Mad Hedge Technology Letter
February 23, 2024
Fiat Lux
Featured Trade:
(SILICON VALLEY INVADES THE USED CARS MARKET)
(CVNA)
Posts
Even tech’s red-headed stepchild such as Carvana is making money in Bidenflationary times showing the deep momentum of the tech sector in early 2024.
Tech stocks are hot and Carvana (CVNA) is joining in on the action.
The Nasdaq has ignited early this year rallying around the hype of AI.
In turn, investors are coming off the sidelines to pour money into tech stocks and that has also had a strong effect on the lower tranche of tech firms like Carvana.
Carvana sells used cars on a digital platform. They charge a commission for this service.
The business model poorly scaled and incurs high costs yet they were able to turn their first profit in the history of the company.
They also forecasted core current-quarter profit "significantly above" $100 million helped in part by cutting costs.
To strengthen its balance sheet and attain positive cash flow, Carvana has been trimming inventory and slashing advertising and other expenses.
The company became popular during the healthcare pandemic, as people opted for readily available used cars instead of buying newer vehicles, which were in short supply due to a global chip crunch.
Carvana said it expects retail units sold in the first quarter of 2024 to be "slightly up" from last year.
Carvana said it expects first-quarter retail gross profit per unit to be similar to the fourth quarter, with an upside potential.
It reported retail gross profit per unit of $2,812, representing a nearly seven-fold increase from the fourth quarter of 2022.
Carvana also said it expects to reduce expenses per retail unit sold from the $5,769 it reported in the fourth quarter, on a sequential basis.
The company reported net income of $450 million for the year 2023. It had reported a loss of $1.59 billion in 2022.
The company’s gross profit per unit rose to more than $5,500 from $3,022 in 2022.
The online car seller has lowered costs in recent quarters and restructured some debt to lower interest payments. Carvana has sought to regain its financial footing and resume growing after an ill-fated expansion several years ago.
Carvana offers a unique insight into the health of the American economy.
The US is a car-reliant country and car costs are one unavoidable input. Good news for CVNA.
The accelerating profit in used cars shows the impact of Bidenflation and increase in goods which has led to many tech firms reporting profits like Uber.
If the price of cars sold continues to increase, the future augurs well for Carvana.
I fully expect inflation to stay sticky for many types of goods in the US economy and used cars are one of them.
I fully believe an ample volume of supply won’t be dumped in the car market because consumers know they’ll have to pay a higher price for something similar.
This won’t reverse anytime soon.
Carvana is poised to be a serious tech player selling a product that will likely see increasing prices for the short to medium term.
Carvana would be a great buy the dip candidates on big dips of 10 or 20%.
Mad Hedge Technology Letter
June 9, 2023
Fiat Lux
Featured Trade:
(SHOULD YOU BUY CARVANA?)
(CVNA)
The biggest takeaway I took from the used car platform Carvana’s (CVNA) latest earnings report is: who is dumb enough to buy an old car and get fleeced for $6k?
Apparently, $6k is what CVNA earns per unit in gross terms now.
But hey, if paying a broker $6k is what it takes to buy a used car then so be it.
The problem I have with the $6k gross per unit is how much further can that number go?
My bet is not much.
How much higher broker fees can Americans absorb?
My bet is not much more.
Just doing simple math means that for a $20,000 used car purchase, adding on the Carvana service would mean it costs $26,000 to the end buyer.
Sure, for some people like me and you it’s not a big deal, but I don’t believe this can scale well or efficiently as a tech platform.
That being said, it’s quite a corporate achievement for such gaudy margins and one that meant CVNA’s share exploded to the upside rising 44% on the news.
The stock is down 18% today highlighting the volatile nature of the stock.
Revenue fell 25% to $2.6 billion, but total gross profit rose 14% to $341 million.
The update helped reassure investors that the stock would be able to avoid bankruptcy after plunging as much as 99% from its peak in 2021 on slowing growth and mounting losses, especially as interest rates rise and used car prices fell for much of last year.
Carvana didn’t give guidance for net income but said adjusted earnings before interest, taxes, depreciation and amortization would be $50 million in the current quarter — way above the consensus analyst estimate of a $3.6 million loss — and gross profit per unit would be a record of more than $6,000.
Carvana’s $8.7 billion debt load as of March 31 has been a big problem for the company, which recently scrapped a debt exchange offer that would have reduced its burden because creditors held out for a better deal.
The interest on Carvana’s debt cost the company more than $2,000 per car in the first quarter, which is one reason it reported a loss of $286 million despite gross profit per vehicle sold of more than $4,000.
From peak to trough, Carvana lost 99% of its value as used car prices fell, the company made an ill-timed acquisition of the ADESA auction business, and creditors began preparing for a bankruptcy.
Although in the short term the stock is having a nice bounce, that doesn’t mean the stock’s appreciation is sustainable in the long run.
I do believe the bounce is just the proverbial dead cat bounce and ok for a quick trade and quick profit.
In a world where big tech is really crushing it, small tech needs that extra little bit of juice or special sauce to navigate the iron clad balance sheets of Silicon Valley.
Selling used cars is hard to digitize and I believe this platform will continue to burn cash on the road to a never ending feedback of explaining why it can’t be profitable.
Sell this one on the bounce.
Global Market Comments
February 10, 2023
Fiat Lux
Featured Trade:
(FEBRUARY 8 BIWEEKLY STRATEGY WEBINAR Q&A),
(RCL), (TSLA), (UUP), ($VIX), (BRKB), (TLT), (TBT), (ROM), (CVNA), (SLV), (DIS)
CLICK HERE to download today's position sheet.
NOTE TO SUBSCRIBERS: There will be no strategy letter for
February 13 and 21 as I will be traveling. - JT
Below please find subscribers’ Q&A for the February 8 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Silicon Valley in California.
Q: What do you make of the Chinese balloon that crossed the United States last week?
It was the most overhyped, least consequential event in recent memory, and is not a new thing. There is no chance this was an innocent scientific mission as there was no flight plan filed. What’s China’s new frontline weapon? A catapult? A bow and arrow? Are American balloon makers going to demand increased defense spending? Curiously, no mention was ever made of the three Chinese balloons that crossed the US during the previous administration when no action was taken. My guess is that a Chinese Army faction wanted to keep their defense spending rising and torpedoed any rapprochement that was in the works with the US. Another theory was that they wanted to test our response. There is nothing the balloon could have captured that the Chinese didn’t already have from their satellites or even Google Earth for free. The media coverage has been a flood of false information. If the Chinese really can predict global winds at 60,000 feet two weeks in advance, then their math is so far more advanced than our own then we might as well surrender. By the way, during WWII the Japanese sent 20,000 balloons our way in an attempt to set the Western US on fire. Only one exploded, killing a family in Oregon.
Q: I’m getting worried about my long-term LEAPS in (TLT) and (FCX) given the recent market action. Thanks in advance for your help.
A: The (TLT)'s should be OK by expiration because they hit max profit even in an unchanged bond market. But Republican radicals who want a government shutdown at any price are definitely going to rattle your cage. That’s why I currently have no short-term position in bonds and am waiting for a bigger pullback to maybe $101 before I get back in. As for Freeport McMoRan (FCX) you can take profits any time. The stock doubled after we recommended the LEAPS in October. Longer term, I think (FCX) goes to $100 because of a coming global copper shortage.
Q: Should I buy Royal Caribbean (RCL) because we’re looking at a record-breaking cruise season coming up this year?
A: The time to buy Royal Caribbean was actually last June; it was one of the first outperformers in the market, completely skipped the October meltdown, and is practically doubled off the low. So great idea, just 8 months too late. And that actually is the case with a lot of stocks now—they've had such enormous runs over a short time, that you’re taking a lot of risks to get involved here.
Q: Do you think Silicon Valley should force all workers back into the office? Wouldn't that enhance creativity?
A: It does enhance creativity but at the cost of productivity. People are much more productive when they work at home, don’t have to spend 2 hours commuting, and can build their job around their lifestyle. They work at home cheaper too. So, it’s a trade-off, do you want creativity or do you want productivity? Well, the productive people should stay at home, the creative people should go to the office—it’s a company by company, product by product decision.
Q: You say you never touch 2x and 3x ETFs?
A: The only exception to that is the ProShares UltraShort 20+ Year Treasury ETF (TBT) which we traded for 2.5 years while the bonds were making a straight line move down, or the ProShares Ultra Technology ETF (ROM) which tends to have straight up move like this year. And the only time you could do a 2x is if you think the move in the underlying is going to be so enormous it covers up all the costs of dealing in these ETFs, then it’s worth doing. 3xs I never ever touch them because those reset at the end of the day and are really designed to be intraday hedging instruments, which we’re not interested in.
Q: Are you still bearish on the US dollar (UUP)?
A: Absolutely, we’ve had almost a straight line move down ever since October, and we’re getting a temporary break on that while interest rates stay higher for longer. The next dive in interest rates, the dollar collapses once again.
Q: When you buy back into bonds, where in the curve will you be buying?
A: In bull markets, you always want to buy the longest maturity available. Back in the 1970s, I used to buy WWI infinite British Treasury bonds because they had 100-year maturities, and therefore, in any bull market, have the largest gains. In the US, the 30-year instruments are pretty illiquid, so I focus on the 10-year, which is the iShares 20 Plus Year Treasury Bond ETF (TLT).
Q: What could be the next entry point for Tesla (TSLA) LEAPS?
A: I’m afraid that we have left LEAPS land for Tesla, I mean $100, $110, $120, $130—that’s all LEAP territory. Up here? Not unless you want to do a very low return LEAP like a $150/$160. I don’t see Tesla going below $150. Too many people trying to get into the stock, and Elon Musk is a master at delivering short squeezes, which he has done a perfect job of this year.
Q: What do you think about Real Estate Investment Trusts (REITS)?
A: I love REITS. They are a falling interest rate play. Highly exposed to interest rates, highly leveraged, and you get some great performance—and we’ve already had some since October. I think the bear market in real estate ends this year and we get a new bull in housing that starts next year because we still have a chronic structural shortage of housing. We’re missing about 10 million houses that we need—in that situation, prices go up. In fact, there are still bidding wars going on in the prime residential (mostly rural) parts of the country.
Q: Wouldn’t you want to buy at-the-money calls, not spreads in a low Volatility Index ($VIX) market on a 4-6 month view, because of cheaper pricing?
A: Yes you do, but not on top of a record move to the upside. If we can get a pullback in the markets of a1 /3-1/2 of their recent moves, and the ($VIX) is still low, then that makes all the sense in the world, to buy at the money calls with ($VIX) of $17. The only problem is if we give up half the recent gains, you’re not going to have a ($VIX) at $17 anymore, it’ll be more like $27 if we get a pullback like that and options will be expensive again. It’s amazing how cheap upside exposure gets at market tops—that’s what the ($VIX) market is telling you. In other words, it’s a sucker’s bet. You can’t have your cake and eat it too.
Q: What do you think about Alphabet (GOOGL)?
A: It’s overbought like the rest of the stocks in the sector. But the charts are looking very attractive, with an upside breakout of the 200-day. Long-term, they have a killer business model, but they also have antitrust problems. Again, everything is way too overbought for me to get involved on a short-term basis.
Q: What price would you get in at for Berkshire Hathaway (BRK/B)?
A: It’s not selling off, it’s flatlining. So even a small dip like we had yesterday would be a decent place to get into. Long term we’re looking for $400/share for this by the end of this year.
Q: Will strong wage growth lead the Fed to raise interest rates higher?
A: Well they’ve already said essentially they’re going to do 2 more quarter point rises. Beyond that, the Fed itself doesn’t know. When you have interest rates at 10-20 year highs, and 3.4% unemployment. No one has ever seen that before, there is no playbook for what’s happening now—either in the economy or in the stock market. So everyone’s standing around, scratching their heads, trying to figure out what to do, and waiting for more data to come out to give direction. And I’m in the same position really.
Q: Will the US Treasury bond get down to a 2.0% yield by the end of the year?
A: I think it's a possibility but expect a lot of volatility and fears around prospects of a government shutdown this summer and a debt default. Part of the Republican party seems intent on forcing that, and that is not good for bond longs. You get through that, you could have an absolutely ballistic move up in the (TLT), to $120 or even $130.
Q: Would you consider a LEAPS on housing stocks?
A: LEAPS are things you do at multi-year market bottoms, not after 50% moves; and the housing stocks have actually been moving since June; so that was a June story. Buy low, sell high—it’s my revolutionary new concept; most people do the opposite.
Q: Should I invest in Disney (DIS) on a buy it on a Bob Iger turnaround?
A: Yes, but only on a dip; we’ve already had a massive move. If we don’t get a recession, that is fantastic for Disney’s park business.
Q: What is your target for Silver (SLV)?
A: $50/oz. We’re at $20 now. Silver is becoming the new industrial metal, far outstripping any jewelry demand that you used to have; and that’s because of EVs and solar. Who knew that we’re at 10 million homes with solar panels in California now? That is just an enormous number that’s happened mostly in the last five years.
Q: When you look at Natural Gas, would you consider LEAPS?
A: Yes, but I haven’t run the numbers yet. The price has gotten so low, down 80% in eight months that you buy it even if you hate it.
Q: Should I pay attention to demographics when I invest? What is the most important one right now?
A: Demographics are very important, because children born today become customers in 20 years, and companies will start adapting their policies for those customers now in terms of capital investments and so on. It also affects stock markets now. Also, you always want to invest in the country that had the fastest growing population, which used to be China but isn’t anymore. By the way, the reason the US economy has outperformed Europe by 1% a year in GDP growth for the last 70 years is because we allow immigrants, and they don’t. All parties used to be in favor of immigration while now only one is. Why, I don’t understand.
Q: What about a LEAP on Silver (SLV)?
A: That is a possible candidate because we have had a move, but it’s only been about 20%. It’s not like 50% or 100% like we’ve seen with Tesla (TSLA). There are a few asset classes that are still in LEAPS territory—I think Silver would be one of them, and certainly natural gas (UNG). If I were to do a LEAPS, I’d go out 2 years and do something like a $25-$27; the old high is $50. You should get about a 5x leverage on that kind of LEAPS.
Q: Would you buy LEAPS puts on Carvana (CVNA)?
A: Absolutely not. Again, another great one-year-ago idea, not a now idea. Buy Put LEAPS at extreme market tops, not now. Carvana had dropped 95% in the last year.
Q: Is seasonality an important consideration in your trading strategy?
A: Absolutely yes. If you buy stocks in November and do the sell-in-May strategy, your average annual return is something like 20% a year. If you buy stocks in May and sell them in December, the 70-year return on that is zero. I love having the tailwind of seasonality; I can’t remember seeing it when it didn’t work. It’s an important consideration, and we’re right in the middle of the “BUY” season and the market is agreeing with me.
Q: You should do a LEAPS letter.
A: I already do in fact do a LEAPS letter, and it’s called the Mad Hedge Concierge Service where we have a whole website dedicated to just LEAPS. Some ten out of 12 made money last year, and some went up 10X. Contact customer support at support@madhedgefundtrader.com if you’re interested. Concierge members are very happy with their LEAPS coverage.
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
At 29 Palms in my M1 Abrams Tank in 2000
Mad Hedge Technology Letter
November 11, 2022
Fiat Lux
Featured Trade:
(POSITIONING COUNTS)
(AMZN), (CVNA), (CPI)
Yesterday was a historic day for technology stocks as blue chips firm such as ecommerce firm Amazon (AMZN) was up over 12% on the day.
It was a day to remember.
Even the marginal tech stocks did well like digital used car dealer Carvana (CVNA) which delivered almost 31% of performance in just one day.
I would boil down one of the greatest up days in tech stocks’ history to positioning.
Tech stocks have been crushed on almost every inflation report and when the October Consumer Price Index (CPI) dished us a 7.7% increase over last year and 0.4% increase over the prior month, tech stocks took off like a rocket.
We finally clawed one back for the tech companies.
That’s not to say we are in a deflationary environment – hardly so.
However, the bar has been set so unbelievably low at this point, that any measly beat of consensus was going to cause this type of explosive reaction.
The highly positive unintended result is that it offers investors an attractive entry point into tech stocks until the November CPI report in December where we play chicken yet again.
I fully expect dip buyers and portfolio managers chasing year-end performance to jump into this bear market rally until December 13th.
Long term, the Central Bankers must be shaking their heads as this sets the stage for even more inflation as a cheaper dollar will bid up the price of commodities possibly delivering consumers higher oil prices and higher raw material costs next year.
That means higher iPhone costs and higher EV costs that get passed onto the guy or gal opposite the cashier's counter – the American consumer.
Other knock-on effects will mean higher gas prices for Uber, Lyft, and DoorDash drivers to deliver hot meals.
Celebrating a 7.7% inflation headline as a homerun is funny when we think about it, but that’s how negative positioning was going into yesterday.
The indexes for used cars and trucks, medical care, apparel, and airline fares all declined over the month.
Looking into individual aspects of the report, housing prices continued their climb, with the cost of shelter recording its largest month-on-month increase — 0.8% — since August 1990, while rising 6.9% from a year ago.
The food index increased 0.6%, down slightly from September's 0.8% increase.
I can easily see the shelter portion of inflation dropping for the November CPI report in December because shelter is a lagging indicator and my analysis earths reductions in rental listing prices and greater supply.
Therefore, shelter coming down would stoke yet another bull rush into New Year for tech stocks.
In a nutshell, short-term highly positive and long-term somewhat negative for tech stocks is how I would categorize this report.
At the end of the day, investors and traders scoff at the 5% Fed Funds rate as not a big deal and are weaponizing any scintilla of relative loosening to pile into the long side.
This is the problem when the smartest people in the world are convinced that the Fed will save the day if systemic contagion ever emerges and until then, keep bulldozing into the bull side on every modicum of perceived easing to the credit liquidity story.
It is basically a lift-off for tech stocks until December 13th.
Mad Hedge Technology Letter
September 30, 2022
Fiat Lux
Featured Trade:
(CARVANA ISN’T NIRVANA)
(CVNA), (KMX), (TSLA)
Avoid Carvana (CVNA) stock.
Don’t expect a quick reversal in this digital used-car dealer after the car buying frenzy over the past couple of years.
Why?
We have reached the high water mark in American automobile sales setting up a sharp cliff edge as increasingly, US consumers are either priced out of buying a new used car or have decided to drastically cut back discretionary spending on larger items.
This has sent shockwaves for used car retailer CarMax (KMX) whose stock cratered by 24% and our tech play derivative CVNA who dropped 20% when CarMax’s poor earnings report came out. The price action of these two stocks mirrors each other.
Remember that stocks are forward pricing mechanisms and not backwards to the detriment of these two stocks.
KMX and CVNA are inextricably linked and offer deep insights into the state of each other’s companies.
In a quite damaging earnings report, CarMax was able to increase its gross profit per vehicle by boosting its average vehicle sales price. That’s about all that went right. This appears more like a one-off.
Carvana has a history of overpaying for supply during the boom of used car sales over the past few years.
The numbers are clearly working against CVNA.
Even more worrisome, CVNA is facing an uncertain and rapidly deteriorating macroeconomic environment moving forward.
The data bodes ill for future earnings reports as US consumers abruptly pull back on spending especially at the middle-class to lower income levels.
Just as precarious, many in the middle class to lower echelon prefer to secure automobile loans to finance a new used car purchase.
With interest rate yields exploding to the upside, it sets the stage for not only mass automobile loan delinquency and nonpayment, but it also prices out new car shoppers by making the monthly payment too exorbitant.
There will be few buyers using bank financing to get that new used car they have always wanted. And what non-rich person has a car’s worth of cash lying around these days?
At the ground level, things are bleak.
US consumers are increasingly prioritizing paying the utility and food bills over upgrading, upsizing, or even styling their used cars.
For most US consumers, a brand new car sits in the realm of fantasy as the prices of new cars surge because of high input, logistical, and manufacturing costs. A fresh car from the factory is now a luxury many can’t afford which is why many have turned to the used market.
The worsening consumer sentiment will absolutely negatively impact the volume and nominal price of each individual car sale moving forward.
I believe the data will show up in the last quarter of 2022 and 2023.
As the price of cars falls, CVNA are stuck with a higher cost basis because they snapped up many cars at premium prices and now buyers have vacated. These car dealers’ algorithms haven’t adjusted yet to the paradigm shift.
CVNA will need to consider taking a loss on these automobile units to shed inventory otherwise they are on the hook for high carry costs.
Sadly, the short-term outlook doesn’t provide any silver linings and is getting grimmer by the day.
I fully expect gross margins to crater and nominal sales to fall sharply, causing a severe downgrading in annual revenue.
If the high-end consumer holds up, better to migrate into Tesla (TSLA) stock, but that’s a big if.
