or even months.

I knew this was going to happen. That’s why I went pedal to the metal, full speed ahead, damn the torpedoes aggressive during the first half of the year and clocked a 60% profit. I expected that if you didn’t make a profit in the first half of the year, you wouldn’t have any profits in 2023 at all.

And the trade alert drought continues.

There isn’t a day that goes by when I am not asked if America’s $33 trillion national debt will destroy the economy, cause the stock market to crash, and bring the end of Western Civilization. The answer is no, never, not in our lifetimes.

The reason is very simple. Any dollar the government borrows today sees its purchasing power go to zero in 30 years. That’s where the massive Civil War debt went, that's where the WWI debt went, and that’s where the gigantic WWII debt went, some 105% of GDP. Today’s debt will similarly vaporize over time.

Who pays for this cataclysmic decline in value? US government debt holders, who similarly see their purchasing power disappear over time. It turns out that the ultimate avoiders of risk, investors in US government debt, not only don’t get paid for their cowardice, they lose their entire principal as well, at least in terms of purchasing power.

There is a wonderful article in Barron’s this week entitled “Government Debt Needs to Be Repaid, And Other Myths About the Federal Deficit” by Paul Sheard which explains how all this works, which I quote below in its entirety.

“The U.S. national debt currently stands at $32.91 trillion, and 10 months into this fiscal year, the U.S. government has spent $1.6 trillion more than it has collected in revenue. Those intimidating figures animate political battles that can shut down the government and even bring it to the brink of default. But the meaning of this money isn’t as simple as it seems. Five myths in particular deserve straightening out.

The first is that the government has to borrow in order to spend and run deficits. It’s the other way around. The government creates money (injects it into the economy) when it spends and destroys money (withdraws it from the economy) when it taxes. The government taxes variously to correct for negative externalities, to redistribute income, and to modulate aggregate demand; “raising revenue” is just a cover story. 

A related myth is that the government needs to repay its debt. “Debt” is a misnomer; government debt is just money (or purchasing power) in another form. A $20 bill is a liability of the Fed, which makes it a liability of the federal government. A $20 bill never has to be repaid; it just is. Fundamentally, Treasuries aren’t much different.

That government debt never needs to be repaid doesn’t mean the government can or should create as much of it as it likes.

Too big a pile of debt because of prior and ongoing budget deficits may be inflationary, as too much money chases insufficient goods and services. That will require some combination of monetary and fiscal tightening. A mountain of debt may indicate a government that is too big and intrusive in the economy for many people’s liking, an issue that can be fought out at the ballot box. 

A third myth is that the Fed prints money when it does quantitative easing. The money-printing happens when the government runs a budget deficit; QE just changes the form of that money. 

QE is really just a debt refinancing operation of the consolidated government—that is, the government including the Fed—whereby it refinances one form of debt (government bonds or guarantees) into another (reserves). QE changes the composition of the (consolidated) government debt in the hands of the private sector, but it doesn’t directly add one iota of new purchasing power. For every dollar the Fed “pumps into” the economy by doing QE, it “sucks out” a dollar of assets. Conversely, quantitative tightening just returns assets to private sector portfolios, expunging reserves in the process. 

Reserves are like banknotes: The Fed can withdraw them, but it never has to repay them as such. It looks like the government has to repay Treasuries, but this is an institutional artifact. In extremis, the Fed could convert all outstanding Treasuries into reserves, and it could maintain monetary control by it, rather than the fiscal authorities, paying interest on reserves. 

Japan is the poster child for a miserable-looking fiscal picture. Yet, the Bank of Japan, the pioneer of QE, owns almost half of the stock of outstanding Japanese government securities and, at the same time, since 2016 has managed the 10-year yield, with some leeway, to be “around zero percent.” 

It is precisely because the government can create money at will that the modern monetary and fiscal architecture has been designed to put shackles on its ability to do so: The creation of an “independent” central bank within the government, the central bank not allowing the government’s account with it to go into overdraft, the central bank not buying bonds directly from the government, and governments issuing debt securities rather than leaving their deficits in the form of reserves all serve that purpose. But what the government taketh away, it can give back. Faced with the need, it could loosen those shackles.

A fourth, and related, myth is that banks could, if so moved, “lend out” the excess reserves created by QE. Banks can lend these reserves to one another but they cannot turn them into lending to companies and households in the broader economy.

It isn’t just the government that creates money. Banks do, too. A fifth myth is that banks are just financial intermediaries “taking in” deposits and “lending them out.” Not so. Banks create money when they lend. For an individual bank making a new loan, it may not feel like this, because the first thing borrowers do is spend their money. If none of that money flows back into the same bank, its reserves at the central bank will decline by the amount of the loan. It will then probably want to attract deposits to “fund” the loan, but doing so will just top up its lost reserves. Bank lending for the system is entirely self-funding (so long as none of the money created leaks into bank notes).

The U.S. economy currently produces about $27 trillion of goods and services annually, a little more than the amount of federal debt held by the public and the QE-embracing Fed. The money needed to sustain this giant prosperity-generating machine comes from the government running deficits and from banks extending credit, with the Fed’s activities linking the two. Political debates and decisions currently are based on a befuddled grasp of how this monetary system works. The stakes for society are too high for that.”

So far in August, we are down -4.70%. My 2023 year-to-date performance is still at an eye-popping +60.80%. The S&P 500 (SPY) is up +17.10% so far in 2023. My trailing one-year return reached +92.45% versus +8.45% for the S&P 500.

That brings my 15-year total return to +657.99%. My average annualized return has fallen back to +48.15%, another new high, some 2.50 times the S&P 500 over the same period.

Some 41 of my 46 trades this year have been profitable.

Beige Book Shows Consumer Spending Slowing, long a pillar of this recovery, as the last of the pandemic bonuses work their way for the system. It’s putting a dent in corporate profits and hints at a shrinking economy, contrary to recent economic data.

The US Dollar (UUP) is Soaring, thanks to “higher interest rates for longer” and a strengthening US economy. Asian currencies are at ten-month lows and central bank intervention is looking. The dollar shorting selling opportunity of the decade is setting up.

China Restricts Sales of iPhones (AAPL), barring sales to government agencies. It’s only a small nick in overall sales, but certainly casts of cloud over doing business in the Middle Kingdom. Some $200 billion, (AAPL)’s market cap has been vaporized.

Weekly Jobless Claims Dive, down 13,000 to 216,000, a seven-month low. It’s the fourth consecutive decline and not what the Fed wanted to hear.

Rate Hikes Will Drag on the Economy for at Least a Decade, as the Fed's $8.24 trillion balance sheet unwinds, according to the San Francisco Fed. The balance sheet was only at $800 million before the 2008 Great Recession.

Saudi Arabia and Russia Engineer Short Squeeze on Oil (USO), taking the price over $90 a barrel this year. Large production cuts announced in June will be maintained until yearend. Will Biden counter with a release from the Strategic Petroleum Reserve, or SPR?

Tesla’s Chinese EV Deliveries Rise 9.3% in August, thanks to aggressive price cuts. There is a two-month wait for the Model Y. Chinese rival BYD (BYD), with its Dynasty and Ocean series of EVs and petrol-electric hybrid models, recorded deliveries of 274,086 passenger vehicles in August, a jump of 57.5% year-on-year. China has the world’s largest car market.

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, September 11, US Consumer Inflation Expectations are announced.

On Tuesday, September 12 at 8:30 PM EST, NFIB Business Optimism Index is released. Apple announced the new iPhone 15.

On Wednesday, September 13 at 8:30 AM, the Core Inflation Rate for August is published.

On Thursday, September 14 at 8:30 AM, the Weekly Jobless Claims are announced. ARM started trading after its IPO, which was five times oversubscribed. NVIDIA tried but failed to take over the chip maker.

On Friday, September 15 at 2:30 PM, the Producer Price Index for August is published. At 2:00 PM the Baker Hughes Rig Count is printed.

As for me, not just anybody is allowed to fly an aircraft in Hawaii. You have to undergo special training and obtain a license endorsement to cope with the Aloha State’s many aviation challenges.

You must learn how to fly around an erupting volcano, as it can swing your compass by 30 degrees. You must master the fine art of not getting hit by a wave on takeoff since it will bend your wingtips forward. And you’re not allowed to harass pods of migrating humpback whales at a low level, a sight I will never forget.

Traveling interisland can be highly embarrassing when pronouncing reporting points that have 16 vowels. And better make sure your navigation is good. Once a plane ditched interisland and the crew was found six months later off the coast of Australia. Many are never heard from again.

And when landing on the Navy base at Ford Island you were told to do so lightly, as they still hadn’t found all the bombs the Japanese had dropped during their Pearl Harbor attack in 1941.

You are also informed that there is one airfield on the north shore of Molokai you can never land at unless you have the written permission from the Hawaii Department of Public Health. I asked why and was told that it was the last leper colony operating in the United States.

My interest piqued, the next day found me at the Hawaiian state agency with an application in hand. I still carried my UCLA ID which described me as a DNA researcher, which did the trick.

When I read my flight clearance to the controller at Honolulu International Airport, he blanched, asking if I had authorization because he’d never seen one before. I answered that yes, I did, I really was headed to the dreaded Kalaupapa Airport, the Airport of no Return.

Getting into Kalaupapa is no mean feat. You have to follow the north coast of Molokai, a 3,000-foot-high series of vertical cliffs punctuated by spectacular waterfalls. Then you have to cut your engine and dive for the runway in order to land into the wind. You can only do this on clear days, as the airport has no navigational aids. The crosswind is horrific.

If you don’t have a plane it is a 20-mile hike down a slippery trail to get into the leper colony. It wasn’t always so easy.

During the 19th century, Hawaiians were terrified of leprosy, believing it caused the horrifying loss of appendages, like fingers, toes, and noses, leaving bloody open wounds.  So, King Kamehameha I exiled lepers to Kalaupapa, the most isolated place in the Pacific.

Sailing ships were too scared to dock. They simply threw their passengers overboard and forced them to swim for it. Once on the beach, they were beaten a clubbed for their possessions. Many starved.

Leprosy was once thought to be a result of sinfulness or infidelity. In 1873, Dr. Gerhard Henrik Armauer Hansen of Norway was the first person to identify the germ that causes leprosy, the Mycobacterium leprae.

Thereafter, it became known as Hanson’s Disease. A multidrug treatment that arrested the disease, but never cured it, did not become available until 1981.

Leprosy doesn’t actually cause appendages to drop off as once feared. Instead, it deadens the nerves, and then rats eat the fingers, toes, and noses of the sufferers when they are sleeping. It can only be contracted through eating or drinking live bacteria.

When I taxied to the modest one-hut airport, I noticed a huge sign warning “Closed by the Department of Health.” As they so rarely get visitors the mayor came out to greet me. I shook his hand but there was nothing there. He was missing three fingers.

He looked at me, smiled, and asked, “How did you know?”

I answered, “I studied it in college.” Even today, most are terrified of shaking hands with lepers.

Not me.

He then proceeded to give me a personal tour of the colony. The first thing you notice is that there are cemeteries everywhere filled with thousands of wooden crosses. Death is the town’s main industry.

There are no jobs. Everyone lives on food stamps. A boat comes once from Oahu a week to resupply the commissary. The government stopped sending new lepers to the colony in 1969 and is just waiting for the existing population to die off before they close it down.

Needless to say, it is one of the most beautiful places on the planet.

The highlight of the day was a stop at Father Damien’s church, the 19th century Belgian catholic missionary who came to care for the lepers. He stayed until the disease claimed him and was later sainted. My late friend Robin Williams made a movie about him, but it was never released to the public.

The mayor invited me to stay for lunch, but I said I would pass. I had to take off from Kalaupapa before the winds shifted.

It was an experience I will never forget.

Stay Healthy,

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

 

The Airport of No Return

 

 

Father Damien

 

 

 

 

 

Mad Hedge Fund Trader

May 12, 2023

, ,

Global Market Comments
May 12, 2023
Fiat Lux

Featured Trades:

(THURSDAY, MAY 16, 2023 KEY WEST, FLORIDA STRATEGY LUNCHEON)
(MAY 10 BIWEEKLY STRATEGY WEBINAR Q&A),
(SCHW), (AAPL), (TLT), (BITCOIN), (FXA), (USO), (FCX), (LLY), (PYPL)

 

CLICK HERE to download today's position sheet.

Mad Hedge Fund Trader

May 10 Biweekly Strategy Webinar Q&A

,

Below please find subscribers’ Q&A for the May 10 Mad Hedge Fund Trader Global Strategy Webinar, broadcast from Incline Village, NV.

 

Q: Why is the market down on such great inflation data?

A: Yes, a 4.9% annualized inflation rate is a big improvement from 9.1% nine months ago. The market only cares about the debt ceiling debacle right now. I’ve been teaching people about the stock market for about 55 years, and I can tell you that all investors have one great fear, and it's not the fear of losing money—that they can handle. It’s the fear of looking stupid. And if they load the boat with stock now, and the US government defaults and the market drops 25%, they will look really stupid. This is not a black swan. It has probably been the most advertised market negative in history. We’ve known about the debt default since December when the Democrats chose not to raise the debt ceiling because they thought they could gain a political advantage by letting the Republicans fumble the issue, and they are reaping such advantages by the bucketload. So, even though everyone knows that this will be settled, it has settled 98 consecutive times in the last 106 years, and they don’t want to do anything before a deal. And by the way, this was only put into place during WWI to meter the rate of government borrowing during the war, so I would say it’s lost its purpose. However, it's hard to make any changes at all in the government these days. What that does do, is create big gaps up in the market when they are resolved, and big gaps down when they are not resolved. That’s why we’re doing nothing.

Q: Do you like regional banks here—are they a buy? And do you like the Schwab LEAPS?

A: Yes on the Charles Schwab LEAPS (SCHW), because you have two years for that to work out. With regional banks as a stock buy here, you’re really buying a lottery ticket because if they do get attacked by short sellers, you get wiped out practically overnight (as has happened 4 times.) On the other hand, if the US Treasury or the FCC makes selling bank shares or lending bank shares illegal, then you’ll have the regional banks just roar, because the sellers will be gone. There are too many better things to do than to make a high-risk trade on bank shares, especially after the debt ceiling is resolved.

Q: Is Apple (APPL) trade a long?

A: Yes, on any pullback. I think big tech leads for the next 10 years once we get out of our current quagmire. So it’s a question of how much pain you’re willing to take in the meantime.  My target for Apple this year is $200.

Q: iShares 20 Plus Year Treasury Bond ETF (TLT) is up today; would it be worth selling out of the money call spreads with the same expiration date as our long position?

A: No, it is not. At $104, it’s not a great short, or otherwise, I’d do it myself. When we get up to $109, then you want to go short like with the $114 puts or $115 puts. But down here if you’re shorting say, the $109s, and we go to $109 the next day or week, then you get stopped out. Remember any shorts of bonds here is now a long-term counter-trend trade—you’re betting that your position expires in the money before a long-term trend to the upside reasserts itself. So no, that’s why I’m not doing any shorts right here. Also, we’re not low enough to buy it yet. You get down to $101 or $102, I’ll look at buying call spreads, but here in the middle is never a good place to trade.

Q: Are you still expecting a correction in May?

A: May isn’t over yet. When they say “Sell in May and go away,” they don’t tell you if it’s May 1st or May 30th, so I’m happy where I am. There’s no law that says you have to get every trade of the year. I think doing nothing is the best solution right now, especially with a 62% profit already in the bank this year.

Q: Is it too late for bank LEAPS?

A: I would say, on a two-year view, no. I’m looking for these shares to double in two years, so a bet that it’s unchanged or higher right now is a pretty good bet, I would say—especially if it gives you a 100% return in one or two years. So yes, all the big bank LEAPS are still good, and with small banks, too much is unknown right now for a highly leveraged bet in that sector.

Q: What do you mean when you say one-year LEAPS is a call spread?

A: When I say one year LEAP, I mean at the money, and then short the next strike higher, and that gives you the maximum leverage. Something like 20:1 leverage when you go that aggressive. But now is the time to be aggressive; that's when these LEAPS are all on sale.

Q: Near-term iShares 20 Plus Year Treasury Bond ETF (TLT) move?

A: Sorry to say, sideways. That's why I'm doing nothing. I’m waiting for the market to tell me what to do. If it goes down, I want to buy it, if it goes up, I want to sell it, if it goes sideways, I want to go on vacation—very simple trading strategy.

Q: What about commercial real estate?

A: I don’t want to touch it, and the Real Estate Investment Trusts (REITs) on those have been horrible. Maybe later in the year when the REITs are at bankruptcy levels, it might be worth a buy. But you have to be careful on your REITs; there are good REITs and there are bad REITs, and you don’t want to be anywhere near the commercial ones. With things like cell phone towers, assisted care living facilities—you know, dedicated LEAPS in safe areas would be a good place. And the yields, by the way, are very high, if they pay.

Q: If the US defaults, what would you buy?

A: Everything, because everything will be at a low for the year; so that’s an easy one. By the way, when we got the banking crisis in March, I adopted an everything strategy then: buy all big banks and brokers—and it turned out to be the best trade of the year. The same is going to happen with the debt default.

Q: How long will it take for the regional bank construction to play out?

A: I think the regional banks have completely separated themselves out from the big banks. You only want to own the big banks because you get big returns on those, and the risk/reward ratio is overwhelmingly in favor of big banks, unlike with small banks. Therefore, you only buy the big banks in that situation. If you feel like buying a lottery ticket on your local bank because it’s down 80%, go ahead and do so, but remember that's what it is—a lottery ticket, with a big payoff if you win.

Q: Bitcoin has recently been weak off its top. Do you expect another leg up in Bitcoin prices?

A: I do not. Bitcoin was the perfect asset to have when we had a huge oversupply of cash and a shortage of assets. Now, is the opposite: we have an oversupply of assets and a shortage of cash, and that may remain true for another 10 years or so. So, if you have Bitcoin, I’d be unloading any positions you have now and falling down on your knees, thanking goodness you were able to recover this much of your loss. The other problem is you now have a lot of the intermediaries going bankrupt or shut down by the SEC or the US Treasury. So, that is an additional risk, which you don’t have buying JP Morgan (JPM), for example, or the Australian dollar (FXA), or oil (USO), or copper (FCX). It’s just so far out there on the risk/reward basis. Only large institutions and miners are in the market now—most individuals have been scared away for life.

Q: Would you buy PayPal (PYPL) on the dip? The earnings were terrible.

A: Yes, I would. It is now discounting a recession. If you don't get a recession, you get a big recovery in PayPal.

Q: Do you think that a Ukraine-Russia war will end soon?

A: I would doubt that the Russia-Ukraine war lasts more than a year, and when it ends, it will create the biggest global economic stimulus since the Marshall Plan. Also, American companies will be at the front of the line on the reconstruction deals because we supplied a lot of the weapons and intelligence. Looking at the Marshall Plan in modern terms: $17 billion in 1947 money would be on the order of a $1 trillion today—you basically have to rebuild an entire country. And guess who’s good at building countries? We are. We have all the big engineering companies to do it. Buy Caterpillar (CAT) for sure. By the way, I’ll be spending my summer vacation working on the Ukraine War for the US Marine Corps and NATO. At least the Belgians have better food.

Q: What do you think about pharmaceuticals like Eli Lilly (LLY)?

A: We’ve been recommending them in the Mad Hedge Biotech & Health Care letter for literally years. They’re absolutely kicking butt with their weight loss drug Mounjaro—to the extent that there are shortages of supplies, a black market, and big price increases coming, so it’s all about the weight loss boom. I hate to think of what the combined overweightness of America is, but it’s got to be somewhere in the millions of tons (and I am one of the guilty parties myself.)

Q: There's talk that EVs put out a lot of sulfur that increases climate change issues. What do you think?

A: Absolutely not true, as there is no sulfur in an EV. I don't know where they would come out of an electric engine running on a lithium battery. It’s just another bit of fake news coming out of the oil industry, which is pretty much around us all day, every day. You just have to get used to that. Conventional international combustion engines do emit a lot of sulfur in the form of sulfur dioxide and the big three have been sued over this for at least 50 years.

Q: When will the debt ceiling negotiations end?

A: There are two indicators you look for in predicting the end of a debt ceiling crisis (the last one of which was 12 years ago): #1. When the government announces it can’t send out social security checks anymore because they have no more money, and #2. A big drop in the stock market that scares all the billionaires, cuts their wealth, and makes them threaten to withdraw funding from the politicians who are blocking this thing. Another big indicator is when the Department of Defense announces they have no more money to pay military salaries. Almost all military presence in the United States is in red states and is a major support for economies. And the reason is that's where land was cheapest during WWI, which was when we did a very rapid buildup in the number of military bases. So, watch for those indicators and look for a massive rally when this happens. The US government is basically a giant recycling machine. It takes money off the coast, where all the wealth and taxes are paid, and spends it inland, where all the infrastructure and military have to be paid for. The only military spending on the coasts is in Hawaii, cyber warfare in California, and shipbuilding on the east coast. Anything that interferes with the process of moving money off the coasts and inland is doomed to fail for sure. That’s my one-minute analysis on the cash flows inside the US economy.

Q: I read that the clarity of Lake Tahoe is the best ever. Is this true?

A: Yes, it is. It is an example of a major effort to save the environment that succeeded, but you had to live 70 years to see it. The biggest factor was improving gas mileage for cars. The average fuel economy for new model cars has increased from 12 miles per gallon in 1950 to 35 today. Notice that cars have gotten a lot smaller too. That cuts by two-thirds the carbon dioxide going into the atmosphere which can combine with nitrogen to make nitric acid which fell into the lake. Several big development projects were stopped in their tracks. So was a planned freeway around the lake. Some 17 golf courses are now banned from using fertilizer. Sewage is now piped out of the valley instead of into the lake. A record 70 inches of rainfall this year helped dilute the water. Finally, an ill-conceived freshwater shrimp farming industry ended when the shrimp all starved to death when the lake became too clear, eliminating their poop from the picture. There is now a campaign to clean garbage off the bottom which I help fund. We even found “Fredo’s” body from The Godfather! As a result, the lake clarity has improved from 50 feet in 1970 to 115 feet, the same as when Mark Twain first visited Lake Tahoe in 1861.

To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in to www.madhedgefundtrader.com , go to MY ACCOUNT, click on GLOBAL TRADING DISPATCH, then WEBINARS, and all the webinars from the last 12 years are there in all their glory.

Good Luck and Stay Healthy,

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

 

 

 

 

 

Want to Know What Happens Next?

Mad Hedge Fund Trader

May 8, 2023

, ,

Global Market Comments
May 8, 2023
Fiat Lux

Featured Trades:

(MARKET OUTLOOK FOR THE WEEK AHEAD,
or THE GOLDEN AGE OF BIG BANKING HAS JUST BEGUN)
(JPM), (FRC), (BAC), (C), (WFC), (AAPL), (GOOGL), (META),
(AMZN), (TSLA), (NVDA), (CRM), ($VIX), (USO), (TLT), (QQQ)

 

CLICK HERE to download today's position sheet.

Mad Hedge Fund Trader

The Market Outlook for the Week Ahead, or The Golden Age of Big Banking has Just Begun!

,

The United States is about to change beyond all recognition.

Most investors have missed the true meaning of the JP Morgan takeover of First Republic Bank for sofa change, some $10.6 billion. It in fact heralds the golden age of big banking. The US is about to move from 4,000 banks to four, with all of the profits accruing at the top.

Look at the details of the (JPM)/(FRC) deal and you will become utterly convinced.

(JPM) bought a $90 billion loan portfolio for 87 cents on the dollar, despite the fact that the actual default rate was under 1%. The FDIC agreed to split losses for five years on residential losses and seven years on commercial ones. The deal is accretive to (JPM) book value and earnings. (JPM) gets an entire wealth management business, lock, stock, and barrel. Indeed, CEO Jamie Diamond was almost embarrassed by what a great deal he got.

It was the deal of the century, a true gift for the ages. If this is the model going forward, you want to load the boat with every big bank share out there.

And the amazing thing was that (JPM) made the highest bid among a half dozen contenders.

Along with Health Care, banking is the last unconsolidated US industry. We have five railroads, four airlines, three trucking companies, three telephone companies, two cell phone providers….and 4,000 banks?

Other countries get by with much less. England has five major banks, Australia four, and Germany two, one of which goes bankrupt every decade (I’m not naming names). America’s financial system is an anachronism of its federal system where each of the 50 states is treated like a mini country.

The net net of this will be a massive capital drain from the entire country to New York where the big banks are concentrated. Local economies in the Midwest and the South will collapse for lack of funding. The West Coast will be OK with behemoth technology companies spinning off gigantic cash flows.

The other big story here is the dramatic change in the administration’s antitrust policy. Until now, it has opposed every large merger as an undue concentration of economic power. Then suddenly, the second largest bank merger in history took place on a weekend, and there will be more to come.

All it takes is a Twitter run by depositors. Every weekend has become a waiting game for the foreseeable future.

Needless to say, this makes all the big banks a screaming buy. Hoover up every one of the coming dip, including (JPM), (BAC), (C), and (WFC).

Big is beautiful.

To prove I am not perfect, my position in First Republic Bank (FRC) still sits on my broker statement a week after it filed for bankruptcy, dead, moribund, and worthless as if it is some form of punishment. It’s a very small position but it stings nonetheless.

It’s like they want to punish me for leading them astray. They have been copying my trades for ages without paying for them and I hope they took a big one in (FRC).

So far in May, I have managed a modest +0.55% profit. My 2023 year-to-date performance is now at an eye-popping +62.30%. The S&P 500 (SPY) is up only a miniscule +8.40% so far in 2023. My trailing one-year return reached a 15-year high at +120.45% versus -3.67% for the S&P 500.

That brings my 15-year total return to +659.49%. My average annualized return has blasted up to +48.86%, another new high, some 2.79 times the S&P 500 over the same period.

Some 40 of my 43 trades this year have been profitable. My last 20 consecutive trade alerts have been profitable.

I initiated no new trades last week, content to run off existing profitable ones. With the Volatility Index at a two-year low at 15.78%, opportunities are few and far between. Those include both longs and shorts in Tesla (TSLA), a long in the bond market (TLT), and a short in the (QQQ).

That leaves me with only one remaining position, a short-dated long in the bond market. I now have a very rare 90% cash position due to the lack of high-return, low-risk trades.

The Fed Raises Rates 0.25%, likely the last such move in this cycle. Futures markets are now discounting a 25-basis point CUT by September, the beginning of a new decade-long falling rate cycle. The problem is that AI is creating more jobs than it is destroying, keeping the Fed fixated on the wrong data.

Nonfarm Payroll Jumps by 253,000, another hot number. The headline Unemployment Rate dropped to a half-century low of 3.4%. These figures suggest for rate hikes to come.

The JP Morgan Buys First Republic Bank from the FDIC, for $10.6 billion, thus wiping out the shareholders. It’s a huge win for (JPM), which picked up 87 branches and $90 billion in loans in the wealthiest part of the country, taking the share up $5. What you lost on (FRC) you made pack on (JPM) LEAPS. Live and learn. On to the next trade! The FDIC got out for nearly free, a big win for the government.

Government Default Date Moved Up to June 1, by US Treasury Secretary Janet Yellen, smacking the bond market for three points. The House remains an albatross around the bond market’s debt.

Europe Ekes Out 0.1% Growth in Q1, versus a 1.1% rate for the US. This is despite the drag of the Ukraine War, energy shortages, high inflation, and Brexit. What’s the difference between the US and Europe? We allow immigrants who become customers, while the continent doesn’t.

You Only Need to Buy Seven Stocks This Year, as the rest are going nowhere. That include (AAPL), (GOOGL), (META), (AMZN), (TSLA), (NVDA), (CRM). Watch out when the next rotation broadens out to the rest of the market.

Is Volatility Bottoming Now? The Fed announcement of a 25 basis point hike on Wednesday could end the move up in stocks. After that, shares will only have an imminent debt default and US government downgrade to focus on. ($VIX) seven-week fade will end that revisit the old highs in the high $20’s. Great shorting opportunities are setting up.

Oil (USO) Crashes 5% on US debt default fears in the biggest drop since January. This is the worst asset class to own going into a recession. EV competition is also starting to take a bite. No gas needed here. $66 a barrel here we come.

More Tesla Price Cuts to Come, with swelling inventories forcing Musk’s hand. The only consolation is that Detroit will suffer more. Musk is cutting profits while the big three are accelerating losses. Tesla has excess inventory for the first time in its 20-year history.

 

Apple (AAPL) Earnings Beat, led by stronger than expected Q1 iPhone sales at $53.1 billion. EPS came in at $1.53 versus $1.42 expected, revenues at $94.84 billion versus $92.96. Mac and iPad sales are down YOY. Services rose 5.3%. Apple bought back a stunning $90 billion of its own shares and paid dividends. The shares popped $3. The long-term growth play here is low prices phone in India where second hand phone sales have been burgeoning. That's why Apple is now offering to buy your old phone. Next stop: New Delhi.

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, May 8 at 7:30 AM EST, the Consumer Inflation Expectations are out.

On Tuesday, May 9 at 6:00 AM, the NFIB Business Optimism Index is announced.

On Wednesday, May 10 at 11:00 AM, the US Inflation rate is printed.

On Thursday, May 11 at 8:30 AM, the Weekly Jobless Claims are announced. We also get the Producer Price Index.

On Friday, May 12 at 8:30, the University of Michigan Consumer Sentiment Index for April is released.  

As for me, I have been going down memory lane looking at my old travel photos looking for new story ideas and I hit the jackpot.

Most people collect postcards from their foreign travels. I collect lifetime bans from whole countries.

During the 1970s, The Economist magazine of London sent me to investigate the remote country of Nauru, one half degree south of the equator in the middle of the Pacific Ocean.

At the time, they had the world’s highest per capita income due to the fact that the island was entirely composed of valuable bird guano essential for agriculture. Before the Haber-Bosch Process to convert nitrogen into ammonia was discovered, guano was the world’s sole source of high grade fertilizer.

So I packed my camera, extra sunglasses, and a couple of pairs of shorts and headed for the most obscure part of the world. That involved catching Japan Airlines from Tokyo to Hawaii, Air Micronesia to Majuro in the Marshall Islands, and Air Nauru to the island nation in question.

There was a problem in Nauru. Calculating the market value of the bird crap leaving the island, I realized it in no way matched the national budget. It should have since the government owned the guano mines.

Whenever numbers don’t match up, I get interested.

I managed to wrangle an interview with the president of the country in the capital city of Demigomodu. It turns out that was no big deal as visitors were so rare in the least visited country in the world that he met with everyone!

When the president ducked out to take a call, I managed to steal a top-secret copy of the national budget. I took it back to my hotel and read it with great interest.

I discovered that the president’s wife had been commandeering Boeing 727s from Air Nauru to go on lavish shopping expeditions to Sydney, Australia where she was blowing $200,000 a day on jewelry, designer clothes, and purses, all at government expense. Just when I finished reading, there was a heavy knock on the door. The police had come to arrest me.

It didn’t take long for missing budget to be found. I was put on trial, sentenced to death for espionage, and locked up to await my fate. The trial took 20 minutes.

Then one morning I was awoken by the rattling of keys. My editor at The Economist, the late Peter Martin, had made a call and threatened the intervention of the British government. Visions of Her Majesty’s Navy loomed on the horizon.

I was put in handcuffs and placed on the next plane out of the country, a non-stop for Brisbane Australia. When I was seated next to an Australian passenger, he asked “Jees, what did you do mate, kill someone?” On arrival, I sent the story to the Australian papers.

I dined out on that story for years.

Alas, things have not gone well for Nauru in the intervening 50 years. The guano is all gone, mined to exhaustion. It is often cited as an environmental disaster. The population has rocketed from 4,000 to 10,000. Per capita incomes have plunged from $60,000 a year to $10,000. The country is now a ward of the Australian government to keep the Chinese from taking it over.

If you want to learn more about Nauru, which many believe to be a fictitious country, please click here.

As for me, I think I’ll pass. I don’t ever plan to visit Nauru again. Once lucky, twice forewarned.

Stay healthy,

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

 

 

 

 

 

 

 

 

 

 

 

 

Mad Hedge Fund Trader

The Market Outlook for the Week Ahead, or Preparing for the Next Liquidity Surge

,

When Elon Musk personally invited me to tour his Gigafactory in Sparks, Nevada, I thought, “How could I pass on this?” He had read my recent report on Tesla and thought the more I know about Tesla the better.

I couldn’t agree more.

As I approached the remote facility 20 miles east of Reno, I spotted a herd of wild Mustangs on the red volcanic hills above. I thought it was a great metaphor for our rapidly evolving transportation system, from horse to all-electric in 100 years.

There are no signs to the Gigafactory until you approach the main gate. I had to find it with my GPS after inputting longitude and latitude. When you upset the apple cart for the global energy system, you make a lot of enemies. Once in, no cameras are allowed.

What I found inside what much what I saw at the original Fremont, CA factory 15 years ago: an army of robots building machines. The factory is in effect a machine that makes machines….by the millions. Occasionally, a worker would swan past with an oil can in his hand and squirt some lubricant into an important joint, then swan away.

If you want a view of the future, this is it.

Elon does nothing small.

The present factory occupies about 2 million square feet, or about 33 football fields. Some 60% of the world’s lithium-ion batteries come out of this one place right now, which are devoted to Tesla Model 3’s and Powerwalls, of which I own six. Japan’s Panasonic, which has the contract to supply the batteries, occupies a substantial part of the factory space.

When completed, it will occupy 6 million square feet, making it the world’s largest building. The planet’s greatest solar array sits on top, making the entire facility energy neutral when combined with local windmills. The plant is fully automated and runs 24/7. There are still a few of those pesky humans around to perform complex tasks which robots can’t do….yet.

The State of Nevada just granted Tesla a ten-year tax holiday to start the second phase, which will employ another 5,000. Whole cities are being carved out of the virgin desert to accommodate them, so the entire city of Reno is rapidly marching east. Burger Kings, Taco Bells, Subways, and Chinese and Mexican restaurants are popping up in the middle of nowhere.

It's all coming into place to assure that Tesla meets its 1.8 million vehicle target for 2023, up 40% from 2022. The last time someone had a technology lead this great was in 1913 when Henry Ford launched assembly lines that mass-produced Model T’s for the first time. He offered them for $400 each and doubled his workers’ pay to $5 a day to buy them. This gave Ford a 75% share of the US car market for two decades.

Elon Musk will achieve the same.

Which all raises a much larger issue.

The future is happening far faster than anyone realizes.

Tesla is just the tip of the iceberg in an AI/automation trend that is rapidly taking over the world. The net effect will be to double or triple the value of the companies that embrace these trends and wipe out those that don’t. ALL companies are AI plays. This is a large part of my Dow 240,000 in a decade prediction.

Microsoft brought out its office in 1990 and it instantly made ALL companies more valuable as they adopted it. The Dow Average soared by 20 times from $600 to $12,000. The same thing is going on now with AI.

If it worked before it will work again. A 20-fold return from here takes the Dow Average from $34,000 to $680,000, except it will happen much more quickly as technology is hyper-accelerating. Dow 240,000 looks like a chipshot.

If you think this is some kind of George Lucas THX 1138 prediction, think again. These are headlines I saw in the last week.

FedEx (FDX) is firing 86,000 drivers, to be replaced by robots. Uber (UBER) is replacing its 5 million drivers with autonomous drivers to increase reliability and cut costs. Dentists adopting AI to read X-rays are catching the 12% of cavities they miss, increasing fillings and increasing profits.

I often get asked for great AI plays in the market and there are no direct ones. But in five years, companies like Microsoft’s (MSFT) ChatGPT and Alphabet’s (GOOGL) DeepMind Technologies will be spun off and sold at enormous multiples to the public, creating a frenzy.

I’ve seen it all before.

What does doubling or tripling the value of surviving companies do to the economy? It reliquefies the financial system with immense corporate cash flows. All asset classes will rocket in value, including stocks, bonds, commodities, precious metals, energy, and real estate.

While the 2010s had endless quantitative easing and zero interest rates, the 2020s will have AI and robots. Except that this time we won’t have to rely on government handouts to get there.

Suddenly, Dow 240,000 looks cheap.

I just thought you’d like to know.

My big bet-the-ranch long in banks and brokers paid off huge. My 2023 year-to-date performance is now at an incredible +49.57%. The S&P 500 (SPY) is up only a miniscule +8.42% so far in 2023. My trailing one-year return maintains a sky-high +106.31% versus -8.03% for the S&P 500.

That brings my 15-year total return to +646.76%, some 2.73 times the S&P 500 (SPY) over the same period. My average annualized return has blasted up to +48.51%, another new high.

I executed four trades last week. I used the spectacular earnings beat at (JPM) to take profits and rolled that money into Boeing (BA), which had just been trashed. I also took profits on my expiring April bond long (TLT) and rolled it into a May bond long. I will run my remaining expiring April long positions in (TSLA), (BAC), (C), (IBKR), (MS), (and FCX) into the Friday, April 21 expiration.

Inflation Takes a Dive, dropping to a 5.6% YOY rate, the ninth consecutive month of decline. I think we will fall to 3%-4% by yearend, prompting the Fed to lower interest rates. That will spark a new bull market and another leg up for residential real estate. It all more fodder for the bull case. Given what the Fed has been facing, a mild recession would be a huge win.

Fed Minutes Fear Banking Crisis May Lead to a Mild Recession, killing off today’s nascent rally. It will also hobble job growth and lead to sharp declines in interest rates in 2024. Markets now see a 75% probability of a 25-basis point rate hike on May 3.

FedEx Looking to Fire All Drivers, moving to autonomously driven delivery vehicles. It may take 20 years but it’s in the works. (FDX) has already cut 12,000 jobs since June in an effort to maintain profitability and surpass rival (UPS). In 2022, (FDX) took in $93.5 billion in revenues delivering 3 billion packages, 9 for each American. I received more than my share.

PC Sales Drop 29% YOY, in Q1, adding more ammunition to the recession camp. Apple Macs led the charge to the downside with a heart-thumping 40% decline. The news slugged (AAPL). Only 56.9 million PCs we sold during the last quarter. Even with heavy discounting inventories remain high. Amazing, isn’t it?

Tesla Cuts Prices Again, knocking $3,000 off the Model 3 and $5,000 for the Model X. That sets the cat among the pigeons with traditional car companies desperately trying to catch up. Tesla is simply passing on the 50% drop in lithium prices this year. If they flush competitors out of business in the meantime so much the better. Ford has ordered designers to cut the number of parts by 80%, which Tesla did 14 years ago. (F) and (GM) are just too slow to react, even when the writing is on the wall.

$1.5 Trillion in Commercial Real Estate Debt coming due is a Threat to all asset classes. Refi’s are coming due that will double or triple interest rates from the zero-rate era and many won’t qualify. The sector is already being hammered by the “stay-at-home” work trend, with big tech firms virtually vacating whole office building in San Francisco. Regional banks may no longer have the capital to roll over at any prices given recent massive deposit withdrawals. Avoid commercial real estate REITS.

Banks Shares Explode to the Upside. JP Morgan announced blockbuster earnings, taking the stock up a ballistic $11, or 8.6%. Revenues came in at $39.34 billion versus an expected $36.19 billion. Adjusted EPS was $4.32 a share versus an expected $3.41. It is the biggest gap up in share prices on an earnings announcement in 20 years. As a result, we are just short of the maximum profit in our long (JPM), with the shares up an eye-popping 21% from the nearest strike price.

PPI Gives Another Deflation Hint, dropping a shocking 0.5% in March to only a 2.7% YOY rate. That’s a big drop from 4.9% in February. It’s the lowest inflation indicator in two years. Stocks loved the news, jumping $383. Low inflation, and therefore sharp interest rate cuts are coming within reach.

Boeing Goes Back in the Penalty Box, with a recurring bulkhead problem halting 737 MAX production. The stock dumped 8%. Buy (BA) on the dip. They’ll fix it. The company has a massive order backlog of 4,000 planes and will crush it on the earnings. The 737 MAX will shortly be flying again, the company’s largest selling product. With the airline business booming a global aircraft shortage has emerged. The end of the trade wars with China will bring a resurgence of orders there. And Boeing just surpassed Airbus in aircraft deliveries in Q1

Weekly Jobless Claims Jump 11,000 to 239,000, showing that the Fed’s harsh medicine is starting to work. It’s all consistent with a stock market that may start to roll over soon.

Private Sector Payrolls Slow to 145,000, according to ADP, a substantial drop from the previous month. Financials took the big hit with a loss of 51,000 jobs, followed by Business Services at 46,000. Leisure & Hospitality leads again with a 98,000 gain. It is more evidence of the economic slowdown the FED has been attempting to engineer for the past year.

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 17 at 7:30 AM EST, the New York State Manufacturing Index is out.

On Tuesday, April 18 at 6:00 AM, the US Building Permits are announced.

On Wednesday, April 19 at 11:00 AM, the Fed Beige Book is printed.

On Thursday, April 20 at 8:30 AM, the Weekly Jobless Claims are announced. Existing Home Sales are out.

On Friday, April 21 at 8:30 AM, the Global Composite Flash PMI is released. We also get the April options expiration at the 4:00 PM stock market close.

As for me, I don’t get invited to help design new nuclear weapons systems very often. So when the order came from Washington to report to Los Alamos, New Mexico, I was on the next plane.

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 scientists would go to work for Libya, North Korea, or Pakistan, which all had active nuclear programs. There ended up here instead.

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.

Before they started, they launched a nationwide search for those who were still alive and had nuclear expertise the last time we made our own plutonium, and they came up with….me?

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 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 20’s and 30’s, 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. Suddenly, I had an entire room of young scientists who were fair game, and it was fun relaying stories, they hung on my every word. It was like being a Revolutionary War buff and out of the blue you meet someone who knew George Washington.

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.

As a reward for my efforts, I was allowed to visit the Trinity site at the White Sands Missile Test Range, the first visitor 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 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 the 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 78 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.

I know the numbers, but I can’t tell you as they are classified. Otherwise, I’d have to kill you and you might not renew your subscription to Mad Hedge Fund Trader.

Good Luck and Good Trading,

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

 

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

 

 

 

 

 

 

 

 

Mad Hedge Fund Trader

April 10, 2023

, ,

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.

Mad Hedge Fund Trader

The Market Outlook for the Week Ahead, or Mad Hedge Clocks 46.38% Profit in Q1

,

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

 

 

 

 

 

 

 

 

Mad Hedge Fund Trader

March 27, 2023

, ,

Global Market Comments
March 27, 2023
Fiat Lux

Featured Trade:

(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE BANKING CRISIS IS OVER),
(SPY), (TLT), (SCHW), (NFLX), (CS), (GLD), (USO), (BRK/B), (TSLA), (BAC), (C), (JPM), (IBKR), (MS)

 

CLICK HERE to download today's position sheet.

Mad Hedge Fund Trader

The Market Outlook for the Week Ahead, or The Banking Crisis is Over

,

I think it is safe to say that the banking crisis is now in the market. You saw this in the ritual Friday selloff of bank stocks, which last week made back two-thirds of its losses by the end of the day.

Treasury Secretary Janet Yellen has made it clear that she will use her emergency authority to bail out the depositors of any US banks and leave the shareholders drifting in the wind. That’s OK as long as failures happen in ones and twos and not hundreds.

So after this coming dead, data-less week, we may launch into a serious rally next month, often the strongest of the year, back up to the top of the recent trading range. After that, it will be time to “Sell in May and go away,” and not come back until an interest rate collapse is imminent.

Personally, I have suites on the Queen Mary II and the Orient Express waiting for me. How about you?

And what happens when a crisis winds down? The need for protection ebbs as well. That means that big tech stocks with large balance sheets which had a great March will be due for a rest.

You see this in other flight-to-safety assets, like gold (GLD), which gave up some of its recent gains.

Given the failure of the Volatility Index ($VIX) to maintain a sustainable rally this year, it is clear that something important has changed in that market. That would be same-day options, which are stealing the thunder of the old ($VIX).

Instead of panicking and buying the ($VIX) at market, hedge fund algorithms are now programmed to buy individual same-day stock put options. That vastly increases the volatility of single stocks, with one day 10%-15% moves becoming normal.

When a piece of bad news erupts about the banking system, same-day put options across the entire sector rocket, regardless of whether any individual bank is having problems or not.

Needless to say, as ($VIX) opportunities fade, spectacular new trades are opening up in single stocks which Mad Hedge is happily taking advantage of. As a result, the profitability of our trading strategy has near doubled. This has produced the blowout numbers which I list below.

When panic put buying tanks a stock, we pile on call spreads, as we did two weeks ago with many bank and broker stocks. When fears of recession drive bond prices insanely high, we buy (TLT) put spreads.

Buy low, sell high, it’s my new investment strategy. I’m thinking of patenting it.

With some of the most extreme volatility of the year, Mad Hedge continued on up tear, with March up an eye-popping +12.52%.

My 2023 year-to-date performance is now at an incredible +38.28%. The S&P 500 (SPY) is up a miniscule +0.77% so far in 2023. My trailing one-year return maintains a sky-high +95.52% versus -10.23% for the S&P 500.

That brings my 15-year total return to +635.47%, some 2.8 times the S&P 500 (SPY) over the same period. My average annualized return has recovered to +48.26%, another new high.

I executed only two trades last week, content to leave alone my remaining eight positions that are profitable. I used a bond selloff to take profits with my bond short (TLT). A frenetic 25% rally prompted me to close out my long in Charles Schwab (SCHW) as we were nearing our maximum profit.

Fed Raises Interest Rates 25 basis points, to an overnight range of 4.75% to 5.00%, a 15-year high. But it left the door open to a further 25 basis points on May 3. The statement substantially weakened the prospect for future interest rate hikes, a de facto pause. Stocks loved the move, especially brokerage and technology stocks. Powell said the US banking system is sound and announced further support measures for small banks.

Yellen to Guarantee Deposits if More Banks Fail, which traders are taking to the bank as a nationwide government backstop. That explains the ballistic moves in financials yesterday. Today, Fed governor Jay Powell plays his hand.

Will the Banking Crisis End the Bear Market? I think so, as a drop in interest rates is the only possible solution. The Fed may have to guarantee all US bank deposits for a year to get there. Bank and technology stocks certainly think so, which have been on a tear this week.

Fed Window Increases By $94 Billion on the Week, and $400 billion in two weeks, in its so far successful effort to float the banking system. Some $60 billion went to foreign borrowers. It has to be viewed as a positive and the emergency need for funding is declining.

Netflix (NFLX) Soars 10%, by ending password sharing in Canada. The United States is expected to be next. The move is expected to boost paid subscriptions. I took profits on my long in (NFLX).

Oil (USO) Dives 1%, as the US energy secretary says it may take “years” to refill the Strategic Petroleum Reserve. How about never?

Existing Home Sales Soar 14.5% in February, a three-year high on a signed contract basis. The annualized rate was 4.58 million according to the National Association of Home Builders. Inventories shrink to an incredible 2.6 months or 980,000 homes. The median home prices fell 0.2% to $363,000, the first decline in 11 years. The sharp drop in interest rates last week will further turbocharge sales. Cash sales were 28% of total sales.

Gold (GLD) Tops $2,000 an Ounce, as the flight to safety bid continues. Lower interest rates sooner will also provide less yield competition for precious metals. Silver will provide the higher beta from here, as it always does.

UBS Buys Credit Suisse (CS) for $3.25 Billion, less than half of where it traded on Friday, eliminating another threat to the global financial system. It looks like there were $5 billion in hidden trading losses. Some $17 billion in lower tier bonds were written down to zero, which several US bond funds like Pimco owned. The deal includes a sweetheart $100 billion loan facility from my friends at the Swiss National Bank. The forced marriage will create one of the largest banks in Europe. Some 9,000 CS jobs will get axed.

Berkshire Hathaway Steps up Share Buybacks, totaling $1.8 billion in 2022. The three-year total is an incredible $60 billion. It explains why (BRK/B) was unchanged in an otherwise horrific year. Buffet still holds a stunning $147 billion in cash, most of which is invested in US Treasury short terms bills.

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, March 27 at 7:30 AM EST, the Dallas Fed Manufacturing Index is out.

On Tuesday, March 28 at 6:00 AM, the S&P Case Shiller National Home Price Index is announced.

On Wednesday, March 29 at 7:00 AM, the Pending Home Sales for February are printed.

On Thursday, March 30 at 8:30 AM, the Weekly Jobless Claims are announced. The final read on Q4 GDP is disclosed.

On Friday, March 31 at 8:30 AM, the Personal Income & Spending are released.

As for me, not a lot of people get a chance to board a WWII battleship these days. So when I got the chance, I jumped at it.

As part of my grand tour of the South Pacific for Continental Airlines in 1981, I stopped at the US missile test site at Kwajalein Atoll in the Marshall Islands, a mere 2,000 miles west southwest of Hawaii and just north of the equator.

Of course, TOP SECRET clearance was required and no civilians are allowed.

No problem there, as clearance from my days at the Nuclear Test Site in Nevada was still valid. Still, the FBI visited my parents in California just to be sure that I hadn’t adopted any inconvenient ideologies in the intervening years.

I met with the admiral in charge to get an update on the current strategic state of the Pacific. China was nowhere back then, so there wasn’t much to talk about in the wake of the Vietnam War.

As our meeting wound down, the admiral asked me if I had been on a German battleship. “It’s a bit before my time,” I replied. “How would you like to board the Prinz Eugen?" he responded.

The Prinz Eugen was a heavy cruiser, otherwise known as a pocket battleship built by Nazi Germany. It launched in 1938 at 16,000 tons and with eight 8-inch guns. Its sister ship was the Admiral Graf Spee, which was scuttled in the famous Battle of the River Platte in South America in 1939.

Early in the war, it helped sink the British battleship HMS Hood and damaged the HMS Prince of Wales. The Prinz Eugen spent much of the war holed up in a Norwegian fjord and later provided artillery support for the retreating German Army on the eastern front. At the end of the war, the ship was handed over to the US Navy as a war prize.

The US postwar atomic testing was just beginning so the Prinz Eugen was towed through the Panama Canal to be used as a target. Some 200 ships were assembled, including those from Germany, Japan, Britain, and even some American ships deemed no longer seaworthy like the USS Saratoga. One of the first hydrogen bombs was dropped in the middle of the fleet.

The Prinz Eugen was the only ship to remain afloat. In the Navy film of the explosion, you can see the Prinz Eugen jump 200 feet into the air and come down upright. The ship was then towed back to Kwajalein Atoll and put at anchor. A typhoon came later in 1946, capsizing and sinking it.

It was a bright at sunny day when I pulled up to the Prinz Eugen in a small boat with some Navy divers. There was no way the Navy was going to let me visit the ship alone.

The ship was upside-down, with the stern beached to the bow in 300 feet of pristine turquoise water. The propellers had recently been sent off to a war memorial in Germany. The ship’s eight cannons lay scattered on the bottom, falling out of their turrets when the ship tipped over.

The small part of the Prinz Eugen above water had already started to rust through. But once underwater it was like entering a live aquarium.
 A lot of coral, seaweed, starfish, and sea urchins can accumulate in 36 years and every inch of the ship was covered. Brightly tropical fish swam in schools. A six-foot mako shark with a hungry look warily swam by.

My diver friends knew the ship well and showed me the highlights to a depth of 50 feet. The controls in the engine room were labeled in German Fraktur, the preferred prewar script. Broken dishes displayed the Nazi swastika. Anti-aircraft guns frozen in time pointed towards the bottom. No one had been allowed to remove anything from the ship since the war, and in the Navy, most men follow orders.

It was amazing what was still intact on a ship that had been blown up by a hydrogen bomb. You can’t beat “Made in Germany.” Our time on the ship was limited as the hull was still radioactive, and in any case, I was running low on oxygen.

A few years later the Navy banned all diving on the Prinz Eugen. Three divers had gotten lost in the dark, tangled in cables, and downed. I was one of the last to visit the historic ship.

I checked with my friends in the Navy and the Prinz Eugen is still there, but in deteriorating condition. When the ship started leaking oil in 2018 and staining the immaculate beaches nearby, the Navy launched a major effort to drain what was left from the 80-year-old tanks. No doubt a future typhoon will claim what is left.

So if someone asks if you know anybody who’s been on a German battleship, you can say “Yes,” you know me. And yes, my German is still pretty good these days.

Vielen dank!

Good Luck and Good Trading,

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

 

The Prinz Eugen in 1940

 

The Prinz Eugen Today

 

 

 

 

 

 

Legal Disclaimer

There is a very high degree of risk involved in trading. Past results are not indicative of future returns. MadHedgeFundTrader.com and all individuals affiliated with this site assume no responsibilities for your trading and investment results. The indicators, strategies, columns, articles and all other features are for educational purposes only and should not be construed as investment advice. Information for futures trading observations are obtained from sources believed to be reliable, but we do not warrant its completeness or accuracy, or warrant any results from the use of the information. Your use of the trading observations is entirely at your own risk and it is your sole responsibility to evaluate the accuracy, completeness and usefulness of the information. You must assess the risk of any trade with your broker and make your own independent decisions regarding any securities mentioned herein. Affiliates of MadHedgeFundTrader.com may have a position or effect transactions in the securities described herein (or options thereon) and/or otherwise employ trading strategies that may be consistent or inconsistent with the provided strategies.