The Market Outlook for the Week Ahead, or How Tim Cook Plucked Apple Out of the Fire Back into the Frying Pan!

Economic growth has dropped by 50%-100% in a year, and if you strip out AI investment, the economy actually shrank by 2%. Inflation is rising, with much worse to come, and stocks are at all-time highs both in terms of price and multiples. Markets are now sitting on a knife-edge, and the slightest unforeseen development could send them plunging.

Oh, and September is just around the corner, usually the worst trading month of the year.

What could possibly go wrong?

The stock market is now more concentrated than ever. At the beginning of the year, the top ten tech stocks accounted for 30% of the S&P 500 (SPY). Now it’s 40%.

I’m sure you all own shares in Apple, which saw frenetic market action last week. That’s not a stretch, as Apple is the most widely owned stock in the world, followed by Nvidia (NVDA). In fact, I know that some of my followers keep half their equity portfolio in Apple and the other half in Nvidia.

And now, Apple has joined the fray. Its shares were demolished this year as the company was the worst affected by tariffs of any large US company, down 35%, with most of its production taking place in China. The $8,000 MacBook Pro laptop I recently bought from Apple was sent by DHL directly from Shanghai (with a transfer in Ohio?).

Apple then rapidly moved the bulk of its iPhone production to India, which has been in the works for years. The administration then slapped a 25% import duty on India, and the stock tanked once again. Days later, Apple was exempted from tariffs because it promised an additional $100 billion in U.S. investment sometime in the future. The shares soared by 15%.

Apple is not out of the woods yet. It incurred $800 million in tariffs in Q2 and expects to pay another $1.1 billion in Q3. Still, buy (AAPL) on dips.

By enormous coincidence, last week, Apple CEO Tim Cook flew to Washington and presented the president with a gold plaque. This follows Cook’s $10 million donation to the inaugural committee early this year. Silicon Valley now views Cook as a technology diplomat par excellence and his actions as a model for future dealings with the administration.

Apple shareholders should be pleased.

The focus on Apple should now be on its lagging AI investment. If you had to choose between buying a stock that is an AI leader, like Meta (META) or Microsoft (MSFT), and one that’s about to play catch-up, you would choose the latter all day long. That’s where the performance will come from.

We are just completing the second-quarter earnings period, which was expected to show 12% growth. Instead, earnings came in at 22% for the Magnificent Seven and 4% for the Unmagnificent 493. This year shows how half of the economy is getting juiced by the administration, while the other half is being punished severely. If you work in the wrong half of the economy, Heaven help you.

Stocks have followed accordingly.

There is another great stock out there that has just suffered a massive 21% selloff, and that is Palo Alto Networks (PANW). This was the market reaction to its announcement of its purchase of competitor CyberArk (CYBR), which we have also been following for years. The deal is highly dilutive, as it is almost entirely being paid for with 100 million shares of new stock issuance. That will dilute existing shareholders by an unwelcome 13.50%—or less than (PANW) shares have already fallen.

We view cybersecurity as one of the sectors in the market that is absolutely a must-own. AI has created an arms race where companies have to invest in ever more sophisticated and expensive software to keep AI-driven hackers at bay. This is why (PANW) expects net profits to rise by 10% in H2 to $1.5 billion.

Elimination of redundancies between the companies should send profitability rocketing. Not cheap at a 42X earnings multiple, but nothing is cheap. You don’t negotiate with the doctor on price when in the middle of open-heart surgery. Several companies have been shut down by cyberattacks in recent years.

My August performance is showing a rare decline so far, down -0.85% gain, taking us to new all-time highs on all metrics. That takes us to a year-to-date profit of +51.58%. My trailing one-year return rose to +93.56%. That takes my average annualized return to +51.29%, and my performance since inception finally topped +803.47%. These are all non-compounded numbers.

I added a short position in the S&P 500 (SPY) last week, expecting the market to go nowhere this month. This week, we have the August option expiration on Friday, and I have four positions running into max profit. I have longs in (NFLX) and (FCX) and shorts in (SPY) and (TSLA). Facing a very high-risk market with the Volatility Index back at a complacent $15 handle, I am keeping 60% in cash, 20% short, and 20% long, for a net market-neutral position.

All four positions expire at max profit on Friday, when I will go 100% into cash and then wait for something big to happen.

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 evens. 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.

Global Equity Funds See Second Week of Outflows. Global equity funds came under selling pressure while safe-haven demand bolstered money market funds in the week through August 6, as U.S. tariff announcements and data showing signs of weakness in the U.S. economy fueled risk aversion. Investors sold off a net $7.82 billion worth of global equity funds during the week, adding to $29.95 billion worth of net divestments the week before.

US Gold (GLD) Futures Hit New All-Time High, at $3,534 an ounce. The sudden 39% tariff shock has prompted some Swiss exporters to halt all shipments to the US. Washington may place the most widely traded gold bullion bars in the United States under country-specific import tariffs, according to a US ruling, which would be a major blow to global supply chains for the metal. I am maintaining my long-term gold target of $5,000.

World Food Commodity Prices Rose to Their Highest in Over Two Years, as a jump in vegetable oils and record levels for meat outweighed falling cereal, dairy, and sugar prices, the United Nations’ Food and Agriculture Organization said. The FAO World Food Index, which serves as a global benchmark for food commodity prices, averaged 130.1 points in July, a 1.6% increase from June, FAO said. The global inflation is here.

The Bond Auction Was a Disaster. Below-average demand: The auction attracted less interest from investors compared to previous sales. Higher Yields: The Treasury had to offer a higher yield (4.813%) to attract buyers, indicating investors demanded a premium to purchase the bonds. Low Bid-to-Cover Ratio: A low bid-to-cover ratio (2.27 in this case, below the 10-auction average of 2.43) signifies weak demand relative to the supply of bonds offered for sale. 

Weekly Jobless Claims Rise 7,000, to 226,000. The “No hire, no fire” economy continues. The number of Americans filing new applications for unemployment benefits ticked up to the highest level in a month last week, suggesting the labor market was largely stable even though job creation is weakening and it is taking laid-off workers longer to find new employment.

US Alcohol Sellers to Lose $2 Billion in Sales, according to organizations representing major European producers, including Diageo (DGE) and Pernod Ricard (PERP), U.S. whiskey and wine producers, as well as glass suppliers, retailers, and restaurants. Avoid the sector.

US Services Take a Big Hit. The US services sector effectively stagnated in July as firms — faced with tepid demand and rising costs — reduced headcount. The Institute for Supply Management’s index of services declined last month to 50.1, below all estimates in a Bloomberg survey of economists. Readings above 50 indicate expansion. The employment index dropped to 46.4, contracting for the fourth time in five months and marking one of the lowest readings since the pandemic. The group’s measure of prices paid for materials and services, meanwhile, climbed to the highest since October 2022.

Factory Orders Collapse at the fastest rate since data collection began, a predictable outcome of tariff chaos. These numbers have recession written all over them. Falling aircraft orders were the major factor, with a Chinese Boeing import ban in the numbers.

Tesla Loses $243 Million Judgment on Autopilot Crash, which killed the driver. A Florida jury on Friday found Tesla liable to pay $243 million to victims of a 2019 fatal crash of an Autopilot-equipped Model S, a verdict that could encourage more legal action against Elon Musk’s electric vehicle company. The company claims the driver overrode the autopilot, disabling safety systems, which they do in every one of these cases.

On Monday, August 11, at 8:30 AM EST, no note is released.

On Tuesday, August 12, at 7:30 AM, the Inflation Rate is announced. Two days of the Fed meeting begin.

On Wednesday, August 13, at 7:00 AM, we get MBA Mortgage Applications.

On Thursday, August 14, we get Weekly Jobless Claims. We also get the Producer Price Index.

On Friday, August 15, at 10:00 AM EST, we get the Baker Hughes Rig Count. We also get US Retail Sales.

As for me, I am reminded of a previous pandemic in which I played a role in ending.

After a 30-year effort, by 1976, the World Health Organization was on the verge of wiping out smallpox, a scourge that had been ravaging the human race since its beginning. I have seen Egyptian mummies at the Museum of Cairo that showed the scarring that is the telltale evidence of smallpox, which is fatal in 50% of cases.

By the early 1970’s the dread disease was almost gone, but still remained in some of the most remote parts of the world. So, they offered a reward to anyone who could find live cases.

To join the American Bicentennial Mt. Everest Expedition in 1976, I took a bus to the eastern edge of Kathmandu and started walking. That was the furthest roads went back in those days. It was only 150 miles to basecamp and a climb of 14,000 feet.

Some 100 miles in, I was hiking through a remote village, which was a page out of the 14^th century, back when families though buckets of sewage into the street. The trail was lined with mud-brick two-story homes with wood shingle roofs, with the second story overhanging the first.

As I entered the town, every child ran to their windows to wave, as visitors were so rare. Every smiling face was covered with healing but still bleeding smallpox sores. I was immune, since I received my childhood vaccination, so I kept walking.

Two months later, I returned to Kathmandu and wrote to the WHO headquarters in Geneva about the location of the outbreak. A year later, I received a letter of thanks at my California address and a check for $10,0 telling me they had sent in a team to my valley in Nepal and vaccinated the entire population.

Some 15 years later, while on customer calls in Geneva, Switzerland for Morgan Stanley, I stopped by the WHO to visit a scientist I went to school with. It turned out I had become quite famous, as my smallpox cases in Nepal were the last ever discovered.

The WHO certified the world free of smallpox in 1980. The US stopped vaccinating children for smallpox in 1972, as the risks outweighed the rewards. Some 200 people a year were dying from the vaccinations alone.

Today, smallpox samples only exist at the CDC in Atlanta, frozen in liquid nitrogen at minus 346 degrees Fahrenheit in a high-security level 5 biohazard storage facility. China and Russia are thought to have the same.

That is because scientists fear that terrorists might dig up the bodies of some British sailors who were known to have died of smallpox in the 19^th century and were buried on the north coast of Greenland, remaining frozen ever since. If you need a new smallpox vaccine, you have to start from somewhere.

As for me, I am now part of the only 34% of Americans who remain immune to the disease. I’m glad I could play my own small part in ending it. If smallpox does make a comeback, I will be one of the few survivors.

 

Mt Everest in 1976

 

 

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