April 2020

SoftBank's Crash and Burn

The bizarre case of Softbank’s emperor has no clothes – its enigmatic CEO Masayoshi Son was heralded as a tech genius who planned to validate his intelligence by throwing money at budding tech companies that were supposed to deliver his investors billions in shareholder value.

It’s now Mr. Market who has the last laugh, as the infamous tech venture fund, smartly named the Vision Fund, bankrolled by Son and Middle Eastern wealth funds, took a turn for the worst with a $16.6 billion loss in the fiscal year that just ended.

Apparently, the vision fund is blind.

How bad is the situation at the “vision” fund?

A fraudulent tech company that sells shared office space owned by Softbank is now suing itself, creating a scenario where WeWork is reliant on Softbank to fund it, yet attacking the hand that is feeding it.

Presiding over a cesspool of conflict of interests, unremarkable business models, inflated egos, and botched management, the vision fund’s greatest success is overpaying for massive loss-making tech companies that sometimes weren’t even tech companies.

WeWork is the most high-profile casualty of Son’s excesses, but Oyo, the hotel sharing company, also epitomizes the state of Son’s crumbling empire.

Less than a year ago, Son publicly anointed Founder and CEO of Oyo Ritesh Agarwal one of the new up-and-coming tech innovators.

Oyo is the Uber of hotels that, through a reservation website, matches hotel units with paying customers.

Agarwal began working with small hoteliers on service, design and standardized accouterments like bedding and toiletries to draw more travelers. He took a 25% cut of sales.

The online hotel platform expanded ambitiously by recruiting hotel owners and guaranteeing a minimum amount of revenue, essentially doubling down that its online booking system and brand name would attract enough extra cash flow to sustain sales.

In the event that revenue goes to zero because of a pandemic, Oyo would incur abnormally high risk by still being on the hook for the revenue to the hotel operators.

Oyo has since gone back on its guarantee to pay guaranteed revenue streams to hotel operators alienating any potential relationships with hotels in the future.

Agarwal’s brainchild was supposedly poised to become the biggest hotel operator in the world.

Fast forward to today and the situation is nothing short of a disaster.

Oyo has called for a major restructuring, furloughing thousands of employees as it clings on for dear life.

Oyo is just another disastrous instance of the Vision Fund’s toxic array of underperforming assets.

The hotel startup was valued at $10 billion just recently and even though not a zero yet, the company has lost around 70% of its value in one month.

Complicating the pitiful situation, Agarwal borrowed $2 billion to buy back shares in his own creation speculating that Oyo would be able to offload the asset to avid investors.

Agarwal could face an imminent margin call from the banks he borrowed from, setting the stage for Son to bail out another ridiculous sideshow or let it rot like WeWork who is effectively suing Son for not following through with a $3 billion bailout that he is walking away from.

Son promised after WeWork that he wouldn’t bail out any more startups, but the issue now is that the list of eroding companies grows longer and Son’s ability to fund these decrepit companies weakens by the day as business is shut around the world and his balance sheet sours.

Just look around at the lifeless companies that have been put out of their misery such as Brandless Inc., Zume Pizza Inc., and OneWeb just filed for bankruptcy.

I double down that no tech firm will be able to go public in 2020, and the rotten apples under Son’s leadership are now being inspected for exactly how rotten each apple is.

Tech investors should take this cue to find higher ground in the form of iron-clad balance sheets, positive cash flow, and unmistakable intellectual property.

If you can slip in a recurring subscription model in the equation, then that is the cherry on top of the chocolate sundae.

Park money in the corona tech stocks of DocuSign (DOCU), Zoom Video Communications, Inc. (ZM), Amazon (AMZN), Netflix (NFLX) and Microsoft (MSFT), then grab some popcorn to watch how Son’s portfolio blows up in dramatic fashion.

April 15, 2020 - Quote of the Day

Tech Letter

“It's better to be a pirate than to join the Navy.” – Said Co-Founder and Former CEO of Apple Steve Jobs

Trade Alert - (FISV) April 14, 2020 - BUY

Tech Alert

When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more

April 14, 2020 - MDT Alert (AGNC)

MDT Alert

I would like to suggest that you collect some more call premium on the AGNC position.

The last price for the April 24th - $13.00 calls were $0.35

My suggestion is to sell them at $0.35.

These are the calls that expire next Friday.

Assuming you collect the 35 cents, it will mean you would have collected $1.55 in call premium on this position.

If these calls are assigned next Friday, the total return would be 10.3%.

April 14, 2020

Biotech Letter

Mad Hedge Biotech & Healthcare Letter
April 14, 2020
Fiat Lux

Featured Trade:

(ELI LILLY’S CORONA LEAP FORWARD)
(LLY), (GSK)

Eli Lilly's Corona Leap Forward

Biotech Letter

Eli Lilly (LLY) is one of the major biotechnology companies that have been working double-time to develop a coronavirus disease (COVID-19) cure, and the company shared its progress in this field.

According to this top biotech company, its partnership with the National Institute of Allergy and Infectious Diseases will explore the potential of Olumiant as a COVID-19 treatment.

This drug was first approved in June 2018 as a rheumatoid arthritis medication. Health experts believe that its anti-inflammatory effects on the immune system could be effective as a COVID-19 cure.

The clinical trial for Olumiant will involve COVID-19 patients in the US, with results available within two months.

Other than this Olumiant trial, Eli Lilly has another potential COVID-19 clinical trial already in Phase 2 for an experimental antibody treatment currently dubbed LY3127804.

This trial will involve pneumonia patients diagnosed with COVID-19. These patients are at a higher risk of acquiring acute respiratory distress syndrome (ARDS). The antibody treatment trial is slated to begin by late April at several US centers.

Apart from these experimental treatments, Eli Lilly is also taking an active part in providing testing centers to frontliners in its home state Indiana.

In March, Eli Lilly launched drive-through testing centers for active healthcare workers. This initiative was in partnership with the Indiana State Department of Health and backed by the U.S. Food and Drug Administration.

Eli Lilly’s centers test for the SARS-CoV-2 virus, which is the type that caused COVID-19. This service is offered free of charge to frontliners.

Outside its COVID-19 efforts, Eli Lilly has been active in developing its pipeline.

The latest deal towards this end is with privately held company Sitryx, which focuses on creating drugs for cancer and inflammatory diseases.

The partnership involves a five-year collaboration culminating in the development of four drugs. Eli Lilly has already selected two lead projects from Sitryx’s pipeline to be the first drugs they’ll submit for licensing.

Founded in 2018, all projects in Sitryx’s pipeline are still in the preclinical phase. The company is also comprised of widely known immunology experts, with another biotech heavyweight GlaxoSmithKline (GSK) contributing to its technology.

According to the terms of the collaboration, Sitryx will handle drug discovery while Eli Lilly will fund the clinical development as well as the marketing efforts.

Sitryx will get $50 million from Eli Lilly upfront, with the Indianapolis biotech company making an additional $10 million equity investment.

Meanwhile, the smaller biotech is eligible to almost $820 million if the development milestones are reached. Sytrix is also entitled for royalties.

Amid the pandemic, Eli Lilly is riding the momentum of its previous quarters and is still aiming to deliver a promising growth this year.

Coming off a strong 2019 fourth quarter, the company saw an 8% year over year growth in its top line. The entire year’s sales also went up by a modest 4% from how much they earned in 2018.

As for earnings per share (EPS), the said quarter showed off an impressive 49% year over year jump to reach $1.64. Meanwhile, the entirety of 2019 recorded an EPS of $8.89 which is more than twice 2018’s $3.13 total.

For Eli Lilly’s 2020 performance, the company is anticipating more growth, especially after the completion of its $1.1 billion all-cash acquisition of Dermira.

This acquisition opens a plethora of opportunities for Eli Lilly, particularly in the dermatology medicines sector.

A prime example to illustrate potential growth is Dermira’s top-selling product Qbrexza, which is used to treat excessive underarm sweating. This bestselling item boosted Eli Lilly’s quarterly sales by 27%, increasing the revenue from $8.1 million to $10.2 million.

Even without the collaborations, Eli Lilly can stand on its own as a solid buy.

The company has shown a strong operating margin, staying over 20% in all the previous 10 quarters. Moreover, its free cash flow of $3.5 billion and consistent revenue generation platforms through the years, Eli Lilly is in a good position to take on more acquisitions down the road.

Basically, Eli Lilly is ideal for investors on the lookout for a biotech stock that you can buy and just forget.

Only a handful of sectors managed to escape the coronavirus pandemic unscathed as practically every stock suffered a 20% drop over the course of the past months. I believe there’s one group that merits our attention even in the midst of this pandemonium: the biotech sector.

I think biotech stocks will roar back soon enough, and buying shares of solid and well-managed biotech companies that pride themselves with promising product lineups and solid pipelines should be rewarded in the long run.

Among these biotech stocks, Eli Lilly is one of the best-positioned growth stories. Investors searching for a port in this coronavirus storm might want to take a good look at this biotech stock.

April 14, 2020 - MDT Alert (FRO)

MDT Alert

Today, I am going to suggest you close the FRO position. The idea was to capture premium destruction over the long holiday weekend.

Therefore, let's book the profit and move on.

Sell to close FRO at the market, which is $8.70.

Then Buy to Close the April 17th - $9.00 call for $0.25.

The cash return, if you traded the suggested 500 share lot should be about $185.

The return for 5 days will be 4.3%.

April 14, 2020 - MDT Pro Tips A.M.

MDT Alert

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

April 14, 2020

Diary, Newsletter, Summary

Global Market Comments
April 14, 2020
Fiat Lux

Featured Trade:

(APRIL 8 BIWEEKLY STRATEGY WEBINAR Q&A),
(INDU), (SPY), (SDS), (BA), (VIX), (VXX), (GLD), (GDX),
(GOLD), (NEM), (QCOM), (HYG), (JNK)
(WHY SENIORS NEVER CHANGE THEIR PASSWORDS)

April 8 Biweekly Strategy Webinar Q&A

Diary, Newsletter, Summary

Below please find subscribers’ Q&A for the Mad Hedge Fund Trader April 8 Global Strategy Webinar broadcast from Silicon Valley, CA with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!

Q: Is it premature to be buying long-term LEAPS?

A: Absolutely not—a long-term leap is a bet that your stock will recover beyond your strike prices in two years, which I certainly believe is the case with all of the quality tech and biotech names. These are pretty illiquid so the only way to get a good price is to have a bid in place on one of those absolute puke out days. You will never buy these at the bottom.

Q: Do you see a rally in the stock market in the fourth quarter of this year after the election?

A: For sure—we should be well clear of the pandemic by then, and all of the $6 trillion stimulus will be hitting at the same time.

Q: With the rally in the S&P 500, would you double up on the (SPY) put spread—the May $300-$310?

A: No, keeping your leveraged positions small is crucial in this kind of environment, and the big short play is basically behind us. Better to add the 2X ProShares Ultra Short S&P 500 (SDS) to catch a smaller move down.

Q: Will gold work if the market sells off as a safety trade?

A: Yes, it will. Gold (GLD) had that big 15% selloff a couple of weeks ago when it looked like all financial markets worldwide were going to completely freeze up, and everyone got margin calls all at the same time. We are clear of that now and I expect gold and other traditional hedges like shorting volatility, for example, to also work as a hedge. Gold is going to a new all-time high soon. Buy (GLD), (GDX), (GOLD), and (NEM).

Q: When do you think international borders will open up again, and will that have a positive effect on the economy?

A: Absolutely. You can expect the market to rally 10% into the opening of borders, and then another 10% afterwards depending on where the starting point for the market is in that. As for timing, they may open up in June, and then close up in again in the fall when a second Corona wave hits.

Q: Will you teach us how to buy LEAPS?

A: Just go to my website, type in LEAPS in all caps, and everything you need to know about leaps is there. I will also be following up soon with more individual stock LEAPS ideas, but I don’t want to put them out now because we have just had a $5,000-point rally on the Dow.

Q: Please talk about 5G.

A: The best play is Qualcomm (QCOM). They have a near-monopoly on a 5G chip which virtually the entire world has to buy. The stock has also held up incredibly well. Buy two-year LEAPS on Qualcomm with probably a $90 or $100 strike price.

Q: What level in the S&P do you think this will fail?

A: I think it will fail right around here, so that's why I have been adding on the short positions on every rally. We are exactly at halfway point between the February high and the March low, which is a perfect bear market rally.

Q: What’s the definition of the next big dip?

A: You give up the 5000-point rally we just had, and whether we give up 4000 or 6000 of it, at these kinds of conditions, 1000 points in the Dow (INDU) is a round lot, like the daily move. So, looking at the charts and these lows, it could be a $19,000, $18,000, or $17,000.

Q: Fundamentals may tell you the virus may be peaking, but the worst of the economy is yet to come.

A: True. Do all the markets follow fundamentals now? No, they will look at the virus numbers. Economic numbers are utterly meaningless and out of date here. I wouldn’t depend on them at all, just look at the new cases every day from the Johns Hopkins website, and that gives you a better buy signal than any economic indicator can.

Q: Are all the good shorts are over?

A: When I say shorts are over, from here you’re not going to get the 80% and 90% down moves that we have seen so far; those are gone. The reason I bought the 2X ProShares Ultra Short S&P 500 (SDS) is to play for the bottom end of the range, which could be down 2000 to 4000 points from here, and also to hedge the short volatility (VXX) puts that I already have. A rising market should make the (VXX) go down, and a falling market will make the (VXX) and the (SDS) go up. So, it's both a hedge and a view on a range of a market.

Q: Could the Federal Reserve buy shares?

A: Yes, they have done that already in Japan, with no success whatsoever in helping the economy, but I doubt the Fed will buy shares here. The government will take minority share ownerships in the troubled industries like the airlines, much like they did with (GM) and the top 20 banks during the 2008-09 crash and sell them later at huge profits. I don't expect them to go beyond that. The Fed here has too many other things to buy, like all of our different bond and money markets; those don't exist in other countries like Japan or Europe. Stocks are often the only thing they can buy, and in Japan’s case, they already own the entire government bond market, so they had nothing else left to buy besides stocks.

Q: How about buying Boeing (BA)?

A: I would buy Boeing LEAPS here, something like a $170-$180. If you’re going to make a 1,000% return on LEAPS on any one stock, it's going to be Boeing. That company will be around somehow, and you could get literally a 10-fold return just by going 50% out of the money on two-year LEAPS.

Q: How is liquidity on 2-year 30% out of the money LEAPS?

A: It is practically nonexistent. You have to put in a limit order and then wait for a dump in the market to get filled. That’s how all the people who have been doing LEAPS have been getting them. Put in a bid and when you get these cataclysmic, down-1,000-point days, they hit any bid. The algos go in there and they just say hit any bid, and you can get done at incredible prices in those situations.

Q: Are the fees on (SDS) a problem?

A: No, your standard equity commission is all you should be paying. They trade like water.

Q: Would you short junk bonds short-term?

A: No, because you short the (HYG) or the (JNK), you are shorting a 7.5% yield which you have to pay if you’re short, so the great short in junk bond play was in February when it was yielding 4.5%. It’s too late now.

Q: Will treasuries go to zero?

A: They could, but we’re close enough to zero where you might as well think of them at zero.

Stay healthy all.

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader