Mad Hedge Technology Letter
March 26, 2025
Fiat Lux
Featured Trade:
(TECH FIRMS COULD BE OVERSPENDING)
(BABA), (MSFT)
Posts
I get it that there is a massive AI craze sweeping the tech industry and that these are the shovels to the potential gold rush in which could induce a revenue waterfall.
There have been many promises and like the fate of many promises – they aren’t kept.
Personally, I have not been convinced yet that this AI revolution will turn into some transformative movement.
Then there is the issue of whether humans will just revolt against AI once they begin to understand we are essentially training software to replace human interaction.
Talking to software engineers, the avalanche of firings in Silicon Valley has woken up their cohort.
Coders thought for a long time they were immune from firings and the gift that kept giving would continue unabated.
Now, software engineers are being terminated at record levels, and management has decided to pour money into building AI data centers.
Even China is getting in on the act.
Alibaba (BABA) itself — which in February declared it was going all-in on AI — plans to invest more than 380 billion yuan ($52 billion) over the next three years. Server farms are springing up from India to Malaysia.
Critics have also pointed out the persistent dearth of practical, real-world applications for AI.
Alibaba is mounting a comeback in 2025 thanks in part to the recent popularity of its Qwen-based AI platform, which it envisions boosting Alibaba’s core commerce business as well as cloud services.
American tech companies have already spent close to half a trillion dollars on AI data centers and there hasn’t been much revenue follow-through parallel to it.
Co-founder of Alibaba Joseph C. Tsai has said that American companies are overspending on AI data centers and less money can be spent than what is necessary to get the same result.
He said, “I’m still astounded by the type of numbers that are being thrown around in the United States about investing into AI.”
The latest news comes from Microsoft (MSFT).
They have quit new data center projects in the US and Europe that had been set to consume 2 gigawatts of electricity.
Microsoft’s retrenchment in the last six months included lease cancellations and deferrals.
Microsoft has said it will spend about $80 billion building out AI data centers this year, and that the pace of growth should begin to slow after that.
If investors don’t see anything meaningful in revenue possibilities soon, people will start to think this is beginning to feel like the Chinese ghost city problem.
China is usually not the type to overspend, and watching their development of AI for a fraction of the price is fascinating.
What does this all mean?
After a brutal correction in tech stocks in February, it could mean another leg down for tech stocks.
If it proves to be true in the short-term, tech stocks won’t deserve the premium they are fetching if they are in fact overspending on AI data centers.
Then throw into the blender that the government is fighting about trade, and there is a severe limit on what we can do in the short-term.
Global Market Comments
March 21, 2025
Fiat Lux
Featured Trade:
(THE MAD HEDGE MARCH TRADERS & INVESTORS SUMMIT REPLAYS ARE UP)
(MARCH 19 BIWEEKLY STRATEGY WEBINAR Q&A),
(SH), (SDS), (COST), (PANW), (FTNT), (ZS), (MSFT), (GOOGL), (NVDA), (GLD), (AMZN), (BAIDU), (BABA), (LNG), (FXA), (FXE), (FXC), (FXB)
Below please find subscribers’ Q&A for the March 19 Mad Hedge Fund Trader Global Strategy Webinar, broadcast from Incline Village, NV.
Q: I tried to get into ProShares Short S&P500 (SH), it seems pretty illiquid. How did you get in?
A: Well, before I actually sent out the trade alert, I tested the liquidity of the SH seeing if you could get anything done. This is an easy thing to buy on up days in the market when others are taking profits. It is a really difficult thing to get into on down days in the market because you have so many long-only mutual funds trying to hedge their exposure through buying the (SH). We literally had just one up day at the beginning of the month, and I was able to increase my position tenfold and had no trouble getting my price on the LEAPS at $0.50. If you waited one day, you would have had to pay $0.60 for the same position, and that’s because the volatility explodes on this thing. If you look at the charts, the 1x short play has actually delivered enormous returns, as well as the 2x. It’s outperforming 2 to 1. So you have to buy when other people are selling, that’s the only way to get in and out of the (SH). Of course, I’m buying these things with the intention of running these to expiration.
Q: Is it time to sell US stocks?
A: Yes but only on the up days like today. Don’t sell into a pit, don’t sell into bottoms—wait for rally days like today. That's a good place to reduce risk and add some short positions like the ProShares Short S&P500 (SH) and the ProShares UltraShort S&P500 (SDS).
Q: How did you miss the rotation to Europe and China in emerging markets?
A: Very simple—if you ignore something for 15 years, it’s easy to miss a turn. I also missed the turn in Japan, which I ignored for 35 years. The real reason though is that I underestimated the extremity of this government, its economic policies, and the chaos it would create. I think almost everyone underestimated what the new government would actually do and how it would affect the stock market. If I knew ahead of time that the government would adopt recessionary policies, I would have done everything to get my money out of the US and into Europe and China, but this kind of unfolded with a shock a day, sometimes a shock an hour, and markets don’t like shocks and surprises, so they sold off. The more a stock had gone up in the last six months, the more it went down when the new government came into office.
Q: What are your downside targets for the market?
A: Now that we are in recession, I think any 5% rally off the recent low at 5500, you want to sell. The market could rally 3-5% off the bottom—that would be half of the recent loss. Then you’d want to get rid of more longs, cut your portfolio down to a few very high-quality positions, and add downside protection by buying the ProShares Short S&P500 (SH), the ProShares UltraShort S&P500 (SDS), doing buy rights on the calls and buying outright puts. That would be my recommendation. Eventually I see the S&P 500 falling to 5,000 by the summer, and if I’m wrong, it’s going down 30% to 4,500. That is a deep recession scenario, which we are on the track for unless the government suddenly reverses its draconian policies. This is the most extreme government in American history.
Q: Are you going to use the selloff to get into Costco (COST) after a 20% selloff?
A: Absolutely. I’ve been trying to get into Costco for years and it’s just always been too expensive. They keep increasing earnings every year —investors are willing to pay very high multiples for that. This time around, I am going to get into Costco because they are an absolutely outstanding company. By the way, my mentor at Morgan Stanley was a guy named Barton Biggs, who created the asset management division some 40 years ago. He was close friends with Sam Walton, the founder of Walmart, and Sam Walton was a huge admirer of Costco, which was just starting up then. I’m surprised they never took over the company, which is too big to take over now.
Q: What to buy at the bottom?
A: You want to buy what was leading right before we went into this collapse. Those are financials, and the highest quality profit making of the Mag7 which include Nvidia (NVDA), Amazon (AMZN), Alphabet (GOOGL), Meta (META), as well as cybersecurity stocks like Palo Alto Networks (PANW), Fortinet (FTNT), Zscaler (ZS) and so on.
Q: Why are you making your recession call when we have no evidence of that fact?
A: If you wait for proof of recession, that often is the market bottom. And that could be August of this year. You know, I talk to hundreds of businessmen around the world, and everyone is saying business is slowing. Companies stop making decisions. Customers stop buying. Everyone's afraid of the tariffs. Nobody knows what's going to happen next. Business confidence is terrible. That adds up to a recession, but data tends to move very slowly, so we won't see it in the data for months. If you're a stock trader, you don't have the luxury of waiting for confirmation of the data. By the time you get it, the move is over. But if you cut half of government spending or 12% of GDP, the recession outcome is guaranteed. It's not a speculation. That is the government's goal: to cause a recession, so they can have a recovery going into the next election to take credit for.
Q: If Alphabet (GOOGL) is broken up, what will happen to the company?
A: With all of these big tech breakups, the parts will be worth a lot more than the whole. The individual pieces can be sold off at much bigger premiums creating new companies with more stock liquidity. This is what happened with AT&T (T) in 1982. I participated in that, and the parts were worth more than the original AT&T was within two years. I expect that to happen to Alphabet, and I expect that to happen if Amazon (AMZN) is broken up— eventually, these companies become so big, they become too big to manage. And if the management sees they can get 100% premium on a spinoff, they'll take it so fast it makes your head spin.
Q: None of the 90% gain in stock prices during the Biden administration was a result of his policies.
A: That's absolutely correct. He stayed out of the way, which is the best thing that governments can do—get the hell out of the way. American capitalism on its own will innovate and create profits far faster than any other economic system in history. Biden did quite a good job of staying away.
Q: Why are credit spreads still okay to do in this environment?
A: Because the implied volatility on the options are so high, you can get insane amounts of money—in the money like 30% or 40% —and get trades done and have a 0% chance of taking a loss on that. Suddenly you're being paid double to take risks on these option trades. The classic example is the $88-$90 call spread in Nvidia (NVDA), which we have expiring on Friday, March 21. We never even got close to $90, but the implied volatility on the day we added that trade was a ridiculous 75%. So, it's almost impossible to lose money when you put on trades with implied volatility in the options of 75%.
Q: What's your long-term target on gold now that your last long-term target of 3,000 finally got hit?
A: Yes, we've been recommending gold (GLD) for seven years now. In that time, it's doubled: $1,500 to $3,000. I'm now looking for $5,000 in gold by 2030, in five years. I got a feeling that flight-to-safety plays are going to be very popular in the world going forward. And by the way, people who did look for Bitcoin to protect them in any downturns: Bitcoin actually went down three times faster than the S&P 500 in the last month.
Q: Will stocks rise if the Fed cuts interest rates?
A: No, they won't, because the only reason the Fed will cut interest rates is if inflation falls, and right now, inflation is about to see a big upturn as those import duties of 25% or 50% work their way through the system. A lot of companies are front-running price increases before they even pay the tariffs and try to carve out some extra margin for themselves in advance. On Wednesday, Jay Powell said he expects inflation to rise from 2.5% to 2.8% by yearend and this will prove to be a low number. That is his “president breathing down the back of his next” forecast.
Q: What are your favorite Chinese stocks?
A: Well, a lot of these leading stocks have already gone up 50% or more since the beginning of the year as capital flees the United States and goes abroad. But if you held a gun to my head and said you had to buy two, I would buy Baidu (BIDU), and I would buy Alibaba (BABA). Those would be my Chinese picks. Alibaba is the closest thing you get to an Amazon in China.
Q: Has the dollar hit its lows this year?
A: No. Risk of the next Fed rate move is an interest rate cut. That is going to hang over the dollar and the currency markets for the entire year. And I don't see any recovery in the dollar this year. In fact, it's easy to see much lower lows, and higher highs in the foreign currencies. Buy (FXA), (FXE), (FXC), and (FXB) on dips.
Q: How do you feel about natural gas?
A: I would not be a buyer here. I think we've had a terrific run off of extreme cold weather—believe me, we got some of that in Nevada too—and that is starting to fade now. This is historically when that gas starts to fade for the year. Long term, my view on gas is bullish because of increased exports to China. We have a very pro-energy administration here; that means taking off the export restraints on natural gas, which can only be good for the gas companies and the gas price. China has basically told us they'll take all the natural gas they can get from us because every shipload of gas they buy (LNG) means less coal they have to burn.
To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in to www.madhedgefundtrader.com, go to MY ACCOUNT, click on GLOBAL TRADING DISPATCH, then WEBINARS, and all the webinars from the last 12 years are there in all their glory.
Good Luck and Good Trading
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
November 29, 2024
Fiat Lux
Featured Trade:
(The Mad DeCEMBER traders & Investors Summit is ON!)
(CHINA’S VIEW OF CHINA),
(FXI), (BIDU), (BABA), (JD)
There was so much enthusiasm for China only a month ago.
A stimulus package was announced, a massive short-covering rally ensured, and finally, after a three-year hiatus, China was back in play. Several hedge funds announced major commitments to the Middle Kingdom.
Here we are only three weeks after the US presidential election, and China now looks so much rubble. Asst prices returned to their starting points. The hedge funds have so much mud on their faces. It’s back to a long wait.
Which gives us all plenty of time to think about what China is really all about.
I ran into Minxin Pei, a scholar at the Carnegie Endowment for International Peace, who imparted to me some iconoclastic, out-of-consensus views on China’s position in the world today.
He thinks that power is not shifting from West to East; Asia is just lifting itself off the mat, with per capita GDP at $12,969, compared to $81,695 in the US.
We are simply moving from a unipolar to a multipolar world. China is not going to dominate the world, or even Asia, where there is a long history of regional rivalries and wars.
China can’t even control China, where recessions lead to revolutions, and 30% of the country, Tibet and the Uighurs want to secede.
China’s military is almost entirely devoted to controlling its own people, which makes US concerns about their recent military build-up laughable.
All of Asia’s progress, to date, has been built on selling to the US market. Take us out, and they’re nowhere.
With enormous resource, environmental, and demographic challenges constraining growth, Asia is not replacing the US anytime soon.
There is no miracle form of Asian capitalism; impoverished, younger populations are simply forced to save more because there is no social safety net.
Try filing a Chinese individual tax return, where a maximum rate of 40% kicks in at an income of $35,000 a year, with no deductions, and there is no social security or Medicare in return.
Ever heard of a Chinese unemployment office or jobs program?
Nor are benevolent dictatorships the answer, with the despots in Burma, Cambodia, North Korea, and Laos thoroughly trashing their countries.
The press often touts the 600,000 engineers that China graduates, joined by 350,000 in India. In fact, 90% of these are only educated to a trade school standard. Asia has just one world-class school, the University of Tokyo.
As much as we Americans despise ourselves and wallow in our failures, Asians see us as a bright, shining example for the world.
After all, it was our open trade policies and innovation that lifted them out of poverty and destitution. Walk the streets of China, as I have done for four decades, and you feel this vibrating from everything around you.
I’ll consider what Minxin Pei said next time I contemplate going back into the (FXI) and (EEM).
China: Not All Its Cracked Up to Be
Mad Hedge Technology Letter
September 30, 2024
Fiat Lux
Featured Trade:
(CHINESE TECH GLITTERS IN THE SHORT-TERM)
(BABA), (JD), (PDD), (BIDU)
The bazookas have been unloaded, and the results are big.
The aftermath is reverberating through the rest of the world’s equity markets.
The Chinese economy is in the dumps and the Chinese communist party is using every tool in the proverbial toolkit to pull them out of their slump.
Juxtapose that in the face of a demographic time bomb and we could say that it is in the nick of time.
Now that we have decades of data on the issue, the Chinese economy has major structural issues and instead of fixing it, they are throwing liquidity at it.
Chinese purchasing power is about to drop through the toilet pipes, but I believe bellwether stocks like Alibaba (BABA), JD.com (JD), Pinduoduo (PDD), and Baidu (BIDU) will perform quite well.
China is all about ecommerce at the retail level anyway and Alibaba will be able to reverse a years-long slump on the back of Beijing’s sweeping stimulus measures.
Flooding the system with liquidity will paper over the cracks and should get consumers out and about instead of eating instant noodles in their little apartments.
Retail is now moving in the right direction again.
Although, long term this does nothing to address the major structural issues in the system, the short-term transfusion should help putting money in consumer’s pockets and liquidity on Chinese corporates will outperform.
Market-support measures initiated by the People’s Bank of China included mortgage rate cuts and an unprecedented $114 billion stock-buying facility.
The renewed positive market sentiment for Alibaba reflects its resilience after struggling in recent years, owing to Beijing’s 32-month crackdown on Big Tech firms and the mainland’s shaky post-pandemic economic recovery.
BABA lost nearly half their value over the past five years.
China’s largest operator of online shopping platforms and a major domestic artificial intelligence (AI) technology player, Alibaba recently won praise from the State Administration for Market Regulation for complying with rectification measures, ending more than three years of regulatory scrutiny that has hung over the company’s operations.
Alibaba’s cloud computing services unit last week announced at an event in Hangzhou the release of more than 100 large language models – the deep-learning technology underpinning generative AI applications like ChatGPT – to the global open-source community and a new text-to-video model, as the company showed its rapid progress in this field.
Earlier this month, Alibaba founder Jack Ma called on employees of the business empire he created 25 years ago to “believe in the future” and “believe in the market” amid stiff competition.
The Chinese Communist Party and their heavy handed approach has a lot to do with many tech companies fizzling out.
It is impossible to really kick start growth when they are suppressing it.
However, now is the time when the government has realized they are overdoing it and have unleashed the animal spirits.
Ultimately, the Chiense government is the arbiter of who gets to do business and how well in China.
In the short-term, Chinese tech stocks will outperform American tech stocks.
Chinese tech stocks are cheap by almost every metric – buy the dip in Chinese tech.
Global Market Comments
May 31, 2024
Fiat Lux
Featured Trade:
(The Mad June traders & Investors Summit is ON!)
(MAY 29 BIWEEKLY STRATEGY WEBINAR Q&A),
(TSLA), (AMZN), (META), (NFLX), (GLD), (SLV), (NVDA), (MSFT), (GOOG), (DELL), (MSFT), (TLT), (BRK/B), (PYPL), (BABA), (DD), (XOM), (OXY)
Below please find subscribers’ Q&A for the May 29 Mad Hedge Fund Trader Global Strategy Webinar, broadcast from Incline Village, NV.
Q: Since Elon Musk is raising tons of money for his AI startup called xAI, will this impact Tesla’s (TSLA) stock price?
A: Yes, it's a very positive move for Tesla because anytime Elon Musk raises money anywhere in his network, it takes the need off of him to sell Tesla shares for cash. And I think his xAI will be the next trillion-dollar company, and SpaceX is in front of it as another trillion-dollar company. Those stocks, he can sell any time and raise a lot of money, but the other two are still private companies. We can't buy them yet unless we buy some of the public vehicles offered by venture capitalists like Ron Baron who has heavy positions in both Tesla and SpaceX. So, no direct plays yet on these companies, but no doubt when they become incredibly valuable, he'll take them all public and become the richest man in the world two or three times over. So yes, that is a positive.
Q: Where do you think (TLT) will be in the next few months?
A: In a narrow trading range. I think we're basically in a $86 to $91 trading range, and we'll go nowhere until we get clarification on Fed interest rate cuts. At the rate the economy is slowing, we may get one in September, and even if the Fed doesn't cut, the rest of the world will, including Japan, Europe, Great Britain, and so on. So we may get our interest rates dragged down here by foreign countries that all have much weaker economies than the US.
Q: Should I keep buying big tech stocks after Nvidia's (NVDA) blowout earnings?
A: Well, if you recall back in the ancient times of April, Nvidia had a 20% sell-off, and most of the tech stocks were down at least 10%. So, I would wait for the next 20% sell-off of Nvidia not only to buy Nvidia but all other big tech stocks as well, because it basically is a big tech story and will continue for the rest of the year like that. So we're really looking to buy dips among the big tech winners, and those would include Amazon (AMZN), Meta (META), Microsoft (MSFT), and so on.
Q: How long can the US economy go without a recession?
A: Five years. The way our economic cycle works is after a long period of growth, companies get overconfident, over-invest, create excessive capacity in the markets for everything, and that leads to a crash and a recession, deflation, and lower interest rates. So even if we don't get major moves in the (TLT) upside now, you always will over the long term get interest rates going back to 2 or 3% for the 10-year so it’s a great long-term hold. That is the economic cycle—that's what creates bear markets and it’s known as “Boom and Bust”. Long may it live because that’s where we traders earn our crust of bread. But this time may be different. We may go longer than 5 years because AI is still in its infancy, still rolling out, and the number of companies making actual profits in AI will go from 3 to 300 over the next five years.
Q: I'm looking to buy gold in an investment account (GLD). Would you do that now, if so, what would you recommend?
A: I would recommend GLD (SPDR Gold Trust) because the metals are still outperforming the miners, miners being held back by the inflation rates unique to the mining industry, which are much higher than the 3.3% for the general economy. And if you want to add a little more spice to your portfolio, buy some silver (SLV) because it is rising at three times the rate of gold thanks to Chinese speculation. You might buy some copper while you're at it too—it's moving almost as fast as gold is.
Q: Which big tech firm is next to issue a dividend?
A: That's an easy answer, it's Netflix (NFLX). But there's a more important question out here— Which is the next tech stock to issue a stock split? And guess what the answer is? Netflix again, which needs to declare both a dividend and a stock split. It's at an all-time high, has a very high share price, and over time, stocks that split deliver double the performance of the S&P 500. So, the mere announcement will suck in a lot of new retail investors as we just saw with Nvidia (NVDA), where we got a $250 move on the split announcement. So, watch your splits, and in fact, I'm going to be devoting a major piece of next Monday's newsletter to splits and how to play them.
Q: Why has the stock market been so strong this year when interest rates are high?
A: The answer to that is AI. We are still in the very early days of AI, and as I mentioned earlier, only three companies are making money from AI right now. That's Nvidia (NVDA), Microsoft (MSFT), and Google (GOOG). That number will increase as AI moves down the food chain and everybody starts using it, including you and me. I view the AI development as similar to 1995 when all of a sudden we got Netscape, a navigator that made the Internet available to the public, Dell Computers (DELL), and Microsoft (MSFT) software all at once hitting the market and creating the online economy essentially from scratch. Something of that magnitude is what the stock market is discounting now. Think of it in terms of the revolutionary new technologies of 1995, which means we have another 5 or 6 years to go, and that's why the stock market is so strong.
Q: Should I invest in Berkshire Hathaway (BRK/B), or do you think their magic will run out soon?
A: I don't think their magic will ever run out. Of course, the day that Warren Buffett dies it'll be down 10%, but then you'll want to buy it with both hands because Warren has already replaced himself with a first-class management team who is carrying on his strategy. Any selloffs in Berkshire you get this summer, go in there and buy the calls, the call spreads, the stock, the LEAPS, and the kitchen sink. Still a great long-term BUY, and I see $500 either late this year or next year in (BRK/B).
Q: I'm a member of IM Academy.
A: Oh my gosh. I would let your membership expire, except you're probably on auto-renewal, and the only way to stop your subscription is to call your credit card company and ask them to block the billings. That is the problem with these predatory financial newsletters, they're impossible to get out of, even when they promise refunds anytime.
Q: Are there any Chinese stocks you like now?
A: No, but the highest quality stock in China is Alibaba (BABA). It's basically a combination of Amazon and PayPal in China, but you still have a very high political risk investing in anything in China. The currency is very weak, so better fish to fry is my opinion. And I tend to avoid countries suffering from demographic implosions.
Q: Should we buy (TLT) now or wait?
A: I would wait until we get some upside momentum going and we complete a few more downside tests.
Q: What's the best place to put cash in the summer?
A: The answer is always good old 90-day US Treasury bills. They are still paying 5.25%.
Q: What are your thoughts on PayPal (PYPL)?
A: I'm avoiding that sector because of over-competition crushing profit margins; that has been a problem for a couple of years now. Don't confuse “gone down a lot” with cheap.
Q: Which oil companies are the best to invest in right now?
A: You can buy Exxon Mobil (XOM) for the high dividend and the sheer size of the company. My second is Occidental Petroleum (OXY), because Warren Buffett owns 25% of the company, has shrunk the float, and that has a result in magnifying any moves up in the stock. Also, I somewhat admire Warren Buffett's stock-picking ability. And of course, I’ve been following the California company OXY since 1970, back when it was run by Armand Hammer, a friend of Vladimir Lenin, so my connections with the company go back a very long time.
Q: Do you like DuPont (DD) for the three-way split?
A: I do, but DuPont has a major problem looming with lawsuits over the PFAS chemicals—those are the forever chemicals which are all over the country, all over the food supply, and cause cancer. So that could be sort of like a Johnson & Johnson-type liability problem with the talcum powder. So again…why look for trouble? Buying a stock facing that kind of liability could be another tobacco situation.
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