Mad Hedge Technology Letter
January 10, 2024
Fiat Lux
Featured Trade:
(LITHIUM CRATERS)
(TSLA), (NIO), (RIVN), (LCID)
Posts
EVs were the darling of tech until the hype ran out.
How do I know this?
The price of lithium has nosedived.
The lack of interest is undermining projects, nixing deals, and triggering a scramble for cash that has put a damper on the EV industry.
If anyone thought that EVs would really move the needle for tech, then think again because tech is over-reliant on AI to save the day in 2024. Throw in the Fed pivot too.
Lithium has dropped by 80% in price since the end of 2022 signaling a dramatic slowdown in the electric vehicle market.
The demand for this product isn’t what it used to be.
Sure, there are those (TSLA) lovers in big coastal cities who can’t get enough of the product, but these types max out at 3 Teslas and sit on them until an upgrade a few years later.
With inflation wreaking havoc in every part of American society, this promises to elongate the refresh cycle for tech products like iPhones and Teslas.
Nickel and cobalt have also tumbled, weighed down by an influx of new production amid concerns that the shift to EVs may not be as smooth and quick as predicted.
It’s a dramatic reversal from the froth of recent years that sent prices soaring and sparked a rush by some of the auto industry’s biggest players to secure future supply.
Chemaf Resources Ltd. last year put itself up for sale after a slump in the cobalt price left it struggling to finish key projects in the Democratic Republic of Congo, and London-based Horizonte Minerals Plc scaled back work on its Brazilian nickel mine as it searches for funds to complete construction, and announced an emergency $20 million financing late last year.
Building new mines takes years and sometimes decades, and stalled projects can often be hard to restart. And while most crucial battery markets are now in surplus, shortages are already forecast toward the end of the decade as the greening of the economy accelerates.
In the case of lithium — a once-tiny commodity market that has been catapulted into the global spotlight due to its vital role in EV batteries — the extreme boom and bust of the last few years shows the difficulties in trying to forecast future supply-demand balances and prices, for both producers and their investors.
Yet supply charged ahead as demand growth underwhelmed, and the price won’t come back for years.
It’s highly possible that lithium could be in a drought until close to 2030.
Cobalt has lost two-thirds of its value since a recent peak in 2022, with top-two supplier Glencore Plc forced to build stockpiles of the metal.
Nickel tumbled 45% last year, weighed down by a flood of low-cost supply from Indonesia, where new techniques to produce battery-grade material are threatening to completely upend the industry.
Jumping off the EV bandwagon, the consumers aren’t impressed as much, and snagging the next incremental EV buyer has become hard.
The bad is out there for everybody to see such as the annoyance of running out of electricity and not getting those software updates properly.
Consumers are starting to remove those rose-tinted glasses and look at Ev's dark side too.
This explains why Tesla was discounting its vehicles so aggressively because management sensed the lack of desire from new buyers.
Unfortunately, this could be a bust year for Tesla as they give way to software companies to carry the load. Smaller EV firms like Rivian (RIVN) and Lucid (LCID) are some that I would avoid. Nio (NIO) is another EV company in free fall. I would say stay away from the EV sector in the short term.
Mad Hedge Technology Letter
June 29, 2022
Fiat Lux
Featured Trade:
(CHINESE TECH ROTATION)
(NIO)
When stocks capitulate, the initial reversion to the mean often is a lucrative bounce.
Chinese tech stocks are going through that honeymoon process right now.
After being targeted systematically, the Chinese communist party changed its tune.
A clearer and more defined regulatory framework around these internet businesses is a definite positive.
There is a growing consensus that the “worst is behind us” for Chinese tech stocks and investment banks have been shooting out stock upgrades.
However, I would recommend readers to never touch Chinese tech stocks like your life depends on it.
Having traveled and lived in the country numerous times, I can say that the foundations are rotten to the core there causing buildings literally to fall over and balance sheets even more rotten than the felled buildings.
Even more damning is that locals assume that everyone else is being shady as well which they feel justifies themselves to participate in less than stellar business practices.
So when I read a report of Chinese EV maker NIO (NIO) denying a report published by short-seller Grizzly Research claiming the company is exaggerating revenue and profit margins, I am not surprised.
Grizzly Research said that NIO is playing “accounting games to inflate revenue and boost net income margins to meet targets.”
The report examined the company’s creation of Wuhan Weineng Battery Assets Company.
The company was created in 2020 and includes NIO, EV battery giant Contemporary Amperex Technology.
The business owns the batteries that NIO drivers can, essentially, pay a monthly fee for in what NIO calls BaaS, short for battery as a service.
NIO pioneered separating the car purchase from the battery purchase. A NIO buyer can choose to buy an EV for a lower price and then pay for the battery on a monthly basis. It’s a way to lower the cost of an EV and make it more comparable to buying and filling up a gasoline-powered car.
NIO recognizes sales when it sells batteries to Weineng. That’s the issue Grizzly has with the company.
Plastering fake sales on the balance sheet that are in effect a sale to oneself and clocking that as gross income is not a shocker.
In fact, I would be surprised if that is all they are doing behind the scenes. Usually, it’s a million times worse in China.
At least there is a product and it’s not a Potemkin product!
Chinese tech companies are not beholden to the same accounting standards as United States registered companies.
They are not GAAP-stamped companies and more or less just fill out their balance sheet as they see fit.
They then register on America’s public exchanges as an American Depositary Receipt (ADR) which doesn’t stringently check the financial health to the same degree as if an American company went public in New York.
Even more bonkers, Chinese management isn’t exposed to any criminal or civil liability which emboldens Chinese tech firms listed as ADRs to lie and cheat as much as possible to boost the share price.
It is now fashionable to say investors are rotating back into China after a year of heavy selling that wiped out almost $2 trillion.
Just be aware that your money could experience a covid zero reaction from the Chinese government and these companies are all dealing in fake numbers to a substantial degree.
That is why I can never recommend buying any Chinese tech stock.
There are so many better opportunities in America.
Mad Hedge Technology Letter
April 11, 2022
Fiat Lux
Featured Trade:
(SMALL EV PLAYERS HIT HARD)
(RIVN), (TSLA), (NIO)
A killer tornado is coming for the global EV sector in the short-term and smaller firms like Rivian (RIVN) will bear the brunt of the damage.
That’s not to say that leaders like Tesla (TSLA) have a slam dunk situation as well.
It’s been rough going of late as the already well-documented spiking inflationary pressures could be followed by even worse inflationary gut punches.
How do I know this?
China.
China’s zero covid policy has made the country incredible successful at defending the health of their population against the novel coronavirus.
The Middle Kingdom has only recorded around 4,000 deaths and they are by far the most successful country partly due to their mass lockdown policies.
However, when large swaths of the population are on the subs bench, the vaunted Chinese manufacturing sector is out of order as well.
Tesla’s Shanghai Giga factory was only supposed to shut down for 4 days, but that has been extended as Shanghai’s spread of the virus has expanded to all parts of the city.
This particular factory is Tesla’s most successful and efficient factory producing 16,000 Teslas every week.
A week’s work usually consists of 6,000 Model 3s and 10,000 Model Ys.
As it stands, Tesla’s Gigafactory in Shanghai was supposed to open this Monday, but again, that date has been pushed back yet again bringing a painstaking wait to 17 days.
That means, in total, an opportunity cost of 40,000 units of Shanghai Teslas that were unable to be completed.
Tesla will again, try to open on April 14th which would represent a full 3 weeks of delays and 48,000 cars unable to be produced.
Elon Musk was a legendary genius to build a Gigafactory in Shanghai and avoiding all US raw material import tariffs.
Romanticizing about a cheap source of labor and reduced building construction costs by 75% definitely help companies stay ahead.
In practice, life as an American corporation in an authoritarian country has its downsides.
Ironically enough, Musk was always unhappy about California’s hostile take on allowing his enterprise to run free from covid restrictions.
I wonder what his thoughts are about cooperating with the Chinese communist party, and does he believe they will cave on the covid restrictions?
Maybe California isn’t so bad for Elon.
The news comes on the heels of another EV firm Nio (NIO) announcing they would stop production because of supply chain issues.
Nio’s supplier partners in several cities including Jilin, Shanghai and Jiangsu suspended production making it impossible to finish the cars in production.
Nio also has a large part of the production process placed in Shanghai such as the testing sites and its factory.
Shanghai is home to the country's greatest number of EV-related companies, totaling 18,200.
This is a gargantuan setback for the global EV sector and this Shanghai lockdown is poised to shake out the bottom line of many of these companies who are exposed to China.
The situation is on the verge of spiraling out of control as another Chinese megacity, famous for its industrial prowess, Guangzhou is now in the early stages of initiating a full-scale zero lockdown as well.
These Chinese supply bottlenecks aren’t just a one-off for the EV players, the Eastern European military conflict has forced Rivian to reduce forecasts and lower expectations for a company that is supposed to become the new Tesla.
Large issues such as shortages of critical parts like semiconductors and other materials and equipment necessary for vehicle production have forced it to make changes to its internal processes that have only increased its expenses.
Skyrocketing bills for essential materials such as nickel, lithium, cobalt, and aluminum have hamstrung RIVN.
The price spikes have forced the EV sticker price to spike as well and an uproar ensued as RIVN even raised prices to customers who pre-booked and already paid their initial deposit.
Rivian later walked back the price hikes to the existing purchases and settled for the price hikes for future RIVN purchase.
Ripping off the first swath of customers is bad management.
In the EV world, we are closely approaching the levels of meaningful demand destruction as many consumers could start balking at extortionate pricing especially when RIVN is already struggling to ramp up production and also when RIVN has yet to prove their quality to the median EV buyer.
Ultimately, the headwinds are real for an upstart like Rivian and they have pulled back production targets of 40,000 this year to 25,000 representing a massive blow to the growth trajectory of the company.
Even the 25,000-unit forecast could get another cut to 15,000 if Chinese zero lockdowns persist, and the Eastern European military conflict unleashes another level of inflationary contagion which is highly plausible.
With Tesla producing record quarterly units, that appears as if it will represent a short-term high-water mark for the EV industry as the fracturing of global supply chains forces many of these companies to go into survival mode.
In the short term, I am highly bearish on NIO and RIVN, but TSLA has more tools at its disposal to find better solutions while having the magic of Elon Musk. Shorting TSLA never makes sense from a trading perspective, but other EV firms do.
Global Market Comments
July 30, 2021
Fiat Lux
Featured Trade:
(JULY 28 BIWEEKLY STRATEGY WEBINAR Q&A),
(SPY), (CRSP), (TLT), (TBT), (BABA), (BIDU), (FXI), (RAD), (TSLA), (NASD), (NKLA), (NIO), (INTC), (MU), (NVDA), (AMD), (TSM), (VXX), (XVZ), (SVXY), (FCX), (ROM), (SPG)
July 28 Biweekly Strategy Webinar Q&A
Below please find subscribers’ Q&A for the July 28 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Lake Tahoe, NV.
Q: What is your plan with the (SPY) $443-$448 and the $445/450 vertical bear put spreads?
A: I’m going to keep those until we hit the lower strike price on either one and then I’ll just stop out. If the market doesn’t go down in August, then we are going straight up for the rest of the year as the earnings power of big tech is now so overwhelming. Sorry, that’s my discipline and I’m sticking to it. Usually, what happens 90% of the time when we go through the strike, and then go back down again by expiration for a max profit. But the only way to guarantee that you'll keep your losses small is by stopping out of these things quickly. That’s easy to do when you know that 95% of the time the next trade alert you’ll get is a winner.
Q: Are you still expecting a 5% correction?
A: I am. I think once we get all these great earnings reports out of the way this week, we’re going to be in for a beating. I just don't see stocks going straight up all the way through August, so that’s another reason why I'm hanging on to my short positions in the S&P 500 (SPY).
Q: What’s the best way to play CRISPR Therapeutics (CRSP) right now?
A: That is with the $125-$130 vertical bull call spread LEAPS with any maturity in 2022. We had a run in (CRSP) from $100 up to $170 and I didn’t take the damn profit! And now we’ve gone all the way back down to $118 again. Welcome to the biotech space. You always take the ballistic moves. Someday I should read my own research and find out why I should be doing this. For those who missed (CRSP) the last time, we are one proprietary drug announcement, one joint venture announcement, or one more miracle cure away from another run to $170. So that will probably happen in the next year, you get the $125-$130 call spread, and you will double your money easily on that.
Q: I’m down 40% on the United States Treasury Bond Fund (TLT) January $130-$135 vertical bear put spread LEAPS. What would you do?
A: Number one, if you have any more cash I would double up. Number two, I would wait, because I would think that starting from the Fall, the Fed will start to taper; even if they do it just a little bit, that means we have a new trend, the end of the free lunch is upon us, and the (TLT) will drop from $150 down to $132 where it was in March so fast it will make your head spin. I'm hanging onto my own short position in (TLT). If you are new to the (TLT) space and you want some free money, put on the January 2020 $150-$155 vertical bear put spread now will generate about a 75% return by the January 21, 2022 options expiration. I just didn't figure on a 6.5% GDP growth rate generating a 1.1% bond yield, but that’s what we have. I'm sorry, it’s just not in the playbook. Historically, bonds yield exactly what the nominal GDP growth rate is; that means bonds should be yielding 6.50% now, instead of 1.1%. They will yield 6.5% in the future, but not right now. And that's the great thing about LEAPS—you have a whole year or 6 months for your thesis to play out and become right, so hang on to those bond shorts.
Q: Do you have any ideas about the target for Facebook (FB) by the end of the year?
A: I would say up about 20% from current levels. Not only from Facebook but all the other big tech FANGS too. Analysts are wildly underestimating the growth of these companies in the new post-pandemic world.
Q: Do you think the worst of the pandemic will be over by September?
A: Yes, we will be back on a downtrend by September at the latest and that will trigger the next leg up in the bull market. Delta with its great infectious and fatality rates is panicking people into getting shots. The US government is about to require vaccinations for all federal employees and that will get another 5 million vaccinated. Americans have the freedom to do whatever they want but they don’t have the freedom to kill their neighbors with fatal infections.
Q: What should I do with my China (BABA), (BIDU), (FXI) position? Should I be doubling down?
A: Not yet, and there’s no point in selling your positions now because you’ve already taken a big hit, and all the big names are down 50% from the February high. I wouldn't double down yet because you don’t know what's happening in China, nobody does, not even the Chinese. This is their way of addressing the concentration of the wealth in the top 1% as has happened here in the US as well. They’re targeting all the billionaire stocks and crushing them by restricting overseas flotations and so on, so it ends when it ends, and when that happens all the China stocks will double; but I have absolutely no idea when that's going to happen. That being said, I have been getting phone calls from hedge funds who aren’t in China asking if it's time to get in, so that's always an interesting precursor.
Q: What happened to the flu?
A: It got wiped out by all the Covid measures we took; all the mask-wearing, social distancing, all that stuff also eliminates transmission of flu viruses. Viruses are viruses, they’re all transmitted the same way, and we saw this in the Rite Aid (RAD) earnings and the 55% drop in its stock, which were down enormously because their sales of flu medicines went to zero, and that was a big part of their business. I didn’t get the flu last year either because I didn’t get Covid; I was extremely vigilant on defensive measures in the pandemic, all of which worked.
Q: Why would the Fed taper or do much of anything when Powell wants to be reappointed in February 2022?
A: I don’t think he is going to get reappointed when his four-year term is up in early 2022. His policies have been excellent, but never underestimate the desire of a president to have his own man in the office. I think Powell will go his way after doing an outstanding job, and they will appoint another hyper dove to the position when his job is up.
Q: What are your thoughts on the Chinese electric auto company Nio competing here in the U.S.?
A: They will never compete here in the U.S. China has actually been making electric cars longer than Tesla (TSLA) has but has never been able to get the quality up to U.S. standards. Look what happened to Nikola (NKLA) who’s founder was just indicted. Avoid (NIO) and all the other alternative startup electric car companies—they will never catch up with Tesla, and you will lose all your money. Can I be any clearer than that?
Q: You recently raised the ten-year price target up for the Dow Average from 120,000 to 240,000. What is Nasdaq's target 10 years out?
A: I would say they’re even higher. I think Nasdaq (NASD) could go up 10X in 10 years, from 14,000 to 140,000 because they are accounting for 50% of all earnings in the U.S. now, and that will increase going forward, so the stocks have to go ballistic.
Q: What do you think of Intel (INTC)?
A: I don’t like it. They had a huge rally when they fired their old CEO and brought in a new one. There was a lot of talk on reforming and restructuring the company and the stock rallied. Since then, the market has started insisting on performance which hasn’t happened yet so the stock gave up its gains. When it does happen, you’ll get a rally in the stock, not until then, and that could be years off. So I'd much rather own the companies that have wiped out Intel: (MU), (NVDA), (AMD), and (TSM).
Q: When you do recommend buying the Volatility Index (VIX), do you recommend buying the (VIX) or the (VXX)?
A: You can only buy the VIX in the futures market or through ETFs and ETNs, like the (VXX), the (XVZ), and the (SVXY), or options on these. I would be very careful in buying that because time decay is an absolute killer in that security, and that's why all the professionals only play it from the short side. That's also why these spikes in prices literally last only hours because you have professionals hammering (VIX). Somebody told me once that 50% of all the professional traders in the CME make their living shorting the (VIX) and the (VXX). So, if you think you’re better than the professionals, go for it. My guess is that you’re not and there are much better ways to make money like buying 6-to-12-month LEAPS on big tech stocks.
Q: Can the Delta variant get a bigger pullback?
A: Yes. I expect one in August, about 5%. But if Delta gets worse, the selloff gets worse. You saw what it did last year, down 40% in the (SPY) in only two months, so yes, it all depends on the Delta virus. I'm not really worrying about Delta, it's the next one, Epsilon or Lambda, which could be the real killer. That's when the fatality rate goes from 2% to 50%, and if you think I'm crazy, that's exactly what happened in 1919. Go read The Great Influenza book by John Barry that came out 20 years ago, which instantly became a best seller last year for some reason.
Q: Does the Matterhorn have enough flat space on the top to stand on it?
A: Actually, there is a 6’x6’ sort of level rock to stand on top of the Matterhorn. If you slip, it’s a 5000’ fall straight down on any side, and on a good weather day in the summer, there are 200 people climbing the Matterhorn. There's sometimes a one-hour line just to take your turn to get to the top to take your pictures, and then get down again to make space for the next person. So that's what it's like climbing the Matterhorn, it's kind of like climbing Mount Everest, but I still like to do it every year just to make sure I can do it, and one year I hope to win the prize for the oldest climber of the year to climb the Matterhorn. Every year this German guy beats me; he’s two years older than me.
Q: When will Freeport McMoRan (FCX) start going up? I have the 2023 LEAPS
A: Good thing you have the two-year LEAPS because that gives you two years for inflation to show its ugly face once again. You just have to be patient with these. I think we’ll get a rally in the Fall along with all the other interest rate plays like banks, industrials, money management companies, and so on. (FCX) will certainly participate in that. In the meantime, if we get all the way down to $30 in Freeport McMoRan, I would double up your position.
Q: Why is oil (USO) not a buy? Oil is the ultimate inflation hedge.
A: Yes, unless all of the cars in the United States become electric in the next 15 years, which they will, wiping out half of all demand from the largest oil consumer. The United States consumes about 20 million barrels of oil a day, half of that is for cars, and if you take that out of the demand picture you dump 10 million barrels a day on the market and oil goes back to negative numbers like we saw last year. Never do counter-trend trades unless you’re a professional in from of a screen 24 hours a day.
Q: Should I take profits on my ProShares Ultra Technology ETF (ROM) November $90-$95 vertical bull spread and then enter a new spread when tech sells off?
A: Absolutely! When you have that much leverage and you get these price spikes, you sell! The leverage on this position is 2X on the ETF and 10X on the options for a total of 20X! Well done, nice trade and nice profit, go out and buy yourself a new Tesla and wait for the next dip in tech, which may have already started, and which could power on for the rest of August.
Q: What’s the next move for REITs?
A: REITs came off of historic lows last year; a lot of people thought they were going to go bankrupt, and for companies like (SPG) it was a close-run thing. I would be inclined to take profits on REITs here. The next thing to happen is for interest rates to go up and REITs don’t do that great in a rising rate environment.
Q: When is the off-season in Incline Village?
A: It’s the Spring and the Fall, in between ski season and the summer season. That means there are four months a year here, May/June and September/October, where I’m the only one here and the parking lots are empty. There is no one on the trails, the weather is perfect, the leaves are changing colors, and the roads aren’t crowded, so that is the time to be here. It’s a mob scene in the winter and a worse mob scene in the summer!
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 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
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Global Market Comments
May 14, 2021
Fiat LuxFeatured Trade:
(MAY 12 BIWEEKLY STRATEGY WEBINAR Q&A),
(FCX), (QQQ), (JWN), (DAL), (MSFT), (PLTR), (V), (MA), (AXP), (UUP), (FXA), (SPWR), (FSLR), (TSLA), (ARKK), (CLX), (NIO), (EPEV), (SOX), (VIX), (USO), (XLE)
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Mad Hedge Technology Letter
March 8, 2021
Fiat Lux
Featured Trade:
(A SPECULATIVE EV NAME TO CONSIDER)
(FSR), (TSLA), (NIO)
