2020 Archive - Mad Hedge Fund Trader

Oil Cataclysm

I spent the day trying to charter a 500,000-tonne oil tanker.

No luck.

If I had found one, I could have bought oil at the close of the market today at negative -$37.78 a barrel and then immediately resold it for June delivery for $21, generating an instant $57.78 a barrel profit. At 7.33 barrels a metric ton that gives me a $211 million profit. All I have to do is keep the oil for a month. Big hedge funds are doing this right now.

When I toured Australia in February, I warned investors that crude would fall from $80 to $10 by 2030, which many called extreme. I warned them to get out of all energy investments immediately, as I have done with you for the past several years. It is an industry that is going the way of the buggy whip maker.

Instead, we saw a move from $80 to negative -$37 in two months. They must think I’m some kind of idiot, clueless about the functioning of this important commodity market, despite having invested and worked in the industry for five years.

Of course, the wild prices are a product of the futures market, where financial derivatives outnumber the underlying physical market by 100 to one. Anyone who buys here today has to take delivery by 2:30 EST on Tuesday. With all the world’s storage and shipping already committed that is impossible. You literally can’t give oil away right now.

All transportation use of oil has virtually ceased. Most airlines are grounded, no ships are sailing, and nobody is driving anymore. Of the world’s potential daily oil supply, we have crashed from 100 million b/d to 65 b/d in two months. It is a move unprecedented in history.

Throwing gasoline on the fire are 16 supertankers which sailed from Saudi Arabia but for which there are no buyers.

This panic is happening in the face of Cushing, Oklahoma’s storage capacity which is now at 61 million barrels and could be at its limit of 78 million barrels in a couple of weeks. Then where does the Texas tea go?

Since June futures are still trading at $21, I believe this carnage is due to the future expiration and should pass in a few days. But unless more storage shows up out of the blue, or the industry shuts in production of 35 million b/d, the Armageddon in the futures market will become a monthly affair.

All eyes are now on the United States Oil Fund (USO), which liquidated all its May oil contracts two weeks ago to avoid precisely this kind of debacle. All longs were rolled forward to June contracts, which expire on May 19, and into July.

(USO) now owns one-third of all June oil contracts. Some $1.5 billion poured into the (USO) last week, which then immediately dropped in value by half.

I know this sounds insane, but if you bought the (USO) at the Monday close of $3.75 and it returns to the $5.00 where it was trading last Thursday and oil was trading at $25 you should be able to make a quick 33% on your money in a few days.

I wouldn’t let this trade grow hair on it. I’ll be selling on the first rally. That’s why I’m only going with a 5% position instead of the usual 10%. Now is not the time to get greedy in the oil market.

Eventually, supply and demand will come into balance from a combination of production cuts and demand increases from a recovering global economy. Best guess is that happens in July or August at the earliest. OPEC has already cut production by 10 million barrels a day for two months and 8 million b/d for the rest of the year. After that, oil could trade back as high as $40 a barrel.

If oil stays this low for too long, the geopolitical implications are immense. There will be a second Russian Revolution, which depends on crude sales for 70% of total government revenues.

Saudi Arabia will go up in flames and the royal family will flee to Geneva, Switzerland where their money is, leaving 34 million citizens to perish. What population did the country support before the post-war oil industry took off in 1950? About 4 million. I remember Saudi Arabia in the 1960s and it was not a pleasant place. People walked barefoot on 150-degree sands.

But I diverge.

At some point, another trade of the century on the long side of oil is out there. But the price of being early is high.

A “BUY” Signal?

April 21, 2020

Biotech Letter

Mad Hedge Biotech & Healthcare Letter
April 21, 2020
Fiat Lux

Featured Trade:

(GETTING YOU BANG PER BUCK WITH ALEXION PHARMACEUTICALS)
(ALXN), (GILD), (RHHBY), (REGN), (SNY)

Getting You Bang per Buck with Alexion Pharmaceuticals

Biotech Letter

Since nobody can actually control when to get sick or what type of disease to acquire, it makes absolute sense that biotech stocks remain one of the wisest bets if you want to put your hard-earned cash to work.

The question, therefore, is what are the best biotech stocks to buy now?

Looking at the biotechnology stock prices today, I can say that Alexion Pharmaceuticals (ALXN) will give you the most bang for your buck.

For over a decade, this ultra-rare-disease biotechnology company had been regularly valued at roughly 22 to 67 times its cash flow and frequently well above 30 times forward EPS.

Now, you can buy this top biotech stock for less than eight times its Wall Street profit consensus in 2021 and 10 times its cash flow for next year as well. It definitely doesn’t hurt that its PEG ratio is less than 1, categorizing it as an “undervalued” stock today.

However, its attractive pricing isn’t the only thing that’s putting Alexion in the news these days as this biotech company has been active in the race to find a coronavirus cure since early February.

When news about the pandemic broke, Alexion decided to repurpose its rare chronic blood disease bestseller Soliris as a potential COVID-19 treatment since the drug showed promising results on patients with severe pneumonia or acute respiratory distress syndrome.

Alexion’s efforts have been quite promising so far, with the biotech company targeting to commence a Phase 2 study of Soliris within the month. What we know so far is that this experiment will involve 10 patients as part of the proof-of-concept trial.

Apart from Alexion, other top biotech companies repurposing old drugs in search of a COVID-19 cure are Gilead Sciences (GILD) with Remdesivir, Roche (RHHBY) with Actemra, and Regeneron (REGN) and Sanofi (SNY) with Kevzara.

Outside its coronavirus treatment efforts, Alexion actually prides itself on a promising pipeline. To date, three treatments are projected to turn into blockbusters soon.

The first is Strensiq, which is formulated to treat a rare disease commonly known as hypophosphatasia. Patients with this disorder have an enzyme deficiency, making them unable to properly process calcium and phosphorus. As a result, they end up with malformed bones and teeth.

The second treatment is Kanuma, which is for patients suffering from lysosomal acid lipase (LAP) deficiency. People with this condition lack a key enzyme, preventing them from effectively breaking down fats.

Both conditions are extremely rare. Hypophosphatasia affects only 1 in 100,000 people while LAP is suffered by 1 in 40,000 individuals.

The third treatment is Ultomiris, which is widely regarded as Soliris’ successor.

For years, Soliris has been Alexion’s major moneymaker. However, uncertainties on the company’s hold on its patent exclusivity have started to shake investors’ faith in this stock. With one of Soliris’ key patents set to expire in 2021, the biotech company has to brace itself for the onslaught of generic competition.

This is where Ultomiris comes in.

Alexion has been busy migrating its customers to opt for Ultomiris before Soliris’ key patent expires.

To make this offer enticing, the biotech company has priced the newer drug to be slightly cheaper than the old blockbuster. Ultomiris costs $458,000 while Soliris is priced at $500,000.

To sweeten the deal further, the newer treatment is only required once every eight weeks. In comparison, Soliris’ treatment schedule is bi-monthly.

Basically, it’s as if Alexion has effectively restarted the clock in its patent exclusivity on this ultra-rare disease indication. The company aims to convert at least 70% of its users by mid-2020.

From a financial point of view, Alexion is performing quite well. Its fourth-quarter report showed that the company earned $1.4 billion in revenues, demonstrating a 23% increase from the same quarter in 2018.

Meanwhile, it raked in $5 billion in full-year sales for 2019. This indicated a 21% jump from its relatively paltry sales of $4.1 billion.

Looking at the metrics, Alexion is one of the surprisingly cheap stocks considering its growth. It also has the added bonus of dominating its chosen ultra-rare disease space.

This is typically a good strategy to avoid competition while also being able to seek high price points for its innovative treatments. The fact that insurers generally cover these treatments all but guarantees that Alexion is secure in terms of cash flow predictability.

Despite the panic induced by the coronavirus market, investing opportunities are everywhere --- if you know where to look.

Alexion is a solid company with strong growth prospects and is selling at a reasonable price. Any opportunistic investor worth his salt would know that this is the ideal time to strike.

Trade Alert - (SFIX) April 20, 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

Trade Alert - (USO) April 20, 2020 - BUY

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

Trade Alert - (FISV) April 20, 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

Trade Alert - (LYFT) April 20, 2020 - SELL-TAKE PROFITS

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

Trade Alert - (VXX) April 20, 2020 - SELL-STOP LOSS

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

April 20, 2020

Tech Letter

Mad Hedge Technology Letter
April 20, 2020
Fiat Lux

Featured Trade:

(THE HYPER-ACCELERATION OF 5G)
(AMZN), (5G), (CCI), (MSFT), (NFLX), (APPL)

The Hyper-Acceleration of 5G

Tech Letter

I will explain to everyone why a wonky side effect of coronavirus is supercharging the 5G revolution.

Market valuations reflect the state of expected future cash flows in a company.

Under this assumption, some could argue that most tech companies with staying power are almost a good buy at any price.

No brainers would include a list of Microsoft, Amazon, Apple, and Netflix.

The health scare and the carnage associated with it have brought forward the tech industry as a whole to the forefront of the global economy.

When you mix that with the Fed hellbent on saving everything that has a heartbeat, it sets up conditions for heavy buying in an industry that is going to be king of the global economy anyway.

It is not a question of if, but when and the health phenomenon has accelerated the dramatic migration to tech by showing how business will be conducted in about 15 years.

The change took place in a blistering 4 weeks.

The clearest signal of who is really calling the shots in the equity market is looking at which companies are dragging it up.

Technology is shouldering the responsibility of the equity market by outperforming the broader market with many software companies’ share price higher than before the crisis.

For every Amazon or Microsoft, there is also a Macy’s or JC Pennys showing that this is really a stock pickers market.

We have not only learned that tech companies are critical to our functioning as a society, but that large tech companies will be even more central than before even if they are currently losing gross revenue.

The relative gains to tech stemming from the coronavirus is equal or greater than an innovation of a game-changing product and will double the effect of 5G.

We are setting up for the Golden Age of 5G with tech poised to invade even more of the broader equity market.

One rough estimate notes that the 5G industry is expected to add about $40bn in incremental revenue to the semiconductor industry, add 5X growth in mobile data monthly traffic by 2024, and a $4.2tn boost to global economies from revenue streams connected to 5G in the next ten years.

I do agree that currently, the network effect is working in reverse order, but the positive force multiplier, when the economy is riding high again, cannot be emphasized enough.

Digital revenue streams will effectively be pumped into every nook and crevice of the digital economy because of current modifications to the business environment.

When business does come back online, investors of physical assets will sell what they can at discounted prices to get into the digital ecosystem causing asset prices to explode as investors chase prices to the sky.

Do you remember commercial real estate guru and Colony Capital’s CEO Tom Barrack?

The company hoped to sell as much as 90% of its $20 billion property portfolio of hotels, warehouses, and other commercial real estate by the end of 2021.

They are also another big investor in nursing homes.

A real-estate pioneer who founded Colony in the early 1990s and is the firm’s chief executive and executive chairman, Barrack said he wanted to go “all digital.”

Rejigging the 29-year-old investment company represented an extreme response to the way technologies have been dismantling cash flow for most every type of commercial real estate, and Barrack was met with fierce backlash from entrenched stakeholders regarding the new direction.

Commercial real estate and hotel operators have had to fight against the triple whammy of office sharing WeWork, short-term hotel platform Airbnb, and the coronavirus - a lethal three-part cocktail of malicious forces to the “traditional” model.

The coronavirus has proven Barrack was spot-on with his synopsis, but he wasn’t able to get rid of Colony’s inventory of commercial real estate in the expeditious way he desired.

Other companies have taken a direct hit like 24-Hour Fitness who are pondering filing for bankruptcy, but I could say the same for a slew of companies like Colony Capital.

Another key manifestation of the current economic malaise is that regulators, antitrust, tax, foreign and all of the above are less likely to disrupt big tech companies moving forward considering they may be the only ones able to get us out of a similar crisis in the future.

Government officials will be under rapid pressure to boost GDP levels and crimping big tech is counterintuitive to this overall goal.

I don’t agree with the glass half empty crowd who believes Amazon needs to be clamped down because of dominating retail during the time of the virus - if Amazon didn’t exist, the panic could have accelerated to an uncontrollable level creating anarchy in the streets.

The big boys have pushed soft power as a legitimate policy tool with Apple sourcing over 20 million face masks and is now building and shipping face shields.

Big tech is becoming like a mini-government in its own right.

Granted that thousands of bankruptcies from restaurants, nail salons, and yoga studio will be swept into the dust bin of economic history, but once the next iteration of the economic cycle turns up, tech is about to go gangbusters in a way many never thought imaginable.

Then if you bake a little 5G into the pecan pie, investors are justified to be salivating about the tech industry’s prospects.

Any deep-pocketed investors should be cherry-picking every quality 5G tech play possible because they will be the most supercharged sub-sector of tech once the economy is reset.

Any long-term investor with a pulse should buy Crown Castle International Corp. (REIT) (CCI) on any and all dips.

They are the largest owner of cell towers owning over 40,000 in the U.S.

<img decoding="async" class="aligncenter wp-image-146926" src="https://madhedgefundtrader.com/wp-content/uploads/2020/04/oil.png" alt="" width="402" height="266" /> A “BUY” Signal?

A “BUY” Signal?