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
August 14, 2020
Fiat Lux
Featured Trade:
(AUGUST 12 BIWEEKLY STRATEGY WEBINAR Q&A),
(GLD), (TLT), (TSLA), (AAPL), (FB), (AMZN), (VXX), (VIX), (JPM), (BAC), (GDX), (NUGT), (MRNA), (BRK/B), (SLV), (FCX)
Below please find subscribers’ Q&A for the August 12 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Lake Tahoe, NV with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: I just joined your service. Can you explain the logic to your current model trading portfolio?
I always try to balance long positions with short position. That greatly mitigates the risk of an out-of-the-blue crash, like we saw in February. Also, every individual position has a long and short, further reducing volatility. And you never can lose more money than you put up, so your risk is defined. That’s another classic risk control measure.
There is a further four hedge in that the portfolio is spread across all asset classes. So, I am long banks (JPM), (BAC), short US Treasury bonds (TLT), short a basket of big tech stocks (AAPL), (AMZN), (FB) and long gold (GLD). Something is always working where you can take profits. Our proprietary Mad Hedge Market Timing Index is always a big help in judging the best time to enter and exit these asset classes.
That is the short course on hedge fund risk management 101.
Q: Is it a good time to add in gold (GLD) here?
A: Yes, my long-term target for gold is $3,000/oz, possibly higher—it’s very common once you get a breakout from a 7-year bottoming process to get a big move like that. You always go back and retest that breakout level, that’s what’s happening now. I would use this dip to buy gold. You can look at (GLD) itself, the (GDX) gold miners which will give you 4:1 leverage over gold, or any of the 2x or 3x gold leveraged ETFs like (NUGT). There are lots of ways to play gold this time left from over the last bull market in gold ten years ago. So yes, bullish on gold with a temporary pullback in store. This recovery trade, which is buying banks, casinos, hotels, restaurants, weak dollar, weak buy market, weak gold—this is all temporary, this is just a trade. Those will all reverse themselves, probably by September if not sooner. So, if you missed the first round in the gold bull market, there’s certainly another chance to get back in.
Q: Do you think Biden and Harris will crash the stock market if elected?
A: No, since Biden started to run away in the polls, the stock market basically went straight up every day, and I prefer the stock market’s judgment on these things to opinion polls or talking heads. As far as Harris is concerned, she was the most middle of the road conservative pick of the 12 or so people they were looking at for vice president. Certainly, she’s a favorite with Wall Street, and isn’t it interesting they’re looking for the talents of a prosecutor in the White House? Who do you think they have in mind? So yes, that’s a net positive for the market. If anything, a new administration will bring a whole new round of Quantitative Easing and deficit spending, except it will be focused on bailing out Main Street, not Wall Street.
Q: Is the vaccine drug maker Moderna (MRNA) overbought here at 70?
A: Yes, I think to get any more appreciation you need to get an actual result on the many vaccines that are out there.
Q: Will Tesla (TSLA) pass 2,000 by year end?
A: I tend not to think so; Tesla had a once-in-a-lifetime 10-fold increase over a year. That is a very big move to digest, and while I’m saying people should keep their Tesla longs for the long term, short term you want to be selling calls against your long positions to hedge any downside and to take in some extra income.
Q: What caused ten-year US Treasury yields (TLT) to jump 14% yesterday? What will yields do from here?
A: Yields will go up and retest the 95-basis point level we saw a couple of months ago. That means we’re going to have a clear shot at adding shorts, probably for the next several weeks or months.
Q: I got the first TLT trade, but when I added the second one, I had to automatically close out my 175 short position to add the long 175 put position.
A: That is the correct way to do this. And what you end up with is a wider spread with a much larger size. So, you take all three positions we currently have, and you now have a (TLT) August $170-177.5 bear put spread in triple the original size and triple the profit, which expires in 5 trading days. It’s a trade with a very high return over a very short time frame. It’s the kind of trade that’s only available with very high volatilities in the market—at $25 in the (VIX), and you get very high accelerated time decay going into the close. So, it really was a two-week expiration play on the (TLT).
Q: Apple (AAPL) has been able to avoid any major damage in its share price in this trade war. How long can it last?
A: It can last 3 more months, until the election. It’s really quite amazing that the Chinese have not retaliated against Apple in all of these trade wars, and the reason for this is that Apple employs a million people in China, and they make a ton of money out of it. Apple has also managed their relationship with the communist government perfectly. So, that’s why they haven’t been hit. General Motors, other US companies—they could get expropriated. If the US can expropriate TikTok, what’s to stop China from expropriating General Motors, Starbucks, or even Apple for that matter?
Q: How do we know who has a real vaccine and who has a fake one? There’s so much information out there, I have a hard time filtering through what is real.
A: Wait for 100,000 people to try it out first—that’s what my plan is. That will be the safe way to do it. And if that means quarantining another couple of months to make sure you get the real deal, it’s worth the investment. Most industry safety standards, like animal trials, have been ditched by the FDA in order to get Trump a vaccine before the election. Putin is doing the same in Russia.
Q: Why is Warren Buffet buying back shares of Berkshire Hathaway (BRK/B) in record amounts? Is it because he sees no good investments?
A: He’d rather buy his own shares at parity or at a small premium than pay record PE multiples for essentially anything else in the market. Because the government rushed in so quickly to support the stock market, there never were any real deals in stocks, they never really got cheap. Yes, it sounds like down 40% in 2 months is cheap, but stocks weren’t, not even close to cheap, on a PE multiple basis. We never got close to the 9 ½X we saw in 2009. Also, if you believe in a recovery play, the ultimate recovery play is Berkshire Hathaway because they own predominantly old-line industrial cash flow stocks, which will lead any real recovery in the economy. So, at this point, Berkshire Hathaway will probably get you a higher return on a 12-month view than say Apple, Facebook or Amazon.
Q: Gold (GLD) vs Silver (SLV)? Which is better? And what about Copper (FCX)?
A: Silver always outperforms gold by at least 2 to 1 in any real economic recovery. Copper prices have risen 30% in 4 months; that is discounting a real economic recovery someday, so I would be buying copper on dips also.
Q: How do we learn more about options?
A: I suggest you go to the “How to Trade” section on our website, and that has links. Every trade alert we send out also has a link to a video that tells you exactly how to do the options part of that trade. And if you don’t want to do options, we also propose ETF and single stocks.
Q: What year end effect on the market do you see from a Biden tax plan on long term capital gains and qualified dividends at the ordinary income rate?
A: Well, if he actually proposes that, there will be a rush to sell assets by the end of the current year so people can take advantage of the very favorable capital gains tax that exist now. However, it’s not known whether that is actually the tax increase he’s proposing; it’s more likely he’ll simply return to the pre-Trump tax rates. However, I do expect him to come up with highly punitive tax rates on any real estate-related investment as a way of getting back at Trump. And that’s like loss carry forwards, steps up in the cost basis, 1031 exchanges—things specific to the real estate industry.
Q: If you think markets are going to come off, why aren’t you more aggressive buying the iPath Series B S&P 500 VIX Short Term Futures ETN (VXX)?
A: (VXX) has become such a professional market it really has become a day trading vehicle. It’s hard to get customers in and out of this thing fast enough to make them money, as most of my followers are not set up to be day traders. It’s a market where 90% of the professionals are playing from the short side, so when you get moves up, they essentially happen over 1 or 2 days, and then they spend weeks or months bleeding off. It really is a tough trade for a retail trader to do; and it is an area where the insiders in Chicago trade this thing and really do have an in-house advantage that I would rather not try to bet against.
Q: I sold the top on all precious metals positions and started buying back today. Was that the right thing to do?
A: Yes, I have a feeling it is. Start scaling in—if you’re nervous about buying gold here, buy a third of a position now, a third if it’s higher or lower, and a third if it’s higher or lower again. That’s what any pro would do.
Q: Do you see another big economic crisis in 2021?
A: I don’t think so; I think any continued weakness will be hit with massive liquidity from the Fed and more government spending. Now that they found the model to keep the economy going, they’re going to just keep at it, no matter who is in power. Roosevelt kept at it for 5 years to end the Great Depression, until he was bailed out by WWII, so hopefully we don’t have to bail our economy out the same way with WWIII.
Q: What about Bitcoin here?
A: We don’t trade Bitcoin as we think the whole thing is a giant scam. There’s also no value added by anyone. Insiders have a huge advantage, the people who are creating the bitcoin to sell. So, it’s a security with no fundamentals—thus unanalyzable.
Good Luck and Stay Healthy
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Mad Hedge Biotech & Healthcare Letter
August 13, 2020
Fiat Lux
Featured Trade:
(HOW ROCHE’S STRATEGIC MOAT KEEPS IT AFLOAT)
(RHHBY), (MRK), (GILD), (LLY), (BPMC), (PFE), (JNJ), (ABBV), (NVS)
Moat is a concept that Warren Buffett's followers are well-acquainted with.
In a nutshell, it describes a company’s capacity to keep its competitive edge over its rivals. For the Oracle of Omaha, the safest bets are businesses with large moats because it indicates a strong ability to ward off competitors.
One company that has a particularly strong moat is Roche (RHHBY).
Roche has been at the forefront of the fight against the COVID-19 pandemic.
In mid-March, Roche became the first-ever commercial company to receive an FDA Emergency Use Authorization for its COVID-19 tests. What made this kit, called Cobas SARS-CoV-2 test, impressive is that the turnaround time of less than 4 hours was incredibly fast compared to others.
By April, Roche’s tests were already administered to roughly 4 million people, with some users paying as low as $5 for every test.
Following the success of its tests, Roche ventured into developing a COVID-19 cure.
While there’s still no conclusive data on its tests, Roche secured agreements with the European Commission to be one of the suppliers of the experimental COVID-19 drugs to any of the 27 EU members looking to buy for their constituents.
The deal involves Roche’s RoActemra. Meanwhile, the other supplier is Merck (MRK) with its Rebif.
Aside from that, Roche is also working alongside Gilead Sciences (GILD) in investigating whether Remdesivir could work better when combined with RoActemra.
The other drug undergoing similar compatibility tests with Remdesivir is Eli Lilly’s (LLY) Olumiant.
However, there remains a much bigger story for Roche outside its COVID-19 efforts.
Looking at the company’s first-quarter earnings report, Roche’s pharmaceutical arm generated over 80% of its total revenue for that period.
This is primarily thanks to its strong lineup of drugs, which recorded a 7% increase to reach roughly $13 billion in sales compared to the previous quarter. Overall, Roche recorded a 52.9% growth in its year-over-year quarterly earnings.
The key growth drivers of the company came from its oncology sector.
Leading the charge is bladder and urinary tract cancer treatment Tecentriq, followed by breast cancer drug Perjeta.
Roche’s efforts to expand the label of its blockbuster drug Tecentriq sets expectations for further growth as well.
To further boost its dominance in the oncology field, Roche recently signed an agreement with Blueprint Medicines (BPMC) to gain commercial rights to market thyroid and lung cancer treatment Pralsetinib outside the U.S., excluding Greater China.
This will allow Roche to directly compete with Eli Lilly’s newly gained blockbuster drug Rotovmo, which the company got from its $8 billion takeover of Loxo Oncology in 2019.
Apart from its oncology sector, Roche also saw promising results from other treatments like hemophilia medicine Hemlibra and multiple sclerosis treatment Ocrevus.
On top of Roche’s 37 approved treatments in the market today, the company is expected to submit regulatory findings for almost 20 products this year alone.
Meanwhile, Roche’s $4.3 billion acquisition of Spark Therapeutics in 2019 provided a much-need boost to the company’s gene therapy space.
Despite the uncertainties brought about by the pandemic, Roche’s shares still saw a 10.5% jump this year. In fact, the company increased its 2020 earnings estimate by 0.8% while it expects a 1.4% rise in 2021.
For context, Roche generated $61.5 billion in revenue in 2019 and raked in approximately $13.5 billion in profits. To date, the company pays its shareholders a dividend that yields close to 2.5%.
These reports highlight Roche’s financial stability and strength.
So far, Roche has been able to corner three of the major diseases today: cancer, hemophilia, and multiple sclerosis.
This makes the company one of the biggest names in the biotechnology and healthcare sector in terms of sales.
In fact, Roche is projected to be the No.1 in the field by 2026 with an annual revenue of $62 billion, achieving a compound rate of over 3.6% since its 2019 numbers.
Pfizer (PFE) is expected to land second place, with sales estimated to reach over $56 billion. The rest of the list includes companies poised to record more than $50 billion in sales, namely, Johnson & Johnson (JNJ), AbbVie (ABBV), and Novartis (NVS).
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
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
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
August 13, 2020
Fiat Lux
Featured Trade:
(RAISING MY TESLA TARGET TO $5,000),
(TSLA)
(TESTIMONIAL)
The bad news about Tesla (TSLA) is that it may take several months, if not a year to digest the massive ten-fold leap in Tesla shares that has taken play over the past year.
The good news is that I am raising my long term target from the $2,500 that I held for the last decade to $5,000 over the next five years. Remember, I first recommended the stock at $16.50, right after the IPO went bust.
I knew I was on the right track when the salesman told me that the customer who just preceded me for a Tesla Model X 100D SUV was the Golden Bay Warriors star basketball player, Steph Currie.
Well, if it’s good enough for Steph, then it’s good enough for me.
Last week, I received a call from Elon Musk’s office to test the company’s self-driving technology embedded in their new vehicles for readers of the Diary of a Mad Hedge Fund Trader.
I did, and prepare to have your mind blown!
I was driving at 80 MPH on CA-24, a windy eight-lane freeway that snakes its way through the East San Francisco Bay Area mountains. Suddenly the salesman reached over and flicked a lever on the left side of the driving column.
The car took over!
There it was, winding and turning along every curve, perfectly centered in the lane. As much as I hated to admit it, the car drove better than I ever could. It does especially well at night, a valuable asset for senior citizens whose night vision is fading fast.
All that was required was for me to touch the steering wheel every two minutes to prove that I was not sleeping.
The cars do especially well in rush hour driving, as it is adept at stop and go traffic. You can just sit there and work on your laptop, read a book, or watch a movie on the built in 4G WIFI HD TV.
When we returned to the garage, the car really showed off. When we passed a parking space, another button was pushed, and we perfectly backed 90 degrees into a parking space, measuring and calculating all the way.
The range is 290 miles, which I can recharge at home at night from a standard 220-volt socket in my garage in seven hours. The chassis can rise as high as eight inches off the ground so it can function as a true SUV.
The “ludicrous mode,” a $10,000 option, takes you from 0 to 60 mph in 2.9. However, even a standard Tesla can accelerate so fast that it will make the average passenger carsick.
Here’s the buzzkill.
Tesla absolutely charges through the nose for extras.
The 22-inch wheels, the third row of seats to get you to seven passengers, the premium sound, the leather seats, and the self-driving software can easily run you $30,000-$40,000.
A $750 tow hitch will accommodate a ski rack on the back. There is a $1,000 delivery charge, even if you pick it up at the Fremont factory.
It’s easy to see how you can jump from an $84,990 base price to a total cost of $162,500, including taxes, for the ultra-luxury Performance model with every option the company offered.
It's my company that the car will be purchased under, thanks to the incredible tax breaks afforded to the wealthy by the Trump tax bill.
This allowed me to deduct the entire $162,500 cost of the vehicle upfront, plus the maintenance and insurance costs for the entire life of the car. However, I will have to maintain a mileage log as a hedge against any future IRS audits.
It looks like I’ll have to buy yet another Tesla this year as tax breaks for the rich are soon to become a thing of the past.
As for “drop dead’ curb appeal, nothing beats the Model X. Buy the stock on every 20% dip. The days of young ladies writing their phone numbers on post-it-notes under the windshield wipers so they can get a ride are not over.
