Mad Hedge Technology Letter
June 23, 2023
Fiat Lux
Featured Trade:
(POACHING FOREIGN TECH)
(OCDO.L), (AMZN), (TSLA), (APPL)
Posts
Europe is reeling and now it is becoming Silicon Valley’s playground.
The evidence is all over Europe and quite clear-cut at this point.
The royal 7 from the likes of Tesla (TSLA) and Apple (APPL), who have been responsible for most of the stock market gains this year, are leading the charge to cherry-pick the best tech companies in Europe.
The Ukraine military conflict was a godsend for American big tech, as many European companies are now waving the red flag amid commercial electricity costs spiking 100% in many Western European countries.
The unrelenting electricity increase has caused a mad rush to relocate the best European talent to the United States.
Or, if they don’t relocate out of their own will, many are buy-out targets just like yesterday’s news of British online grocer Ocado.
They are on the verge of tasting the sweet hand of acquisitive cash from Amazon (AMZN).
Poached or not poached – Silicon Valley is dominating.
Ocado Group shares jumped as much as 47% - the most in more than five years.
Even with today’s gains, shares in Ocado have still lost about two-thirds of their value since the end of 2021 amid a selloff in growth stocks.
The stock soared in 2018 on a landmark deal to build warehouses and license software to US supermarket chain Kroger Co., boosting the grocer’s credentials as a technology company. Ocado has partnerships with several grocers, but investor focus has shifted to profitability as demand for automated warehouses slows.
I’m not surprised to hear about Amazon’s interest in Ocado.
Ocado has developed, leading automated warehouse technology that could be of great use to Amazon if it tried to take over the supermarket industry in Europe, which it might.
Many American tourists might experience how outdated and obsolete many European supermarkets are these days.
On the corporate side, when I talk to many European workers on the ground in Milan and Brussels, the consensus is that finding a job at an American big tech firm is considered the proverbial golden paycheck.
European counterparts are mired in inefficiency, unproductivity, and the politicians who exist as 27 European Joe Bidens are ruthlessly driving the industry into the ground by taxing and regulating the hell out of them.
European workers also take 2 months of vacation every year along with 15 to 20 federal holidays per year.
When I read the tea leaves, the next expansion of Silicon Valley is to gobble up anything of perceived value in Europe and anything in any European Union country is fair game.
This buying spree could trigger another leg up to big tech and expand margins.
American tech possesses the powerful balance sheets to wield around the world and dominating the European supermarket industry would add to the top line.
Amazon has already forayed into the food industry with Whole Foods in America so this should be viewed as something similar to that.
Look for big tech to enter strategic European industries and eventually buy something like Manchester United or any other high-quality asset.
Mad Hedge Biotech and Healthcare Letter
June 22, 2023
Fiat Lux
Featured Trade:
(A ROLLERCOASTER RIDE ON THE BIOTECH HIGHWAY)
(AMGN), (HZNP), (AMZN), (MSFT)
What gets my heart racing about Wall Street's wild rodeo is its capricious personality. This unpredictable creature weaves a tapestry of inflated possibilities, stretching across a vibrant spectrum of asset classes. It's like being at an all-you-can-eat financial buffet; every day, there's a fresh plate of opportunities to dig into.
Just last year, for instance, we saw a grand opportunity to pack our portfolios with tech titans like Amazon (AMZN) and Microsoft (MSFT) when the market was frolicking after cash-flush pharmaceutical stocks, allured by their pricing power and inflation defense.
But oh, how the pendulum swings. Today, we find the market donning its risk-taking garb again, pursuing high-growth stocks and leaving value stocks eating its dust.
This brings us to Amgen (AMGN).
Amgen, a trailblazer in the biotech industry since its inception in 1980, has earned its stripes, boasting membership in the esteemed Dow Jones Industrial Index and Nasdaq 100. Over the past year, AMGN churned out an impressive $26 billion in total revenue.
The company proudly displays a well-rounded product portfolio experiencing a strong global thirst. This is echoed by the hearty 14% YoY volume growth in the first quarter.
Notably, much of this surge was fueled outside U.S. borders, with the Asia Pacific region flexing a muscular 47% volume growth. Credit this partly to the rapidly aging populations in Japan and China, where medicines like Amgen’s Repatha and Prolia are enjoying a burgeoning demand.
However, we're not getting the complete picture from these favorable metrics.
Amgen is embarking on a journey into a period filled with question marks, marked by stiff competition from biosimilars for its aging blockbusters, pushback from the Federal Trade Commission over its proposed acquisition of Horizon Therapeutics (HZNP), and valid doubts surrounding the rationale behind this hefty $28 billion buyout.
The firm has had a tough time finding a true growth engine in recent years, despite launching several new drugs for high-value indications such as lung cancer, cardiovascular disease, and migraine headaches. Can Amgen sail past these patent headwinds?
While most in the industry are betting on Amgen to win its legal battle to acquire Horizon, this move carries its own set of hitches.
The spotlight is on Horizon's primary growth engine, Tepezza, which is dealing with recent commercial setbacks.
In Q1 2023, Tepezza sales took an 18% sequential dip from Q4 2022 and were down 19% YoY.
Horizon blamed seasonality for this significant sales dip, which is disheartening for a drug slated to hit $4 billion in annual sales.
If Tepezza is the mainstay behind the proposed merger with Amgen, the biotech could set itself up for a rocky journey.
And remember, Amgen's previous attempts at value creation via business development haven't always been home runs.
Take the 2013 acquisition of Onyx's cancer drug Kyprolis. Despite initial excitement, Kyprolis has underperformed expectations, illustrating that Amgen's $28 billion bid for Horizon may not be a guaranteed solution to its patent woes.
Furthermore, Amgen's clinical pipeline isn't bursting with potential stars.
Its metabolic disorder candidate AMG 133 has been flagged as a potential blockbuster by some analysts, but the obesity treatment market is heating up. The same applies to Amgen's various candidates in hematology and immunology. Therefore, its current pipeline might not be the panacea to its legacy medicine challenges.
So, what's the play for investors?
The silver lining here is that Amgen isn't predicted to suffer a sharp drop in annual sales anytime soon, irrespective of the Horizon deal or its internal pipeline.
The main concern lies with the drugmaker's potential to resurrect robust top-line growth in the latter part of the decade. Given its low trailing-12-month payout ratio of 54%, the dividend appears to be on solid ground, which is a tick-in-the-box for its prospects as an income stock.
Overall, this stock could be a top pick for income investors considering its ample yield coverage, substantial margins, and double-digit average dividend growth.
Although the top line may seem a little shaky, buybacks should help keep EPS growth on track. Given its resilience, the stock presents an attractive opportunity for income investors. Just don't hold your breath waiting for a sudden surge.
In fact, if you're on a DRIP (Dividend Reinvestment Plan), you'd rather want the shares to slump for a bit.
After all, Amgen has the makings of a SWAN (Sleep Well At Night) stock. So, keep those midnight snacks handy.
Global Market Comments
June 9, 2023
Fiat Lux
Featured Trades:
(JUNE 7 BIWEEKLY STRATEGY WEBINAR Q&A),
($VIX), (TSLA), (TLT), (FCX), (RUT), (COIN), (AAPL),
(ROM), (AMZN), (PYPL), (NVDA), (COPX), (FXI)
CLICK HERE to download today's position sheet.
Below please find subscribers’ Q&A for the June 7 Mad Hedge Fund Trader Global Strategy Webinar, broadcast from Lake Tahoe, NV.
Q: Do you ever trade the CBOE Volatility Index ($VIX)?
A: No, I used to, but I got hit a few times. That’s because 95% of the year is spent seeing the ($VIX) go down, and then the other 5% basically doubles overnight. It’s a short play only. With a long ($VIX), the time decay is enormous, and it’s just not worth owning. The only way to make money in ($VIX) is to buy it right before a giant VIX spike. And the floor traders in Chicago have a huge inside advantage in that market. So, I finally gave up and decided there's better things to do.
Q: Buy the price dip for Tesla (TSLA)?
A: I’d have to look at the charts, but if it gets back down to $200, I would start hoovering it up again. The fundamentals are really arriving for Tesla big time, as is the long-term bull case.
Q: With the debt crisis over, how low will the iShares 20 Plus Year Treasury Bond ETF (TLT) go in the short term?
A: Well, we know they have to issue a trillion dollars of 90-day T-bills in the next few weeks. The debt ceiling crisis stopped Treasury bill issuance for several months and now they have a lot of catch-up to do. So, best case scenario, the (TLT) drops to $95, then you load the boat for the rest of your life in (TLT) LEAPS, like a $95-$100 2024 LEAPS. And that should double about every year.
Q: Are you concerned about commodities given the weakness in the Chinese economy?
A: Yes, it’s definitely slowing the commodities recovery, but is also giving you a fantastic opportunity to get into things like Freeport McMoRan (FCX) at a cheaper price, where it was just a couple of weeks ago. All of the commodities look like they’re bottoming now, it’s time to buy them.
Q: It seems like you really love the Russell 2000 (RUT).
A: I hate the Russell. You only want to own big money stocks because that's where the big money goes first. Big money doesn’t go into the Russell, and as long as there's any doubt of a recession coming, they’ll perform poorly.
Q: Coinbase (COIN) is getting sued by the SEC, should I buy on the dip?
A: No, the whole crypto infrastructure is getting sued out of existence and disappearing. They went after Binance also. It seems like the SEC just doesn’t like crypto very much. That kind of shrinks the whole industry back down to hot wallets, where you slowly have direct control of your bitcoin on the network and you don't use any outside brokers to buy and sell it because there may not be any left shortly.
Q: Should we still hold the Apple (AAPL) bull call spread?
A: Yes, I think we have enough room on our call spread in the next 7 trading days to take max profit. However, if you have any doubts, no one ever gets fired for taking a profit.
Q: Is the ProShares Ultra Technology ETF (ROM) a buy at this time?
A: No, if anything, ROM is a sell. It almost had a near-double move. So no, wait for a 20% or 30% correction this summer in ROM and then go in. It has actually led most tech because it's a 2X long ETF. Sometimes I just want to shoot myself. You buy before stocks double, not afterwards.
Q: What will trigger a correction this summer?
A: The risk of a further rise in interest rates, which we may get. Other than that, the market is running out of negatives.
Q: What is the risk of US currency not being the world reserve?
A: Zero. I have been asked this question every day for the last 50 years and so far, I have been right. What would you rather keep your savings in Chinese Yuan, Russian rubles, or Euros? I would say none of those. And US currency will remain the reserve currency for this century, easily, until a digital US dollar comes out.
Q: Do you want to buy the cellphone companies?
A: No, not really. They weren’t very interesting before—it's a low margin, highly competitive cutthroat business—and now you have one of the world's largest companies, Amazon (AMZN), potentially offering phones for free? I think I'll pass on that one.
Q: Do you have any interest in pairs trading?
A: No, they blow up too often.
Q: Did you say you sent out a one-year LEAPS on Freeport McMoRan (FCX), the $35-$38?
A: Yes, if you didn’t get it, email customer support.
Q: Are investing in 90-day Treasury bills until the next one or two Fed meetings are over a good idea?
A: Yes, that is a good idea. Cash has a high-value night now. Remember, a dollar at a market top is worth $10 at a market bottom, and we now have a rare opportunity to get paid 5.2% or 5.3% while we wait. That hasn’t happened in almost 20 years.
Q: Will the new Apple VR headset be a boon to the stock price?
A: Yes, adding 10% to your earnings is always good, but it won’t happen immediately. You need a few thousand third-party app developers to come through with services before the earnings really get going. That's what happened with iTunes when the iPhone came out. Growth was slow when Apple only allowed its in-house apps to be sold—when they opened to the public, the business went up 100 times. That's maybe what will happen with the virtual headset.
Q: PayPal (PYPL) has dropped a lot, should I buy it here?
A: No, cutthroat competition in the sector is destroying the share price. There are too many other better things to buy.
Q: Why do so many professional analysts say the market will go down this year, but it goes up every day?
A: Professional analysts are just that—they're analysts, not traders. And often these days, to save money, your professional analyst is 26 years old, so they don’t have much market experience. I like to think that 50 years of trading experience backed with algorithms helps.
Q: Do you think oil could hit $100 a barrel next year?
A: Yes, definitely. Especially if we get a decent economic recovery and Saudi Arabia doesn’t immediately bring back 3 million barrels a day that they’ve cut.
Q: Should I chase NVIDIA (NVDA) here?
A: No, better to own cash here than Nvidia. Buy Nvidia on the next dip, or another Nvidia wannabe company, which will almost certainly arrive shortly.
Q: When will we get peace in Ukraine?
A: Within a year, I would say. Russia has literally run out of ammunition, and Ukraine is getting more. Ukraine is also getting F16s, our older fighter planes, and many other advanced weapons and parts—those are a big help. They can beat anything the Russians throw up.
Q: Is Global X Copper Miners ETF (COPX) a good copper play?
A: Yes it is, but you don’t get the leverage that you do with an FCX LEAP. I don’t know how far the top will go, but that would be a great trade one to two years out.
Q: Can you explain why there is a short squeeze in copper?
A: There are 200 pounds of copper needed for each EV, and EV production is exploding both here and in China. Tesla is expected to make 2 million EVs this year, especially with the $33,000 price point. China manufactures this many EVs as well. Four million EVS and 200 pounds of copper per EV equals the entire annual production of copper right now. At some point, people will notice that and they’ll take copper as much as they took lithium up last year.
Q: What do you mean when you say LEAPS one or two years?
A: It really depends on your risk. When you buy a two-year LEAPS, you usually get the extra year for free or almost nothing, and if you get a rapid increase in the underlying share price, the two-year LEAP will go up almost as much as the one year. So for most people who don’t want to watch the market every day, the two-year LEAPS is probably a better choice.
Q: Why did you buy only one LEAPS contracts?
A: All of my LEAPS recommendations are only for one contract. It is up to you to decide what your risk tolerance and experience level is, whether you buy 1, 100, or 1,000 contracts, so I leave the size up to you because it can vary tremendously depending on the person. Also, one contract makes the math really easy for people to understand.
Q: At what point do you sell your LEAPS?
A: Well, if you get a rapid 500% profit, which happened with many of the LEAPS that we did in October as well as the ones we did in March, I would take it. However, the goal on these is to go for the 10 baggers, or the 100% return in a year, and you usually need to hold it for the full year to get that. But, if the stock takes off like a rocket, I would take the profit. How many times in your life do you get a 500% profit in a month or two? I would say none. So, when you get that with these LEAPS recommendations, take it and run like a madman, move to a different country, and change your name.
Q: With the ($VIX) this low and many great companies for the second half down, would you buy single LEAPS instead of spreads?
A: I would; the problem with the call spread strategy is that it’s not the best thing to do at big market bottoms, down 20%, 30%, and 40%. The better thing to do is the LEAPS, but the LEAPS is a one- or two-year position, and I have to be sending out trade alerts every day. At market bottoms, you definitely want to get the most market leverage possible on the upside, and LEAPS does that for you in spades. They essentially turn your stock into a synthetic futures contract with a 10x leverage.
Q: When do we expect China (FXI) to take over Taiwan?
A: Never, because if they invade Taiwan, China loses its food supply from the US, which cannot be replaced anywhere. They also lose their international trade, so they won’t have the profits with which to buy food elsewhere. I’ve been in China when millions died during a famine and let me tell you, there is NO substitute for food. Not all the money in the world can buy it when it just plain isn’t available. But China will keep threatening and bluffing as they have done for 74 years.
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 or TECHNOLOGY LETTER 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
Sometimes the Market Can be Tough to Figure Out
Followers of the Mad Hedge Fund Trader alert service have the good fortune to own a deep in-the-money options position that expires on Friday, June 16, and I just want to explain to the newbies how to best maximize their profits.
This involves the Tesla (TSLA) June 2023 $120-$130 in-the-money vertical bull call debit spread.
Provided that we don’t have another 80-point move down in Tesla in ten trading days, this position should expire at its maximum profit point.
So far, so good.
Your profit can be calculated as follows:
Profit: $10.00 expiration value - $8.80 cost = $1.20 net profit
(12 contracts X 100 contracts per option X $1.20 profit per option)
= $1,440 or 13.63% in 25 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, June 19 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 a security has only hours, or minutes until expiration on Friday. 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.”
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 quarter 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.
You Can’t Do Enough Research
Global Market Comments
May 31, 2023
Fiat Lux
Featured Trades:
(WHAT AI CAN AND CAN’T DO)
(AAPL), (GOOGL), (AMZN), (AMZN), (TSLA), (NVDA), (MU)
CLICK HERE to download today's position sheet.
The future has arrived!
Over the last few weeks, I picked up some astonishing developments in artificial intelligence.
*Mainframes at Stanford University and the University of California at Berkeley were given a direct connection to speak freely with each other. Within 30 minutes they dumped English as a means of communication because it was too inefficient and developed their own language which no human could understand. They then began exchanging immense amounts of data. Fearful of what was going on, the schools unplugged the machines after only eight hours.
*All of the soccer videos ever recorded were downloaded into two robots, but they were not taught how to play the game or given any rules. Not only did figure out how to play the game, it developed plays and maneuvers no one in the sport has ever thought of in its 150-year history.
*It normally takes a PhD candidate five years to 3D map a protein. An AI app 3D mapped all 200 million known proteins in seven weeks, shortcutting one billion years of PhD level research with existing technology. These new maps have already been used to design a malaria vaccine and enzymes that eat plastic. They will soon cure all human diseases.
*A developer asked an AI program a half dozen questions in Bengali, not an easy language. Within an hour, it spoke the language fluently, without any instructions to do so.
By now, word has gotten out about the incredible opportunities AI presents. Our only limitation is our own imagination on how to use it. AI will instantly triple the value of any company that uses it.
What has changed is that we now have millions of computers powerful enough and an Internet fast enough to realize its full potential.
It all vindicates my own long-term vision, unique in the investing community, that in the coming decade, immense technology profits will more than replace the trillions of dollars worth of Fed liquidity we feasted on during the 2010s. Extended QE is proving just a bridge to a much more prosperous future.
The Internet has created about $10 trillion in value since its inception. AI will create double that in half the time. That’s what will take the Dow from 33,000 to 240,000.
No surprise then that the top ten AI companies have delivered 120% of the stock market gains so far in 2023. The other 490 companies in the S&P 500 have either gone nowhere to down.
However, there are many things that AI can’t do. Here is the list.
1) AI Can’t Predict large anomalous events, otherwise known as Black Swans. AI takes past trends and extrapolates them into the future. It in no way could have seen 9/11, the 2008 crash or the pandemic coming, although I warned my hedge fund clients for years that we were overdue. All of the AI stock trading apps I have seen so far, including my own, max out at 90% accuracy. The other 10% is accounted for by black swans: earnings shocks, foreign crises, sudden FDA stage three denials, surprise legal judgments, foreign invasions, or the murder of a key man in a tech company, as recently happened in San Francisco.
2) AI Lies and Lies Often. AI was asked to write a scientific paper on a specific subject. It came back with an elegant and well-researched piece. The problem was that all of the books it made reference to didn’t exist. AI learned early to tell humans what they want to hear.
3) AI Requires Exponential Computing Capacity. Only five companies have the muscle to pursue true AI. No surprise that these, including (AAPL), (GOOGL), (AMZN), and (TSLA), account for the bulk of stock market performance this year. This won’t always be the case. Some 30 years ago, it required thousands of mainframes to contain all human knowledge. Today, that task can be accomplished with a cheap $1,000 laptop.
4) Internet Capacity Will Be a Limiting Factor for AI for Years. To accommodate the traffic that is taking place right now, the Internet will have to grow 500% practically overnight, and that is with five main players. What happens when we have 5 million? That’s why NVIDIA (NVDA) has gone nuts.
5) AI Hallucinates, as anyone who drives a Tesla will tell you. If a car makes a left turn in Florida, the 4 million vehicles in the world’s largest neural network learn from it. The problem is that sometimes the data from that Florida car is placed directly in front of a California one, prompting it to brake abruptly, causing accidents. This is known as “ghost braking.” I have explained to Elon Musk that his database has grown so large, eight video feeds per 4 million cars going back many years and billions of miles, that he may be going behind the limits of known physics.
6) While the Growth Opportunities for AI are Unlimited, the ability of humans and society to absorb it isn’t. All jobs will be affected by AI and millions destroyed, starting with low-level programmers and call centers, and millions more will be created. People are talking about regulating AI but have no idea where to start. Maybe with (AAPL), (GOOGL), (AMZN), and (TSLA)?
7) The Terminator Issue. Can AI be controlled? Or have we started a chain reaction that is unstoppable, as with an atomic bomb? AI researchers have noticed a disturbing issue where AI programs are learning skills on their own, without our instructions. This is referred to as “emergent properties.” If AI is using humans as its example, we can’t exactly count on it to be benign.
Needless to say, AI will be at the core of your investment approach, probably for the rest of your life.
2014 at Micron Technology
Mad Hedge Technology Letter
May 26, 2023
Fiat Lux
Featured Trade:
(RIDE THE ELEVATOR UP WITH GENERATIVE AI)
(NVIDA), (FOMO), (APPL), (MSFT), (META), (GOOGL), (AMZN)
