(COIN) Archives

August 11 Biweekly Strategy Webinar Q&A

Below please find subscribers’ Q&A for the August 11 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Silicon Valley, CA.

Q: If we see a correction in stocks, what would you do?

A: Buy more stocks (SPY). All of our positions expire next week, and we go 100% into cash. I’m looking for just a 5% correction and then I’m just going to go piling in 100% invested with a barbell portfolio since everything is working now and some of the best tech stocks like Amazon have already had 10% corrections.

Q: Time for LEAPS again on Amazon (AMZN)?

A: Yes, but let Amazon have more time to bottom out. It may just be a “time” correction where it goes sideways for a month or two. The company is still growing at an incredible rate.

Q: What about FedEx (FDX) and Walt Disney (DIS) LEAPS?

A: Those LEAPS I would do, right here, right now. We’ve had our corrections already in those sectors and they’re ready to take off. It’s just a matter of time before these sectors come back into favor. These are both delta peaking plays.

Q: It seems that the US government is taking the stance that they can tax their way out of the fiscal hole; is this true?

A: No, they don’t need to tax their way out of the fiscal hole; deflation will wipe out all US government debt on a 30-year view, and this is what’s happened to not only all the government debt in US history but all government debts all over the world starting with France in the 1600s. By the time the government has to pay back its 30-year bonds, the purchasing power of that dollar will have fallen by 80% or 90%, meaning that essentially the bonds get deflated away to nothing. And this is why we have governments, so they can borrow that money now, spend it now to rescue the economy, and then they never have to pay it back in real dollars. This is why governments borrow. The investors who really have to pick up the bill for this are bond owners, who see the purchasing power of the bonds decline by 2%-3% a year.

Q: When do you see a correction, and what would you do?

A: It’s either going to be in the next couple of weeks or never. If we get one, I would load the boat again with more long positions. Of the five positions out of 100 I’ve lost money this year, four have been short positions, so you can see why we’re really trying to limit the short positions here.

Q: Visa (V) is going ex-dividend tomorrow—is there a risk of early assignment?

A: There is, but if you get an early assignment, just say thank you very much, Mr. Market, call your broker to tell them to exercise your long call position to cover your call short position, and you will get the maximum profit several days earlier than expiration. This happens sometimes as hedge funds try to get the quarterly dividend on the cheap, but you have to act fast, otherwise, you’ll end up with a short position in Visa on your hands, and most likely a margin call. Brokers are not allowed to automatically exercise longs to meet calls anymore. You have to call them and order them to exercise that long. So, pay attention going into quarterly option expirations.

Q: I don’t trust your COVID information any more than I trust the government line.

A: All of my Covid data comes from Johns Hopkins University and is interdependently collated from every country in the United States. If you have any complaints you can go to them. All I can say is there are 620,000 bodies in the country that died of something. Oh, and we had the lowest population growth last month in 50 years. I’ve had family members die from it so I believe that.

Q: If the Republicans win in 2022 and 2024, will the bull market continue?

A: Absolutely not. We get a new recession and another bear market. Everything that’s going well now reverses, the entire environmental infrastructure strategy goes down the toilet, and Covid makes a huge recovery. I would go with what’s working, and 6.5% economic growth now and a market going up 30% a year totally works for me. Of course, I would make another fortune on the short side.

Q: How should you play infrastructure?

A: There is an infrastructure ETF called the Global X Funds Infrastructure ETF (PAVE) that has already had a big move, up 176% in 17 months. Other than that you can just play your basic commodity stocks like US Steel (X), Nucor (NUE), and Freeport McMoRan (FCX).

Q: How long will the hot housing market continue?

A: Ten more years. That's how long it will take to digest the current 85 million strong millennial generation who are now buying first-time homes or upgrading what they’ve got. And remember, we’re still operating with half of the new home construction capacity that we had 15 years ago before the last financial crisis.

Q: What's your prognosis for semiconductors?

A: They just had a super-heated spike; I expect them to take a break. That's why I took profits on Advanced Micro Devices (AMD). We’ll find a new bottom, and then I want to buy back into it. It’s taking a break with the rest of technology right now, which is perfectly normal.

Q: Would you take this dip to add to mRNA and BioNTech?

A: I would say yes. This is an industry that’s on the eve of a biotech revolution—the cure of all human diseases. And these two companies with their mRNA technologies are in the best place to take advantage of that.

Q: Will there be a big spike down in August?

A: It looks like it’s not happening. Like I said, if it doesn’t happen in the next few weeks, it’s not going to happen. Excess liquidity is just driving all investment decisions. If it doesn’t go down now, what’s the reason for it to go down in October? I just see no negatives at all on the horizon except for another out-of-the-blue variant like a Lambda or an Epsilon variant.

Q: Does slow population growth include illegal immigration?

A: It does, immigration both legal and illegal has been constant for decades and decades, it’s about a million people a year. But Americans are not reproducing like they used to, the birth rate hit a 50-year low last year because women did not want to go to the hospitals which were full of COVID patients. A lower population growth over the long term is very bad for economic growth. That is why Japan has essentially been in a nonstop recession for the last 32 years, because of their baby bust.

Q: Do you have political debt ceiling concerns?

A: No, these are always last-minute before midnight deals. I don't see this being any different, never underestimate the ability of Congress to spend more money, no matter who is in power.

Q: What do you think of oil in the short run?

A: Short term it may go sideways, we may even have a rally to new highs, but the long-term trade for oil is that it’s going out of business. EVs, mean you lose 50% of demand for oil in the next 10 years, and they will start discounting that now in the price of oil.

Q: Why is silver down so much?

A: It’s being dragged down by Gold (GLD), and silver (SLV) always moves twice as fast as gold.

Q: How are muni bonds going forward?

A: I don’t see them going much further. They had a massive rally, discounting an increase in taxes which hasn’t happened. So even if they do raise taxes which may be next year’s business, that is fully discounted in the Muni market already.

Q: What am I missing? You’ve been saying for months not to get involved with Bitcoin but then I heard you say you bought LEAPS.

A: No, I didn’t buy the LEAPS. I tried to buy the LEAPS but missed them and it ran away and they ended up tripling in two weeks. It’s just not like buying a normal stock. Once these things turn, they just start going up every day for weeks with no pullbacks whatsoever. This is valuation-free security with no dividend, interest, or earnings. It’s driven by pure supply and demand.

Q: What do you think of the precious metal miners like the Van Eck Vectors Gold Miners ETF (GDX)?

A: Let the current meltdown burn out and then go into long term LEAPS.

Q: What’s the best way to buy silver?

A: The best way is doing 2-year LEAPS on Wheaton Precious Metals (WPM) at current levels.

Q: What do you think about Coinbase (COIN)?

A: It’s definitely a candidate, but you want to get it on a down day. Coinbase is in the “selling shovels to the gold miners” business which is always a fantastic business model and we here in California know all about it. It’s just a question of when and where to get involved. It’s been gyrating this week because of their new burden of doing the tax reporting on all crypto buyers among their customers. That will definitely be a drag on the business.

Q: What's your short-term view on the big commodity plays like Freeport McMoRan (FCX), Alcoa Aluminum (AA), and US Steel (X)?

A: I would say they’re all going up. Maybe half the infrastructure bill has been discounted into the metals prices, but not all of it, therefore they have more to go to the upside.

Q: What are the best real estate buys?

A: There are none anywhere; maybe somewhere in eastern Europe, but still unlikely. It’s the best time ever now to rent. Buying here would be madness. And by the way, I predicted this property boom 10 years ago, if you go back in my research because 2021 was when the millennials would show up as massive buyers in the housing market, right when there was going to be a demographic shortage. That’s why I think the real estate boom goes on for another 10 years. But you won't see the gains that we’ve seen this year. You will maybe see 5% or 10% gains a year, definitely not 50% or 100% gains that we’ve just seen.

To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in here, go to MY ACCOUNT, click on GLOBAL TRADING DISPATCH, then WEBINARS, and all the webinars from the last ten years are there in all their glory.

Good Luck and Stay Healthy.

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

August 11, 2021

Tech Letter

Mad Hedge Technology Letter
August 11, 2021
Fiat Lux

Featured Trade:

(HIGHER HIGHS FOR THE NASDAQ?)
(UBER), (DIDI), (BABA), (COIN), (HOOD), (SFTBY)

Higher Highs for the Nasdaq?

Tech Letter

The blowback from the Chinese tech crackdown has been quite tough to take for Softbank (SFTBY) because of the decision to maneuver deeply into Chinese tech shares.

It looked good at the time, as China was the center of every Wall Street analyst’s growth proposition short and long term.

However, troubles in China crystallize the massive shift of deglobalization and many investment funds are finding a new world as we turn the page.

Gone are the days when aggressive investors could just dabble in all sorts of exotic markets believing that globalized forces would be a wind at its back.

So much so that nobody ever batted an eye if you told them you had investment theses playing out in Mongolia or Brazil.

Emerging markets are blowing up and now even the passport with which you do business has never been more prominent.

Rich countries are going the way of Europe – that of intense and mind-numbing regulation to make up for a shortage of tax revenues to pay for these costly programs.

The global canary in the coal mine can be traced back to Alibaba’s founder Jack Ma effectively being muzzled by the Chinese Communist Party. This was the nail in the coffin for the China story as it relates to foreign money waterfalling in the Middle Kingdom.

That’s the end of it.

Softbank will need to go back to the drawing board and probably pluck China off the board as top dog and reset their draft board.

The pain is now being found in Softbank’s balance sheet with net profit down 40%.

Let’s look at some of Softbank’s investments which include Chinese e-commerce giant Alibaba (BABA), car-share giant Didi Global (DIDI), and short-video app TikTok owner ByteDance Ltd.

Around 35%-40% of Softbank’s investments are tied up in China and its net profit is down to 761.5 billion yen, equivalent to $6.9 billion.

The incremental buyer has dried up and Softbank is now saddled with an illiquid Chinese tech portfolio they can’t get rid of.

Softbank founder Mr. Son said that SoftBank’s shares have fallen so low that the price is now only around half of the value of the company’s assets, after subtracting debt. Given that discount, SoftBank will unveil more share buybacks at some point, and is now discussing the timing and size.

He also said that SoftBank will continue the furious pace of investment at Vision Fund 2, which has stakes in 161 companies and has been funding startups at a rate of nearly one per day in recent months.

SoftBank’s new investment in pharmaceutical company Roche Holding AG signals that the Japanese company might resort to safer stocks with stable free cash flow.

Compounding the situation might be that Softbank feels that they have been burnt by tech investment one time too many.

The ripple effect of China tech going down affects their assets as a whole and have concluded that the balance sheet needs trimming and re-upping.

Even if Softbank can find some balance sheet rejuvenation - they no longer feel they can take these extraordinary tech risks that achieve high beta which is required to satisfy investors.

Overall, we could be dealing with a dearth of real, legitimate tech opportunities in proven business models which could be a reason for Softbank rotating into sectors like pharmaceuticals.

No doubt I believe they will keep their eye out for tech opportunities, but they aren’t set on it from the beginning like the past 2 decades.

Or perhaps, this could be the segue into riskier investments than before - remember Uber (UBER) was a company that no VC wanted to touch with a 10-feet pole and Softbank took it on and made a lot of money. but where is the next Uber after Uber?

It's possible that there are no real, transformative companies in the pipeline after the Coinbase (COIN), Robinhood (HOOD) IPOs, these investments usually take 10-20 years to take profits from the initial seed funding.

It could also signal further advancements into the derivatives market with the company looking for leverage bets instead of holding vanilla equities and standard ETF index funds.

Their foray into derivate exposure gave them the nickname the “Nasdaq whale” when the company bought a torrent of call options profiting in the billions from the tech lurch up.

Even retail traders have gotten into options with their profit possibilities which are able to surpass any equity trade that only have a 2:1 leverage ratio.

Softbank could be finding tech too overvalued and looking to jump short-term into another industry almost like a day trader, although tech, for them, is something that is a long-term core objective.

We can analyze this whichever way we want but its meaning is clear – the low hanging tech fruit is gone, and it will be harder to fight for your crust of bread even much so that the Nasdaq whale is looking into morphing into the S&P whale or a different type of whale all together.

I can tell you that deep down in the weeds as a trader, I am seeing a rapidly evolving rotation that has rewarded cyclicals that are back from the dead and financials that are breaking out benefiting from the massive amount of stimulus deposits.

We need to acknowledge that the consumer is currently in the best health of our lifetime because of the free payouts, PPP loan forgiveness, and other goodies. And that doesn’t necessarily mean that tech will go up in the short-term as we skim all-time highs.

Technical charts still look positive for tech, but it is true that the sector has cooled off even if the trend will be higher long-term. It’s getting that much harder to eke out higher highs in the Nasdaq.

July 7, 2021

Tech Letter

Mad Hedge Technology Letter
July 7, 2021
Fiat Lux

Featured Trade:

(SHOULD YOU BUY THE ROBINHOOD IPO?)
(HOOD), (COIN), (PLTR)

Should You Buy the Robinhood IPO?

Tech Letter

Robinhood (HOOD) is an American financial services company headquartered in Menlo Park, California, known for offering commission-free trades of stocks, exchange-traded, and cryptocurrencies via a mobile app introduced in March 2015.

After perusing their S-1, I can’t help but offer the same recommendation I gave readers for the Coinbase (COIN) listing, which proved to be spot on.

Although this is a real company with real revenues, the growth rates are particularly high because of a one-off phenomenon in alternative asset classes.

I would urge readers to not buy shares of HOOD directly after they are public but instead wait for an entry point sometime after the lock-up period expiration which usually coincides with the insiders and long-time employees unloading shares or a partial trove of them.

The same happened to Palantir (PLTR) which saw a meaningful sell-off upon the lock-up expiration and although PLTR shares are higher today than they were the day of lock-up expiration, it’s better to avoid that dip if you can. PLTR had a big dip when the lock-up expired presenting a great entry point into shares.

Lock-up periods are usually 180 days and I firmly believe this company that will be trading under the ticker symbol HOOD, is not worth paying a premium before that 180-day lock-up period is over.

Don’t be that sucker.

To dovetail with my thesis of not buying HOOD too early is the analysis of their inherent high stakes/ high rewards nature of the business.

Let’s not fudge the details, this is a high-risk business and as of now, they have been handsomely rewarded for it, but that might not always be the case.

They pioneered commission-free trading when the likes of Fidelity and Charles Schwab were still charging $15 to execute one side of a trade.

Why can they offer free trading?

Order history is paid for by third-party high-frequency traders, namely Citadel.

Citadel accounts for 27% of payments for Robinhood retail order flow, and Payment for order flow is 81% of total Robinhood revenue.

The thinking behind buying order flow is to then apply the data through machine learning to even front-run orders of normal retail traders and profit off the spread or micromovements in shares.

They even make markets with their liquidity and trade their own proprietary books.

And yes, this is legal in the United States and companies have gone gangbusters in high-frequency trading (HFT) like Virtu Financial founded by Vincent Viola who owns the NHL franchise Florida Panthers and is big into competing for his horses at the Kentucky Derby.

It obviously pays to do HFT, and if done properly, are great businesses and these are the companies propping up HOOD today.

Robinhood has taken advantage of the Millennial lust to go crypto or go home.

The numbers back me up — $11.6 billion of crypto under custody by the end of Q1.

Bitcoin was the HOOD’s most traded asset in 2020 and the first quarter of 2021 and 17% of total revenue came from crypto in Q1, (compared to 4% in Q420)

In the S-1, it said that HOOD’s business “may be adversely affected, and growth in our net revenue earned from cryptocurrency transactions may slow or decline, if the markets for Dogecoin deteriorate or if the price of Dogecoin declines.”

HOOD and its future success are now uniquely levered towards alternative coin Dogecoin which is now 34% of their total crypto revenue in Q1.

This is the altcoin that Elon Musk joked about, and it explains the 54% growth of 2020 revenue in the first 3 months of 2021.

This is an incredibly high-risk growth strategy that won’t work out every quarter.

HOOD now has 18 million cumulative funded accounts showing the popularity of the business and did $522M in 1Q21 revenue vs. $127.6M in 1Q20 and did $958.8M in revenue in '20 reporting $7.5M in net income.

The median age of customers on HOOD’s platform is 31 and over 50% are first-time investors so if they nurture this customer base, this could be a sticky business moving forward.

If they lead them down this treacherous Dogecoin cliff, it could be trouble and result in terrible quarterly earnings.

A few other risks I felt notable was that Robinhood users went from holding/trading $400M of crypto to $11.5B of crypto from March 2020 to 2021, but HOOD intends to potentially never offer delivery of customer crypto purchases.

This means they are exposed to derivative contracts which just layers on high risk on top of high risk.

Robinhood said there is tremendous regulatory risk for its stock with the company fined $70 million by the securities industry's self-regulator, FINRA, for misleading customers and system outages that the agency said hurt Robinhood's customers.

They said they will likely incur similar fines in the future and investors will need to stomach its predisposition to skirt the law.

There is nothing low-risk about HOOD, and I would wait for a big sell-off after the lock-up expiration to get in at a certain discounted price. Readers shouldn’t blindly pay a premium for HOOD, the risk isn’t worth it.

HOOD

April 16, 2021

Tech Letter

Mad Hedge Technology Letter
April 16, 2021
Fiat Lux

Featured Trade:

(SHOULD I BUY COINBASE TODAY?)
(COIN), (CRM), (ADBE), (PYPL), (SQ)

Should I Buy Coinbase Today?

Tech Letter

For all the cryptocurrency haters in the world, it’s getting harder to take that stand.

I’ll tell you why.

Coinbase (COIN) was the first major crypto business to go public in the U.S. when it began trading at $381 Wednesday morning on the Nasdaq and its IPO symbolizes the acceptance of an alternative digital asset class in technology.

Prior to this watershed moment, the only way to play crypto was through second derivatives plays like PayPal (PYPL) and Square (SQ) who have been handsomely rewarded through higher share prices.

Now, we get the biggest U.S. cryptocurrency exchange trading publicly that will allow exposure to mainstream stock-market investors.

The event has also been tabbed as a catalyst that might drive the adoption of incremental digital assets.

At the very least, this lays down a marker for further crypto-related companies eyeing the Nasdaq after Coinbase’s blowout success.

This also shows that the cryptocurrency infrastructure is developing rapidly and its budding credibility is something that needs to be acknowledged.

The Coinbase IPO was also the catalyst in sending bitcoin prices to almost $65,000.

No doubt that the appreciating asset has been the most attractive use case for the incremental investor and cryptocurrency buyer.

Many early investors who got into bitcoin at 20 cents are now billionaires many times over.

After such stunning success, it’s hard to believe that any fintech or cryptocurrency start-up would ever consider doing their IPO anywhere else but New York.

New York has the liquidity, the US dollar, and the capacity to receive such type of growth companies in bulk.

This is not only an emphatic victory for digital assets, but also for the US tech sector and a stamp of validation for the Nasdaq market.

Ironically enough, even during this trade war, Chinese tech companies are clamoring to go public in New York and not mainland China for the above reasons.

Here are a few other highly positive data points to digest that were talking points in their S-1 filing.

The overall market capitalization of crypto assets grew from less than $500 million to $782 billion between December 31, 2012, and December 31, 2020, representing a CAGR (compound annual growth rate) of over 150%.

Over the same period, Coinbase retail users grew from less than 13,000 to 43 million, a 175% CAGR.

I believe the total market cap of crypto is now around $2 trillion in April 2021.

And more recently, Coinbase has experienced significant growth in the number of institutions on their platform, increasing from over 1,000 as of December 31, 2017, to 7,000 as of December 31, 2020.

Bitcoin reported a nine-fold increase in Q1 revenue, to $1.8B, up from $190.6M the previous year.

Just like Google and Facebook benefit from a duopoly, Coinbase will benefit from being the only pure cryptocurrency option on the Nasdaq and that will put a floor under shares in the short-term.

The growth metrics of the company are also robust via a helping hand by the increasingly expensive price of bitcoin.

No doubt that this company’s prospects are tied to the hip with the prices of cryptocurrencies.

If the price of bitcoin retraces to $30,000, which it could because of the high volatility of it, expect Coinbase shares to dive with it.

This for all intents and purposes is a bet on the health and price trajectory of bitcoin for better or worse until other crypto-based choices are introduced which would give more layers and complexity to this sub-sector.

Bitcoin calls out Binance which they state as a competitor and Kraken is another exchange that is large and vying for the same capital.

I believe these two companies have a chance to go public and that is when you will really see the institutions jump on this crypto bandwagon.

More options and a foundational investment base will also promote stability in this new technology sub-sector.

Should you buy Coinbase today?

No.

I understand Coinbase’s growth metrics are off the charts with revenue growing 900%, but it’s not worth $100 billion market cap on just $1.8 billion of quarterly sales.

Investors would need solid tailwinds such as bitcoin passing $100,000 in 2021 for this company to be worth $100 billion and I just don’t see it.

Then also understand the cybersecurity and possible regulations are two risks that could blow up the business model at any moment which would take down the premium in the stock.

Yes, the meteoric rise of crypto at the start of 2021 has turned heads, but as the economy reopens, I do believe money will rotate from crypto back into traditional technology that is underpinned by cash cow businesses.

Highly profitable companies that aren’t FANGs are also set to deliver share appreciation to shareholders such as Salesforce (CRM) or a company like Adobe (ADBE) who earn profits of $5.27 billion on $13 billion of annual revenue.

I acknowledge that Coinbase’s IPO was the perfect time to go public.

They are taking advantage of easy money and low rates while the acceptance of this alternative asset class has never been higher.

However, I don’t see any more incremental growth in the short term and the stock is more than fully priced today.

The risk-reward is not favorable to pile into this stock now unless you have a bullish 50-year view on crypto and can’t wait.

This stock will go through volatility because of the inherent dynamics they are tied to and I would seriously look at buying Coinbase only on a massive sell-off.

Don’t go chasing unicorns.

At the end of the day, this is a real company with real revenue growth of 900% year-over-year. Slice it up anyway, and these numbers are numbers that attract investors, but the stock is too expensive right here.

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