Global Market Comments
February 23, 2024
Fiat Lux
Featured Trade:
(FEBRUARY 21 BIWEEKLY STRATEGY WEBINAR Q&A),
(FXI), (SMCI), (PANW), (TSLA), (NVDA), (XLF),
(CCI), (XOM), (FANG), (AMD), (HD), (LOW)
Posts
Below please find subscribers’ Q&A for the February 21 Mad Hedge Fund Trader Global Strategy Webinar, broadcast from Silicon Valley, CA.
Q: What do you think of the comments of Ray Dalio and Jamie Dimon of an imminent war with Russia and China?
A: I think the chances of that are almost zero. You’re talking about Russia with a $1 trillion economy going to war against a combined GDP of the US and Europe of $50 trillion. Even Switzerland is sending tanks to Ukraine now. Our military is so dominant compared to any other country in the world, that it would be an instant wipeout. Russia and China know that, so they can threaten all they want but will take no action. That really has been the course since the end of WWII; talk is cheap. However, it is not a zero risk—a person like Ray Dalio, especially, always has to consider the 1% risk (Jamie Dimon less so.) I don’t worry about that at all; a lot of that is media hype. Newspapers have to fill their space every day of the year, even when nothing is happening.
Q: What about Russia putting nuclear weapons in space?
A: The US actually looked at doing this in the 60s and 70s when I was with the Atomic Energy Commission, and this is the problem: Uranium weighs four times that of lead, and it’s very hard to get any serious weight into space. And Russia has never been able to actually hit anything it aims at, so other than destroying a bunch of nearby Starlink satellites, it wouldn’t really accomplish much. Plus, we do have a treaty with Russia not to put nuclear weapons in space—not that agreements between the US and Russia are particularly trustworthy these days.
Q: Would you sell naked Nvidia (NVDA) puts right now?
A: Dan, somehow you got into my personal trading account and looked at all my positions! You know, I never advise people to sell naked puts unless they're happy to own the stock at that level. That means, first of all, you cannot leverage at all—the way people go bust on short put strategies is they sell far more puts than they have the money to support the cash buy if they have to do it. But I can tell you, I looked at the numbers this morning: if you sell short an Nvidia put now at 600 you can get about $10 for it. And, if Nvidia goes below 600 by option expiration day, you own Nvidia stock at a cost of $590. And I'm happy to own Nvidia at $590 because I think it could be worth $1,000 by yearend. There may be better ways to use your money with Nvidia at $600, like doing an at-the-money LEAPS which will get you a 100% return in a year even on no move. If you want to go, say, $40 out of the money or $50, like a 650-$650 Nvidia LEAPS, then you're looking at it with a 150% return in a year. So that is the better way to do it, it just depends on how aggressive you want to be and how eager you are to go back to work at Taco Bell if you lose all your money.
Q: What would you do with Super Micro Computer Inc. (SMCI) right now?
A: I would sell it, but then I would’ve sold it on the first 23x move. (SMCI) is a no-touch right now—I think they have a 3% float in their shares, and that’s what’s causing the spectacular market volatility.
Q: Will continued weakness in China (FXI) bring down the US markets?
A: No. We have very few investors from China in the US stock market. They really have no impact on our market. And the fundamentals couldn't be more different. You know, the US economy is in great shape right now (and getting better, I might add), while China continues to go down the toilet and is saber-rattling and warmongering. So, it's not good for stock prices for sure. You could put that at the bottom of the list of worries.
Q: Will Tesla (TSLA) ever turn around?
A: Well what you don’t know if you don't follow the company on a daily basis like I do, is that Tesla is continuously cutting costs, and increasing performance, and that will lead to greater sales and greater profits. But when that happens, I have no idea. I think the Tesla 2 coming out next year—the $25,000 EV could be a big turning point for the company. And of course, Tesla stock may front-run that by six months. So eventually, Tesla will come back.
Q: Thanks for your advice. I have a ton of Nvidia (NVDA) and some Tesla (TSLA). Should I sell my Tesla and put it in Nvidia?
A: No, you should do the opposite. Buy low, sell high—it’s my revolutionary new stock trading system which I’m thinking of copywriting. Nvidia has had one of the biggest stock gains in history, and Tesla is down year-on-year. So, that is the trade, and that is what a lot of long-term investors are doing, is doing that swap.
Q: Can we do a LEAPS on Palo Alto Networks (PANW)?
A: Absolutely. Wait for this selloff to finish, then go in at the money one year out and you should get a 100% or a double on your return. And by the way, when I’m convinced that tech stocks have finished this selloff, I’ll be issuing a whole bunch of LEAPS trade alerts. I’ll do the numbers and do the heavy lifting for you.
Q: Can Ukraine win the war against Russia without US aid?
A: No, in fact, it needs aid from both the US and Europe. Right now, Europe is carrying 100% of the burden, as the US has stopped providing aid to Ukraine, thanks to the Republican-led House of Representatives. And Ukraine is now ceding cities to Russia because they don’t have the ammunition or the missiles to defend them. So, give as much ammo as we can. Otherwise, it’s just a matter of time before US soldiers get involved in a European war once again. How the Republicans see cutting off as in America’s benefit, I can’t imagine, nor do many Republicans. They must be reading different news sources. But I’m also prejudiced on this, having been shot by Russians in Ukraine in October. (Those injuries are all healed by the way thanks to a stem cell injection and I’m back to hiking as usual.)
Q: When you say buy on dips, do you have a rule of thumb on what percentage a stock has to drop in order to consider it a dip?
A: It’s different for every stock because every stock has a different volatility. “Buy on the dip” might be a 5% for Cleveland Cliffs but it might be 20% for Nvidia. It’s all over the map—you just have to look at the charts and judge where the next support level is, before considering risking your own money.
Q: What’s your favorite dividend stock?
A: Well my Number One favorite, of course, is Crown Castle International (CCI)—the cellphone tower REIT—and REITS of any kind are going to be very high-yield and very attractive. Just stay away from the commercial office REITS, which are having their own well-publicized problems. Beyond that, the only attractive high dividend stocks are in energy: you have Exxon Mobil (XOM) yielding 3.7% and Diamondback Energy with the lovely ticker symbol of (FANG) yielding 4.48%. On the oils, you get a shot for not only the dividend but a nice capital gain on any recovery in the oil market. So that could be an attractive play once we finish bombing the Houthis and wiping out all their Iran-supplied missiles.
Q: What happened to the Japanese yen rally?
A: Well as with all other foreign currencies, it died and went to Heaven, because of the delay in US interest rate cuts. As long as the US doesn't cut interest rates, it will continue to have the strongest currency in the world. And when we get to the currency charts, you'll see exactly how strong the dollar has been. That does make the currencies very attractive right around here.
Q: Will commercial real estate blow up the banks, and therefore the stock market?
A: No, first of all, for big banks (XLF), commercial real estate is only 5% of their loan portfolio and if they lose 20% of that, that’s only a 1% loss of their total loans year for them and that is totally acceptable by in their business model. Second, if interest rates fall, the commercial real estate problem goes away because they can refinance at lower rates than you get now. Third, as the economy recovers, demand for office space will also recover, though it may take 5 years to soak up all the excess inventory that we have right now. San Francisco has an empty office space rate of about 30%, which is higher than it’s ever been. That is why a lot of smart, long-term real estate money is buying up buildings in San Francisco— they're buying them up for pennies on the dollar, so that sounds like a great investment. I remember back in the early eighties, Morgan Stanley did exactly the same thing in Houston after an oil collapse. You know, they were giving away office buildings—paying you to take them away, literally—and Morgan Stanley set up an in-house partner fund (it was only open for the partners from Morgan Stanley to invest in) and we went in and bought 600 million dollar’s worth of cheap Houston real estate. I think we ended up getting a 10x return on that, but that's what being a Morgan Stanley partner is all about. That was about 45 years ago, and it’s what’s happening now in San Francisco.
Q: Are you worried about Amazon (AMZN) with Jeff Bezos selling 8 billion dollars worth of stock?
A: Well, if you've made a couple of $100 billion you're allowed to spend $8 billion on yourself. And Amazon is one of the early leaders in AI technology, so I'm buying that on every dip. In fact, we had a long position in Amazon that just expired on Friday.
Q: Why is Home Depot Inc. (HD) stagnating?
A: Well that's easy: during the pandemic, everyone was stuck at home 24 hours a day, 7 days a week, so they wanted to fix stuff. With the end of the pandemic, that has ended and has slowed down business at both Home Depot and Lowes (LOW).
Q: Do you like Advanced Micro Devices (AMD) and would you buy it on a dip?
A: Absolutely, it’s all part of the same AI trade, as are all the other big chip stocks.
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, select your subscription (GLOBAL TRADING DISPATCH, TECHNOLOGY LETTER, or Jacquie's Post), 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
Mad Hedge Technology Letter
January 26, 2024
Fiat Lux
Featured Trade:
(WESTERN DIGITAL HAS POTENTIAL)
(WDC), (NVDA), (AMD)
Chip stocks have been the talk of the town in the tech world.
It’s hard not to notice as stock valuations skyrocket.
These aren’t normal times anymore.
A secular trend that could be the biggest we have seen for a generation is taking hold.
That trend today is AI, and this 800-pound gorilla in the room is causing institutional money to pour into the chips that will help AI and the top firm is clearly Nvidia (NVDA).
After NVDA, there is a solid group of others like AMD, but even after that, there is still more ammo left in the shotgun.
Investors could look at an intriguing name - something like Western Digital (WDC).
WDC has a $19 billion valuation and in the long term future could be considered a bargain looking back.
Its earnings weren’t great with another quarter of decelerating revenue.
Western Digital (WDC) reported a narrower-than-expected loss for its December quarter, with revenue just squeaking past expectations.
The business model has been affected due to the impact of structural changes the company implemented in its flash and HDD businesses.
Last quarter, the company said it would spin off its flash memory business, which has been grappling with a supply glut after talks of merging the unit with Japan's Kioxia stalled, by the second half of 2024.
The company said its second-quarter loss included $156 million underutilization-related charges in Flash and HDD.
Western Digital has struggled as demand for memory chips cooled in the past couple of years, but underlying shares have rallied in recent months.
WDC stock had gained nearly 40% since the end of October.
Cloud represented 35% of total revenue, with the quarterly growth attributed to higher “nearline” or onsite data storage shipments to data center customers and better nearline pricing. The increase in client revenue was driven by an increase in the average selling price of flash memory and customer revenue was driven by a seasonal surge in flash bit shipments.
Revenue came in at $3.023 billion, down 2.5% year-over-year but up 10% quarter-over-quarter.
In addition to the recovery in both Flash and HDD markets, I believe storage is entering a multi-year growth period.
Generative AI has quickly emerged as yet another growth driver and transformative technology that is reshaping all industries, all companies, and our daily lives.
Importantly, industry analysts estimate that the edge now represents approximately 80% of total NAND bit shipments, an increase from approximately 75% in 2022, which is another indication that cloud demand was significantly pulled in during the pandemic.
In addition, I believe the second wave of generative AI-driven storage deployments will spark a client and consumer device refresh cycle and reaccelerate content growth in PC, smartphone, gaming, and consumer in the coming years.
WDC has done some nice business specifically in the cloud division with some serious growth.
WDC is also at the center of the generative AI trend and they could be the recipient of “the tide lifts all boats.”
However, I don’t like how revenue as a whole isn’t growing causing major uproar in the investor community.
Splitting up the company should do the trick of weeding out the bad revenue from the good.
I do believe that WDC represents good value for buy-and-hold investors in the mid-$50 range.
This isn’t an ideal stock to trade in and out and even on an earnings beat, the stock sold off which isn’t what investors like to see in terms of price action.
There isn’t enough investor confidence in the stock yet, but that could change in the future.
Mad Hedge Technology Letter
January 22, 2024
Fiat Lux
Featured Trade:
(TAKE A DEEP BREATH WITH AI)
(NVDA), (QRVO), (GOOGL), (AMZN), (AMD), (AVGO), (AAPL), (AI)
Stocks and firms tethered to artificial intelligence won’t always have a one-way joyride to profits.
The honest truth is that the road will be met with drawbacks some years and the sector will need time to digest the new developments.
Mainstream tech has made most people believe that AI can do no wrong in the short-term future.
There is a consensus that it’s the panacea for everything and anything.
The Magnificent 7 tech firms are priced for an AI boom and the hype is there, but it will take some time for AI to really filter into meaningful balance sheet development.
We are still in the beginning stages.
It’s not surprising that the Massachusetts Institute of Technology published a study that sought to address fears about AI replacing humans in a swath of industries and found that artificial intelligence can’t ACTUALLY replace the majority of jobs right now in cost-effective ways.
It’s important to note this report because much of AI has been celebrated with no mention of cost control or benefit versus the price or expenses incurred.
Any corporate tech will need to evaluate whether it’s worth gutting whole divisions to replace it with AI.
In many cases in early 2024, this type of strategy to a workforce could turn into an unmitigated disaster.
For instance, a new AI study found only 23% of workers, measured in terms of dollar wages, could be effectively supplanted. In other cases, because AI-assisted visual recognition is expensive to install and operate, humans did the job more economically.
The adoption of AI across industries accelerated last year after OpenAI’s ChatGPT and other generative tools showed the technology’s potential. Tech firms from Microsoft and Alphabet in the US to Baidu and Alibaba in China rolled out new AI services and ramped up development plans which could serve as a canary in the coal mine for things to come. Fears about AI’s impact on jobs have long been a central concern.
Computer vision is a field of AI that enables machines to derive meaningful information from digital images and other visual inputs, with its most ubiquitous applications showing up in object detection systems for autonomous driving or in helping categorize photos on smartphones.
The cost-benefit ratio of computer vision is most favorable in segments like retail, transportation, and warehousing.
The study was funded by the MIT-IBM Watson AI Lab and used online surveys to collect data on about 1,000 visually assisted tasks across 800 occupations. Only 3% of such tasks can be automated cost-effectively today, but that could rise to 40% by 2033 if data costs fall and accuracy improves.
When getting academic about the subject, many projections feel way too ambitious.
AI won’t take over the workforce in the next few years and will struggle to make inroads before 2030.
That doesn’t mean firms like Nvidia, AMD, Qorvo, and Broadcom will not sell AI-based chips promising better AI.
That doesn’t mean firms like Google, Apple, Microsoft, Amazon, and Meta won’t feel a small AI bump in revenue.
There certainly will be some changes, but wholesale transformation is a ways off.
I believe the AI hype has gotten too far over its skis.
Tech needs to slow down and make sure it’s properly implemented and the real effects will be seen after 2030.
Global Market Comments
November 17, 2023
Fiat Lux
Featured Trade:
(NOVEMBER 15 BIWEEKLY STRATEGY WEBINAR Q&A),
(TLT), (AMD), (SPY), (FXA), (WYNN), (MGM), (RCL), (CCL), (TSLA), (SCHW), (BLK), (JPM), (XHB), (TSLA), (FXI), (FCX)
Below please find subscribers’ Q&A for the November 15 Mad Hedge Fund Trader Global Strategy Webinar, broadcast from Incline Village, NV.
Q: I was a little surprised that you closed the (TLT) $79-$82 vertical bull call spread so early. Why not wait longer?
A: I took an 84% profit in only four trading days and skipped the last 16% which I would have had to wait another month to get. I was much better off putting on another position and making another 100%. In this kind of market, you want to take quick profits and then roll them into new positions as fast as you can. That’s where you make the big money, and that's what we’ve been doing. You have to strike when the iron is hot.
Q: November’s results are phenomenal!
A: Yes they are, 55 years of practice makes it easy.
Q: Thoughts on Advanced Micro Devices (AMD)?
A: It’s going higher. I think the whole semiconductor sector is the leading sector in the market; we have seen that with these gigantic 30-40% moves in the semis. That will continue, and then it will spread out to the rest of big tech (which it’s already done), and eventually, we get to the industrials and commodities in the second half of 2024 when the big economic growth returns. So that is the script for the coming year.
Q: Will the upcoming Fed interest rate cuts crash the dollar, and which emerging currency should I buy?
A: Yes and yes. It will crush the dollar–we could be entering a new decade of a falling U.S. dollar. The number one currency to buy is the Australian dollar (FXA). It has the most leverage for a global economic recovery. And you can see when we get to the currency section of today’s webinar that the currencies are already starting to move. Whatever currency has falling interest rates is always the weakest, and the U.S. dollar is about to become just that.
Q: What’s the deal with casino stocks lately like Wynn Resorts (WYNN) and MGM Resorts International (MGM)?
A: These companies took on massive amounts of debt during the pandemic to stay in business, so they are now highly sensitive to interest rates. If you look at the collapse of these stocks in the last four months, it is almost perfectly in sync with rising interest rates, and that’s why the stocks performed so poorly. By the way, the same is true for all the cruise companies like Royal Caribbean (RCL), and Carnival (CCL). The flip side of that is when interest rates start to go down these stocks do great, and they are falling interest rate plays, so you probably should be buying the casinos, the cruise lines, and the hotel stocks here because they are all suffering from massive debt loads, the cost of which is about to decline sharply.
Q: Should we roll up the expiration of LEAPS to 2026?
A: Probably not a bad idea, because we may get weakness in commodities for the next several months before we enter a massive new bull market. If you have the 2025, you’ll probably make money on that, but to be ultra-safe you could roll it forward to 2026. We know there’s a global copper shortage developing because of EVs, but right now EV sales are slow, so you don’t want to be piling onto the leverage plays on that too soon. That’s also why I am not in Tesla (TSLA) for the Moment.
Q: What will happen if the Fed cuts interest rates and there’s no recession? Won’t prices of everything from houses to butter go wild?
A: They won’t go wild, but they will go up at a 2% inflation rate, which is what the Fed wants. And house prices, which have been flat for the last year, will rise. And they may rise greater than the inflation rate of 2%; they may rise more like 5%. Falling interest rates mean falling mortgages; we’ve already seen mortgage rates drop from 8 to 7.4%. It's one of the sharpest drops in history, and more drops bring more first-time home buyers into the market. And don’t forget that the Fed could also raise interest rates down the road. If the economy gets too hot again, they may raise again, but I think we’ll see a lot of cuts first.
Q: Do you think financial stocks will go up or fall with potential rate decreases?
A: Banks always go up during falling interest rates because their cost of funds goes down and the default rate on their loans also goes down, so they get a hockey stick effect on earnings; that’s why you’re seeing such monster moves in stocks like JP Morgan (JPM) and the brokers (SCHW) as well as the money managers like BlackRock (BLK).
Q: Does the bull market keep going since unemployment still hasn’t made a dent, meaning consumers are fueling the rise in stocks?
A: Yes, consumer spending is still doing well. People seem to be getting the money from somewhere and it seems to be rising wages. But I expect wage gains to drop by half; people will still get wage increases, but not the peak levels that the UAW got in their deal with Detroit. Is a Goldilocks economy that is setting up, and the economy keeps growing We never do get a recession, and all risk assets rise as a result. That is the outlook!
Q: Bullish on Berkshire Hathaway (BRK/B)?
A: I completely agree, it’s one of the best-run companies in the world. 93-year-old Warren Buffet and 99-year-old Charlie Munger have delivered double the performance of the S&P 500 over the last three years.
Q: When does the IPO market come back to life, and which industries will benefit the most?
A: AI and Technology will benefit the most. There are several AI companies in the wings waiting to go public, and they will be the first out the door with the highest multiples, and then the IPO business will broaden out from there.
Q: Will a worsening Chinese property market blow up the U.S. Stock rally or is it just a fake risk I shouldn’t worry about?
A: The Chinese (FXI) real estate market is detached from the global economy. There is no international implication, and it’s also typical of emerging markets to overbuild and then have a financial collapse. Nobody I know has suffered anything in China in a long time, and if anything, they’re liquidating what little they have left. It doesn’t affect us at all. It’s interesting reading about it in the newspapers, and that’s about it.
Q: What are some stocks we should consider day trading these days?
A: None. Most people who try day trading lose money doing it; some people pull it off but they have many years of experience. Algorithms from big brokers have essentially taken over the day trading business with high-frequency trading. You do better on a one-month view, which I do on my front-month options. Most 2023 Stock Gains Happened in only eight days, up some 14% since January 1, and only seven stocks accounted for most of the increase. If you are a day trader, you most likely missed all of this because most of the moves were on gap openings.
Q: Home builders (XHB) have just had a great run, is this an area too short?
A: “Short” is a term you need to remove from your language! You don’t want to short a big bull move like this. If anything, wait until May when the summer seasonals start to favor short positions, and it depends on how high the market runs up until then. Don’t ever think about shorting the very beginning of a new bull market in stocks–not for housing, not for anything! And the outlook for housing over the long term looks fantastic; there’s still an overwhelming supply and demand in favor of the home builders. Some 85 million new Millennials need to buy first-time homes.
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, select your subscription (GLOBAL TRADING DISPATCH, TECHNOLOGY LETTER, or Jacquie's Post), then click on 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
2023 Kherson Ukraine – Ha Ha Missed Me! It was a dud.
Mad Hedge Technology Letter
November 13, 2023
Fiat Lux
Featured Trade:
(RIDE THE NVIDIA AND AMD ROLLER COASTER)
(NVDA), (AMD), (ORCL), (GOOGL), (AMZN)
It’s scary when the best chip company in the world rolls out new products.
It’s scary because others can’t compete and they get left further behind.
It’s scary because the high level of technology facilitates another new wave of technological expertise in other companies from the software and hardware side.
These new products are almost always faster, more efficient, and better than the previous products catalyzing a snowball effect that lifts everybody’s revenue.
This type of outstanding performance of late is the reason that made Nvidia (NVDA) into the world’s most valuable chipmaker and they have announced they are updating its H100 artificial intelligence processor, adding more capabilities to a product that has fueled its dominance in the AI computing market.
The new model, called the H200, will get the ability to use high-bandwidth memory, or HBM3e, allowing it to better cope with the large data sets needed for developing and implementing AI.
Amazon’s AWS, Alphabet’s Google (GOOGL) Cloud and Oracle’s (ORCL) Cloud Infrastructure have all committed to using the new chip starting next year.
Winning orders is easy with the outsized brand recognition and type of game changing product on offer.
The current version of the Nvidia processor is already experiencing accelerated demand.
But the product is facing stiffer competition: Advanced Micro Devices (AMD) is bringing its rival MI300 chip to market in the fourth quarter, and Intel Corp. claims that its Gaudi 2 model is faster than the H100.
AMD is another chip company that readers should feel comfortable diversifying into if they don’t feel comfortable putting all eggs into the Nvidia basket.
AMD’s stock is surging towards old highs around $125 and should overtake that soon after the nice rally in the 2nd half of the year.
With the new product, Nvidia is trying to keep up with the size of data sets used to create AI models and services.
Adding the enhanced memory capability will make the H200 much faster at bombarding software synthesizing data.
Large computer makers and cloud service providers are expected to start using the H200 in the second quarter of 2024.
Nvidia got its start making graphics cards for gamers, but its powerful processors have now won a following among data center operators.
That division has gone from being a side business to the company’s biggest moneymaker in less than five years.
Nvidia’s graphics chips helped pioneer an approach called parallel computing, where a massive number of relatively simple calculations are handled at the same time.
That’s allowed it win major orders from data center companies, at the expense of traditional processors supplied by Intel.
The growth helped turn Nvidia into the poster child for AI computing earlier this year — and sent its market valuation soaring.
Nvidia is like a freight train that has left the station.
The stock is up 9 straight days as we cruise into its earnings report on November 21st.
It’s hard to see this earnings report being nothing short of spectacular and Nvidia have become famous for forecasting the unthinkable.
They then go and surpass a high bar and push the envelope further so it’s not a bad idea to buy NVDA before the earnings report.
The speed at which they come out with products is astounding and now being able to boast the best server chip in the tech enterprise community, it just represents yet another powerful part of their stunning array of tech arsenal.
$600 per share is a no-brainer for Nvidia and that will be surpassed in 2024.
