Mad Hedge Technology Letter
December 6, 2023
Fiat Lux
Featured Trade:
(POSITIVE SIGNS FOR 2024)
(AMZN), (APPL), (GOOGL), (MSFT), (TSLA), (META), (NVDA)
Posts
There have been a lot of whispers as to who the tech leadership group could be in 2024.
The notion that for the tech rally to continue, more participation is needed is unequivocally false.
A strong but narrow group of tech stocks coined the magnificent seven don’t need smaller stocks to help buoy the broader tech indices.
The law of large numbers also dictates price action meaning even if smaller stocks have the time of their life next year, they still won’t make a dent compared to the absurdly expensive tech stocks that are aiming at $4 trillion in market cap.
Therefore, I believe there is a high likelihood that these potent 7 stocks outperform the rest of tech yet again and I will explain why.
Faster growth rates and reasonable valuations bode well for mega-cap tech stocks.
The seven stocks I am talking about refer to Apple, Amazon, Alphabet, Meta, Microsoft, Tesla, and Nvidia, are responsible for 76% of the S&P 500's 2023 gain of nearly 20%.
Nvidia is up more than 200% year-to-date, and even Apple, the world's largest company, saw its stock price surge nearly 50% this year. The seven companies represent a collective $11.5 trillion in market value
The fundamentals are superior.
The seven mega-cap tech stocks have more attractive fundamentals when compared to the S&P 500's bottom 493 stocks.
They boast faster growth, higher profit margins, stronger balance sheets, and reasonable valuations on a relative basis.
And while price-to-earnings valuations are elevated for the tech stocks, when accounting for growth, they're actually in line with the rest of the market.
Mega-cap tech stocks cratered in 2022.
The sharp outperformance in the mega-cap tech stocks this year comes after a brutal 2022 in which a number of the stocks were severely punished because of the Fed hiking like they have never hiked before.
From their peak, Meta fell more than 70%, Nvidia dropped more than 60%, and Amazon's share price was cut in half in 2022.
The dominance of mega-cap tech in 2023 largely reflected a reversal of meaningful underperformance in 2022 so much so that the group of tech stocks fell a collective 39% that painful year.
The pullback was a healthy consolidation and psychologically, it feels like this bullish year means we are back to neutral.
There is a high chance that tech stocks rally on the belief that a recession will cause the Fed to drop interest rates.
Indicators are starting to look a little sluggish suggesting that earnings could come somewhat soft in the first quarter.
No doubt that the US consumer is stretched to its limit and thinking twice before spending.
The knock-on effect will be delayed iPhone purchases, delayed Tesla purchases and the other 5 of the Magnificent 7 could feel the slowdown as well.
Tech’s path to the recession could cause another rally into the recession when investors are likely to take profits when we finally arrive at the recession that every investor has been waiting for years.
In the meantime, there is a high likelihood that these 7 stocks will continue success in the short-term.
Mad Hedge Technology Letter
November 27, 2023
Fiat Lux
Featured Trade:
(5 STOCK FOR THE UPCOMING A.I. BOOM)
(NVDA), (AMBA), (MBLY), (AI), (AYX)
There has been non-stop talk about how artificial intelligence is reimagining the tech sector.
The highest quality artificial intelligence chatbot to ever grace the earth is exciting tech executives around the world.
My personal discussions with people in the know is that every tech company is now forming a work group and assembling its best engineers to figure out how to get their hands on something similar.
That being said, here are five companies that will benefit asymmetrically as this chatbot tech goes from fringe to mainstream.
Buckle up with your cowboy hat, because this type of technology will become pervasive in no time.
Since the cutting-edge chatbot was launched, there has been a massive re-rating of A.I. stocks because of the legitimacy of the technology.
It appears that chatbot AI will finally live up to the hype.
In November 2023, OpenAI Chat introduced GPT and has since shown that the software can be used in everything from writing stock reports to resignation emails to messages for dating apps
Nvidia (NVDA) famously known for designing and manufacturing graphics chips is the first stock that goes off the top of my head to benefit from this new AI craze.
The company's technology is being used for various AI integrations from self-driving cars to robots.
Nvidia's CEO Jensen Huang is one of the best leaders in Silicon Valley.
Recent forecasts estimate that a boom in Chat GPT usage could bring Nvidia revenue of between $5 billion and $14 billion over the next 12 months.
The success of Chat GPT brings Nvidia a potentially significant boost in demand for computing power.
New Nvidia chips are benefiting from the large computing requirements of AI tools such as ChatGPT.
Ambarella (AMBA) is another chip company powering the AI market. It develops semiconductors used in everything from in-car entertainment consoles to cell phones.
AMBA chips are also specifically used in self-driving cars, and the company recently partnered with German auto parts maker Continental for a joint autonomous driving project.
Mobileye (MBLY) was spun off from Intel and focuses on autonomous driving technology and driver assistance systems, which include chips and cameras. Volkswagen, Ford, and GM are among the company's customers.
Mobileye SuperVision is the top AI product at MBLY and is the most advanced driver-assist system on the market, providing “hands-off” navigation capabilities of an autonomous vehicle and designed to handle standard driving functions on various road types, while still always requiring the driver's full attention and eyes on the road.
C3.ai (AI) is a provider of software solutions in the field of artificial intelligence and owes its recent share price increase to the success of Chat GPT. Upon the announcement alone, shares rose about 28% when it was announced that Chat GPT would be integrated into its product range.
Alteryx software (AYX) is best known for data and analytics. The company is also involved in automation and specializes in artificial intelligence integration, albeit to a much lesser extent than competitors like Google and Meta.
There are rosy days ahead for AI stocks that will ride on the coattails of the most important trend in Silicon Valley.
Global Market Comments
November 17, 2023
Fiat Lux
Featured Trade:
(NOVEMBER 15 BIWEEKLY STRATEGY WEBINAR Q&A),
(TLT), (AMD), (SPY), (FXA), (WYNN), (MGM), (RCL), (CCL), (TSLA), (SCHW), (BLK), (JPM), (XHB), (TSLA), (FXI), (FCX)
Below please find subscribers’ Q&A for the November 15 Mad Hedge Fund Trader Global Strategy Webinar, broadcast from Incline Village, NV.
Q: I was a little surprised that you closed the (TLT) $79-$82 vertical bull call spread so early. Why not wait longer?
A: I took an 84% profit in only four trading days and skipped the last 16% which I would have had to wait another month to get. I was much better off putting on another position and making another 100%. In this kind of market, you want to take quick profits and then roll them into new positions as fast as you can. That’s where you make the big money, and that's what we’ve been doing. You have to strike when the iron is hot.
Q: November’s results are phenomenal!
A: Yes they are, 55 years of practice makes it easy.
Q: Thoughts on Advanced Micro Devices (AMD)?
A: It’s going higher. I think the whole semiconductor sector is the leading sector in the market; we have seen that with these gigantic 30-40% moves in the semis. That will continue, and then it will spread out to the rest of big tech (which it’s already done), and eventually, we get to the industrials and commodities in the second half of 2024 when the big economic growth returns. So that is the script for the coming year.
Q: Will the upcoming Fed interest rate cuts crash the dollar, and which emerging currency should I buy?
A: Yes and yes. It will crush the dollar–we could be entering a new decade of a falling U.S. dollar. The number one currency to buy is the Australian dollar (FXA). It has the most leverage for a global economic recovery. And you can see when we get to the currency section of today’s webinar that the currencies are already starting to move. Whatever currency has falling interest rates is always the weakest, and the U.S. dollar is about to become just that.
Q: What’s the deal with casino stocks lately like Wynn Resorts (WYNN) and MGM Resorts International (MGM)?
A: These companies took on massive amounts of debt during the pandemic to stay in business, so they are now highly sensitive to interest rates. If you look at the collapse of these stocks in the last four months, it is almost perfectly in sync with rising interest rates, and that’s why the stocks performed so poorly. By the way, the same is true for all the cruise companies like Royal Caribbean (RCL), and Carnival (CCL). The flip side of that is when interest rates start to go down these stocks do great, and they are falling interest rate plays, so you probably should be buying the casinos, the cruise lines, and the hotel stocks here because they are all suffering from massive debt loads, the cost of which is about to decline sharply.
Q: Should we roll up the expiration of LEAPS to 2026?
A: Probably not a bad idea, because we may get weakness in commodities for the next several months before we enter a massive new bull market. If you have the 2025, you’ll probably make money on that, but to be ultra-safe you could roll it forward to 2026. We know there’s a global copper shortage developing because of EVs, but right now EV sales are slow, so you don’t want to be piling onto the leverage plays on that too soon. That’s also why I am not in Tesla (TSLA) for the Moment.
Q: What will happen if the Fed cuts interest rates and there’s no recession? Won’t prices of everything from houses to butter go wild?
A: They won’t go wild, but they will go up at a 2% inflation rate, which is what the Fed wants. And house prices, which have been flat for the last year, will rise. And they may rise greater than the inflation rate of 2%; they may rise more like 5%. Falling interest rates mean falling mortgages; we’ve already seen mortgage rates drop from 8 to 7.4%. It's one of the sharpest drops in history, and more drops bring more first-time home buyers into the market. And don’t forget that the Fed could also raise interest rates down the road. If the economy gets too hot again, they may raise again, but I think we’ll see a lot of cuts first.
Q: Do you think financial stocks will go up or fall with potential rate decreases?
A: Banks always go up during falling interest rates because their cost of funds goes down and the default rate on their loans also goes down, so they get a hockey stick effect on earnings; that’s why you’re seeing such monster moves in stocks like JP Morgan (JPM) and the brokers (SCHW) as well as the money managers like BlackRock (BLK).
Q: Does the bull market keep going since unemployment still hasn’t made a dent, meaning consumers are fueling the rise in stocks?
A: Yes, consumer spending is still doing well. People seem to be getting the money from somewhere and it seems to be rising wages. But I expect wage gains to drop by half; people will still get wage increases, but not the peak levels that the UAW got in their deal with Detroit. Is a Goldilocks economy that is setting up, and the economy keeps growing We never do get a recession, and all risk assets rise as a result. That is the outlook!
Q: Bullish on Berkshire Hathaway (BRK/B)?
A: I completely agree, it’s one of the best-run companies in the world. 93-year-old Warren Buffet and 99-year-old Charlie Munger have delivered double the performance of the S&P 500 over the last three years.
Q: When does the IPO market come back to life, and which industries will benefit the most?
A: AI and Technology will benefit the most. There are several AI companies in the wings waiting to go public, and they will be the first out the door with the highest multiples, and then the IPO business will broaden out from there.
Q: Will a worsening Chinese property market blow up the U.S. Stock rally or is it just a fake risk I shouldn’t worry about?
A: The Chinese (FXI) real estate market is detached from the global economy. There is no international implication, and it’s also typical of emerging markets to overbuild and then have a financial collapse. Nobody I know has suffered anything in China in a long time, and if anything, they’re liquidating what little they have left. It doesn’t affect us at all. It’s interesting reading about it in the newspapers, and that’s about it.
Q: What are some stocks we should consider day trading these days?
A: None. Most people who try day trading lose money doing it; some people pull it off but they have many years of experience. Algorithms from big brokers have essentially taken over the day trading business with high-frequency trading. You do better on a one-month view, which I do on my front-month options. Most 2023 Stock Gains Happened in only eight days, up some 14% since January 1, and only seven stocks accounted for most of the increase. If you are a day trader, you most likely missed all of this because most of the moves were on gap openings.
Q: Home builders (XHB) have just had a great run, is this an area too short?
A: “Short” is a term you need to remove from your language! You don’t want to short a big bull move like this. If anything, wait until May when the summer seasonals start to favor short positions, and it depends on how high the market runs up until then. Don’t ever think about shorting the very beginning of a new bull market in stocks–not for housing, not for anything! And the outlook for housing over the long term looks fantastic; there’s still an overwhelming supply and demand in favor of the home builders. Some 85 million new Millennials need to buy first-time homes.
To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in to www.madhedgefundtrader.com, go to MY ACCOUNT, select your subscription (GLOBAL TRADING DISPATCH, TECHNOLOGY LETTER, or Jacquie's Post), then click on WEBINARS, and all the webinars from the last 12 years are there in all their glory.
Good Luck and Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
2023 Kherson Ukraine – Ha Ha Missed Me! It was a dud.
Mad Hedge Technology Letter
November 13, 2023
Fiat Lux
Featured Trade:
(RIDE THE NVIDIA AND AMD ROLLER COASTER)
(NVDA), (AMD), (ORCL), (GOOGL), (AMZN)
It’s scary when the best chip company in the world rolls out new products.
It’s scary because others can’t compete and they get left further behind.
It’s scary because the high level of technology facilitates another new wave of technological expertise in other companies from the software and hardware side.
These new products are almost always faster, more efficient, and better than the previous products catalyzing a snowball effect that lifts everybody’s revenue.
This type of outstanding performance of late is the reason that made Nvidia (NVDA) into the world’s most valuable chipmaker and they have announced they are updating its H100 artificial intelligence processor, adding more capabilities to a product that has fueled its dominance in the AI computing market.
The new model, called the H200, will get the ability to use high-bandwidth memory, or HBM3e, allowing it to better cope with the large data sets needed for developing and implementing AI.
Amazon’s AWS, Alphabet’s Google (GOOGL) Cloud and Oracle’s (ORCL) Cloud Infrastructure have all committed to using the new chip starting next year.
Winning orders is easy with the outsized brand recognition and type of game changing product on offer.
The current version of the Nvidia processor is already experiencing accelerated demand.
But the product is facing stiffer competition: Advanced Micro Devices (AMD) is bringing its rival MI300 chip to market in the fourth quarter, and Intel Corp. claims that its Gaudi 2 model is faster than the H100.
AMD is another chip company that readers should feel comfortable diversifying into if they don’t feel comfortable putting all eggs into the Nvidia basket.
AMD’s stock is surging towards old highs around $125 and should overtake that soon after the nice rally in the 2nd half of the year.
With the new product, Nvidia is trying to keep up with the size of data sets used to create AI models and services.
Adding the enhanced memory capability will make the H200 much faster at bombarding software synthesizing data.
Large computer makers and cloud service providers are expected to start using the H200 in the second quarter of 2024.
Nvidia got its start making graphics cards for gamers, but its powerful processors have now won a following among data center operators.
That division has gone from being a side business to the company’s biggest moneymaker in less than five years.
Nvidia’s graphics chips helped pioneer an approach called parallel computing, where a massive number of relatively simple calculations are handled at the same time.
That’s allowed it win major orders from data center companies, at the expense of traditional processors supplied by Intel.
The growth helped turn Nvidia into the poster child for AI computing earlier this year — and sent its market valuation soaring.
Nvidia is like a freight train that has left the station.
The stock is up 9 straight days as we cruise into its earnings report on November 21st.
It’s hard to see this earnings report being nothing short of spectacular and Nvidia have become famous for forecasting the unthinkable.
They then go and surpass a high bar and push the envelope further so it’s not a bad idea to buy NVDA before the earnings report.
The speed at which they come out with products is astounding and now being able to boast the best server chip in the tech enterprise community, it just represents yet another powerful part of their stunning array of tech arsenal.
$600 per share is a no-brainer for Nvidia and that will be surpassed in 2024.
Global Market Comments
November 6, 2023
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or VINDICATION WEEK)
(SPY), (QQQ), (IWM), (NVDA), (BRK/B), (TLT)
It was truly vindication week for the bulls. All major Indexes clocked their best week of the year
The patience was rewarded. The S&P 500 (SPY) gained an impressive 6.09%, the NASDAQ ETF (QQQ) 7.35%, and the small-cap Russell 2000 (IWM) 8.64%. A recent favorite of mine, mortgage REIT lender Anally Capital Management (NLY) soared by an amazing 21%
Better yet, all of my Mad Hedge forecasts came true. Big tech led the charge, with our long in NVIDIA (NVDA) up a gob-smacking 16.67%. Another long in Berkshire Hathaway (BRK/B) gained 7.5%. And our long in US Treasury bonds (TLT) picked up a welcome $6.00, dropping ten-year yield from 5.0% to 4.52%.
The 60/40 stock and bond/portfolio came back with a vengeance. This time, everything went up.
The harder I work, the luckier I get.
The markets accomplished these feats against a geopolitical background that couldn’t be worse. The Gaza War is lurching from one tragedy to the next. The Ukraine War grinds on (but without me). Saber rattling continues in China.
It just goes to show how far out on a limb the shorts had gotten and the extent of buying demand that was pent up.
It all sets up a nice year-end rally. We may not reach the $4,800 target I expected at the beginning of 2023. But a $4,600 hit is within range. Don’t expect a straight line move there. The world is still a pretty unsettled place. It's definitely going to be a stock pickers market (NVDA), (BRK/B), and (TLT) and not an index one.
Particularly fascinating is how Berkshire Hathaway absolutely Knocked it Out of the Park, with a 41% gain in operating earnings from companies like BNSF Railroad, Geico, and Precision Castparts. But Warren Buffet was noted in his weekend earnings report more from what he didn’t own than what he did.
The Oracle of Omaha unloaded $5 billion worth of global stocks in Q3, taking his cash position up to a record $157 billion. He can now earn a staggering $8.6 billion in interest in the coming year. His explanation is that stocks never really got cheap this year and high rates were just too attractive. Keep buying (BRK/B) on dips. And buy the things he buys.
And with the number of new investment opportunities and sectors to chase that almost can’t be counted, I will prompt you to look at some oldies buy goodies.
PC stocks are back in play, namely Dell Computer (DELL) and Hewlett Packard (HPQ). How about those for a blast from the past? I think it’s been 30 years since I touched these legacy tech companies.
The fact is that AI is rapidly moving downstream as far down as your humble PC, which in the meantime has gotten cheaper and much more powerful. PCs are now the dumb end of a link that can access the AI superheroes of the day, like ChatGPT. It’s a lot like the old Quotron used to be the access point to the New York Stock Exchange mainframes for current price information.
Dell shares have already outperformed, up 57% in just six months, while HP is just getting started. You might take a look.
So far in November, we are up +1.97%. My 2023 year-to-date performance is still at an eye-popping +68.15%. The S&P 500 (SPY) is up +14.21% so far in 2023. My trailing one-year return reached +75.21% versus +25.62% for the S&P 500.
That brings my 15-year total return to +665.34%. My average annualized return has rocketed to +50.85%, another new high, some 2.61 times the S&P 500 over the same period. I am at maximum profit on all positions and am looking to add more on a dip.
Some 47 of my 52 trades this year have been profitable.
Fed Leaves Rates Unchanged. It’s not the end of high rates, nor the end of the beginning, but the beginning of the end. Powell may contemplate actual rate CUTS in six months, driven by the certain slowing of growth and inflation in the current quarter. Markets will start discounting that now as seen by the 30-basis point back off in rates this week. No surprise then that there is a short covering buying panic across the entire fixed income front today.
Palantir Rockets on New AI Demand, up 20% at the opening, even though its substantial government business slowed. The company announced the fourth consecutive quarter of profitability and highest earnings since its founding 20 years ago. The Denver-based data analysis company said Thursday it expects 2023 revenue of about $2.22 billion. Buy (PLTR) on dips.
Buying Panic Hits All Fixed Income Markets, with falling Fed interest rates appearing on the distant horizon. (TLT) is up $1.60, (JNK) $0.80, and (NLY) REITS up $0.45. This could be the trade of the decade, with (TLT) targeting $110 by early 2024.
Homebuyers are Pouring into ARMs, or adjustable-rate mortgages, shunning 30-year fixed rates at a mind-numbing 8.0%. ARMs could be had at 6.77% last week. Overall, mortgage applications are down 22% YOY.
Panasonic Says EV Demand is Sluggish, taking Tesla Shares down 5%, and off 35% from the recent high. Elon Musk says the Cybertruck will take a year to 18 months before it is a significant positive cash flow contributor. Full disclosure: I am on the waiting list. The Street expects Tesla to hit 2.3 million vehicle deliveries next year, an increase of about 500,000 year over year. Buy (TSLA) on dips.
Bank of Japan Eases Grip on Bond Yields, ending its unlimited buying operation to keep interest rates down. Japan is the last country to allow rates to rise. Expect the Japanese yen to take off like a rocket.
Hedge Fund Pour into Uranium, as the nuclear renaissance gains steam. Prices have gained 125% in three years. The International Energy Agency says demand will double by 2050. There are 440 nuclear power plants in the world that represent a non-carbon source of energy and China plans another 100 coming on line. Buy (CCJ) on dips.
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!
On Monday, November 6 at 8:30 PM EST, the US Loan Officer Survey is out.
On Tuesday, November 7 at 2:30 PM, the US Imports and Exports are released.
On Wednesday, November 8 at 3:15 PM, the Fed Chair Jay Powell Speaks.
On Thursday, November 9 at 8:30 AM, the Weekly Jobless Claims are announced.
On Friday, November 10 at 2:30 PM, the University of Michigan Consumer Sentiment is published. At 2:00 PM the Baker Hughes Rig Count is printed.
As for me, I have been doing a lot of high-altitude winter mountain climbing lately, and with the warm spring weather, the risk of avalanches is ever-present. It takes me back to the American Bicentennial Everest Expedition, which I joined in 1976.
It was led by my old friend, instructor, and climbing mentor Jim Whitaker, who pulled an ice ax out of my nose on Mt. Rainer in 1967 (you can still see the scar). Jim was the first American to summit the world’s highest mountain. I tried to break a high-speed fall and an ice ax kicked back and hit me square in the face. If I hadn’t been wearing goggles I would have been blinded.
I made it up to 22,000 feet on Everest, to Base Camp II without oxygen because there were only a limited number of canisters reserved for those planning to summit. At that altitude, you take two steps and then break to catch your breath.
There is a surreal thing about that trip that I remember. One day, a block of ice the size of a skyscraper shifted on the Khumbu Ice Fall, and out of the bottom popped a body. It was a man who went missing on the 1962 American expedition. Everyone recognized him as he hadn’t aged a day in 15 years, since he was frozen solid.
I boiled my drinking water but at that altitude, water can’t get hot enough to purify it. So I walked 100 miles back to Katmandu with amoebic dysentery. By the time I got there, I’d lost 50 pounds, taking my weight to 120 pounds.
Jim was an Eagle Scout, the first full-time employee of Recreational Equipment Inc. (REI), and last climbed Everest when he was 61. Today, he is 92 and lives in Seattle, WA.
Jim reaffirms my belief that daily mountain climbing is a great life extension strategy, if not an aphrodisiac.
Mount Everest 1976
Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
