Global Market Comments
February 22, 2021
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or TIME FOR A BREAK)
(GME), (TLT), (FB), (AMZN), (AAPL), (XME), (FCX), (MS), (GS), (BLX), (KO), (AMD)
Posts
I know you’re not going to want to hear this. I might as well be trying to pull your teeth, lead you down a garden path, or sell you a high-priced annuity.
But there is nothing to do in the market right now. Nada, diddly squat, bupkis, and for all you Limey’s out there, bugger all.
For during the first six weeks of 2021, we have pretty much squeezed all there is out of the market.
Not only did we nail the timing and the direction, we also got the lead sectors, financials, brokers, chips, and short bonds (MS), (GS), (BLK), (AMD). We also chased the Volatility Index (VIX) down from $38 to a lowly $20, baying and protesting all the way.
That enabled us to extract a 28.29% profit so far in 2021, the best return in the 13-year history of the Mad Hedge Fund Trader. The only other time you see numbers this high is when Ponzi schemes get busted. And not a dollar of this was earned from the really marginal plays like Bitcoin, SPAC’s, GameStop (GME), or pot stocks.
If I feel like I did a year’s worth of work during the first seven weeks of 2021, it’s because I have, issuing 60 trade alerts since January 1.
However, bonds (TLT) are reaching the end of their current leg down. The 1.34% yield we saw on Friday is suspiciously close to the 1.36% yields we saw during the 2012 and 2017 market double bottom.
So, there may be some wood to chop around these, levels, possibly for weeks or months.
This is important because a collapsing bond market has been the principal driver of the winning trades of 2021, such as in banks, brokers, money managers, and other domestic recovery plays.
And when one side of the barbell goes dead, what do you do? You buy the other side. FANGs are just completing a six-month “time” correction where they have gone absolutely nowhere. So, Facebook (FB), Amazon (AMZN), and Apple (AAPL) may be getting ready for a roll.
One other sector that might keep running is the SPDR Mining & Metals ETF (XME), and Freeport McMoRan (FCX). That’s because it's not just us buying metals to front-run a recovery, it’s the entire world. What do you think a $2 trillion infrastructure budget will do to this area?
New lows for bonds, as the ten-year US Treasury yield hits 1.26%, up 38 basis points since January 1 and a one-year high. 1.50% here we come! Ever hear the expression “Don’t fight the Fed”? All financials are off to the races, where we were 60% long. Biden’s $1.9 trillion rescue package will be 100% borrowed and take total US borrowing to a back-breaking 55% of GDP. I hate to sound like a broken record but keep selling rallies in the (TLT), buy (JPM), (BAC), (GS), (MS), and (BRK/B) on dips.
Volatility index hit a one-year Low, which is what you’d expect at the dawn of a decade-long bull market in stocks. The (VIX) may flat line here for a while before the next out-of-the-blue spike.
The Nikkei Stock Average topped 30,000, for the first time in 31 years, Yes, it’s been a long haul. I was heavily short in the initial 1990 meltdown from 39,000 to 20,000 and many fortunes were made. The top marked the end of the Japanese company’s ability to copy their way into leadership. After that, rapidly advancing technology made copying too slow to compete in a global economy.
A midwest storm upended energy markets, with oil popping $8 to $67 and gas deliveries spiking from $4 to $999. It would have gone higher, but the software only provided for three digits. Electricity prices are all over the map. Some 4 million Texas customers are without power. Fracking has ground to a halt. Windfarms are frozen solid. If you are a net producer (as I am), you are in heaven. The turmoil is expected to be gone by the weekend. It’s another high price paid for ignoring global warming.
Weekly Jobless Claims soared, to 861,000, casting a dark cloud over the economic recovery. The news took a 300-point bite out of the Dow. Illinois and California saw the biggest gains. We are not out of the woods yet.
SpaceX was valued at $74 Billion, according to an $850 billion venture capital fundraising round this week. However, Elon Musk’s rocket company won’t go public until men are landed on Mars. The company is also the launching pad for its Starlink global WIFI project, which will cost at least $10 billion to build out. Blowing up rockets is not a good backdrop for an IPO.
Cash is still pouring off the sidelines, with equity mutual funds attracting some $7.8 billion last week. As long as this is the case, which could be for years, any market corrections will be limited. Strangely, bond funds are still pulling in money too, some $5.7 billion. It’s called a liquidity-driven market, silly!
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 400% to 120,000 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 120,000 here we come!
My Mad Hedge Global Trading Dispatch earned an amazing 17.27% so far in February after a blockbuster 10.21% in January. The Dow Average is up a trifling 2.92% so far in 2021.
This is my fourth double-digit month in a row. My 2021 year-to-date performance soared to 27.28%. After the February 19 option expiration, I am now 80% in cash, with a single long in Tesla (TSLA) left.
That brings my 11-year total return to 450.03%, some 2.05 times the S&P 500 (SPX) over the same period. My 11-year average annualized return now stands at an Everest-like new high of 40.30%.
My trailing one-year return exploded to 94.09%, the highest in the 13-year history of the Mad Hedge Fund Trader. We have earned 109.00% since the March 20, 2020 low.
We need to keep an eye on the number of US Coronavirus cases at 28 million and deaths approaching 500,000, which you can find here. We are now running at a heart breaking 3,000 deaths a day. But that is down 35% from the recent high.
The coming week will be a boring one on the data front.
On Monday, February 22, at 8:30 AM EST, the Chicago Fed National Activity Index is out. Zoon (ZM) reports.
On Tuesday, February 23 at 9:00 AM, the S&P Case-Shiller National Home Price Index for December is announced. Square (SQ) and Intuit (INTU) report.
On Wednesday, February 24 at 8:30 AM, New Home Sales for January are printed. NVIDIA (NVDA) reports.
On Thursday, February 25 at 9:30 AM, Weekly Jobless Claims are printed. US Durable Goods for January and Q4 GDP are out. Salesforce (CRM), (Moderna (MRNA), and Airbnb (ABNB) report.
On Friday, February 26 at 8:30 AM, US Personal Income and Spending are published. DraftKings (DKNG) reports. At 2:00 PM, we learn the Baker-Hughes Rig Count.
As for me, if you want to see what it is like to work at Amazon, watch the movie Nomadland. It’s an artsy Francis McDormand film made with a $4 million budget about the end of life, which I caught over the weekend on Hulu.
It covers a contemporary trend in US society where retirees with no savings move into RVs and live off the grid, working occasionally to earn gas money. They raved about it in Europe.
If I don’t keep those trade alerts coming, that could be me in a couple of years.
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
February 17, 2021
Fiat Lux
Featured Trade:
(HOW TO HANDLE THE FRIDAY, FEBRUARY 19 OPTIONS EXPIRATION),
(TSLA), (MS), (BA), (BLK), (GS), (AMD), (KO), (BAC), (NFLX), (AMZN), (AAPL), (INTU), (QCOM), (CRWD), (AZN), (GILD)
Followers of the Mad Hedge Fund Trader Alert Services have the good fortune to own no less than 16 deep in-the-money options positions, all of which are profitable. All but one of these expire in two trading days on Friday, February 19, and I just want to explain to the newbies how to best maximize their profits.
It was time to be aggressive. I was aggressive beyond the pale.
These involve the:
Global Trading Dispatch
- (TSLA) 2/$650-$700 call spread 20.00%
- (TSLA) 3/$600-$650 call spread
- (MS) 2/$55-$60 call spread 10.00%
- (BA) 2/$150-$160 call spread 10.00%
- (BLK) 2/$640-$660 call spread 10.00%
- (GS) 2/$240-$260 call spread 10.00%
- (AMD) 2/$75-$80 call spread 10.00%
- (BAC) 2/$28-$30 call spread 10.00%
- (KO) 2/$44-$47 call spread 10.00%
Mad Hedge Technology Letter
- NFLX 2/ $510- $515 call spread 10.00%
- AMZN 2/ $3,095- $3,100 call spread 10.00%
- AAPL 2/ $126-$129 call spread 10.00%
- INTU 2/ $340-$345 call spread 10.00%
- QCOM 2/ $135-$140 call spread 10.00%
Mad Hedge Biotech & Healthcare Letter
- (AZN) 2/$46.50-$49.50 call spread 10.00%
- GILD 2/ $57-$60 call spread 10.00%
Provided that we don’t have a huge selloff in the markets or monster rallies in bonds, all 15 of these positions will expire at their maximum profit point.
So far, so good.
I’ll do the math for you on our oldest and least liquid position, the Tesla February 19 $650-$700 vertical bull call spread, which I initiated on January 25, 2021 and will definitely run into expiration. At the Friday high, Tesla shares were at a lowly $816, some $53 lower than the $869.70 that prevailed when I strapped on this trade.
Provided that Tesla doesn’t trade below $700 in two days, we will capture the maximum potential profit in the trade. That’s why I love call spreads. They pay you even when you are wrong on the direction of the stock. All of the money we made was due to time decay and the decline in volatility in Tesla stock.
Your profit can be calculated as follows:
Profit: $50.00 expiration value - $44.00 cost = $6.00 net profit
(4 contracts X 100 contracts per option X $6.00 profit per options)
= $2,400 or 20% in 18 trading days.
Many of you have already emailed me asking what to do with these winning positions.
The answer is very simple. You take your left hand, grab your right wrist, pull it behind your neck, and pat yourself on the back for a job well done.
You don’t have to do anything.
Your broker (are they still called that?) will automatically use your long position to cover your short position, canceling out the total holdings.
The entire profit will be credited to your account on Monday morning February 22 and the margin freed up.
Some firms charge you a modest $10 or $15 fee for performing this service.
If you don’t see the cash show up in your account on Monday, get on the blower immediately and find it.
Although the expiration process is now supposed to be fully automated, occasionally machines do make mistakes. Better to sort out any confusion before losses ensue.
If you want to wimp out and close the position before the expiration, it may be expensive to do so. You can probably unload them pennies below their maximum expiration value.
Keep in mind that the liquidity in the options market understandably disappears, and the spreads substantially widen, when security has only hours, or minutes until expiration on Friday, February 19. So, if you plan to exit, do so well before the final expiration at the Friday market close.
This is known in the trade as the “expiration risk.”
If for some reason, your short position in your spread gets “called away,” don’t worry. Just call your broker and instruct them to exercise your long option position to cover your short option position. That gets you out of your position a few days early at your maximum profit point.
If your broker tells you to sell your remaining long and cover your short separately in the market, don’t. That makes money for your broker, but not you. Do what I say, and then fire your broker and close your account because they are giving you terrible advice. I’ve seen this happen many times among my followers.
One way or the other, I’m sure you’ll do OK, as long as I am looking over your shoulder, as I will be, always. Think of me as your trading guardian angel.
I am going to hang back and wait for good entry points before jumping back in. It’s all about keeping that “Buy low, sell high” thing going.
I’m looking to cherry-pick my new positions going into the next month-end.
Take your winnings and go out and buy yourself a well-earned dinner. Just make sure it’s take-out. I want you to stick around.
Well done, and on to the next trade.
Global Market Comments
February 16, 2021
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or A RETURN TO IRRATIONAL EXHUBERANCE)
(PLBY), (SPX), ($INDU), (NVDA), (AMD), (MU), (USO)
Playboy is going public.
Its flagship magazine was wiped out by free internet porn last year after a storied 66-year run. During the 1970s, an invitation to a new club opening was the hottest ticket in town.
Of course, I bought the magazine only to read the articles.
Melania Trump as a centerfold? The business possibilities boggle the mind. Of course, it’s going public through a SPAC. Nobody else would touch this with a ten-foot pole. The ticker symbol will be (PLBY).
What this IPO does tell me is how overheated the markets are getting. In 1996, former Fed governor, saxophone player, and Ayn Rand acolyte, the gnomish Alan Greenspan warned the stock market of “irrational exuberance.” Since then, the Dow Average has risen by 5.2 times in 23 years, revisiting the 6,000 low once in 2009.
In fact, let me explain to you why stocks are so cheap.
At the 2000 Dotcom Bubble top, ten-year US Treasury yields stood at 6%. Stocks would have to rise five times more from today’s paltry 1.20% to reach the same relative valuation.
Dow 163,000 anyone?
Similarly, the big FANG stocks would have to triple in value to get us to the 100X price earnings multiple that prevailed in 2000. That gets us at least to Dow 94,500.
And this is what people don’t get about liquidity-driven bull markets. They go on far, far longer than anyone imagines possible. You had to be in Tokyo in 1989 to understand this.
If you’re really and truly worried about stocks, take a look at the chart below and how they reacted to the last catastrophic selloff that took place during 2007-2009.
After an initial, frenetic move, they rose by, you guessed it, 5.2 times.
The Global Chip Shortage is spreading beyond cars to phones and electronics. High prices beckon across the board. Could this be the black swan that heads off the recovery? It’s all a screaming BUY for (NVDA), (AMD), and (MU). I can’t believe these haven’t moved yet.
Biden created a Bull Market in Oil (USO) when he banned new leases on federal lands. The move took 3 million barrels a day off the market, taking a bite out of the 10 million barrels a day oversupply. And economic recovery should soak up the remaining 7 million barrels, 2021 forecasts for Texas tea are now reaching as high as $80.
Space X is taking pre-orders for Starlink, Elon Musk’s Global satellite WIFI network. Another industry disrupted. For a $99 deposit, you can access 500 megabytes a second, faster than available for most of the US. The goal is to launch 11,943 satellites by 2024. If it works, AT&T (T), Comcast (CMCSA), and Verizon (V) could be in big trouble. When you own your own rocket company, it’s easy to undercut the competition.
Weekly Jobless Claims are still weak, at 793,000, far higher than expected, but less than last week. Total jobless claims have it an unbelievable 20.44 million, just short of the 1930’s Great Depression high. Perhaps 20% of the country is living on government handouts.
The Pandemic Property Boom continues, posting the hottest numbers since 2005. The National Association of Realtors says the price of a single-family home rose by a staggering 14.9% in Q4. The Northeast was the leader at a 21% gain. The market keeps going from strength to strength.
Will the Dow double in a year? We only have 4,500 points to go for a 100% gain from the last March 20 low. We have already seen the sharpest gain in history, beginning when Biden took the lead in the primaries. Will passage of the $1.9 trillion rescue package take us over the finish line? And are we setting up for a “Buy the rumor, sell the news? We’ll know in a month. I bet you’ve just made more money in stocks than you’ve ever imagined possible. Take short-term profits in everything.
Bonds hit new lows, taking the ten-year US Treasury yield up to 1.20%. The Feds hit the markets for a massive $120 million in debt this week and buyers are obviously glutted. Keep selling those rallies in the (TLT). Maybe you should start selling dips, too. Use bond selloffs for your stock market timing. They’re about to become “certificates of confiscation” again.
No hint of rising rates soon, hints Fed governor Jay Powell. Recovery is the only goal, damn the inflation torpedoes.
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 400% to 120,000 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 120,000 here we come!
My Mad Hedge Global Trading Dispatch earned an amazing 16.48% so far in February after a blockbuster 10.21% in January. The Dow Average is up a trifling 2.80% so far in 2021.
This is my fourth double-digit month in a row. My 2021 year-to-date performance soared to 26.69%. There are only four trading days left until the February 19 option expiration, when I automatically go into 80% cash. That’s convenient!
That brings my 11-year total return to 449.24%, some 2.04 times the S&P 500 (SPX) over the same period. My 11-year average annualized return now stands at an Everest-like new high of 40.29%.
My trailing one-year return exploded to 90.96%, the highest in the 13-year history of the Mad Hedge Fund Trader. We have earned 108.63% since the March 20, 2020 low.
We need to keep an eye on the number of US Coronavirus cases at 27.7 million and deaths approaching 500,000, which you can find here. We are now running at a heartbreaking 3,000 deaths a day. But that is down 35% from the recent high.
The coming week will be a boring one on the data front.
On Monday, February 15, markets are closed for Presidents Day.
On Tuesday, February 16 at 8:30 AM EST, the NY Empire State Manufacturing Index is out. CVS (CVS) and Zoetis report.
On Wednesday, February 17 at 8:30 AM, US Retail Sales for January are published. At 2;00 PM, we learn the Fed Open Market Committee minutes from the last meeting. Shopify and Twilio report.
On Thursday, February 18 at 9:30 AM, Weekly Jobless Claims are printed. Barrick Gold (GOLD) and Roku (ROKU) report.
On Friday, February 19 at 10:00 AM, Existing Home Sales for January are released. We learn the Baker-Hughes Rig Count. As we have a three-day weekend following, option volatility should collapse. John Deere (DE) reports.
As for me, let me tell you what the last weeks of the great Japanese bull market were like at the end of 1989.
The big thing then was to eat sushi salted with flecks of pure gold. Any foreigner who could speak Japanese was worth hundreds of thousands of dollars a year.
The brokers would hire anyone. Kids went from running sandwich shops to trading desks at Morgan Stanley. Others upgraded from bicycles to Porsche Carrera’s and used to race on Tokyo’s abandoned freeway system in the middle of the night.
And you know what? Someone offered me a piece of gold-flecked sushi just the other day!
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Stock Gains Since Greenspan’s “Irrational Exuberance” Comment
Global Market Comments
January 22, 2021
Fiat Lux
Featured Trade:
(JANUARY 20 BIWEEKLY STRATEGY WEBINAR Q&A),
(QQQ), (IWM), (SPY), (ROM), (BRK/A), (AMZN), NVDA), (MU), (AMD), (UNG), (USO), (SLV), (GLD), ($SOX), CHIX), (BIDU), (BABA), (NFLX), (CHIX), ($INDU), (SPY), (TLT)
Below please find subscribers’ Q&A for the January 20 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Incline Village, NV.
Q: What will a significant rise in long term bond yields (TLT) do to PE ratios in general, and high tech specifically?
A: Well, the key question here is: what is “significant”. Is “significant” a move in a 10-year from 120 to 150, which may be only months off? I don’t think that will have any impact whatsoever on the stock market. I think to really give us a good scare on interest rates, you need to get the 10-year up to 3.0%, and that might be two years off. We’re also going to be testing some new ground here: how high can bond interest rates go while the Fed keeps overnight rates at 25 basis points? They can go up more, but not enough to hurt the stock market. So, I think we essentially have a free run on stocks for two more years.
Q: What about the Shiller price earnings ratio?
A: Currently, it’s 34.5X and you want to completely ignore anything from Shiller on stock prices. He’s been bearish on stocks for 6 years now and ignoring him is the best thing you can do for your portfolio. If you had listed to him, you would have missed the last 15,000 Dow ($INDU) points. Someday, he’ll be right, but it may be when the market goes from 50,000 to 40,000, so again, I haven't found the Shiller price earnings ratio to be useful. It’s one of those academic things that looks great on paper but is terrible in practice.
Q: Do you see any opportunity in China financials with the change of administration, like the (CHIX)?
A: I always avoid financials in China because everyone knows they have massive, defaulted loans on their books that the government refuses to force them to recognize like we do here. So, it’s one of those things where they look good on paper, but you dig deeper and find out why they’re really so cheap. Better to go with the big online companies like Baidu (BIDU) and Alibaba (BABA).
Q: Is it too late to enter copper?
A: No, the high in the last cycle for Freeport McMoRan (FCX) was $50 dollars and I think we’re only in the mid $ ’20s now, so you could get another double. Remember, these commodity stocks have discounted recovery that hasn’t even started yet. Once you do get an actual recovery, you could get another enormous move and that's what could take the Dow to 120,000.
Q: Do you see the FANGs coming back to life with the earnings results?
A: I think it'll take more than just Netflix to do that. By the way, Netflix (NFLX) is starting to look like the Tesla of the media industry, so I’d get into Netflix on the next dip. You could get a surprise, out-of-nowhere double out of that anytime. But yes, FANGs will come to life. They've been in a correction for five months now, and we’ll see—it may be the end of the pandemic that causes these stocks to really take off. So that's why I'm running the barbell portfolio and buying the FANGs on weakness.
Q: Are you recommending LEAPS on gold (GLD) and silver (SLV)?
A: Absolutely yes, go out two years with your maturity, you might buy 120% out of the money. That's where you get your leverage on the LEAPS. Something like a (GLD) January 2023 $210-$220 in-the-money vertical bull call spread and generate a 500% profit by expiration.
Q: Do you foresee a cool off for semiconductors ($SOX) even though there's been recent news of shortages?
A: No, not really. There are so many people trying to get into these it’s incredible. And again, we may get a time correction where we sideline at the top and then break out again to the upside. This is classic in liquidity-driven markets, which is what we have in spades right now. Thanks to 5G, the number of chips in your everyday devices is about to increase tenfold, and it takes at least two years to build a new chip factory. So, keep buying (NVDA), (MU), and (AMD) on dips.
Q: Where are the best LEAPS prospects (Long Term Equity Participation Securities)?
A: That would have to be in technology—that's where the earnings growth is. If you go 20% out of the money on just about any big tech LEAPs two years out, to 2023 those will be worth 500% more at expiration.
Q: What about SPACs (Special Purpose Acquisition Company) now, as we’re getting up to five new SPACs a day?
A: My belief is that a SPAC is a vehicle that allows a manager to take out a 20% a year management fee instead of only 1%. And it's another aspect of the current mania we’re in that a lot of these SPACs are doubling on the first day—especially the electric vehicle-related SPACs. Also, a lot of these SPACs will never invest in anything, but just take the money and give it back to you in two years with no return when they can't find any good investments…. If you’re lucky. There's not a lot of bargains to be found out there by anyone, including SPAC managers.
Q: Does natural gas (UNG) fall into the same “avoid energy” narrative as oil?
A: Absolutely, yes. The only benefit of natural gas is it produces 50% less carbon dioxide than oil. However, you can't get gas without also getting oil (USO), as the two come out of the pipe at the same time; so I would avoid natural gas also. Gas and oil are also about to lose a large chunk, if not all, of their tax incentives, like the oil depletion allowance, which has basically allowed the entire oil industry to operate tax-free since the 1930s.
Q: What about hydrogen cars?
A: I don't really believe in the technology myself, and when you burn hydrogen, that also produces CO2. The problem with hydrogen is that it’s not a scalable technology. It’s like gasoline—you have to build stations all over the US to fuel the cars. Of course, it produces far less carbon than gas or natural gas, but it is hard to compete against electric power, which is scalable and there's already a massive electric grid in place.
Q: If you inherited $4 million today, would you cost average into (QQQ), (IWM), or (SPY)?
A: I would go into the ProShares Ultra Technology ETF (ROM), which is double the (QQQ); and if you really want to be conservative, put half your money into (QQQ) or (ROM), and then half into Berkshire Hathaway (BRK/A), which is basically a call option on the industrial and recovery economy. I know plenty of smart people who are doing exactly that.
Q: Is it weird to see oil, as well as green energy stocks, moving up?
A: No, that's actually how it works. The higher oil and gas prices go, the more economical it is to switch over to green energy. So, they always move in sync with each other.
Q: I heard rumors that Amazon (AMZN) is likely to raise Prime’s annual fee by $10-20 a year in 2021. Will that be a catalyst for the stock to go higher?
A: Yes. For every $10 dollars per person in Prime revenue, Amazon makes $2 billion more in net profit. I would say that's a very strong argument for the stock going up and maybe what breaks it out of its current 6-month range. By the way, Amazon is wildly undervalued, and my long-term target is $5,000.
Q: Do you think that the spike in Apple (AAPL) MacBook purchases means that computers will overtake iPhones as the revenue driver for Apple in 2021, or is the phone business too big?
A: The phone business is too big, and 5G will cause iPhone sales to grow exponentially. Remember, the iPhones themselves are getting better. I just bought the 12G Pro, and the performance over the old phone is incredible. So yeah, iPhones get bigger and better, while laptops only grow to the extent that people need an actual laptop to work on in a fixed office. Is that a supercomputer in your pocket, or are you just glad to see me?
Q: Share buybacks dried up because of revenue headwinds; do you think they will come back in a massive wave, giving more life to equities?
A: Absolutely, yes. Banks, which have been banned from buybacks for the past year, are about to go back into the share buyback business. Netflix has also announced that they will go buy their shares for the first time in 10 years, and of course, Apple is still plodding away with about $100 or $200 million a year in share buybacks, so all of that accelerates. The only ones you won't see doing buybacks are airlines and Boeing (BA) because they have such a mountain of debt to crawl out from before they can get back into aggressive buybacks.
Q: Interest rates are at historic lows; the smartest thing we can do is act big.
A: That’s absolutely right; you want to go big now when we’re all suffering so we can go small later and run a balanced budget or even pay down national debt if the economy grows strong enough. The last person to do that was Bill Clinton, who paid down national debt in small quantities in ‘98 and ‘99.
Q: What do you think about General Motors (GM)?
A: They really seem to be making a big effort to get into electric cars. They said they're going to bring out 25 new electric car models by 2025, and the problem is that GM is your classic “hour late, dollar short” company; always behind the curve because they have this immense bureaucracy which operates as if it is stuck in a barrel of molasses. I don’t see them ever competing against Tesla (TSLA) because the whole business model there seems like it’s stuck in molasses, whereas Tesla is moving forward with new technology at warp speed. I think when Tesla brings out the solid-state battery, which could be in two years, they essentially wipe out the entire global car industry, and everybody will have to either make Tesla cars under license from Tesla—which they said they are happy to do—or go out of business. Having said that, you could get another double in (GM) before everyone figures out what the game is.
Q: Will you update the long-term portfolio?
A: Yes, I promise to update it next week, as long as you promise me that there won’t be another insurrection next week. It’s strictly a time issue. After last year being the most exhausting year in history, this year is proving to be even more exhausting!
Q: Do you see a February pullback?
A: Either a small pullback or a time correction sideways.
Q: Do you think the Zoom (ZM) selloff will continue, or is it done now that the pandemic is hopefully ending?
A: It’s natural for a tech stock to give up one third after a 10X move. It might sell off a little bit more, but like it or not, Zoom is here to stay; it’s now a permanent part of our lives. They’re trying to grow their business as fast as they can, they’re hiring like crazy, so they’re going to be a big factor in our lives. The stock will eventually reflect that.
Good Luck and Stay Healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Mad Hedge Technology Letter
December 21, 2020
Fiat Lux
Featured Trade:
(THE BEST WAY TO SUPERCHARGE YOUR TECH PORTFOLIO)
(NVDA), (PLTR), (AMD), (APPL), (OTC:SFTBF), (INTC), (QCOM)
Superiority is mainly about taking complicated data and finding perfect solutions for it. Trading in technology stocks is no different.
Investing in software-based cloud stocks has been one of the seminal themes I have promulgated since the launch of the Mad Hedge Technology Letter way back in February 2018.
Well, if you thought every tech letter until now has been useless, this is the one that should whet your appetite.
Instead of racking your brain to find the optimal cloud stock to invest in, I have a quick fix for you and your friends.
Invest in The WisdomTree Cloud Computing Fund (WCLD) which aims to track the price and yield performance, before fees and expenses, of the BVP Nasdaq Emerging Cloud Index (EMCLOUD).
What Is Cloud Computing?
The “cloud” refers to the aggregation of information online that can be accessed from anywhere, on any device remotely.
Yes, something like this does exist and we have been chronicling the development of the cloud since this tech letter’s launch.
The cloud is the concept powering the “shelter-at-home” trade which has been hotter than hot in 2020.
Cloud companies provide on-demand services to a centralized pool of information technology (IT) resources via a network connection.
Even though cloud computing already touches a significant portion of our everyday lives, the adoption is on the verge of overwhelming the rest of the business world due to advancements in artificial intelligence and the Internet of Things (IoT) hyper-improving efficiencies.
The Cloud Software Advantage
Cloud computing has particularly transformed the software industry.
Over the last decade, cloud Software-as-a-Service (SaaS) businesses have dominated traditional software companies as the new industry standard for deploying and updating software. Cloud-based SaaS companies provide software applications and services via a network connection from a remote location, whereas traditional software is delivered and supported on-premise and often manually. I will give you a list of differences to several distinct fundamental advantages for cloud versus traditional software.
Product Advantages
Speed, Ease, and Low Cost of Implementation – cloud software is installed via a network connection; it doesn’t require the higher cost of on-premise infrastructure setup and installation.
Efficient Software Updates – upgrades and support are deployed via a network connection, which shifts the burden of software maintenance from the client to the software provider.
Easily Scalable – deploying via a network connection allows cloud SaaS businesses to grow as their units increase, with the ability to expand services to more users or add product enhancements with ease. Client acquisition can happen 24/7 and cloud SaaS companies can more easily expand into international markets.
Business Model Advantages
High Recurring Revenue – cloud SaaS companies enjoy a subscription-based revenue model with smaller and more frequent transactions, while traditional software businesses rely on a single, large, upfront transaction. This model can result in a more predictable, annuity-like revenue streams making it easy for CFOs to solve long-term financial solutions.
High Client Retention with Longer Revenue Periods – cloud software becomes embedded in client workflow, resulting in higher switching costs and client retention. Importantly, many clients prefer the pay-as-you-go transaction model, which can lead to longer periods of recurring revenue as upselling product enhancements does not require an additional sales cycle.
Lower Expenses – cloud SaaS companies can have lower R&D costs because they don’t need to support various types of networking infrastructure at each client location.
I believe the product and business model advantages of cloud SaaS companies have historically led to better margins, growth, higher free cash flow, and efficiency characteristics as compared to non-cloud software companies.
How does the WCLD ETF select its indexed cloud companies?
Each company must satisfy critical criteria such as they must derive the majority of revenue from business-oriented software products, as determined by the following checklist.
+ Provided to customers through a cloud delivery model – e.g., hosted on remote and multi-tenant server architecture, accessed through a web browser or mobile device, or consumed as an application programming interface (API).
+ Provided to customers through a cloud economic model – e.g., as a subscription-based, volume-based, or transaction-based offering Annual revenue growth, of at least:
+ 15% in each of the last two years for new additions
+ 7% for current securities in at least one of the last two years
Some of the stocks that would epitomize the characteristics of a WCLD stock are Salesforce, Microsoft, Amazon-- I mean, they are all up, you know, well over 100% from the nadir we saw in March and contain the emerging growth traits that make this ETF so robust.
If you peel back the label and you look at the contents of many tech portfolios, they tend to favor some of the large-cap names like Amazon, not because they are “big” but because the numbers behave like emerging growth companies even when the law of large numbers indicate that to push the needle that far in the short-term is a gravity-defying endeavor.
We all know quite well that Amazon isn't necessarily a direct play on cloud computing, but the elements of its cloud business are nothing short of brilliant.
But ETF funds like WCLD, what they look to do is to cue off of pure plays and include pure plays that are growing faster than the broader tech market at large. So you're not going to necessarily see the vanilla tech of the world in that portfolio. You're going to see a portfolio that's going to have a little bit more sort of explosive nature to it, names with a little more mojo, a little bit more risk because you're focusing on smaller names that have the possibility to go parabolic and gift you a 10-bagger.
One stock that has the chance of a 10-bagger is my call on Palantir (PLTR).
Palantir is a tech firm that builds and deploys software platforms for the intelligence community in the United States to assist in counterterrorism investigations and operations, and my call was to buy them at $10 after it’s IPO, it's up to $26 and has an easy pathway to $50.
This is one of the no-brainers that procure revenue from Democrat and Republican administrations even though its CEO Alex Karp has been caught on video making fun of the current administration’s leaders.
In a global market where the search for yield couldn’t be tougher right now, right-sizing a tech portfolio to target those extraordinary, extra-salacious tech growth companies is one of the few ways to produce alpha without overleveraging.
No doubt there will be periods of volatility, but if a long-term horizon is something suited for you, this super-growth strategy is a winner and don’t forget about PLTR while you’re at it.
