Hi Again,

Did you see our scorecard? In January 2023, we had a gain of 20.35% ! Almost a 25% net gain since 11/1/22! We have been in a bear market for about 18 months. Nine months ago, when Netflix crashed, all the Wall Street pundits advised us to keep away from Netflix but I purchased Netflix for our portfolio and now in 9 months, Netflix is up by 85.89%! On my personal account, over the past few months I lost some money on my bond/stock “shorts” (put options) but that was more than offset by my gains on my stocks. As I have been advising, when a “good” stock “crashes”( about 50%), it is a good time to start buying (“nibbling”) and as those go downward, you keep buying more to make use of dollar cost averaging. What stocks belong to this category? Meta/FaceBook, AMD, Netflix, Tesla qualify.  On 11/3/22, Meta/Facebook bottomed but I start buying it on my personal account on 10/27/22, and on 2/4/23, I have a paper gain of 90% in 109 days! All the Wall Street experts pessimistic on Meta last Fall! I bought some Nividia on 10/2/22 and now my gain is 80%. NVDA ended at $211 on 2/3/23. NVDA was at $315 14 months ago. On my personal account, for the first time I bought TESLA on 1//3/23 and as of 2/3/23; in 1 month, I have a gain of 79%!

I am a contrarian. The US dollar (USD) has been going down since 10/9/22 (US dollar ETF: UUP) and all experts say that the USD will continue to decline. I disagree. This is a good time to bet that the dollar will rally soon. On 2/3/23, I bought some CALL options on the UUP (expiring 1/19/24 with a strike price of $30) for a price of $60 per contract. 1 contract = 100 stocks. On 10/9/22, UUP was at $30. The US dollar has gone down excessively against some currencies. If Feds keep raising rates, the USD will go up. When Democrats are in the White House, USD gets stronger; and the opposite happens with Republicans in the White House.

At most times, markets act irrationally but that create long term opportunities. Our task is to take advantage of those opportunities not seen by most. One of the most famous stock/bond market cliches is “don’t fight the federal reserve”. But the bond market has a cliché of its own- “Feds give the signal when they will raise rates and the bond market gives the signal when to lower rates”. When an economic expansion is needed, the Federal Reserve lower rates. Then due to lower mortgage rates, there is a boom in housing and that is followed by a boom in durable goods etc. When the Federal Reserve raise rates, they expect the opposite. However, as I have been stating in previous editions, as the Feds increase rates, “bond kings” have been lowering the yields; and mortgages are connected to these bond yields. Finally, what I have been saying can be seen in the economy. On 1/11/23, CNBC reported that in December 2022, mortgage demand surged as home owners took advantage of lower mortgage rates (due to lower bond yields).  The average rate for a 30 year fixed mortgage decreased during the first week of January to 6.42% from 6.58%. If the Federal Reserve listen to Professor Siegel and the “bond kings” and lower rates, we are not going to keep inflation under control for long. Most probably the Federal Reserve will listen to those experts and create a 1970s style economy. Take a look at the ETF “ITB” which tracks home builders; it has been rising since June 2022. Even though many pundits talk as if inflation is headed towards the 2% desired by the Feds, there are many signs to show that inflation will rise again soon. A few months ago, as the world expected a recession in the US and Europe, oil prices went down. People took that as an indication that inflation is going to go down. What happened since then? Not only oil prices went up in the commodity markets, oil prices even went up at the pump! Not only oil, most commodities and commodity stocks rallied. Europe was expected to have a severe recession in 2023, but now the IMF states that only UK will have negative GDP growth in 2023. China is supposed to open up soon which will lead to more inflation. Why is the Federal Reserve dumping more than $95 Billion from their bloated $8 Trillion balance sheet?  Per bond manager, Nancy Davis, the amount Feds increased (balance sheet) exceeded the amount they had done for the prior 9 years! As CNBC’s senior economics reporter, Steve Liesman reports on all aspects of the economy, including the Federal Reserve and major economic indicators. Steve has a nice example to show why the Feds do not want expedite the process of reducing the balance sheet even as the Bond gurus lower the yield; Steve compares the Feds balance sheet to Godzilla in a cage and as long as Godzilla is in the cage, everyone is safe but the Feds have no idea what might happen if that Godzilla gets out of the cage! Excellent example! No guts, no glory! Prior to 2/3/23, even Jim Cramer was saying that the Feds should reverse course as inflation is coming down but 2/3/23 changed all that! The US government announced a “blowout job report”. Non-farm payroll was expected to go up by 187,000 but it went up by 517,000. Jim Cramer stated, “ People who thought that the Feds should think about cutting rates are crazy! Rates need to go higher until the labor market slows down”!

There is another choice; as the Fed Chair Powell has been suggesting, we could open our doors to new immigrants and that will help but the Republican Party and Fox News will not allow that to happen. Some say that this is not like the 1970s. In some ways, it is not but inflation is a big threat. Have you heard of the Phillips Curve? What Is the Phillips Curve? The Phillips curve is an economic theory that inflation and unemployment have a stable and inverse relationship. Developed by William Phillips, it claims that with economic growth comes inflation, which in turn should lead to more jobs and less unemployment. In economics, “full employment” is not when no one is unemployed. Full employment is the lowest unemployment rate that we could have with very limited inflation. In the 1970s, it was about 5%-6%. Then the US economy got very efficient; and we had an unemployment rate under 4% with no inflation. Due to the aging of the US labor force, economists state that we need to open up to more immigrants to have an annual growth rate of  5%. If not, the Feds will have to raise rates to destroy inflation.

Mohamed Aly El-Erian is an Egyptian-American economist and businessman. He is President of Queens' College, Cambridge, and chief economic adviser at Allianz, the corporate parent of PIMCO where he was CEO and co-chief investment officer. On 1/10/23, Mohamed stated “ We need to get out of these distorted markets (stocks and bonds)”. I will not go that far. We need to watch for trading and investment opportunities.

The bond market and most bond gurus expect interest rates to decline during the latter half of 2023 but I was shocked to hear that the “bond king” Gundlach predict that interest rates will go higher during the latter half of 2023. The US yield curve is inverted (short term ones have a higher yield than the long-term ones) and for the first time in history, the Global Yield Curve is inverted. For most pundits, this is an indication that we are headed towards a recession.  I am not too sure. Even if we have a recession, it could be a mild one. According to Gundlach, most of the selling during the latter part of 2023 (bonds and stocks) was due to tax selling and as expected it all came back in early 2023.

For the past 12 months, all Wall Street experts were saying that consumers have a lot of money so banks will not have trouble in the future. At that time, I was wondering if the people with big cash balances were different from the people who were carrying most of the debt. When markets go down, that can have a major impact even on the wealthy. Jim Cramer was saying that in 2022, the Feds had to provide extra security to the officers of the Federal Reserve due to the death threats they were getting from the public. Anyway, there are so many unrealistic conspiracy theories about the Federal Reserve on social media.  Suze Orman, a former vice-president of investments and Prudential-Bache, heads her own financial planning firm, is a columnist for Self magazine. Recently, on CNBC “Fast Money”, Suze was saying that most people in the US are having major financial problems -mainly with debt. With the crazy stock market going up for years and with all the cash provided by the Federal Reserve and stimulus checks ($5 Trillion), people were buying expensive gas-guzzling cars on debt. We are sure to see bad debt losses for many banks and companies in the future. Did you think the rich would be spared? When all bank experts believed that even if all major banks get in to trouble, Goldman Sachs (that cater to the rich), would be spared. Then on 1/17/23, Goldman Sachs reported big loan losses! Profits dropped 69% in one year!

Wall Street gurus like Jim Cramer try to predict the cause of the next crash as crashes happen only when the unexpected happen. Jim Cramer has been saying that when China (PRC) invades Taiwan, we will see the next market crash. Now that the Republicans have a slim margin in the US House, they are threatening to default on the US Debt if the Biden Administration does not agree to severe cuts in Social Security and Medicare. How about tax increases for the rich (those earning over $400K per year as Biden suggested)? For 60+ years it was considered to be suicidal to talk about social security reductions. Trump gave a huge tax cut for companies and stated that it will be used for economic expansion and hiring but years later even Trump agreed that 99% of that went for stock buybacks. CEO pay packages are dependent on stock performance so this is no surprise. On 2/6/23, Biden proposed quadrupling of taxes on stock buybacks. Republican party is complaining about the budget deficit and the debt level. Since World War 2, one and only time we had a budget surplus was when Bill Clinton was President; but the process was started by Herbert W Bush. He went back on his word (“Read my lips”) for the sake of the country.  The US budget deficit for 2022 was $85 Billion and it was $21 Billion for 2021. Just from 1/1/22 to 6/30/22, companies spent $501 Billion (half a trillion) in buybacks!  In 2021, $880 Billion was spent on stock buybacks! These stock buybacks do almost nothing good for the economy. This is just “financial engineering”. There should be a 100% to 1,000% tax on stock buybacks. Apple alone buybacks about $100 billion in stocks each year.

We could have fireworks in the markets in 2023. That is good. Just keep an eye out for opportunities. “Fish in troubled waters!”

Have a great month!

Fernando