Mad Hedge Biotech and Healthcare Letter
December 19, 2023
Fiat Lux
Featured Trade:
(HIDDEN IN PLAIN SIGHT)
(VRTX), (CRSP), (NVDA), (GOOGL), (AMZN), (AAPL), (META), (MSFT), (TSLA)
Posts
In the high-pressure game of stock market investments, where volatility is the norm and certainty a luxury, the Nasdaq Composite’s 36% uptick this year is nothing short of remarkable.
The credit largely goes to the “Magnificent Seven” – a septet of tech behemoths comprising Nvidia (NVDA), Alphabet (GOOGL), Amazon (AMZN), Apple (AAPL), Meta Platforms (META), Microsoft (MSFT), and Tesla (TSLA). These giants have not just captured the market’s imagination; they've powered its ascent.
However, while these tech titans have been capturing the spotlight, there's been a different kind of giant, hidden in plain sight, quietly making significant strides in a sector just as crucial as technology – biotechnology and healthcare.
This is where Vertex Pharmaceuticals (VRTX) emerges, a standout performer in the industry, demonstrating that groundbreaking innovation and solid investment opportunities aren't exclusive to the tech world.
The tech sector's rebound this year, following a tumultuous 2022, wasn't just luck. It was a confluence of a resilient economy and consumer spending that stayed robust.
This buoyancy proved a boon for the Magnificent Seven, whose fortunes often mirror economic trends. Apple's case is illustrative. Its iPhones, a blend of luxury and necessity, see fluctuating demand based on economic health.
But Vertex operates on a different plane.
Vertex specializes in life-saving drugs for cystic fibrosis (CF). This isn't a market swayed by economic tides. CF patients depend on the company’s drugs, literally, for survival.
What's more, Vertex is the only game in town for these medications. This unique position grants Vertex significant pricing power, ensuring stable financial performance, come rain or shine.
Now, let’s zoom in on Trikafta, Vertex’s CF superstar.
This is not just another drug; it’s a lifeline, a revenue juggernaut with 13 years of patent protection left.
While rivals scramble to find footholds in CF therapy, Vertex is already eyeing the next big thing: a once-daily treatment, promising more convenience than Trikafta’s twice-daily regimen.
In short, Vertex isn’t just leading the CF market; it's redefining it.
Vertex's ambition doesn't end with CF. The company is making bold strides in pain management with VX-548, a potential opioid alternative. This pill is a beacon of hope in a field littered with failed attempts at non-opioid pain solutions. The recent Phase 2 study results? Encouraging. The study revealed significant pain reduction in patients with chronic neuropathic pain.
But there's more. Vertex is also pioneering gene-editing therapies. Its latest triumph is Casgevy, developed with CRISPR Therapeutics (CRSP).
This treatment, a potential cure for sickle cell disease (SCD) and transfusion-dependent beta-thalassemia (TDT), recently received UK approval. It’s a complex treatment, not a simple pill. This complexity translates to both a high price and a shield against generic competition. With an initial target market of 32,000 patients, Vertex is looking at a potential goldmine.
Contrast this with the struggles of smaller gene-editing firms. Vertex stands out with its deep pockets and negotiation expertise. It's not just about developing groundbreaking therapies; it's about successfully bringing them to market. As it has shown over the years, Vertex’s prowess in this arena is unrivaled.
Of course, biotech is a realm of high risks and high rewards.
Vertex is no stranger to setbacks. Remember October 2020? The company saw its shares plummet by over 15% in a day after discontinuing a promising program. But it's the rebound that tells the story. Since then, Vertex’s shares have soared, making that drop a mere blip in its upward trajectory.
In the pantheon of biotech, Vertex Pharmaceuticals is a rare breed. It's a company that has not only conquered the CF domain but is also making significant inroads in pain management and gene editing. The financials are solid, the pipeline robust, and the market potential vast. Its collaboration with CRISPR Therapeutics on Casgevy is just one example of its strategic foresight.
So while the Magnificent Seven continue to dominate headlines, Vertex Pharmaceuticals emerges as a compelling, if quieter, story. It’s a narrative of a company not content with leading just one market but expanding its prowess into new, uncharted territories. I suggest you buy the dip.
Mad Hedge Technology Letter
December 18, 2023
Fiat Lux
Featured Trade:
(THE TRUTH ABOUT AUTOMATION AND WALL STREET JOBS)
(AAPL), (GOOGL), (FB), (AMZN), (NFLX)
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 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 costs, 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.
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 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 have already felt the brunt of downsizing with purges carried out in 2023 representing a fifth year of 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 20% and the accumulation of hordes of data will advance the marketing effort into a smart, hybrid cloud-based, and hyper-targeted strategy.
Historically, a strong labor market and low unemployment boosts wage growth, but national income allocated to workers has dipped from about 63% in 2000 to 56% in 2023.
Causes stem from the deceleration in union membership and outsourcing has snatched away negotiating power amongst workers and the implemented mass automation has poured fat on the fire.
I was recently in Budapest, Hungary on a business trip, and on a main thoroughfare, a J.P. Morgan and Blackrock office stood a stone’s throw away from each other employing an army of local English proficient Hungarians for 30% of the cost of American bankers.
Banks simply possess wider optionality to outsource to an emerging nation or to automate hard-to-fill positions now.
In this race to zero, companies can easily rebuff requests for higher salaries and if they threaten to walk off the job, a robot can just pick up the slack.
Automation is getting that good now!
The last two human bank hiring waves are a distant memory.
The most recent spike occurred 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.
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 are chomping at the bit and even tech companies like Amazon and Apple have started tinkering with new financial products.
The brutal truth out there is sadly; don’t tell your kid to get into banking, because they will most likely be feeding on scraps at that point.
WALL STREET IS LEANER THAN EVER
Mad Hedge Technology Letter
December 6, 2023
Fiat Lux
Featured Trade:
(POSITIVE SIGNS FOR 2024)
(AMZN), (APPL), (GOOGL), (MSFT), (TSLA), (META), (NVDA)
There have been a lot of whispers as to who the tech leadership group could be in 2024.
The notion that for the tech rally to continue, more participation is needed is unequivocally false.
A strong but narrow group of tech stocks coined the magnificent seven don’t need smaller stocks to help buoy the broader tech indices.
The law of large numbers also dictates price action meaning even if smaller stocks have the time of their life next year, they still won’t make a dent compared to the absurdly expensive tech stocks that are aiming at $4 trillion in market cap.
Therefore, I believe there is a high likelihood that these potent 7 stocks outperform the rest of tech yet again and I will explain why.
Faster growth rates and reasonable valuations bode well for mega-cap tech stocks.
The seven stocks I am talking about refer to Apple, Amazon, Alphabet, Meta, Microsoft, Tesla, and Nvidia, are responsible for 76% of the S&P 500's 2023 gain of nearly 20%.
Nvidia is up more than 200% year-to-date, and even Apple, the world's largest company, saw its stock price surge nearly 50% this year. The seven companies represent a collective $11.5 trillion in market value
The fundamentals are superior.
The seven mega-cap tech stocks have more attractive fundamentals when compared to the S&P 500's bottom 493 stocks.
They boast faster growth, higher profit margins, stronger balance sheets, and reasonable valuations on a relative basis.
And while price-to-earnings valuations are elevated for the tech stocks, when accounting for growth, they're actually in line with the rest of the market.
Mega-cap tech stocks cratered in 2022.
The sharp outperformance in the mega-cap tech stocks this year comes after a brutal 2022 in which a number of the stocks were severely punished because of the Fed hiking like they have never hiked before.
From their peak, Meta fell more than 70%, Nvidia dropped more than 60%, and Amazon's share price was cut in half in 2022.
The dominance of mega-cap tech in 2023 largely reflected a reversal of meaningful underperformance in 2022 so much so that the group of tech stocks fell a collective 39% that painful year.
The pullback was a healthy consolidation and psychologically, it feels like this bullish year means we are back to neutral.
There is a high chance that tech stocks rally on the belief that a recession will cause the Fed to drop interest rates.
Indicators are starting to look a little sluggish suggesting that earnings could come somewhat soft in the first quarter.
No doubt that the US consumer is stretched to its limit and thinking twice before spending.
The knock-on effect will be delayed iPhone purchases, delayed Tesla purchases and the other 5 of the Magnificent 7 could feel the slowdown as well.
Tech’s path to the recession could cause another rally into the recession when investors are likely to take profits when we finally arrive at the recession that every investor has been waiting for years.
In the meantime, there is a high likelihood that these 7 stocks will continue success in the short-term.
Mad Hedge Technology Letter
December 1, 2023
Fiat Lux
Featured Trade:
(THE PLACE TO BE)
(AMZN), (ZS), (CRM), (GOOGL)
Dealing with the Cloud works, and for every relevant tech company, this division serves as the pipeline to the CEO position.
If this isn’t the case for a tech company, then there’s something egregiously wrong with them!
Take Andy Jassy, the mastermind behind Amazon’s (AMZN) lucrative cloud computing division and the man who succeeded company founder Jeff Bezos.
He was rewarded with this important position based on his performance in the cloud and faced the daunting proposition of following Bezos as CEO.
Bezos incorporated Amazon almost 30 years ago.
Jassy developed a highly profitable and market-leading business, Amazon Web Services, that runs data centers serving a wide range of corporate computing needs.
Cloud 101
If you've been living under a rock for the past few years, the cloud phenomenon hasn't passed you by and you still have time to cash in.
You want to hitch your wagon to cloud-based investments in any way, shape, or form.
Amazon leads the cloud industry it created.
It still maintains more than 30% of the cloud market. Microsoft would need to gain a lot of ground to even come close to this jewel of a business.
Amazon relies on AWS to underpin the rest of its businesses and that is why AWS contributes most of Amazon's total operating income.
Total revenue for just the AWS division would operate as a healthy stand-alone tech company if need be.
The future is about the cloud.
These days, the average investor probably hears about the cloud a dozen times a day.
If you work in Silicon Valley, you can quadruple that figure.
So, before we get deep into the weeds with this letter on cloud services, cloud fundamentals, cloud plays, and cloud Trade Alerts, let's get into the basics of what the cloud actually is.
Think of this as a cloud primer.
It's important to understand the cloud, both its strengths and limitations.
Giant companies that have it figured out, such as Salesforce (CRM) and Zscaler (ZS), are some of the fastest-growing companies in the world.
Understand the cloud and you will readily identify its bottlenecks and bulges that can lead to extreme investment opportunities. And that is where I come in.
Cloud storage refers to the online space where you can store data. It resides across multiple remote servers housed inside massive data centers all over the country, some as large as football fields, often in rural areas where land, labor, and electricity are cheap.
They are built using virtualization technology, which means that storage space spans many different servers and multiple locations. If this sounds crazy, remember that the original Department of Defense packet-switching design was intended to make the system atomic bomb-proof.
As a user, you can access any single server at any one time anywhere in the world. These servers are owned, maintained, and operated by giant third-party companies such as Amazon, Microsoft, and Alphabet (GOOGL), which may or may not charge a fee for using them.
The most important features of cloud storage are:
1) It is a service provided by an external provider.
2) All data is stored outside your computer residing inside an in-house network.
3) A simple Internet connection will allow you to access your data at any time from anywhere.
4) Because of all these features, sharing data with others is vastly easier, and you can even work with multiple people online at the same time, making it the perfect, collaborative vehicle for our globalized world.
Once you start using the cloud to store a company's data, the benefits are many.
No Maintenance
Many companies, regardless of their size, prefer to store data inside in-house servers and data centers.
However, these require constant 24-hour-a-day maintenance, so the company has to employ a large in-house IT staff to manage them - a costly proposition.
Thanks to cloud storage, businesses can save costs on maintenance since their servers are now the headache of third-party providers.
Instead, they can focus resources on the core aspects of their business where they can add the most value, without worrying about managing the IT staff of prima donnas.
Greater Flexibility
Today's employees want to have a better work/life balance and this goal can be best achieved by letting them work remotely which effectively happened because of the public health situation. Increasingly, workers are bending their jobs to fit their lifestyles, and that is certainly the case here at Mad Hedge Fund Trader.
How else can I send off a Trade Alert while hanging from the face of a Swiss Alp?
Cloud storage services, such as Google Drive, offer exactly this kind of flexibility for employees.
With data stored online, it's easy for employees to log into a cloud portal, work on the data they need to, and then log off when they're done. This way a single project can be worked on by a global team, the work handed off from time zone to time zone until it's done.
It also makes them work more efficiently, saving money for penny-pinching entrepreneurs.
Better Collaboration and Communication
In today's business environment, it's common practice for employees to collaborate and communicate with co-workers located around the world.
For example, they may have to work on the same client proposal together or provide feedback on training documents. Cloud-based tools from DocuSign, Dropbox, and Google Drive make collaboration and document management a piece of cake.
These products, which all offer free entry-level versions, allow users to access the latest versions of any document so they can stay on top of real-time changes which can help businesses to better manage workflow, regardless of geographical location.
Data Protection
Another important reason to move to the cloud is for better protection of your data, especially in the event of a natural disaster. Hurricane Sandy wreaked havoc on local data centers in New York City, forcing many websites to shut down their operations for days.
And we haven’t talked about the ransomware attacks by Eastern Europeans on energy company Colonial Pipeline and meat producer JBS Foods.
The cloud simply routes traffic around problem areas as if, yes, they have just been destroyed by a nuclear attack.
It's best to move data to the cloud, to avoid such disruptions because there your data will be stored in multiple locations.
This redundancy makes it so that even if one area is affected, your operations don't have to capitulate, and data remains accessible no matter what happens. It's a system called deduplication.
Lower Overhead
The cloud can save businesses a lot of money.
By outsourcing data storage to cloud providers, businesses save on capital and maintenance costs, money that in turn can be used to expand the business. Setting up an in-house data center requires tens of thousands of dollars in investment, and that's not to mention the maintenance costs it carries.
Plus, considering the security, reduced lag, up-time, and controlled environments that providers such as Amazon's AWS have, creating an in-house data center seems about as contemporary as a buggy whip, a corset, or a Model T.
The cloud is where you want to be.
Global Market Comments
November 14, 2023
Fiat Lux
Featured Trade:
(WHY YOU WILL LOSE YOU JOB IN THE NEXT FIVE YEARS, AND WHAT TO DO ABOUT IT),
(INTU), (AMZN), (GOOGL), (TSLA), (BLK), (HRB)
Yes, it’s happening.
And if you lose your job to AI in five years you will be one of the lucky ones.
It’s possible that your job is already gone, they just haven’t told you yet.
The shocking conclusion I am getting from dozens of research fronts is that artificial intelligence and automation are accelerating far faster than anyone realizes.
It is all extraordinarily disruptive.
This will cause corporate profits to rocket and share prices to soar but at the price of higher nationwide political instability.
A big leap took place at the beginning of the year when suddenly it appeared that everything got a lot smarter.
My local Safeway has started using self-checkout scanners to enable customers to avoid the long lines still operated by humans.
I hate them because I can never get them to scan pineapples correctly.
Soon, Amazon (AMZN) opened a supermarket in Seattle where there is no checkout stand at all. You simply just pick up whatever products you want, and it will scan them all on the way out to the parking lot.
Once the software is perfected (it is self-learning), and the consumers are educated, 5 million checkout clerks will be joining the unemployment lines.
Uber has been testing self-driving taxis in Phoenix, AZ, with sometimes humorous results. It seems that other human-driven cars like crashing into them. There has been one fatality so far when the human safety driver was caught texting.
When they figure this out, probably in two years, 180,000 taxi drivers and 600,000 Uber and Lyft drivers will have to hit the road.
Some 3 million truck drivers will be right behind them.
Notice that I am only a couple of paragraphs into this peace and already 8,780,000 jobs are about to imminently disappear out of a total of 150 million in the US.
Two decades from now, only vintage car collectors or the very poor will be driving their cars if Tesla (TSLA) has anything to do with it.
I let my Model X drive me around most of the time. It has reaction time, night vision, and a 360-degree radar system that are far better than my 71-year-old senses.
However, all new Teslas now come equipped with the hardware to use it. They are all only one surprise overnight software upgrade away from the future.
And it's not just the low-end high school dropout jobs that are being thrown in the dustbin of history.
Automation is now rapidly moving up the value chain.
A rising share of online news is machine-generated and is targeting you based on your browsing history. You just didn’t know it.
It was a major influence in the last election.
Blackrock (BLK), the largest fund manager in the country, has announced that it is laying off dozens of stock analysts and turning to algorithms to manage its vast $8.6 trillion in assets under management.
As the April 15 tax deadline relentlessly approaches, you are probably totally unaware that an algorithm prepared your return, particularly if you use a low-end service like H & R Block (HRB) or Intuit’s (INTU) TurboTax.
Because of the simultaneous convergence of multiple technologies, half of all current jobs will likely disappear over the next 20 years.
If this sounds alarming, don’t worry.
We’ve been through all of this before.
From 1900 to 1950 farmers fell from 40% to 2% of the labor force. The food output of that 2% has tripled over the last 60 years, thanks to improved seed varieties and farming methods.
The remaining 38% didn’t starve.
They retrained for the emerging growth industries of the day, automobiles, aircraft, and radio.
But there had to be a lot of pain along the way.
More recently, some 30% of all job descriptions listed on the Department of Labor website today didn’t exist 20 years ago.
Yes, disruption happens fast.
And here’s where it gets personal.
Since I implemented an AI-driven, self-learning Mad Hedge Market Timing algorithm to assist me in my own Trade Alert service six months ago, MY PERFORMANCE HAS ROCKETED, FROM A 21% ANNUAL RATE TO 51%!
As a result, YOU have been crying all the way to the bank!
The proof is all in the numbers (see chart below).
Those trading without the tailwind of algorithms today suddenly find the world a very surprising and confusing place.
They lose money too.
The investment implications of all of this are nothing less than mind-boggling.
Wages are almost always the largest cost for any business, especially the labor-intensive ones like retailing, fast food, and restaurants.
Reduce your largest expense by 90% or more, and the drop through to the bottom line will be enormous.
Stock markets have already noticed.
Maybe this is why price-earnings multiples are trading at a multi-decade high of 19.5X.
Perhaps, the markets know something that we mere humans don’t?
It also is the largest budgetary item in any government-supplied service.
I bet that half of the country’s 7 million teaching jobs will be gone in a decade, taken over by much cheaper online programs.
Today, my kids do their homework on their iPhones, complete class projects on Google Docs, and get a report card that is updated and emailed to me daily.
They’re probably to last generation to ever go to a physical school.
(That’s life. Just as the cost of driving them to school every day becomes free, they don’t have to go anymore).
You can always adopt a “King Canute” strategy and order the tide not to rise.
Or, you can rapidly adapt, as I did.
The choice is yours.
