Global Market Comments
January 14, 2020
Fiat Lux
Featured Trade:
(FRIDAY JANUARY 27, 2020 FIJI STRATEGY LUNCHEON)
(SHOPPING FOR FIRE INSURANCE IN A HURRICANE),
(VIX), (VXX), (XIV),
(THE ABC’s OF THE VIX),
(VIX), (VXX), (SVXY)
Come join me for lunch at the Mad Hedge Fund Trader’s Global Strategy Luncheon, which I will be conducting at Fiji in the South Pacific at 12:30 PM on Monday, January 27, 2020.
An excellent meal will be followed by a wide-ranging discussion and an extended question-and-answer period.
I’ll be giving you my up-to-date view on stocks, bonds, currencies, commodities, precious metals, energy, and real estate.
And to keep you in suspense, I’ll be throwing a few surprises out there too.
Tickets are available for $269.
The lunch will be held at a major resort hotel 12 miles south of Nadi, the location of the international airport.
Fiji was the home of cannibalism until the early 20th century. It is a former British colony that became independent in 1970. Since 1987, there have been two military coups. It returned to a democratic government only five years ago. It has been the site of many movies, including Castaway and Blue Lagoon. Today, it is a destination resort for Australians during their winter and our summer.
At a latitude of 17 degrees south of the equator, the weather is the same every day, 90 degrees Fahrenheit, 100% humidity, with constant rain. Malaria is endemic, so bring your Malaria pills (start taking them three days before departure). Typhoid shots will also be helpful. Needless to say, it is the low season.
If you have any questions about the Fiji luncheon, please email me at support@madhedgefundtrader.com. Just put “Fiji Luncheon question” in the subject line.
I look forward to meeting you and thank you for supporting my research. To purchase tickets for this luncheon, please click here.
Mad Hedge Biotech & Healthcare Letter
January 14, 2020
Fiat Lux
Featured Trade:
(CALIFORNIA JUMPS INTO THE DRUG BUSINESS)
(MYL), (TEVA), (RHHBY)
The bio-pharmaceutical industry, including the biotechnology sector, is in for another shock.
Taking a page off Elizabeth Warren’s book, California Governor Gavin Newson announced his plan to create the first-ever state-run prescription drug label in the country.
This move would be an ideal way to leverage the size and power of the California population in terms of negotiating advantageous pricing with generic drug manufacturers.
Wielding California’s massive purchasing power courtesy of the 40 million residents, almost 33% of which are enrolled in Medicaid or Medicare, Newsom believes that the government can get generic drugs for substantially lower prices from the manufacturers. This idea is part of Newsom’s broader vision to lower the healthcare costs in California.
In effect, the Golden State is stepping in where the federal government has failed to act. Washington should have used their massive purchasing power as a cudgel to lower prices decades ago. We’ve seen a half-century of talk, but no action.
Research from the Kaiser Family Foundation shows that 6 out of 10 Americans take a prescription, with 79% of them complaining about the unreasonable costs of these drugs.
As a result of these prohibitive prices, 3 in 10 Americans no longer take their prescribed medications adding hugely to the nation’s health care bill.
Even governments find it challenging to keep up with the costs of healthcare, with California’s Medicaid program for the less fortunate, otherwise known as Medi-Cal, reached over $100 billion annually in state and federal spending alone.
Inevitably, the skyrocketing prices pushed people to look at generic medications as more reasonable alternatives to brand name medications.
However, Newsom’s announcement wasn’t met with an overwhelmingly positive response from the generics sector either.
In fact, the Association for Accessible Medicines, the advocacy organization for generic drug manufacturers, only sent out a polite message regarding Newson’s announcement.
The group said that they "look forward to working with California to help expand access to safe, affordable and effective generic and biosimilar medicines, but let's make our decisions and policies based on the best data and science available." You couldn’t get any more anodyne.
Despite their lukewarm response to this plan, two major players in the generic pharmaceutical industry have already been identified as the front runners for this shift to generics movement: Mylan (MYL) and Teva Pharmaceutical Industries (TEVA).
To say that 2019 was an awful one for Mylan is an understatement. The generic drugmaker faced a slew of issues including declining sales in their North American market, endless legal battles, and even exclusivity loss for its top-selling impotence treatment Tadalafil (Cialis).
However, Mylan moved to turn things around in July 2019 when it entered a merger agreement with Pfizer’s (PFE) generic unit Upjohn. The two companies will turn into one entity, called Viatris, and will be launched by mid-2020.
According to the terms of this deal, Viatris will be handling the off-patent but lucrative branded drugs of Pfizer such as cholesterol treatment Lipitor, pain medication Celebrex, and erectile dysfunction and the blue erectile dysfunction drug Viagra.
This agreement aims to inject more money into Mylan’s research and development team for them to create more complex generics and biosimilars.
At the same time, the new company will already have a “ready-made” tried and tested drug portfolio courtesy of Pfizer’s off-patent previous blockbusters.
Apart from the Pfizer’s lineup, Mylan also has a number of key products to contribute to Viatris.
One is a biosimilar of Roche’s (RHHBY) blockbuster breast cancer drug Herceptin (it added four years to the life of my first wife). The launches of promising products, like biosimilar versions of Teva’s multiple sclerosis injection Copaxone and GlaxoSmithKline’s (GSK) asthma medication Advair, are also positive indicators of growth.
With these decisions, Mylan is expected to have a brighter 2020.
Another generic drug maker that’s expected to make a comeback in 2020 is Teva.
In 2019, everything that could possibly go wrong went wrong for this company. As a refresher, here’s what it had to endure: executive leadership turnover, bribery allegations, generic competition for its top-selling drug Copaxone, and of course, the opioid lawsuits from 44 states.
Needless to say, Teva’s profit estimates tumbled and its dividend was shelved. Worst, its debt load has been a huge warning sign that repelled investors left and right.
However, Teva has managed to turn things around.
The opioid lawsuits are reaching a reasonable settlement and the company now has a stronger leadership team. More importantly, it has been successful in cutting down its expenditures. If things go smoothly, Teva is expected to save $3 billion in yearly expenses to improve its profit margins in 2020.
On top of these, Teva has regained its footing in the generic drug market via the steady climb in terms of sales of its newer branded treatments, Ajovy and Austedo.
All in all, the stage is set for Teva to make its comeback and patient investors should expect to be richer in 2020.
Since both generic drug makers churned out less than stellar numbers in 2019, the stocks are likely undervalued at the moment. Hence, it’s important to take advantage of this and buy before these regain momentum and the prices skyrocket once again.
While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to a six-month time frame, Mad Day Trader, provided by Bill Davis, will exploit money-making opportunities over a brief ten minute to three-day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points. Read more
While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to a six-month time frame, Mad Day Trader, provided by Bill Davis, will exploit money-making opportunities over a brief ten minute to three-day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points. Read more
Global Market Comments
January 13, 2019
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE TITANIUM MARKET)
(SPY), (TLT), (TSLA), (GLD), (USO), (NFLX), (DIS), (LEN), (BA)
It is not true that this is a Teflon market, rising almost every day for four months.
It is a titanium market.
The more worries placed in front of us, the faster it rises. And this is happening in the face of falling earnings. This can only end in tears. The only question is how many pennies we can pick up in front of the steam roller before we get run over.
Here’s another sobering prediction. Goldman Sachs’ David Kotick expects that a Democratic win in this year’s election will cause S&P earnings to drop from $169 in 2019 to $163 in 2021, the result of rising corporate tax rates.
Take the earnings multiple down from the present 20 to 15 times earnings where it was three years ago, and the stock index can plummet by 25%.
These are numbers to take seriously, especially given that the president is behind the front runners by 14 points in the national polls.
It all underlines the rising risk that the election poses to the market. Everyone I know to a man is pulling money out of the market, and inquiries about long volatility strategies (VIX) are rising daily.
The general agreement is that in 2020, we are going to have to work a lot harder for a lot less money. There isn’t going to be a repeat of the 28% gain we saw in 2019.
If there is, you want to sell all your stocks and your home, change your name, and move to Brazil, where there is no extradition treaty, because the following crash will be so enormous that no one will be spared.
The end of January 2018 comes to mind, which, after a meteoric move, markets plunged 17%.
Cash is a position, it is an opinion, has option value, and it is probably the best one of all to have right now. You can’t take advantage of any 17% dives if you go into them fully invested. I believe that once the New Year equity allocation is done, we could have a problem.
Risk exploded with the US assassination of an Iran general, with the country vowing revenge. Airline stocks globally went into free fall, and oil prices soared. Wildly overbought markets got their comeuppance, with the Mad Hedge Market Timing Index at an all-time high of 97. Wait three days for markets to price this in. I told you 2020 would be harder!
Gold approached a seven-year high on Iran attack, as over-leveraged traders scrambled for cover. So far, gold and oil are the trades of the decade, which is only seven days old. Keep buying (GLD) on dips, oil (USO) not so much. $1,927 an ounce, here we come!
Tesla deliveries hit new high in Q4, to a record 112,000. There was clearly a stampede before the $3,250 per vehicle clean air subsidy expired at yearend. Musk also cut prices 16% to $43,000 for the Shanghai-made Model 3, creating another stampede there. Keep buying (TSLA) on dips.
The Tesla market cap just peaked at $86 Billion, with the stock at an incredible $490 a share, making it the most valuable American car company in history. What is 25% of the global car market worth in a decade? Apparently quite a lot.
Netflix won big in the Golden Globes, capturing 17 nominations, with Amazon Prime close on their tail. It’s all about content streaming now. If they can only figure out how to take on Disney Plus and Apple Plus. Avoid (NFLX), buy (DIS) and (AMZN).
The S&P Case Shiller National Home Price Index rose 2.2% in October. Phoenix (5.8%), Tampa (4.9%), and Charlotte, NC (4.8%) showed biggest gains. Only San Francisco was down, the victim of lost SALT deductions. Housing still has another decade to run. Buy (LEN) on dips.
Boeing backs simulator training as a path back to flightworthiness for the 737 MAX. As a former flight instructor myself, this is what I have been advocating all along. Whenever things start to improve for Boeing, another crash happens as did with an antiquated 737 in Tehran last week, accidentally shot down by their own people. Keep buying dips in (BA).
The ADP Report showed a red-hot December, with 202,000 private sector job gains. If so, interest rate rises may come sooner than you think.
I never thought I’d say this, but the Mad Hedge Trade Alert Service has made no money so far this year. Of course, the year is only seven trading days old.
Buying the Mad Hedge Market Timing Index at 90 and selling it at 97 is not my kind of market. Nor should it be yours. The money being made now is very high-risk.
Better to sit on your laurels of a 55.86% profit last year and wait for a better entry point.
My Global Trading Dispatch performance held steady at +356.91% for the past ten years, an all-time high. My 2019 year-to-date came in at a final +55.86%. We closed out December with a market beating +4.97% profit. My ten-year average annualized profit ground back up to +35.28%.
The coming week will be a noneventful one on the data front, with only housing data gaining our attention..
On Monday, January 13 at 9:00 AM, Consumer Inflation Expectations for December are out.
On Tuesday, January 14 at 7:00 AM, the NFIB Business Optimism Index is released.
On Wednesday, January 15, at 6:15 AM, New York State Manufacturing is announced.
On Thursday, January 16 at 8:30 AM, Weekly Jobless Claims come out. December Retail Sales are published at 9:30.
On Friday, January 17 at 9:30 AM, December Housing Starts s are printed. At 10:30 Industrial Production is released.
The Baker Hughes Rig Count follows at 2:00 PM.
As for me, I will be leading an Orienteering class in San Francisco this weekend, teaching 20 Boy Scouts how to use a compass and navigate over a ten-mile course. Hey, how bad can it be? I found California! Spoiler alert: after a ten-mile hike, we end up at the Ghirardelli Square Chocolate factory at Fisherman’s Wharf.
When I applied for the position, I listed as qualifications 50 years as an FAA commercial pilot and navigator, and a stint as a Marine Corps combat pilot.
They accepted me on the spot.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Mad Hedge Technology Letter
January 13, 2020
Fiat Lux
Featured Trade:
(THE DEATH OF THE GIG ECONOMY)
(GRUB), (OYO), (LYFT), (UBER), (RAPPI)
The demise of the gig economy is upon us.
That is the latest takeaway from a slew of negative news overflowing the news wires lately.
As many of you know, I hate this niche of tech with a passion, and it has been discovered as nothing more than a marginal fly-by-night sub-sector passing off the cost of employees and their wages to the investor.
They also contribute no meaningful technology that moves the needle.
When the hammer fell on Adam Neumann’s WeWork, the hammer fell equally as hard on the gig economy business model that brought public markets the likes of Uber and Lyft.
The path to venture capitalist’s cashing in abruptly closed off was the end development to all this mayhem.
So I was not surprised when online food deliverer Grubhub (GRUB) had a dead cat bounce after rumors of them looking for a sale to their badly run company.
Then last Friday was the day the chickens came home to roost with Grubhub shares cratering over 8%.
If there is a sale, at what heavily discounted price will it go for?
We could see a marked down shell of its former self.
Grubhub naturally came out and rejected the notion that they are about to be sold off.
Where there is smoke – there is fire.
They did, however, admit they are in the process of “consulting” about certain acquisitions which could mean purchasing inorganic growth to juice up their numbers ahead of a sale.
There are four market leaders who control roughly 80% of the food delivery service business.
But the food war is far from over as competitors undercut each other time after time.
Competition in the food delivery market is driving down the unit economics of online food delivery to a nadir at a time when they can least afford it.
The other three involved are Uber Eats division of Uber (UBER) as well as Postmates and DoorDash.
Grubhub mentioned that there will likely be opportunities to acquire market share, but at what cost?
Acquiring inorganic revenue is at peak cost in 2020.
Cost per unit matters more now than any other time in the past 10 years boding ill for Grubhub and its competition.
And until they adequately address the unit economics in detail, readers must assume that Grubhub is on a suicide mission and you won’t know how close they are to the end until there is a dramatic announcement describing it.
The big takeaway here is that conditions are ripe for consolidation in the online delivery business.
As we go further out on the risk curve, private unicorns are in dire straits too.
Taking a barometer of this subsector allows investors to digest the level of risk premium in the overall markets that can be applied to safer parts of the tech ecosphere through extrapolation techniques.
Venture capitalist Masayoshi Son is infamous for overpaying a slew of tech growth firms and in 2020, so far, it has not been kind to him.
Oyo allows customers to book hotel rooms in more than 80 countries through its app.
It even converts struggling local hotels into Oyo franchises, puts up some money to remodel the interior, and takes commission on every booking.
The startup is dumping 5% of its staff in China and another 12% of employees in India, as part of a reorganization.
Oyo is the third company in SoftBank's portfolio to shed jobs in a week, following the layoffs at robotic pizza startup Zume and car rental company Getaround.
Oyo has sucked in more than $3 billion in capital and the last insane tranche of investment values the company at more than $10 billion.
SoftBank has been throwing money at the company since 2015.
The firm is otherwise known as the "SoftBank's jewel in India" for being one of the country's most valuable private companies.
However, there has been a recent barrage of sub-optimal reports suggesting they have accelerated sales by underhanded business practices.
A peek into the firm showed explicit evidence that Oyo rented thousands of rooms at unlicensed hotels and guesthouses then allowing police and other officials use the service for free to avoid trouble with the authorities.
The pain for Softbank doesn’t just stop at Oyo, Rappi has been dragged down as well.
The Latin American delivery startup is laying off 6% of its workforce, less than a year after Japan’s SoftBank Group pumped in nearly $1 billion in the company.
Softbank is putting pressure on local management to trim the fat off their models and forcing them to become profitable now.
Rappi has expanded to nine countries since its founding in 2015.
It plans to be the swiss army knife of online deliveries by getting into groceries, restaurant meals, medication, furniture, and has even foolishly branched out into scooter rental, travel, and basic banking services.
Softbank plans to pour another $4 billion into South American startups but one must beg to ask, are they throwing good money on top of bad money?
Certainly seems so.
When asked how soon Rappi would turn in a profit, co-founder Sebastian Mejia was adamant that his sole priority was to grow fast, and that investors were on board with the plan.
This is code name for NEVER!
Softbank and its vision fund are set for more death by a thousand cuts in 2020, and being in the wrong place at the wrong time aggravates the mess they find themselves in.
Short all companies reliant on gig economy workers in the public markets and prepare for a gloomy IPO pipeline that will last through the end of 2020.
