Global Market Comments
April 21, 2023
Fiat Lux
Featured Trade:
(THURSDAY, MAY 18, 2023 TAMPA, FLORIDA STRATEGY LUNCHEON)
(SOME BASIC TRICKS FOR TRADING OPTIONS)
CLICK HERE to download today's position sheet.
Posts
Global Market Comments
April 20, 2023
Fiat Lux
Featured Trade:
(HAS AI REPLACED THE BLOCKCHAIN CRAZE?)
(TSLA), (META), (GOOGL), (MSFT), (NVDA), (BBAI), (BZFD), (AI), (RTX), (BKR), (LPSN)
CLICK HERE to download today's position sheet.
Artificial Intelligence (AI) has become a crowd-pleaser and is taking oxygen away from crypto and blockchain.
What has initiated this trend?
Sam Altman and Open AI’s ChatGPT.
Altman wanted to create a non-profit that would use AI technology for the greater good of humanity. His mission was backed by Tesla’s Elon Musk and LinkedIn co-founder Reid Hoffman, thereby ensuring the success of its genesis.
Upon its launch, in just one week, one million users quickly signed up.
ChatGPT can create persuasive marketing messages, ad copy, and complex computer programs.
Altman’s venture may be even considered a challenge to the most established tech giants, such as Google (GOOGL). At a $29 billion valuation, Chat GPT is grabbing attention. Venture capital firms are already in negotiations to acquire a stake in OpenAI.
Despite the NASDAQ’s decline, OpenAI has achieved unprecedented success and a remarkable valuation.
Is ChatGPT only for the sophisticated investor?
No, you can invest in this space via a publicly traded fund that has indirect exposure to ChatGPT. Deep pockets are not necessary.
Microsoft (MSFT) has recently made a $13 billion investment in Open AI, which will cement the tech giant’s partnership. This new alliance will provide critical funding to OpenAI and enable could computing power to run increasingly complex models. Microsoft plans to use OpenAI’s technology in a variety of products, including Bing’s search engine and Microsoft Design.
Nvidia Corporation (NVDA) plays a pivotal role in the tech industry. It is best known for its production of top-end graphics chips, which serve as an important source for AI software models, but its role in the technology space may evolve rapidly as it expands into the developing AI industry.
Although we are in the early stages of the AI movement, many businesses have already grabbed AI and strapped it to their core business. It has become a growing trend and is making those businesses a ton of money. AI is growing far faster than anyone realized and the impact on corporate earnings will be enormous.
BigBear.ai Holdings Inc. (BBAI) has seen its share price increase fivefold because of its use of AI to assist clients in data analysis.
A media company called BuzzFeed Inc. (BZFD), saw its stock price increase more than 300% in just two days after announcing its plan to integrate AI-based content into its “core business.”
C3.ai Inc. (AI) is one of the top-performing software makers, with a 77% rally last month, driven by customers like Raytheon Technologies Corp (RTX) and Baker Hughes Co (BKR).
Another company, LivePerson Inc (LPSN), is attracting much notice with its plans to integrate generative capabilities from OpenAI, causing its shares to surge by as much as 19%.
Baidu (BIDU) also has plans to launch its own version of Chat GPT, but its stock price isn’t impressed yet.
ChatGPT offers impressive advances in the field of AI, which can be helpful in performing various personal and professional tasks. Growth and innovation in this area is certain.
AI technology is powerful, useful, and beneficial for our modern society if used responsibly.
Investment in this area should be done thoughtfully and after much careful research. Microsoft (MSFT) and Nvidia (NVDA) would be excellent choices to start your investment in this space.
Mad Hedge Technology Letter
March 31, 2023
Fiat Lux
Featured Trade:
(BUY NOW PAY WHENEVER)
(AAPL), (AFRM), (MSFT)
Apple is stepping into the "buy now, pay later" industry and these lateral moves epitomize the state of the tech sector today.
For a company known for its dazzling innovation, this doesn’t do much to move the needle, but honestly, it doesn’t really need to recreate the wheel at this point either.
"Buy now, pay later" focuses on the bottom feeder consumer who can’t afford to pay full price for something and must elongate the payment cycle.
These are the people who are high-risk consumers that otherwise wouldn’t be able to buy an iPhone without the subsidy.
The good news is that Apple doesn’t need to innovate to stay on top because many other companies aren’t innovating either. The bar is quite low these days.
I would say that Microsoft is probably the one that takes the lead with its artificial intelligence investments, but the jury is also out on that as well with Italy banning its new service.
Without much innovation going on, Apple is moving onto others' turf and leveraging their whole ecosystem against weaker competition like Affirm Holdings, Inc. (AFRM).
Launching Apple Pay Later, which allows Apple Pay users to split purchases into four interest-free payments paid over six weeks without an additional fee.
Apple conducts a soft credit check, which reviews credit scores to understand one’s current credit.
If approved, the Pay Later option is shown when you use Apple Pay online or make in-app purchases on iPhones and iPads. Purchases using the new service will be authenticated using Face ID, Touch ID, or a passcode.
Aside from Affirm, other competitors include Afterpay, Klarna, and PayPal’s “Pay in 4” option. Here’s how Apple Pay Later compares.
I do believe this is a net positive for Apple even if it does increase the risk of non-performing loans.
Apple would easily be able to absorb these losses if they delivered material harm to the company simply because the balance sheet is so healthy.
Apple has been the recipient of the flight to safety trade along with Microsoft during this technology stock melt up.
The expectation of no more interest rates has been the trigger for new capital allocation into Apple stock.
I fully expect Apple’s stock to perform well during a time when liquidity has been poured into the system by the Fed.
They are doing this because the Fed is prioritizing global systemic banking risk as the number one risk to the market.
This has caused the Fed to rid themselves of quantitative tightening meaning the goalposts have suddenly widened for the tech behemoths and Apple is merely obliging to the easier conditions.
Remember, it is more about conditions in the short term than anything else which is why liquidity is so important to share prices.
Therefore, Apple rolling out a “meh” business like "buy now, pay later," which could possibly turn into a "buy now, pay never" business, is not really a big deal.
Rolling out with essentially the same phone over and over again with different colors also doesn’t matter either.
Conversely, this will do material damage to companies like Affirm, Klarna, Afterpay, and PayPal.
Buy the dip in the best and brightest in tech. Apple is obviously one of those candidates.
Mad Hedge Technology Letter
March 29, 2023
Fiat Lux
Featured Trade:
(THE FORCE MULTIPLIER)
(MSFT), (TSLA), (CHATGPT)
Is artificial intelligence already on the ropes?
Tesla CEO Elon Musk and a group of artificial intelligence experts have called for a six-month freeze of developing systems that are more powerful versions than the just-released OpenAI GPT-4 system.
GPT-4 quickly impressed early users and has achieved remarkable gains in the short term.
With its ability to simplify coding, rapidly create a website from a simple sketch, and pass exams with high marks takes fractions of a second.
In an open letter, Musk and the experts point to potential risks for society and humanity as a whole.
This would be significantly detrimental to Microsoft’s stock if the development of AI is halted.
No doubt that part of this is Elon Musk not satisfied that his $100 million donation to this “nonprofit” has been parlayed into a Microsoft for-profit smash-and-grab takeover of the asset.
Malfunctioning AI is something that would be a horror story for everyone on the planet.
The creator of OpenAI Sam Altman has also expressed concern about the societal backlash and volume of misinformation that could become one of those nasty unintended side effects.
Some other disruptions include both economic and political disruptions, and researchers are asking developers to work with regulators to create standards for AI development and integration.
Among the names behind the letter are those of Stability AI CEO Emad Mostake and researchers at Alphabet-owned DeepMind.
The letter comes two days after Europol joined organizations that share ethical and legal concerns about the widespread use of advanced artificial intelligence such as ChatGPT and warn of possible misuse of the system in phishing attempts, disinformation, and cybercrime.
Since its launch last year, ChatGPT has taken the world by storm and has accelerated the development of large-scale language models and companies to integrate generative AI models into their products.
This logically caused a wave of negative comments in addition to positive comments, as a significant part of the scientific community believes that this technology is not yet ready for such widespread use.
Artificial intelligence can cause serious damage, and the big players are increasingly more secretive about what they're doing. That makes it harder to protect the public from any harm that may ever manifest itself.
This news is on the heels of investment bank Goldman Sachs forecasting that as many as 300 million full-time jobs around the world could be automated in some way by the newest wave of artificial intelligence.
They predicted in a recent report that 18% of work globally could be computerized, with the effects felt more deeply in advanced economies than emerging markets.
Fighting the richest man in the world has its drawbacks.
ChatGPT has already destroyed the meaning of going to university for most of the students out there.
Generative AI is the force multiplier that tech has waited for and delaying it with the potential of stopping it would hurt tech shares and put a cap on future returns.
This battle could be the one that defines humanity and is definitely the fight that will define tech market valuations 5 or 10 years from now.
If this technology gets stopped, there is no other force multiplier in the works that could replace something as powerful as this generative artificial intelligence.
Mad Hedge Technology Letter
March 27, 2023
Fiat Lux
Featured Trade:
(SMART MONEY HAS LEFT)
(AAPL), (MSFT), (FRC)
The Federal Reserve is moving deeper into a trapped corner because the Fed is facing inflation that they haven’t fixed yet.
That’s not a problem so far as they are gradually lifting rates to cure it, but what happens when a systemic event occurs and they are forced to pivot when inflation is still at 6%?
This is why I have always championed just doing one big rate raise to get it over with.
The longer the Fed draws it out, the more chance they have to pivot when inflation is still toxic to the consumer.
Why do I care about all this?
The systemic event has arrived and that could mean that precious dollars are steered away from tech shares in April and are funneled over to the banking sector where the smart money is buying the dip in “too big to fail” banking stocks.
Since the beginning of March, three U.S. banks have failed and others — most notably California-based First Republic (FRC) — are teetering on the edge amid deposit outflows.
All else equal, in a banking crisis, investors would expect the Fed to cut rates to ease pressure on the financial system.
Since 1977, the Federal Reserve has worked to fulfill a "dual mandate" of achieving maximum employment and stable prices.
Tech stocks had a strong initial bounce from the banking shock, but that doesn’t mean it will last.
I took profits in some of my tech positions and the pricing action in the last few days has been poor to the upside.
I do believe we could experience a transitory sideways move which might be followed by an earnings scare that could induce a short-term pullback.
Tech has done remarkably well in the first few months of the year and the grind up during the banking crisis has shown resilience.
However, where is the use case for the incremental investor in tech?
Sure, we got some nice bounces from Facebook and Google cutting staff.
Getting leaner is certainly better.
Then there was the OpenAI bounce with artificial intelligence going from a fad to the new buzzword.
Microsoft and Apple have separated themselves from the crowd.
I am concerned about the breadth of the tech sector because many growth companies are starting to dip and dip some more.
It’s true that many investors are on the sidelines because they believe that the banking crisis has just started.
At the end of the day wasn’t it Russia that was supposed to preside over a failing economy susceptible to bank runs?
Ironically enough, by the end of 2021, as a result of high oil prices and a post-pandemic recovery, Russia's annual growth rate exceeded 5%. While the rate was expected to slow down in 2022, prewar forecasters would pin it at around 3 percent.
After the buy-the-dip in banks crowd moved out of the safety tech trade, we could be in for a sideways correction that could lead to some downside risk.
It doesn’t help that the Western financial system has creaky knees and it seems at this point tech might have to navigate around bank blowups in the short term.
The real safety tech trade continues to be Apple and Microsoft because the banking contagion has effectively led to the death of tech startups and small caps.
Call this the Dr. Jekyll and Mr. Hyde market.
On the up days, we see the kindly ministrations of Dr. Jekyll.
On the down days, we suffer from the evil hand of Mr. Hyde.
To say that traders are confused would be an understatement. Many seasoned pros have told me that this is one of the most difficult markets they have ever seen.
Fridays have been particularly treacherous when weekly options expire. Some 56% of all options trading now takes place with expirations of five days or less. Trading before 4:00 PM sees billions of dollars of hot money trying to force closing prices just in or out of the money for key at-the-money strike prices.
What is especially disturbing is that some 80% of the gain in the S&P 500 (SPY) this year has been in just seven names, Meta, (META), Alphabet (GOOGL), Microsoft (MSFT), Apple (AAPL), Amazon (AMZN), Netflix (NFLX) and Tesla (TSLA). Most other stocks went nowhere….or down. That much concentration means that any rallies lack confidence and will fail….for now.
Remember these names because when we finally do get a real upside breakout, they will be the leaders. You can take that to the bank.
Thanks to turmoil in the House of Representatives intent on a national default, bonds have given up 70 of the 120-basis point drop in yields since October. That deprives us of one of our biggest money makers of 2022, our long bond trades.
That means were are also seeing the automatic flip side of the bond trade, a strong US Dollar (UUP), and weak precious metals, (GLD) and (SLV), and emerging markets (EEM).
This too shall end.
If it was excess liquidity that caused stocks to rocket for 13 years, then maybe we should be focusing on what little liquidity is left. That would be the font of government money pouring into infrastructure and alternative energy plays.
Some $370 billion I know available for investment in ESG, would most of it going into the battery industry for the burgeoning electric vehicle industry. Even foreign firms like Finland’s Neste is moving to the US to cash in on federal munificence, converting an old US oil refinery to produce diesel fuel out of animal and vegetable fat (click here for the link).
Probably the best bet here is in California-based Enphase Energy (ENPH), which makes a 40% gross profit margins on microinverters for solar panels and has just seen a 42% dive in its share price. That makes (ENPH) a BUY. Hint: solar stocks always follow the price of oil to which it is tied, which has lately been down.
Some nimble and aggressive trading managed to push me back in the green for February, taking me up +0.93% on the month. That’s a dramatic improvement of +5.48% from a week ago.
You might even call it making a silk purse from a sow’s ear.
My 2023 year-to-date performance is still at the top at +23.28%. The S&P 500 (SPY) is up +4.32% so far in 2023. My trailing one-year return maintains a sky-high +86.58% versus -12.97% for the S&P 500.
That brings my 15-year total return to +620.47%, some 2.78 times the S&P 500 (SPX) over the same period. My average annualized return has recovered to +46.83%, still the highest in the industry.
Last week, I piled on a Tesla (TSLA) March $155-$260 short strangle betting that the stock can stay within a $95 range for 19 trading days. I also added a deep in-the-money long in the bond market for the first time in six weeks. Both positions turned immediately profitable.
My Ten-Year View
When we come out the other side of the recession, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. The economy decarbonizing and technology hyper accelerating, creating enormous investment opportunities. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The new America will be far more efficient and profitable than the old.
Dow 240,000 here we come!
Q4 GDP Dips, from 3.9% to 2.7% in the October-December quarter. Consumption took a dive, which is amazing over the holidays. This is nowhere near a recession.
Fed Minutes Show More Hikes to Come, with the emphasis on the plural. That could take the overnight borrowing rate to a 5.40% high. It certainly pees on the parade for the falling interest rates crowd.
The Tail is Wagging the Dog, with short, dated options, often same-day expiration dominating trading every Friday. Billions of dollars are battling around key strike prices attempting to force expirations in or out of the money. No place for the little guy. Better to take Fridays off.
Netflix Slashes Prices in 30 countries, taking the stock down a modest 3%. (NFLX) is still the leader in the sector with 231 million subscribers, followed by Amazon (200 million), Disney Plus (162 million, HBO Max (95 million, Peacock (18 million), and Hulu 47 million). Buy (NFLX) and (AMZN) on dips.
Individual 401k’s Lost 23% in 2022, according to a study from Fidelity. High inflation is shrinking the remaining purchasing power even faster. A rising number of workers are also borrowing against their 401k’s to make ends meet. Such loans can go up to 50% of the principal. Better start making up the losses or you’ll be spending your golden years working at Taco Bell.
Apple to Add Glucose Monitor on its Watches, to aid diabetic clients. Some 38 million Americans have diabetes and given the obesity epidemic that figure is certain to rise. It highlights Big Tech’s move into the low-hanging fruit in health care.
Existing Home Sales Dive 0.7% in January, to a 4 million annualized rate, the weakest since October 2010. That makes 12 consecutive months of falling sales. The Median Home Price sold rose to $359,000. An imminent national debt crisis and spiking interest rates is not a great environment in which to sell your home.
Biden Ukraine Visit Tanks Gas and Oil Prices, cutting Russia’s chances of a win and eventually leading to a flood of oil on the market. Biden’s visit is sending the message to Putin that there’s no chance of a win here. Energy is hitting two-year lows across the board. Only energy stocks are staying high. Energy is getting so cheap it might be worth a trade.
Germany Accelerates Move Towards Alternatives, permanently cutting all ties with Russia energy. Europe’s biggest economy, and the fourth largest in the world, hopes to get 80% of its electricity from solar and wind by 2030. Hydrogen is also entering the picture. Other countries will follow.
On Monday, February 27 at 8:30 AM EST, US Durable Goods are out.
On Tuesday, February 28 at 9:00 AM, the S&P Case Shiller National Home Price Index for December is released.
On Wednesday, March 1 at 10:00 AM, the ISM Manufacturing PMI is printed.
On Thursday, March 2 at 8:30 AM, the Weekly Jobless Claims are announced.
On Friday, March 3 at 8:30 AM, the ISM Non-Manufacturing PMI. At 2:00 the Baker Hughes Oil Rig Count is out.
As for me, I usually get a request to fund some charity about once a day. I ignore them because they usually enrich the fundraisers more than the potential beneficiaries. But one request seemed to hit all my soft spots at once.
Would I be interested in financing the refit of the USS Potomac (AG-25), Franklin Delano Roosevelt’s presidential yacht?
I had just sold my oil and gas business for an outrageous profit and had some free time on my hands so I said, “Hell Yes,” but only if I get to drive. The trick was to raise the necessary $5 million without it costing me any money.
To say that the Potomac had fallen on hard times was an understatement.
When Roosevelt entered the White House in 1932, he inherited the presidential yacht of Herbert Hoover, the USS Sequoia. But the Sequoia was entirely made of wood, which Roosevelt had a lifelong fear of. When he was a young child, he nearly perished when a wooden ship caught fire and sank, he was passed to a lifeboat by a devoted nanny.
Roosevelt settled on the 165-foot USS Electra, launched from the Manitowoc Shipyard in Wisconsin, whose lines he greatly admired. The government had ordered 34 of these cutters to fight rum runners across the Great Lakes during Prohibition. Deliveries began just as the ban on alcohol ended.
Some $60,000 was poured into the ship to bring it up to presidential standards and it was made wheelchair accessible with an elevator, which FDR operated himself with ropes. The ship became the “floating White House,” and numerous political deals were hammered out on its decks. Some noted guests included King George VI of England, Queen Elisabeth, and Winston Churchill.
During WWII Roosevelt hosted his weekly “fireside chats” on the ship’s short-wave radio. The concern was that the Germans would attempt to block transmissions if broadcast came from the White House.
After Roosevelt’s death, the Potamac was decommissioned and sold off by Harry Truman, who favored the much more substantial 243-foot USS Williamsburg. The Potamac became a Dept of Fisheries enforcement boat until 1960 and then was used as a ferry to Puerto Rico until 1962.
An attempt was made to sail it through the Panama Canal to the 1962 World’s Fair in Seattle, but it broke down on the way in Long Beach, CA. In 1964 Elvis Presley bought the Potomac so it could be auctioned off to raise money for St. Jude Children’s Research Hospital. It sold for $65,000. It then disappeared from maritime registration in 1970. At one point there was an attempt to turn it into a floating disco.
In 1980 a US Coast Guard cutter spotted a suspicious radar return 20 miles off the coast of San Francisco. It turned out to be the Potomac loaded to the gunnels with bales of illicit marijuana from Mexico. The Coast Guard seized the ship and towed it to the Treasure Island naval base under the Bay Bridge. By now the 50-year-old ship was leaking badly. The marijuana bales soaked up the seawater and the ship became so heavy it sank at its moorings.
Then a long rescue effort began. Not wanting to get blamed for the sinking of a presidential yacht on its watch the Navy raised the Potomac at its own expense, about $10 million, putting its heavy lift crane to use. It was then sold to the City of Oakland, Ca for a paltry $15,000.
The troubled ship was placed on a barge and floated upriver to Stockton, CA, which had a large but underutilized unionized maritime repair business. The government subsidies started raining down from the skies and a down-to-the-rivets restoration began. Two rebuilt WWII tugboat engines replaced the old, exhausted ones. A nationwide search was launched to recover artifacts from FDR’s time on the ship. The Potomac returned to the seas in 1993.
I came on the scene in 2007 when the ship was due for a second refit. The foundation that now owned the ship needed $5 million. So, I did a deal with National Public Radio for free advertising in exchange for a few hundred dinner cruise tickets. NPR then held a contest to auction off tickets and kept the cash (what was the name of FDR’s dog? Fala!).
I also negotiated landing rights at the Pier One San Francisco Ferry Terminal, which involved negotiating with a half dozen unions, unheard of in San Francisco maritime circles. Every cruise sold out over two years, selling 2,500 tickets. To keep everyone well-lubricated I became the largest Bay Area buyer of wine for those years. I still have a free T-shirt from every winery in Napa Valley.
It turned out to be the most successful fundraiser in the history of NPR and the Potomac. We easily got the $5 million and then some. The ship received a new coat of white paint, new rigging, modern navigation gear, and more period artifacts. I obtained my captain’s license and learned how to command a former coast guard cutter.
It was a win-win-win.
I was trained by a retired US Navy nuclear submarine commander, who was a real expert at navigating a now thin-hulled 73-year-old ship in San Francisco’s crowded bay waters. We were only licensed to cruise up to the Golden Gate bridge and not beyond, as the ship was so old.
The inaugural cruise was the social event of the year in San Francisco with everyone wearing period Depression-era dress. It was attended by FDR’s grandson, James Roosevelt III, a Bay area attorney who was a dead ringer for his grandfather. I mercilessly grilled him for unpublished historical anecdotes. A handful of still-living Roosevelt cabinet members also came, as well as many WWII veterans.
As we approached the Golden Gate Bridge, some poor soul jumped off and the Coast Guard asked us to perform search and rescue until they could get a ship on station. No body was ever found. It certainly made for an eventful first cruise.
Of the original 34 cutters constructed only four remain. The other three make up the Circle Line tour boats that sail around Manhattan several times a day.
Last summer I boarded the Potomac for the first time in 14 years for a pleasant afternoon cruise with some guests from Australia. Some of the older crew recognized me and saluted. In the cabin, I noticed a brass urn oddly out of place. It contained the ashes of the sub-commander who had trained me all those years ago.
Good Luck and Good Trading,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Captain Thomas at the Helm
