November 2020

The Market Outlook for the Week Ahead, or the Roaring Twenties Have Just Begun

I have a prediction to make.

If you are unhappy about the election result, the world will still turn, the sun will rise in the east and set in the west, and the moon will continue to wax and wane every month.

There, I promise I won’t talk about politics for another four years unless it’s for the Official Incline Village, Nevada Bear Wrangler.

The plywood has started coming down from storefronts in San Francisco, no doubt stored away for another day. Mass celebrations have broken out everywhere.

It is now back to the serious business of making money.

That is easy for me to do because I have just enjoyed the most profitable week in the 13-year history of the Mad Hedge Fund Trader. From the Thursday low last week, our 2020 year-to-date performance has rocketed by an eye-popping 11.46%. This was a once-in-a-decade setup and I struck while the iron was hot.

For only the third time this year, I went 100% fully invested right before the election, and every position dutifully made money across all asset classes. Stocks (SPY) and gold (GLD) soared, while the US Treasury bond market (TLT) and the US dollar (UUP) crashed. On the stock side, everything went up like the true quantitative easing, liquidity-driven market that it is.

My fundamental call on the market came true. It made no difference who won the election, the mere fact that it is over is a major positive for stocks.

With such a historic move last week, the major indexes have pulled forward performance from the rest of 2020 and possibly a piece of 2021 as well. So, I expect to see sideways chop for the next seven weeks with a slight upward bias.

I don’t need to remind the veterans out there that this is the perfect environment for vertical bull call spreads. We may stay fully invested for a while and shoot for a record performance for 2020.

The chance of a market crash now is effectively zero. If for some reason we do get a 5% pullback, for Heaven’s sake please dive in with both hands. The Roaring Twenties and the next American Golden Age have only just begun. Globalization resumes its inevitable course.

The only thing that would trigger a selloff is an exponential growth of the pandemic, which with 122,000 cases and 1,200 deaths yesterday has already started. I have believed all along that the third peak in cases will be the final hyperbolic one, with deaths eventually topping the 1919 Spanish Flu peak of 650,000.

So far, the stock market has chosen to ignore these grim numbers, preferring instead to focus on vaccine hopes. There is effectively no government in Washington until January 21, 2021 so there is no one to step in and stop it. When the market does notice, the next buying opportunity of the decade may be at hand.

Stocks started expecting a Biden Win on Monday when they exploded right out of the gate. The Volatility Index (VIX) will plunge from $40 to $24 in a heartbeat. This was the biggest post-election rally in 100 years, with a 65% voter turnout not seen since women first got to vote in 1918. Buy dips in the (SPY).

The flip side is that massive spending will create monster deficits. Abuse from Trump has prompted the world’s largest buyer of US Treasury Bonds (TLT), China, to cut back their holdings from $1.24 trillion to $1 trillion. If China won’t buy our debt, who will? Sell short the (TLT) on rallies.

The Senate is another story. If the Republicans win, it will block most Biden programs and gridlock government for two years. Gridlocked government is normally good for stocks, except when you have a global pandemic and a Great Depression. No bold action is possible.

Expect slower economic growth as a result, fewer trading opportunities, and less asset appreciation. The Senate’s main job now is to make sure Biden fails. However, if Biden takes Georgia, we won’t know for sure until two Senate runoff elections take place there in January.

Jay Powell isn’t going anywhere, so interest rates are staying at near zero for three more years, according to yesterday’s press conference. Quantitative easing is still the name of the game.

Gold has turned, with the standard 100-day correction over. New highs beckon. The drivers are US interest rates remaining near zero for years, stockpiling by foreign central banks, and a recovering US economy. Notice also that the correlation between US stocks and gold this year has been 1:11. Gold is just another quantitative easing asset class these days. I’m starting to look at silver too, which usually has much more upside volatility.

China’s PMI is up for eight months, to 51.6%, better than expected. The world’s first post-pandemic economic keeps powering on. Anything over 50 is showing expansion.

The US ISM Nonmanufacturing Index hit a two-year high in October, down from 57.5 estimated to 57.5. That’s a two-year high.

The Nonfarm Payroll Report surprises at 638,000 for October, taking the headline Unemployment Rate down to a still recessionary 6.9%. Some 268,000 government jobs were lost, including 147,000 census workers. The rest came from teachers laid off by cash-starved local governments. Leisure & Hospitality jumped by 271,000. There are still 10 million fewer employed than when the pandemic started. The news crushed the bond market, where I’m short. Keep selling rallies in the (TLT).

When we come out the other side of pandemic, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 400% to 120,000 or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 120,000 here we come!

My Global Trading Dispatch exploded to another new all-time high last week.

The Friday prior to election week, I picked up new longs in the (SPY), (TSLA), and (CAT). Then on Monday, I bet the ranch, going 100% “RISK ON,” throwing the dice on a post-election melt-up and adding the (TLT), (JPM), (GOLD), (UNP), (UPS), and (AMGN).

It worked in spades.

That keeps our 2020 year-to-date performance at a blistering +44.16%, versus a LOSS of -.06% for the Dow Average. That takes my 11-year average annualized performance back to +36.82%. My 11-year total return stood at new all-time high at +401.96%. My trailing one-year return appreciated to +52.23%.

The coming week will be a sleeper compared to the previous one. We also need to keep an eye on the number of US Coronavirus cases and deaths, now over 10 million and approaching 240,000, which you can find here.

When the market starts to focus on this, we may have a problem.

On Monday, November 9 at 12:00 PM EST, US Consumer Inflation Expectations for October are out.

On Tuesday, November 10 at 7:00 AM EST, we get the NFIB Business Optimism Index for October.

Wednesday, November 11 is Veterans Day and I’ll be leading the local parade. The stock market is still open.

On Thursday, November 12 at 8:30 AM EST, the Weekly Jobless Claims are announced. At 9:30 AM EST, the US Inflation Rate for October is released.

On Friday, November 13, at 9:30 AM EST, the US PPI for October is printed. At 2:00 PM we learn the Baker-Hughes Rig Count.

As for me, driving back from Lake Tahoe, I couldn’t help but sadly notice what a terrible wreck the country is in.

Stores everywhere are shuttered and schools are closed down. Many of my favorite businesses and restaurants are gone for good. Parts are unobtainable because someone in the supply chain either went out of business or died. You can’t go anywhere without being swathed in masks and hand sanitizer.

The new president has a big job ahead of him.

Stay healthy.

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

Trade Alert - (TWTR) November 6, 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

November 6, 2020

Tech Letter

Mad Hedge Technology Letter
November 6, 2020
Fiat Lux

Featured Trade:

(IN THE KNOW ABOUT ENPHASE ENERGY)
(ENPH)

In the Know About Enphase Energy

Tech Letter

Tech has been trending downwards for the past 2 months apart from this relief rally celebrating potential gridlock in the senate.

There is a high probability that tech will be dormant in the short-term offering me a great opening to focus on alternative industries adjacent to tech that is also forward-looking.

Despite the global pandemic destroying large segments of the U.S. economy, the solar sector has been a revelation.

This is not much of a surprise for long-time solar industry nerds since a similar decoupling occurred in 2009 when many economics were hard hit by the Financial Crisis of 2008.

Under normal seasonality, the solar industry typically strengthens each quarter with the first quarter being the weakest boding well for the last 2 months of 2020

Enphase Energy, Inc. (ENPH) is the company I would like to fill you in on today and they design, develop, manufacture, and sell home energy solutions for the solar photovoltaic industry in the United States.

Looking forward, Enphase expects third quarter revenues to range between $160 to $175 million.

One of Enphase's critical competitive advantages is that the company operates more as a technology company than a commodity manufacturer.

While other companies do produce its main power inverter product, Enphase has market dominance in the micro-inverter segment.

For residential solar applications, micro-inverters do offer an advantageous alternative. Enphase's shipment growth over the past couple of years is the empirical evidence.

Even more salient, the company avoids ruinous capital expenditures by deploying contract manufacturing similar to peers with proprietary technology.

By leveraging these variables, Enphase has accelerated its high gross margins above 30%.

The company's lower margins last year were in part due to higher expedited shipping costs to satisfy demand but has solved that bottleneck and boosted gross margins to over 40% this year.

Enphase's stable high gross margin is the x-factor.

Most solar module producers have high fixed costs which deteriorate margins and drag down utilization rates.

As a result, not only do shipment gyrate between industry cycles but also gross margin. While Enphase is also exposed to industry fiscal cliffs, high gross margins should be highly constructive even in down years.

During up cycles, Enphase's high gross margins and lower operating structure give it abnormally advantageous earnings leverage.

Enphase's earnings leverage will be even more dramatic once revenue growth reaccelerates after the pandemic filters through the U.S. economy.

Up until now, Enphase has been pigeonholed as an inverter company within the solar industry.

The company did offer a battery storage option, but it was not an overwhelming segment of total revenues.

This may change moving forward after the company's next generation Encharge storage option released lately has shown glimpses of stardom among its competition.

As the election grinds down to a bitter finish, Presidential candidate Biden has already announced a $2 trillion climate plan which obviously would include expanding solar installations and be on the table if Biden eventually claims victory.

While a Democratic blue wave could have opened up an opportunity for sweeping change for US solar companies such as Enphase, flipping the US Senate to Democratic control is not a prerequisite for the solar industry to be successful.

It’s already trending in that direction as a mega growth industry like technology.

Also, the Democrats will try to crowbar in any climate-related infrastructure spending with any potential stimulus bill which could add more dollars behind the solar industry.

If annual residential solar installations double with a slightly higher per home average, about one million homes would be converted to solar annually.

With over 139 million homes in the US, only a small fraction would be converted to produce solar electricity over the next decade or two, even if the US residential solar market doubled.

The main takeaway is that the solar market in the US still has a huge upside under the right policies.

Enphase has a current micro-inverter capacity of 10 million units annually and based on its per-unit assumption of 325 watts, can supply 3.25 GW annually.

Based on comments in the company's second quarter earnings conference call, capacity could potentially be raised to 16 million annually with the expansion of its Mexico-based facility and a new India-based contract manufacturer.

Given the lead time required to ramp, actual shipment capacity next year may only be equivalent to 4 GW. If the company's geographic mix remains steady with last year's 83.9% US exposure, about 3.36 GW would be allocated to the US market. This would represent about 68.6% of the total US residential and commercial market during 2019.

Should the US solar market double due to beneficial policies, Enphase's potential market share will rise above 34%.

This would represent about a 10% increase in US market share from Q4 2019.

Ultimately, Enphase's high margins and fixed cost structure should not be underestimated especially under a systemic industry shift such as a Biden-led US economy laser-focused on green infrastructure.

Enphase is one of a few cost-effective US solar companies with attractive products that could get a boost from favorable governmental policies.

Expanded US market share due to favorable policies could push annual earnings well above any expected scenario.

The secret recipe of high gross margin and low-cost structure make Enphase incredibly leveraged to top-line growth.

Lately, a new storage revenue stream and continued shipment growth in a rapidly expanding solar market should result in overperforming earnings growth.

New storage products will meaningfully add to earnings next year without diluting gross margin and Enphase's high US exposure could benefit under a Democratic administration more biased to renewable energy.

Enphase is an unequivocal buy and hold stock and it’s no surprise that shares are up 400% in 2020 at the time of the writing.

enphase

November 6, 2020 - Quote of the Day

Tech Letter

“Technology is a useful servant but a dangerous master.” - Said Norwegian Historian Christian Lous Lange

Trade Alert - (GOLD) November 6, 2020 - SELL-TAKE PROFITS

Trade 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

November 5, 2020 - MDT Pro Tips

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

November 6, 2020

Diary, Newsletter, Summary

Global Market Comments
November 6, 2020
Fiat Lux

FEATURED TRADE:

(HOW THE UNDERGROUND ECONOMY IS EXPLODING)

November 5, 2020

Biotech Letter

Mad Hedge Biotech & Healthcare Letter
November 5, 2020
Fiat Lux

FEATURED TRADE:

(IT’S GO TIME FOR BIOGEN’S ALZHEIMER’S DRUG)
(BIIB), (LLY), (AXSM), (MYL)

It’s Go Time for Biogen's Alzheimer's Drug

Biotech Letter

Investing in beaten-up stocks in this period of uncertainty demands nerves of steel.

In fact, some biotechnology and healthcare stocks have been left for dead in recent months. Meanwhile, there are others that continue to deliver amidst the ongoing pandemic.

One of them is Biogen (BIIB).

Biogen has been consistently tagged as a high-risk-high-reward stock even before the COVID-19 pandemic started.

However, people seem to miss the fact that the company has relatively low debt and a surprisingly positive free cash flow in the past years.

Since 2019, the banner headline for Biogen has been its experimental Alzheimer’s disease treatment Aducanumab.

Recently, Biogen released promising progress following its decision to submit the Alzheimer’s candidate for a priority review to the FDA. It has also been accepted for review by European health regulators.

Although this move appears risky, the goal is to accelerate FDA’s timeline for Aducanumab.

That is, Biogen’s decision to submit the drug for approval earlier than expected also pushes the decision to an earlier date, which is March 7, 2021.

If approved, then Aducanumab will be the first-ever approved drug for Alzheimer’s disease.

The road to this point was not easy though. Biogen went through a series of failed trials and even a brief period of giving up on the project before the company gave the effort another chance.

Looking at the market opportunity for this sector, Biogen’s about-face no longer comes as a surprise.

For decades now, companies have been looking into ways to at least slow the progress of the condition, treat the symptoms, and offer faster ways to diagnose it.

There is currently no cure for this disease, which is ranked as the sixth leading cause of death in the country and accounts for approximately 2 million deaths globally.

Given that this disease takes years to progress, it means tens of millions of patients live with the condition on a daily basis -- and this sector comprise the target niche for Aducanumab.

In the United States alone, over 5 million people are diagnosed with Alzheimer’s disease annually and this number is projected to increase to nearly triple by 2050.

With all the treatments geared towards Alzheimer’s disease, sales for these products were estimated at $3.5 billion in 2018. This cost is expected to hit a 7.2% compound growth rate yearly until 2030.

If successful, Aducanumab can reach peak sales somewhere between $10 billion and $20 billion.

For context, the annual sales of Biogen today is only under $15 billion.

This underscores the significance of Aducanumab for the company as the drug can more than double its total earnings and even its market capitalization. It can also offer a 3x to 4x jump in Biogen’s share price.

Apart from Biogen, other big names working on an Alzheimer’s treatment are Eli Lilly (LLY) and Axsome Therapeutics (AXSM).

Outside Biogen’s work on Aducanumab, the company also has an impressive asset portfolio.

Its second quarter earnings results for 2020 showed that revenues from its multiple sclerosis drug segment contributed significantly to the company’s profits, with Ocrevus raking in $2.3 billion for the period.

The newly acquired rare spinal muscular atrophy disease drug Spinraza also performed well, reporting approximately $2 billion in annual sales.

Even its embattled multiple sclerosis treatment Tecfidera, which has been facing patent exclusivity issues with generic companies like Mylan (MYL), reported an increase from its notable $1 billion in revenue for the first quarter of the year to $1.2 billion in the second quarter.

Finally, Biogen has been working on expanding its biosimilar segment to increase its competitive advantage particularly for its drugs that are nearing the end of their patent exclusivity.

Amid the pandemic, Biogen’s revenue was up by 1% to hit $3.5 billion in the first quarter of 2020 and increased by 2% to reach $3.7 billion in the second quarter.

The company’s financial results also rose by approximately $100 million in the first three months of this challenging year.

However, a widely known caveat not only for Biogen but also for a number of biotechnology companies is the volatility of the stocks.

There is no one-size-fits-all formula for investing in beaten-up stocks. It comes with zero guarantees that their past performances would make a repeat either.

The strategy for these things though is quite basic. Make sure to look at businesses that offer sufficient bandwidth to bounce back once things normalize and the effects of the pandemic start to ease.

Looking at its overall performance, Biogen has achieved an impressively strong financial position despite the setbacks along the way. The company even offers room for growth regardless of the performance of its much-awaited Aducanumab.