CEO of Microsoft (MSFT), Satya Nadella, and his management team have made an aggressive step towards making inroads to the metaverse.
Gaming will be the launching pad to the metaverse that will first start as digital communities and later evolve into interoperable and integrated digital worlds.
The rest of the metaverse will germinate via these gaming communities and Microsoft knows that which is why they purchased Activision (ATVI) in cash for $68 billion and change.
The price was 3X higher than what they paid for LinkedIn but equally as strategic as many tech behemoths look forward to the next “big thing.”
The deal will mean MSFT will be one of the biggest gaming companies in the world just nudging out China’s Tencent and Japan’s Sony.
In the U.S., they will be by far the biggest gaming company and Nadella has made it a point of emphasis to navigate the gaming world by tapping M&A.
Remember, it was Nadella who built the MSFT cloud from scratch and Microsoft possessing its own stand-alone cloud asset dovetails nicely with their deep dive into gaming.
There are intrinsic synergies resulting from owning both.
The lack of native cloud infrastructure was a critical reason why ATVI gave up, as Chief Executive Officer Bobby Kotick said in an interview, “You look at companies like Facebook and Google and Amazon and Apple, and especially companies like Tencent — they're enormous and we realized that we needed a partner in order to be able to realize the dreams and aspirations we have,” he said.
This was the best Kotick could have wished for and I’ve mentioned this overarching trend of the best Silicon Valley companies getting stronger and now it’s even more pronounced as we are on the verge of exiting this pandemic this year.
In a higher interest rate environment, cash hoarders like Microsoft, Apple (AAPL), and Amazon (AMZN) simply have more ammunition than these smaller outfits who get penalized because of a harder route to access cheap capital making future cash flows costlier.
Now many of these smaller companies are realizing that they need to stand on their own two feet and that’s a scary thought for many CEOs who have been accustomed to tapping the capital markets to paper over the cracks.
What’s good about ATVI?
Activision owns mobile-gaming studio King, maker of Candy Crush, one of the most popular mobile games of all time.
Microsoft has almost zero presence in mobile gaming.
Nadella wants his gaming empire to facilitate direct payment like Apple’s App Store.
That’s effectively the holy grail of today’s gaming.
Microsoft has been at war with Apple and Google, over the fees the app stores charge for games.
It’s no surprise that Microsoft wants complete control over its ability to distribute games and content.
The deal also allows Microsoft an access point to secure an influential pool of gamers creating their own gaming content and worlds.
After adding Minecraft, LinkedIn, and GitHub, Nadella has been on the hunt for a game-changing asset that will drive the bottom line of MSFT via a large community of creators.
He failed to land social video service TikTok, while negotiations with Pinterest (PINS) and Discord were rebuffed.
ATVI is really a feather in the cap for Nadella, who won’t stop there and knows it’s just one battle of a greater war for tech supremacy.
These high-quality assets don’t get cheaper over time either.
Simply put, Microsoft loves subscription businesses, and gaming is among the best of them, and they are the stickiest around with recurring revenue that makes predicting future cash flows that much easier.
The ATVI pickup will raise the price of buying gaming assets across the board as I foresee a rush into these types of assets where not only can a company purchase the content, licenses, and gaming platform, but they can also add top-notch gaming developers which are equally as important as Microsoft tries to outmuscle Apple and Google.
This move is highly bullish for MSFT, so much so, that anti-trust regulators might cast a suspicious eye on this deal.
https://www.madhedgefundtrader.com/wp-content/uploads/2022/01/exhibit1.png434936Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2022-01-19 15:02:282022-01-27 13:48:37Microsoft Takes a Giant Leap Forward
Here I am, locked up again. Another day, another pandemic. There is nothing left for me to do but think.
When I turned negative on technology stocks at the end of November, many readers protested, accusing me of high treason, sedition, perfidy, and insisted I be hung from the nearest lamppost.
After last week’s drubbing on technology stocks, those claims are fading fast.
As a math graduate from UCLA, I can tell you it’s not about incompetence, delusion, or dementia, it’s simply all about the numbers.
Over the last five years, the S&P 500 (SPY) rose by 2X, while NASDAQ jumped by 3X, a 50% premium to the main market.
Most of this outperformance was due to multiple expansions. As interest rates fell further and further, investors were willing to pay ever more for tech stocks. As a result, 30% of tech stocks lose money and 30% trade for a nosebleed 10X sales or more.
Roll the interest rate move in reverse, and the tech premium disappears in a puff of smoke. And that has been happening with a vengeance since early December, with yields on the ten-year US Treasury bond soaring an eye-popping 58 basis points, from 1.34% to 1.82%.
Tech stocks are also coming off a pandemic tailwind of hurricane force. Now that every home in the country is equipped with four home offices and the hardware and software to support them, the turbocharger is failing.
Apple (AAPL) is a perfect example. From 2015 to 2019, Steve Jobs creation grew earnings by an average of 4% a year. Then the perfect storm hit, and earnings grew by an astonishing 60% in 2021. That delivered a gobsmacking 58% gain in the share price since March.
Tech momentum is now dead. In two-thirds of the tech market, a Dotcom bust has already played out, with non-earning pandemic darlings like Peloton (PTON) and Zoom (ZM) falling by 60%-70%.
It is not, however, the end of the world (usually, the world doesn’t end). If you are a long-term investor, big (earning) tech won’t fall enough to make it worth selling out and buying back lower. Non-earning small tech has already fallen so much it's no longer worth selling down here.
Back to the numbers, me the mathematician.
It’s all about margins, which are still expanding, and will be up by another 40-basis point in 2022 for the S&P 500 as a whole. For big tech, it’s just a matter of time before earnings catch up with valuations and it's off to the races again. It will take longer for small tech, possibly a lot longer.
The Economy is the Strongest in Decades, according to JP Morgan CEO Jamie Diamond. I agree. That’s because banks prosper most early in an interest-raising cycle. The Fed could raise rates four times this year. Keep buying financials on dips.
Quantitative Tightening to Start in July, says Goldman Sachs. That’s when the Fed starts selling its vast holdings of US Treasury bonds, about $8.5 trillion worth. They will continue QT until the pain becomes too great. Four rate hikes in 2022 are in the bag. It’s not a stock market-friendly scenario.
This is Not the Year to Own Money-Losing Tech, says my friend Goldman’s David Kostin. For investors, the glass has gone from half full to half empty. The big ones will be OK but are still due for a pullback. NASDAQ price-earnings are still at a 20 year high at 38X. Rising interest rates were the stick that broke the camel’s back. Don’t buy the dip too soon.
What is the Cheapest Sector in the Market? Biotech and Healthcare, which are at valuation lows not seen since the 2009 and 2000 lows. It also has the best decade-long growth outlook after technology. The problem is that no one wants to buy them on the back nine of a global pandemic. They will rally hard….someday.
Inflation Hits 7.0%, with the Consumer Price Index hitting a 39-year high. Bonds ended a $3.00 rally and resumed a downtrend. Rents and used cars led the gains. I remember 1982 well. My first home mortgage had an 18% interest rate. Expect worse to come.
S&P 500 Profits Jump 22.4% in Q4, possibly taking the full-year figure up an incredible 49%. It makes stocks look like a bargain, which were up only 27% in 2021. Expect cooler numbers and a quieter stock market in 2022.
Wholesale Prices Soar 9.7% YOY, the most in 11 years. It augers for more interest rate hikes sooner, with overnight rates targeting 1.25% by yearend.
Weekly Jobless Claims Hit Two-Month High at 230,000. No doubt it is due to the omicron surge. A million cases a day is certainly going to make a dent in the workforce. Some people are afraid to get sick, while others know they can get away with it.
Auto Stocks Will Be Top Performers in 2022, says value legend Mario Gabelli. Dealers are extremely short of inventory and demanding more production. Used car prices are soaring. Average industry sales prices have soared from $40,000 to $45,000 in a year. Buy (F) on a dip. (TSLA) has topped out for now with the rest of the tech stocks.
Bitcoin Breaks $40,000, as the flight from all interest-bearing securities continues. Don’t buy the dip yet.
China Posts Record Trade Surplus in 2021 at $676 billion on global economic recovery. The US ran a massive deficit with the Middle Kingdom last year, which is clearly dollar negative. None of the trade deals negotiated by Trump were honored. Exports were up 21% YOY in December.
My Ten-Year View
When we come out the other side of pandemic, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 240,000 here we come!
With a new year at hand, it’s off to the races once again. I exploded out of the gate with a hardy 2.5% profit last week. I used fleeting rallies to sell short the S&P 500, Microsoft (MSFT), and the bond market (TLT). The Friday collapse in JP Morgan (JPM) tempted me into a long position there.
Yes, last year’s mighty 90.02% performance is a lot to top. But even the highest mountain is climbed with the first step (been there, done that).
That brings my 12-year total return to a record 515.11%, some 2.00 times the S&P 500 (SPX) over the same period. My 12-year average annualized return has ratcheted up to a record 42.62%, easily the highest in the industry.
We need to keep an eye on the number of US Coronavirus cases at 66 million and rising quickly and deaths topping 851,000, which you can find here.
On Monday, January 17 markets are closed for Martin Luther King Day.
On Tuesday, January 18 at 7:00 AM, the NAHB Housing Index for January is released.
On Wednesday, January 19 at 8:30 AM, Housing Starts for December are announced.
On Thursday, January 20 at 7:00 AM, the Existing Homes Sales for December are printed. At 8:30 AM, the Weekly Jobless Claims are disclosed.
On Friday, January 21 at 2:00 PM, the Baker Hughes Oil Rig Count is out.
As for me, during the 1980s, my late wife and I embarked on a National Geographic Expedition to the remote Greek islands, including Santorini, which in those days didn’t have an airport.
At dinner, we sat at our assigned table and I noticed that the elderly gentleman next to me spoke the same unique form of High German as I. I asked his name and he replied “Adolph.”
And what did Adolph do for a living? He was a pilot. And what kind of plane did he fly?
A Messerschmitt 262, the world’s first jet fighter.
What was his last name? Galland. Adolph Galland.
I couldn’t believe my luck. Adolph Galland was the most senior Luftwaffe general to survive WWII. He was one of Germany’s top aces and is credited with 109 kills. He only survived the war because he was shot down during the final weeks and ended up in a military hospital.
And that was the end of the cruise for the rest of the table, as Galland and I spent the rest of the week discussing the finer points of aviation history.
It was made especially interesting by the fact that I had already flown most of the allied planes that Galland went up against, including the P51 Mustang and the Spitfire.
Galland started life as a Versailles Treaty glider pilot and joined the civilian airline Lufthansa in 1932. He transferred to the Luftwaffe in 1937 to fight with Franco in the Spanish Civil War and participated in the invasion of Poland in 1939.
He flew a Messerschmitt 109 as cover for German bombers during the Battle of Britain. In 1941, he was promoted to the general in charge of Germany’s fighter force until 1945 when he was sidelined due to his opposition to Goring and Hitler.
It was a fascinating opportunity for me to learn many undisclosed historical anecdotes. Germany actually had a functioning jet fighter in 1939. But Hitler, with a WWI mindset, diverted development money to twin-engine bombers and artillery.
The army eventually produced a canon that fired a monster one-meter-wide shell but was so heavy that it needed double railroad tracks to move anywhere. The canon was virtually useless in a modern war and was a colossal waste of money. Galland believed the decision cost Germany the war.
The ME 262 was a fabulous plane. But it was too little too late. Of the 1,000 produced, 500 were destroyed on the ground and most of the rest during takeoff and landing.
A big problem with the plane was that its jet engines were made out of steel and would only last ten hours. Turkish titanium needed for longer-lived engines was embargoed by the allies.
Today, a beautiful example hangs from the ceiling of the Deutsches Museum in Munich.
Galland negotiated the handover of his jet fighter wing to the Americans from a hospital bed so they could be used in an imminent war against the Russians. The atomic bomb ended that idea.
Galland was one of the few German generals never subjected to a war crimes trial. Pilots on both sides saw themselves as modern knights of the air with their own code of conduct. Parachuting pilots were never attacked and lowering your landing gear was a respected sign of surrender.
After the war, Galland emigrated to Argentina to train Juan Peron’s Air Force. He also test flew Gloster Meteor jets for the Royal Air Force. He participated in the 1972 film, The Battle of Britain and many WWII memorials. By the time I met him, his eyesight was failing. He died in 1996 at 84 of natural causes.
I give thanks to the good luck I had in meeting him, and that I had the history behind me to understand the historical figure I was sitting next to. It isn’t everyone that gets six dinners with Germany’s top fighter ace.
A year later saw me on a top-secret mission flying from Cyprus back to the American airbase at Ramstein. I plotted my course directly over Santorini.
When I approached the volcanic island, I put my Cessna 340 into a steep descent, dove straight into the mouth of the volcano, and leveled out at 100 feet above the water, no doubt terrifying the many yachts at anchor.
Greek Military Air Control gave me hell, but it was my own private way of honoring the principlals of Adolph Galland.
Stay Healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
https://www.madhedgefundtrader.com/wp-content/uploads/2022/01/adolph-galland.png492290Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2022-01-18 09:02:482022-01-18 12:27:58The Market Outlook for the Week Ahead, or Soaring with the Eagles
A month ago, I was wringing my hands, pacing the floor, and tossing and turning at night. I had no idea what the stock market was going to do in 2022.
Now, I feel so much better. For while getting snowed in at Lake Tahoe for two weeks, I dove into the deep research. Slowly, the fog cleared, the clouds lifted, and everything became crystal clear.
The markets vindicating my views with a sledgehammer, I feel so much better.
A year behind schedule, the great bond market crash has begun in earnest, taking ten-year US Treasury yields up an eye-popping 45 basis points in a month. Financial stocks have caught on fire. Technology stocks are getting mercilessly dumped. Any non-yielding security, be it gold, silver, Bitcoin, or small-cap tech stocks, have been taken to the woodshed.
So what happens next? More of the same. The out-of-tech into financials trade could continue for another three to five months.
Then the Fed’s cycle of rising interest rates will take a break by summer. Financials will be super-heated and at all-time highs. Technology stocks will be below their 200-day moving averages. So you reverse the trade. Tech will lead in the second half.
All I can say is that I am really glad that I am not the Chairman of the Federal Reserve right now. If Omicron convinces Jay Powell to delay interest rate hikes, he risks inflation getting out of control. If he continues to accelerate the rate high schedule he could kill the recovery.
And here’s the 800-pound gorilla in the room that no one is talking about. What is the biggest threat to the US and the global economy? No, it’s not Covid. It isn’t inflation. It’s not even a tempestuous midterm election, which has already begun.
It’s a stock market crash. Remember that stock market crash that took the Dow Average down 40%, as we saw in March-April 2020? That is first and foremost what is in Powell’s mind.
So if we breach the 10% correction that now appears underway, Jay may quietly pull back on the rate hike throttle. The folder making the argument will be quietly lost behind the radiator at 20th street and Constitution Avenue in Washington DC, the home of the Federal Reserve.
The Fed Minutes were a bombshell, indicating a serious acceleration of interest rate hikes is in the cards this year. The Fed may flip to a net seller of Treasury bonds by the fall. Bonds sold off hard and may break to new 2-year lows. Take profits on all short-dated bond plays, with the (TLT) down $14.00 in a month. Technology got crushed, posting the worst day in 11 months. Sell all tech option plays. You can buy them back cheaper later. But keep big tech stocks. They can only go don so much with 30% earnings growth this year.
NASDAQ Stocks down 50% hits record from one-year highs. It’s a Dotcom bust echo. Traders are selling first and doing the research later. That means half of all tech stocks are in bear markets. Soaring interest rates aren’t helping.
Nonfarm Payroll Report disappoints at 199,000 in December. But the Headline Unemployment Rate plunged from 4.2% to 3.9%, approaching a new century low. The U-6 “discouraged worker” rate dropped to 7.3%. Leisure & Hospitality led at 53,000, followed by Professional & Business Service at 43,000, and Manufacturing at 26,000. The government lost 12,000 jobs. Some 650,000 people gain jobs, with self-employment surging. Once again, the data is wildly contradictory as a post-pandemic America remakes itself. Bonds and tech were crushed, financials soared.
Apartment Occupancy hits all-time high, as growing numbers are priced out of home ownership. As a result, rental rates are now rising faster than home prices. Occupancy is now at 97.5%.
Tesla delivers a record 308,600 EVs in Q4, blasting all expectations, taking them nearly to Elon Musk’s 2021 target of one million. They managed to beat all supply chain challenges. In a brilliant move, when other car makers cancelled chip orders in 2020, Tesla bought them all up. Tesla remains far and away the mass production leader in EVs, and I am maintaining my $10,000 target. In addition, Musk is done selling the stock for another year.
US Dollar clocks best year in six, up 7%, powered by rising interest rate fears that never came. The Turkish lira was the worst-performing, down 44%, thanks to government mismanagement there.
Apple tops $3 trillion market cap, the shares rising above $183, well on the way to my $250 target for 2022. The stock is getting extended short term to raise cash to buy on the next selloff. I am hanging on to my own long term holding with a split-adjusted cost basis of 25 cents.
US Home Prices soar 18% in October according to S&P Case Shiller. Phoenix (32.3%), Tampa (28.1%), and Miami (25.7%) led. 30-year fixed rate mortgages at 3.05% were a huge help.
Bitcoin gets crushed, approaching a one-year low at $40,000, and will continue to do so. Not interest-bearing instruments like gold and crypto don’t do well during rapidly rising interest rates. In the meantime, some $3.2 billion in crypto was stolen in 2021, a rise of 516% from the previous year, mostly from those who don’t know how to protect their Defi platforms with no central exchange authority.
My Ten-Year View
When we come out the other side of pandemic, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 240,000 here we come!
With the pandemic-driven meltdown on Friday, my December month-to-date performance bounced back hard to 11.26%. My 2021 final performance ended at 90.02%. The Dow Average was up 18.4% in 2021.
I have a 100% cash position, waiting for the ideal entry point to enter the market. With the 500-point crash today, suddenly the requests for new trade alerts have faded.
That brings my 12-year total return to 512.56%, some 2.00 times the S&P 500 (SPX) over the same period. My 12-year average annualized return has ratcheted up to 42.41% easily the highest in the industry.
We need to keep an eye on the number of US Coronavirus cases at 60 million and rising quickly and deaths going up t0 840,000, which you can find here at https://coronavirus.jhu.edu.
On Monday, January 10 at 8:00 AM, Consumer Inflation Expectations are announced.
On Tuesday, January 11 at 10:00 AM, Jay Powell testifies in front of Congress.
On Wednesday, January 12 at 8:30 AM, the Core Inflation Rate for December is released.
On Thursday, January 13 at 8:30 AM the Weekly Jobless Claims are disclosed.
On Friday, January 14 at 8:30 AM, the Retail Sales for December are out.
As for me, as this pandemic winds down, I am reminded of a previous one in which I played a role in ending.
After a 30-year effort, 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 1970s, 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 Katmandu and started walking. That was the farthest roads went 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 14th century, back when families threw 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, but I kept walking.
Two months later, I returned to Katmandu 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 $100 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 for Morgan Stanley, I stopped by the WHO to visit a scientist I went the 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 reward.
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 probably have the same.
That's because scientists fear that terrorists might dig up the bodies of some British sailors who were known to have died of smallpox in the 19th 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 34% of Americans who remain immune to the disease. I’m glad I could play my own small part in ending it.
Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
https://www.madhedgefundtrader.com/wp-content/uploads/2012/01/everest19760012.jpg640465Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2022-01-10 12:02:092022-01-10 14:25:20The Market Outlook for the Week Ahead, or Why I Feel So Much Better
Below please find subscribers’ Q&A for the January 5 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Incline Village, Nevada.
Q: What’s a good ETF to track the Russell 3,000 (RUA)?
A: I use the Russell 2,000 (IWM) which is really only about the Russell 1500 because 500 companies have been merged or gone bankrupt and they haven't adjusted the index yet. This is the year where value plays and small caps should do better, maybe even outperforming the S&P500. These are companies that do best in a strong economy.
Q: Should I focus on value dividends growth, or stick with the barbell?
A: I think you have to stick with the barbell if you’re a long-term investor. If you’re a short-term trader, try and catch the swings. Sell tech now, buy it back 10% lower. Keep financials; when they peak out you, dump them and go back into tech. It’ll be a trading year, but if a lot of you are just indexing the S&P500 or doubling up through a 2x ETF like the ProShares ultra S&P 500 (SSO), it may be the easiest way to go for this year.
Q: Will higher rates sabotage tech, particularly smaller companies?
A: They’ve already done so with PayPal (PYPL) down 44% in six months—I’d say that’s sabotaged. Same with Square (SQ) and a lot of the other smaller tech companies. So that has happened and will continue to happen a bit more, but we’re really getting into the extreme oversold levels on a lot of these companies.
Q: Should we cash out on the iShares 20 Plus Year Treasury Bond ETF (TLT) summer 150/155 put spread LEAPS?
A: No, because you haven't even realized half of the profit in that yet since there is so much time value left in those options. As long as you stay below $150 in the (TLT), which I'm pretty sure we will, you will get your full 100% profit on that position. On the six month and one year positions, they don’t really move very much because they have so much time value in them. Once you get into the accelerated time decay, which is during the last 3 months before expiration, they catch like a house on fire. So, if you're willing to keep a safe long-term position, this thing will write you a check every day for the next six months or a year to expiration. I know we have absolutely everybody in these deep in the money TLT puts; some people even did $165-$170’s—you know, my widows and orphans crowd—and they are doing well, but not as much as if you’d had a front month.
Q: What scares you most for the next 12 months?
A: Another variant that is more fatal than either Delta or Omicron. Unlikely, but not impossible.
Q: Do you expect Freeport McMoRan (FCX) to break out to the upside?
A: I do, I did the numbers over the vacation for copper production to meet current forecast demands for electric vehicle production. Global copper has to increase 11 times, and that can’t be done, so prices are going to have to go up a lot. One of my concerns with these lofty EV projections (that even I make) is that there aren’t enough commodities in the world to make all these cars with the current infrastructure. And you’re not going to find a replacement for copper—it's just too perfect of an electrical conductor. So, that means higher prices to me—you increase demand 11 times on a stable supply, and it takes 10 years to bring a new copper mine online.
Q: Do you have any open trades?
A: No, and one reason is that I figured they would probably crash the market on the last trading day of the year, which they did. If I had positions, they would have crushed them on the last year and my performance. And all hedge fund traders do this; they try to go 100% cash at the end of the year to avoid these things. And whatever you lost on Friday you made back on Monday morning at the expense of last year's performance. But you have to wait 15 months to get paid on today's performance, and, that is the reason I do that. So, looking for higher highs to sell, lower lows to buy.
Q: Should I be buying NVIDIA (NVDA) and Tesla (TSLA) on the dip?
A: Absolutely yes, but Tesla's prone to 45% corrections—we had one last year and the year before—and Nvidia tends to have 25% corrections. So yes, NVIDIA could well be the stock of the decade, but you don’t want to buy it right now. It’s starting to lose steam already.
Q: Will ProShares Ultra Technology (ROM) be under pressure?
A: Keep your position small now, take some profits, look to buy on a bigger dip. If the big techs drop 10%, (ROM) will drop 20% and get you below $100.
Q: Do you offer trade alerts on small caps for short term traders?
A: No, because you can’t execute those trades. A lot of them are just so illiquid, you can’t even trade one share unless you want to pay a huge spread. Keep in mind, when I worked at Morgan Stanley (MS), I covered the Rockefeller Foundation, the Ford Foundation, George Soros, Paul Tudor Jones, the government of Abu Dhabi, California State Pension Fund, and a lot of other huge funds; and the last thing they’re interested in is short term trades for the small-cap stocks. So, I don't really know much about those, but they tend to change the names every year anyway. And it really is a beginner trader type area because the volatility is so enormous. You can get 10x moves one day going to zero the next. It is also an area full of scams, cons, and pump and dump schemes.
Q: What is your advice when it comes to the ProShares UltraShort 20+ Year Treasury (TBT)?
A: Short term, take the profits—you just got a $14 point rally in your favor. Short term traders, take profits on bonds here, cover your shorts. Long term investors keep it, the cost of carry is only about 4% right now, not that high, so I would keep it for a great year-end move for 2.5% yields on the ten-year.
Q: I hate oil (USO) because it’s going to zero. Should I keep trading in it?
A: Very few are nimble enough to trade oil, it’s really an insider’s game. No new capital is moving into the oil industry and oil companies themselves won’t invest in their own businesses anymore.
Q: Would you put on a new position on the iShares 20 Plus Year Treasury Bond ETF (TLT) today?
A: No, you don’t sell short things after they move down $14 points. You put them on before that. If I were to do a short-term trade in (TLT) I would be a buyer, I’d maybe buy it for a countertrend rally of maybe $4 or $5 points.
Q: What should I do with my FCX 2023 LEAP?
A: There is enough time on it, so I would keep running it along as is—don’t get greedy. Keep the LEAPS you have and you should do well by it.
Q: Could the iShares 20 Plus Year Treasury Bond ETF (TLT) bottom out in the near term?
A: Yes, it could, on a short-term basis. $141 is the nine-month low for the (TLT), so a great place to take short term profits. (TLT) is right now at $142.56, so we’re approaching that $141 handle closely. Every technical trader on the market’s going to cover their shorts on the $141 or $142 handle, so just congratulate yourself going into this move short, and take the money and run. You take every $14 point move in your favor in the (TLT); and let it rally 5 points and then reestablish, that’s how you trade.
Q: Do you think there will be a delay in the first interest rate hike due to COVID?
A: Yes, Jay Powell is the ultra-dove—any excuse to delay rate hikes, he’ll do it. And the way you’ll know is he’ll delay the end of other things which you don’t see, like daily mortgage bond purchases, daily US Treasury purchases, and other backdoor forms of QE. We’ll know well in advance if he’s going to raise or not by March or even June. We watch this stuff every day, we talk to people at the Fed every week. And remember, the Treasury Secretary Janet Yellen is a good friend of mine, I get a good handle on these things; this is why 99% of my bond trades make money.
Q: What if I have the $135-$140 put spread in January?
A: Sell it now, take what you can, take the hit; because that’ll expire at zero unless we break down to new lows on the (TLT) in the next ten days or so. That's not a good bet, especially on top of a $14 point drop. Capture what you can on that one and keep the cash for a better entry point. That’s exactly what I did—I sold all my January positions yesterday no matter what they were, because when you get to two weeks to expiration the moves become random.
Q: Do you think inflation will last longer than expected?
A: No, I think it will last shorter than expected because I think at least half of the inflation rate, if not more, are caused by supply chain problems which will end within the next six months, and therefore lead to the over-order problem that I was talking about earlier.
Q: What’s your outlook on energy this year?
A: It could go higher. On the way to zero, you’re going to have several double, tripling’s, even 10x increases in the price of oil, like we saw in the last 18 months. We went from negative numbers to 80, and what happens is oil becomes more volatile as the supply becomes more variable, that's a natural function. But trading this is not for non-professionals.
Q: Since sector rotation is happening, do you think we should sell all tech positions?
A: Short term yes, long term no. Tech will still lead with earnings, and even if they have a bad five months coming, they have a terrific long-term view. For the last 30 years, every sale of tech has been a mistake, especially in Apple (AAPL). So if you’re a trader, yes, you should have been selling since November. If you’re a long-term investor, keep them all.
Q: Is the ProShares UltraShort S&P 500 (SDS) a good position to buy up when the market timing index goes into sell territory?
A: Yes it is, and that will probably work better this year than it did last year because narrow range volatile markets are much more technically oriented than straight-up markets or long term bull markets. Pay close attention to those markets, you could make a lot of money trading them.
Q: Do Teslas have good car heaters for climates up North in -25 or -30?
A: You plug them in. When it gets below zero you actually get a warning message on your Tesla app telling you to plug it in, and then the car heats itself off of the power input. Otherwise, if you get to below zero, the range on the car drops by half. If you have a 300-mile range car like I do and then you freeze it, it drops to like 150 miles. In Tahoe, I keep my car plugged in all the time when I'm not using it, just to keep it warm and friendly.
Q: Is Zoom (ZM) a good buy here?
A: No, I think they’re going to keep punishing these overpriced small cap techs like they have been. We’re a long way from value on small tech. That was a 2020 story.
Q: What about Berkshire Hathaway (BRKB)?
A: Berkshire Hathaway is doing a major breakout because they own financials up the wazoo and they’re all breaking out. And YOU should be long up the wazoo on these things because I’ve been recommending them for the last 4 months.
Q: What do you think of Robinhood (HOOD)?
A: Robinhood I like long term, but it is high risk, high volatility. It is down 78% from the IPO so it is busted. Kind of tempting down here, but again, all the non-earning overvalued stocks are getting their clocks cleaned right here; I'm not in a rush to get involved.
Q: When you enter a LEAP, is the straight call or call spread?
A: It’s a call spread. You finance the high cost of one-year options by selling short a call option against it further out of the money. And that way you can get enormous leverage for practically nothing, 10 or 20 times in some cases, depending on how you structure the strikes.
Q: Best stock to play Copper?
A: Freeport McMoRan (FCX). I’ve been recommending it since it was $4.00.
Q: Oil is the pain train until EVs actually take over.
A: That’s true, and they haven’t. EVs have about a 6% market share now of new car sales worldwide, but that could rapidly accelerate given all the subsidies that EVs are getting. Also, we have many future recessions to worry about, during which oil could easily drop 290% like it did last year. If you can hack that kind of volatility, go for it, but I find better things to do quite honestly. And I think my next oil trade will be a short, especially if we go over $100.
Q: What about Bitcoin?
A: It could go sideways in a range for a while. If we can’t hold the 200-day, we’re going back down to the high 30,000s, where we were at the start of the year—we could give up the entire year of 2021. Bitcoin also suffers from rising interest rates since they don’t yield anything.
Q: Is this recorded?
A: Yes, the webinar recording goes out in about 2 hours. Log into the madhedgefundtrader.com website and go to my account, where you’ll find it with all the different products you’ve purchased.
Q: I just closed out my (TLT) 150 put option for the biggest single trade profit in my life; I just made 20% of my annual salary alone today. Thank you, John!
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 ten years are there in all their glory.
Good Luck and Stay Healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Automation is taking place at warp speed displacing employees from all walks of life.
According to a recent report, the U.S. financial industry will depose of 200,000 workers in the next decade because of automating efficiencies.
Yes, humans are going the way of the dodo bird and banking will effectively become algorithms working for a handful of executives and engineers.
The x-factor in this equation is the direct capital of $150 billion annually that banks spend on technological development in-house which is higher than any other industry.
Welcome to the world of lower cost, shedding wage bills, and boosting performance rates.
We forget to realize that employee compensation eats up 50% of bank expenses.
The 200,000 job trimmings would result in 10% of the U.S. bank jobs getting axed.
The hyped-up “golden age of banking” should deliver extraordinary savings and premium services to the customer at no extra cost.
This iteration of mobile and online banking has delivered functionality that no generation of customers has ever seen.
The most gutted part of banking jobs will naturally occur in the call centers because they are the low-hanging fruit for the automated chatbots.
A few years ago, chatbots were suboptimal, even spewing out arbitrary profanity, but they have slowly crawled up in performance metrics to the point where some customers are unaware they are communicating with an artificially engineered algorithm.
The wholesale integration of automating the back-office staff isn’t the end of it, the front office will experience a 30% drop in numbers sullying the predated ideology that front office staff are irreplaceable heavy hitters.
Front-office staff has already felt the brunt of downsizing with purges carried out from 2018 representing an eighth year of continuous decline.
Front-office traders and brokers are being replaced by software engineers as banks follow the wider trend of every company transitioning into a tech company.
The infusion of artificial intelligence will lower mortgage processing costs by 30% and the accumulation of hordes of data will advance the marketing effort into a smart, multi-pronged, hybrid cloud-based and hyper-targeted strategy.
The last two human bank hiring waves are a distant memory.
The most recent spike came in the 7 years after the dot com crash of 2001 until the sub-prime crisis of 2008 adding around half a million jobs on top of the 1.5 million that existed then.
After the subsidies wear off from the pandemic, I do believe that the banking sector will quietly put in the call to trim even more.
The longest and most dramatic rise in human bankers was from 1935 to 1985, a 50-year boom that delivered over 1.2 million bankers to the U.S. workforce.
This type of human hiring will likely never be seen again in the U.S. financial industry.
Recomposing banks through automation is crucial to surviving as fintech companies like PayPal and Square are chomping at the bit and even tech companies like Amazon and Apple have started tinkering with new financial products.
And if you thought that this phenomenon was limited to the U.S., think again, Europe is by far the biggest culprit by already laying off 63,036 employees in 2019, more than 10x higher the number of U.S. financial job losses and that has continued in 2020 and 2021.
In a sign of the times, the European outlook has turned demonstrably negative with Deutsche Bank announcing layoffs of 40,000 employees through 2023 as it scales down its investment banking business.
Germany banks are also passing on the burden of negative interest rates to their clients.
A recent survey by Deutsche Bundesbank shows that 58% of banks are charging all savers negative interest rates while others only target wealthy and corporate clients.
If the U.S. dips into negatives rates in the future, expect the same nasty effect on job force cuts that Europe has experienced.
Either way, don’t tell your kid to get into banking, because they will most likely be feeding on scraps at that point.
THE LAST STAGE OF HUMAN-FACING BANK SERVICES IS NOW!
https://www.madhedgefundtrader.com/wp-content/uploads/2021/07/jul21.png574936Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2021-12-29 14:02:382022-01-03 12:09:16Automation and Banking
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