The Market Outlook for the Week Ahead, or Don’t Fight the Bubble

We are in a liquidity-driven market; there is no doubt about it.

You can forget about tedious fundamentals, research, price earnings multiples, and GDP reports. They are a waste of time. As long as there is more money going into the market than coming out, prices will rise.

The new just passed budget bill has the government borrowing $1.2 trillion to enable companies to buy back their own shares. That is on top of the $1.2 trillion of buybacks they were already executing, taking the total up to an eye-popping $2.4 trillion. That is a lot of stock buying.

And it isn’t just any old companies that are buying their own shares. The Magnificent Seven will account for the lion’s share of this, which explains why they have nearly doubled in the last three months. The top buyback companies so far this year are Apple (AAPL), Alphabet (GOOGL), Meta (META), Nvidia (NVDA), Microsoft (MSFT), ExxonMobile (XOM), and Wells Fargo (WFC).

This also explains why the stock market has failed to have any meaningful correction in three months, which a normal market should have. We are just getting flat lines followed by new legs up, even though the legs are getting shorter and shorter.

Liquidity-driven markets can go on for a long time and always last longer than you expect. I have traded through quite a few of them. During the early 1970’s we thought the Nifty 50 would go up forever. We had such great companies like IBM, Eastman Kodak, and Texas Instruments, how could we not?

In 1987, the Palace accords cut the legs out from under the Japanese economy, paving the way for an export killing 400% appreciation of the Japanese yen. But the Nikkei rose for three more years until a 32-year bear market kicked in.

And the Dotcom bubble? That was one heck of a liquidity-driven market. If a tech stock, or anything with the term “.com” in its name, it was proof that you had to buy more….until you got wiped out.

A lot will depend on tariffs.

The president’s strategy seems to be “agree to higher tariffs or I will jump off this cliff. The rest of the world is responding, “OK, jump off the cliff and we’ll watch.” Then the deadline comes and goes, and we get an extension. This has happened twice since the trade war started five months ago. How many trade deals have been signed during this time?

Zero.

In the meantime, companies are rushing to ship in as many goods as they can before punitive tariffs kick in. Apple has admitted to bringing in Boeing 747s full of iPhones from China and India. This is why government tariff revenues have hit all-time highs three months running. June alone was $27 billion. The record for a full year is $100 billion.

Eventually, higher tariffs kick in. Then imports will decline precipitously, and the drag on the economy accelerates. Will stocks care? I have no idea. Market bottoms are easy to spot as conventual valuation measures are clearly definable. In 2009, the S&P 500 bottomed at a price earnings multiple of 9.5X. We are now at 23X.  Market tops are impossible to quantify, as greed knows no bounds. The price-earnings multiple for NASDAQ (QQQ) in 2000? 100X.

Another drag on the economy is the resumption of student loan repayments. This will remove 43 million consumers from the economy because it will eat up their disposable income. Their payments have been suspended since the Pandemic. The new 2025 budget resumes collections as part of the administration’s wide-ranging war against higher education.

Student loans at $1.8 trillion are now the single largest source of consumer borrowing, exceeding credit cards ($1.2 trillion) and auto loans ($1.64 trillion). Some 21% of student loans are now in default. They grew from 10% of consumer debt in 2010 to 33% by 2020.

The market is pricing in a rose garden. We may get a weed patch.

After watching same-day options take over the market with my mouth hanging open like everyone else, I thought I would give it a try. This is in full knowledge that 80% of these expire worthless. Hedge funds like Citadel can’t write them fast enough and, in fact, bought Morgan Stanley’s options trading department to increase this business. The New York Times ran a story last week about addictions to same-day options that completely wipe out life savings. Wives are divorcing husbands to protect their own retirement fund.

Midday Friday, the (SPY) rallied up to $625.60. I expected bad news to come out over the weekend (it always does). So I bought the $625 put options for 40 cents, which expired four hours later. Incredibly, I was able to control $62,500 worth of S&P 500 for four hours for just $40, an implied leverage of 1,562.5 times! That puts futures contracts to shame! The (SPY) closed at 4:00 PM EST at $225.40, so I figured I lost my $40.

And hour after the market closed, tariffs of 50% were announced for Brazil, and 35% for Mexico and Canada. On Saturday morning, I opened my brokerage statement and learned to my surprise that I was short 100 shares of the S&P 500. Someone had exercised their $625 puts during the after-market between 4:00 PM and 4:15 PM when (SPY) tanked. On Sunday evening at 6:30 PM EST, the futures traded down to $622. First thing Monday morning, I sold my one contract for $622.20 for a new profit of $240, a gain of 600%!

It is easy to see how the handful of people who understand this market make fortunes, and the ones who don’t get completely wiped out.

Call it beginner’s luck, but I think I’m getting addicted.

My July performance started off with a bang, with a +2.40% gain, taking us to new all-time highs on all metrics. That takes us to a year-to-date profit of +47.57%. My trailing one-year return exploded to a record +100.45%. That takes my average annualized return to +51.30%, and my performance since inception to +799.46%. These are all non-compounded numbers.

It was a totally dead week of desultory summer trading. That leaves me 70% cash, 20% short Tesla (TSLA), and 10% long (AMG). With the Volatility Index hugging the $16 handle, we may be entering a trade drought.

Some 63 of my 70 round trips in 2023, or 90%, were profitable. Some 74 of 94 trades were profitable in 2024, and several of those losses were really break-even. That is a success rate of +78.72%.

Try beating that anywhere.

My Ten-Year View – A Reassessment

We have to substantially downsize our expectations of equity returns in view of the election outcome. My new American Golden Age, or the next Roaring Twenties, is now looking at multiple gale-force headwinds. The economy will completely stop decarbonizing. Technology innovation will slow. Trade wars will exact a high price. Inflation will return. The Dow Average will rise by 600% to 240,000 or more in the coming decade. The new America will be far more efficient and profitable than the old. My Dow 240,000 target has been pushed back to 2035.

The June Nonfarm Payroll Wasn’t So Hot. Half of the 147,000 gains were government jobs, and only 74,000 were from the private sector, a quarter of what they were a year ago. The Headline Unemployment Rate dropped 0.1% to 4.1%. Some 590,000 fill-time jobs have been lost since the beginning of 2025. ADP is probably more accurate, down 33,000 for the month, what you would expect in the middle of a recession.

Nvidia Tops $4 Trillion Market Cap. Yes, the tiny company we recommended 15 years ago at a split-adjusted $2 a share is now the world’s most valuable company. Mad Hedge has just raised its target from $180 to $200. What is the next Nvidia? Watch this space.

Weekly Jobless Claims Fell during the Shortened July 4^th week. Initial claims decreased by 5,000 to 227,000 in the week ended July 5. Continuing claims, a proxy for the number of people receiving benefits, rose to 1.97 million in the previous week, still the highest since late 2021.

Clothing Imports from China Hit 22-Year Low, with tariffs killing off the business at a record rate. The US imported $556 million worth of clothing from China in May, down from $796 million in April – data. US apparel imports from Mexico rose 12% in May from the year earlier – data. Maybe one million small US retailers will get killed off by tariffs.

Copper Hits New All-Time High on 50% Tariff. Copper is the latest industry to be targeted under sector-oriented tariffs applied under Section 232 of a 1960s trade law. Already, Trump has applied such sector tariffs on imports of autos, steel, and aluminum. There are other sector tariffs still pending, including for lumber, pharmaceuticals, and semiconductors. The Section 232 tariffs have been a sticking point in some of the trade negotiations with other countries. Here comes the inflation!

Used Car Prices Surge, as tariffs still drive imported car prices through the roof. A gauge of U.S. used vehicle prices sold at wholesale auctions that proved predictive ahead of the inflation surge following the COVID pandemic is climbing again, last month notching its largest annual increase in nearly three years. The Manheim Used Vehicle Value Index rose 1.6% in June from May on a seasonally adjusted basis and surged 6.3% from a year earlier, the largest year-over-year increase since August 2022, according to data released on Tuesday. At 208.5, the index has been trending upward for a year and is now at its highest since October 2023.

Historic Market Concentration Bodes Ill for Future Gains. Since 1972, the S&P 500 has posted below-average returns over the next one, three, six, and 12 months when new records were made with fewer than 100 stocks on the New York Stock Exchange also posting highs

Immigration Crackdown to Cut US GDP by 1.0%, according to a Federal Reserve study, and the trade war will cost another 1.0%. The US population is shrinking for the first time since the Pandemic, which means fewer customers for businesses and fewer income earners. Fewer border crossings — not deportations — are the biggest driver of the hit to growth, the researchers found, accounting for 93% of the projected GDP reduction. 2025 is a write-off, but are we looking at four years of recession?

US Drillers Cut Rigs for 10^th Week, or the first time since July 2020, thanks to a global oil glut. The oil and gas rig count declined by about 5% in 2024 and 20% in 2023 as lower U.S. oil and gas prices over the past couple of years prompted energy firms to focus more on boosting shareholder returns and paying down debt rather than increasing output.

OPEC Increases Production by 550,000 Barrels a Day. The group, which pumps about half of the world’s oil, has been curtailing production since 2022 to support the market. The production boost will come from eight members of the group – Saudi Arabia, Russia, the UAE, Kuwait, Oman, Iraq, Kazakhstan, and Algeria. The eight started to unwind their most recent layer of cuts of 2.2 million bpd in April. The August increase represents a jump from monthly increases of 411,000 bpd OPEC+ had approved for May, June, and July, and 138,000 bpd in April.

Tesla Dives 10%, as Elon Musk reenters politics. Musk said Saturday that the party would be called the “America Part” and could focus “on just 2 or 3 Senate seats and 8 to 10 House districts.” He suggested this would be “enough to serve as the deciding vote on contentious laws, ensuring that they serve the true will of the people.” The billionaire’s involvement in politics has been a point of contention for investors. Keep your double short in (TSLA).

On Monday, July 14, is Bastille Day. All markets in France are closed.

On Tuesday, July 15, at 7:30 AM EST, the Consumer Price Index for June is announced.

On Wednesday, July 16, at 8:30 AM EST, we get the Producer Price Index.

On Thursday, July 17, we get Weekly Jobless Claims. We also get US Retail Sales.

On Friday, July 18, at 8:30 AM EST, we get Housing States and Building Permits.

As for me, when I was shopping for a Norwegian fjord cruise a few years ago, each stop was familiar to me because a close friend had blown up bridges in every one of them.

During the 1970s at the height of the Cold War, my late wife Kyoko flew a monthly round trip from Moscow to Tokyo as a British Airways stewardess. As she was checking out of her Moscow hotel, someone rushed up to her and threw a bundled typed manuscript that hit her in the chest.

Seconds later, a half dozen KGB agents dog piled on top of Kyoko. It turned out that a dissident was trying to get her to smuggle a banned book to the West. She was arrested as a co-conspirator and bundled away to the notorious Lubyanka Prison.

I learned of this when the senior KGB agent for Japan contacted me, who had attended my wedding the year before and filmed it. He said he could get her released, but only if I turned over a top-secret CIA analysis of the Russian oil industry.

At a loss for what to do, I went to the US Embassy to meet with Ambassador Mike Mansfield, whom, as The Economist correspondent in Tokyo, I knew well. He said he couldn’t help me as Kyoko was a Japanese national, but he knew someone who could.

Then in walked William Colby, head of the CIA.

Colby was a legend in intelligence circles. After leading the French resistance with the OSS, he was parachuted into Norway with orders to disable the railway system. Hiding in the mountains during the day, he led a team of Norwegian freedom fighters who laid waste to the entire rail system from Tromso all the way down to Oslo. He thus bottled up 300,000 German troops, preventing them from retreating home to defend from an allied invasion.

During Vietnam, Colby became known for running the Phoenix assassination program. It was wildly successful.

I asked Colby what to do about the Soviet request. He replied, “Give it to them.” Taken aback, I asked how. He replied, “I’ll give you a copy.” Mansfield was my witness, so I could never be arrested for being a turncoat.

Copy in hand, I turned it over to my KGB friend, and Kyoko was released the next day and put on a flight out of the country. She never took a Moscow flight again.

I learned that the report predicted that the Russian oil industry, its largest source of foreign exchange, was on the verge of collapse. Only a massive investment in modern Western drilling technology could save it. This prompted Russia to sign deals with American oil service companies worth hundreds of millions of dollars.

Ten years later, I ran into Colby at a Washington event, and I reminded him of the incident. He confided in me, “You know that report was completely fake, don’t you?” I was stunned. The goal was to drive the Soviet Union to the bargaining table to dial down the Cold War. I was the unwitting middleman. It worked.

That was Bill, always playing the long game.

After Colby retired, he campaigned for nuclear disarmament and gun control. He died in a canoe accident on the lake in front of his Maryland home in 1996.

Nobody believed it for a second.

 

William Colby

 

Kyoko