“All of technology, really, is about maximizing free options.” – Said Risk Analyst Writer Nassim Nicholas Taleb
Global Market Comments
June 28, 2021
Fiat Lux
Featured Trade:
(BACK FROM MY 50-MILE HIKE)
I received an email from a reader last week that I really had no idea what the stock market was going to do and that I was just guessing.
I answered that I couldn’t agree more. These are unprecedented times for the American economy. There is no playbook for what is going on, we’re just making it up.
“I’m guessing, Jay Powell is guessing, we’re all guessing.” I threw in an afterthought: “guessing and hoping.”
That is why the hottest inflation rate in 13 years sends interest rates into freefall when they should be soaring.
I have been one of the most bullish strategists in the market since the March 2009 low and have been richly rewarded as a result. (Even though being bearish sells more newsletters). You have been too.
I thought the market was overdue for a 7.8% correction. So, even I was flabbergasted when the latest market selloff amounted to only a meager 4.3%. There is still so much money trying to get into the market it is unable to go any lower.
Don’t get fooled again, to quote that eminent market guru, Peter Townsend.
Which raises an issue for investors. That 7.8% correction I thought was overdue is still ahead of us. That demands caution and prudence for shorter term investors. Long term investors can work on their golf swings or take that dreamed of round the world cruise.
What was especially encouraging last week was the leadership maintain by the big five tech stocks. I ran some numbers last week to see if there was more than meets the eye and came up with some eye-popping results.
The rocket fuel last week was provided by progress by an infrastructure bill that could unleash another $579 billion. That could be enough stimulus to keep the recovery on steroids powering well into 2022.
Big tech stocks saw this a month ago when they started discounting robust 2023 earnings reports much farther in advance than usual.
The top five big tech companies, Apple (AAPL), Amazon (AMZN), Alphabet (GOOGL), Facebook (FB), and Microsoft (MSFT), earned a staggering $88 billion in profits in Q1, or an annualized $332 billion.
That amounts to an average 40% YOY growth rate. Some 16.7% of total US profits of $1,984 billion was generated by only 2% of the workforce. These are positively ballistic numbers. Tech was never going to be down for long. That’s why most went to new all-time highs last week.
Don’t get fooled again.
The Infrastructure Deal is done, at $579 billion in new spending, will provide a further boost to the economy. The climate had to be cut to get Republican support. Transportation is the big winner at $312 billion. Grid and broadband upgrades received major funding. I don’t think that Biden expected to get his whole $2 trillion. It was just a negotiating strategy. Still, something is better than nothing. Look for Infrastructure 2.0 after the 2022 midterms with lots of climate spending.
NASDAQ Hit New High. Prime day has catapulted Amazon (AMZN). Microsoft (MSFT) became the second $2 trillion company and Alphabet (GOOGL) will probably be next. Apple (AAPL) is bringing up the rear but could hit new highs in the coming months. The big question is whether this is a one-night stand or a long-term relationship with the bull. Me, being the stable guy that I am, vote for the latter.
Poof, Inflation is Gone! Almost all commodity prices have given up their 2021 gains after traumatic selloffs over the past weeks. Bad boy lumber has dropped by half, and bitcoin has been slaughtered. That puts interest rate hikes on hold. In the meantime, Tesla (TSLA) and the Ark stocks are recovering. Load the boat with big tech, we are going to new all-time highs across the board. Turns out the Fed was right after all.
Weekly Jobless Claims drop to 411,000, down from the pandemic peak of 900,000 in January. We’re headed to 100,000 by yearend.
$1.2 Trillion Poured into Equities in H1, more than double the previous 2007 record. Corporate share buybacks are also approaching new highs. That means the 150-day moving average for the (SPY) should hold well into 2022. As high as we are, equities are still the best game in town.
Bitcoin battles at $30,000, for the fourth time in two months, at one point falling to a $24,000 low. China miners, about 70% of the total, are facing a total ban. Many loaded their servers on planes over the weekend and moved to unregulated Maryland or Virginia. The charts are pointing towards a $20,000 bottom. The ultra bulls are targeting $100,000 by yearend.
Existing Home Sales down for the fourth month, down 0.9% to an annualized 5.8 million in May. Shortage of supply remains the big problem with inventories at an incredible 2.5 months. Some 89% of the homes sold were on the market for less than a month. Conditions will get a lot worse before they get better.
New Home Sales dive 5.9%, thanks to shortage of supply and high prices. Labor, land, and lumber are through the roof. The median price of a home sold in May is $374,400, up a staggering 18% YOY. Supplies rose to 5.1 months. The cure for high prices is high prices. This trend should last a decade.
Amazon Prime Day Sales top $11 billion, including the Havaheart 0754 single door humane rabbit trap I bought for only $27. That made Monday and Tuesday the biggest online sales days of the year. Use the recent profit-taking to load up on (AMZN) shares and LEAPS. It’s headed to $5,000. Oh, and I’ve caught three rabbits so far.
Intel to build huge German chip factory,to address the global shortage. Germany’s largest auto industry makes it a natural location. Buy (INTC) on dips.
NVIDIA is going ballistic, with Raymond James raising its target to $900 as the best-positioned chip company over the long term. I was early at $1,000. The explosion in crypto has been a big plus. A new generation of high-end gaming is coming where (NVDA) has a complete monopoly and supplies are short. I have bought six of their GeForce and RTX graphics cards in the past month. But artificial intelligence is the big grower over the long term, which is exploding everywhere, and their $5,000 Tesla M10 GPU is dominant. Buy (NVDA) now.
We may lose Christmas, as lack of containers and ships makes transport from China problematic. Home Depot (HD) has chartered its own ship to make up for the shortfall, and Target (TGT) is considering the same. Conditions are so bad there is also a fireworks shortage for the Fourth of July where China is a major supplier (they invented them).
My Ten Year View
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 Mad Hedge Global Trading Dispatch profit reached 0.71% gain so far in June on the heels of a spectacular 8.13% profit in May. That leaves me 100% in cash.
My 2021 year-to-date performance appreciated to 68.60%. The Dow Average is up 12.62% so far in 2021.
I spent the week sitting in 100% cash, waiting for a better entry point on the long side. Up this much this year, there is no reason to reach for the marginal trade, the maybe instead of the certainty. I’ll leave that for the Millennials.
That brings my 11-year total return to 491.15%, some 2.00 times the S&P 500 (SPX) over the same period. My 11-year average annualized return now stands at an unbelievable 42.70%, easily the highest in the industry.
My trailing one-year return exploded to positively eye-popping 123.54%. I truly have to pinch myself when I see numbers like this. I bet many of you are making the biggest money of your long lives.
We need to keep an eye on the number of US Coronavirus cases at 33.1 million and deaths topping 600,000, which you can find here. Some 33.1 million Americans have contracted Covid-19.
The coming week will be a weak one on the data front.
On Monday, June 28 at 10:30 AM, the Dallas Fed Manufacturing Index for June is out.
On Tuesday, June 29 at 9:00 AM, the S&P Case Shiller National Home Price Index is published.
On Wednesday, June 30 at 8:15 AM, the ADP Private Employment Report is released.
On Thursday, July 1 at 8:30 AM, the Weekly Jobless Claims are published.
On Friday, July 2 at 8:30 AM, the all-important June Nonfarm Payroll Report is announced. At 2:00 PM, we learn the Baker-Hughes Rig Count.
As for me, I’m in Los Angeles this week visiting old friends, and I am reminded of one of the weirdest chapters of my life.
There were not a lot of jobs in the summer of 1971, but Thomas Noguchi, the LA County Coroner, was hiring. The famed USC student jobs board had delivered! Better yet, the job included free housing at the coroner's department.
I got the graveyard shift, from midnight to 8:00 AM. All I had to do was buy a black suit from Robert Halls for $25.
Noguchi was known as the “coroner to the stars” having famously done the autopsies on Marlin Mansfield and Jane Mansfield. He did not disappoint.
For three months, whenever there was a death from unnatural causes, I was there to pick up the bodies. If there was a suicide, gangland shooting, or horrific car accident, I was your man.
Charles Manson had recently been arrested and I was tasked with digging up the victims. One, cowboy stuntman Shorty Shay, had his head cut off and neatly placed in between his ankles.
The first time I ever saw a full set of women’s underclothing, a girdle and pantyhose, was when I excavated a desert roadside grave that the coyotes had dug up. She was pretty far gone.
Once, I and another driver were sent to pick up a teenaged boy who had committed suicide in Beverly Hills. The father came out and asked us to take the mattress as well. I regretted that we were not allowed to do favors on city time. He then said, “Can you take it for $200”, then an astronomical sum.
A few minutes later found a hearse driving down the Santa Monica freeway on the way to the dump with a double mattress expertly tied on the roof with Boy Scout knots with a giant blood spot in the middle.
Once, I was sent to a cheap motel where a drug deal gone bad had produced several shootings. I found $10,000 in a brown paper bag under the bed. The other driver found another ten grand and a bag of drugs and kept them. He went to jail. Eventually, I figured out that handling dead bodies could be hazardous to your health, so I asked for rubber gloves. I was fired.
Still, I ended up with some of the best summer job stories ever.
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Mad Hedge Technology Letter
June 23, 2021
Fiat Lux
Featured Trade:
(IGNORE THE GOOGLE COMPLAINTS)
(GOOGL), (AAPL), (MSFT), (FB), (AMZN)
Another part of the tech bull case that gets overlooked is the more than $700 billion in buyback authorizations that could manifest itself in tech shares in the near term.
Right now, that buyback authorization is holding steady at $500 billion but primed to grow.
This powerful combination of shareholder returns and continuous strong earnings are likely meaningful catalysts that could take us to higher highs in technology stocks later in the year.
Certainly, we have seen a massive rotation back into growth stocks the last few weeks that have buoyed tech shares.
The likes of PayPal (PYPL) are bouncing off technical weakness.
Just take a look at Apple which is the buyback alpha male of the S&P this year and trailing 12-months.
When you consider that apart from the dividends and buybacks, they generate over $110 billion in free cash flow, it’s hard not to like the stock.
Apple itself has authorized $90 billion in buybacks and the company is the biggest in the world.
Yes, the stock underperforms sometimes, but don’t overthink this name.
Apple is easily a $170 stock with no sweat.
The iPhone maker repurchased $19 billion of stock in the March quarter, bringing the total for the past fourth quarters to around $80 billion.
Luca Maestri, the company’s chief financial officer, said in a conference call that “we continue to believe there is great value in our stock and maintain our target of reaching a net cash neutral position over time.”
That is code for many buybacks in the near to medium term and investors must love it.
Apple had $83 billion of net cash at the end of the quarter.
Apple’s aggressive stock buyback plan is one reason that Berkshire Hathaway CEO Warren Buffett is so interested in the company.
Berkshire (BRK.A and BRK.B) holds a 5% stake in Apple and is one of its largest investors.
The same thing is happening at other tech firms.
Google repurchased a record $11.4 billion of stock in the quarter, up from $8.5 billion a year earlier, and Facebook (FB) bought back $3.9 billion, triple the total a year ago.
Apple’s share count declined by almost 4% year-over-year and by over 20% since the end of 2016.
With its elevated repurchase program, Alphabet is slicing into its share count, which fell almost 2% year-over-year in the March quarter. The buybacks are comfortably exceeding Alphabet’s ample issuance of stock compensation to employees. Alphabet authorized an additional $50 billion of stock repurchases.
Facebook’s buyback program hasn’t dented its share count, which was little changed year-over-year at 2.85 billion.
Microsoft (MSFT) is making more headway, with its buyback reducing its share count by nearly 1% in the past year. Microsoft bought back about $7 billion of stock in the March quarter and $20 billion in the first nine months of its fiscal year ending in June.
Apple and Microsoft also return cash to holders through dividends, although both now have yields under 1%. Alphabet and Facebook don’t pay dividends.
Although buybacks have not yet reached pre-health crisis levels, the trend seems to be heading in that direction.
Tech firms are ratcheting up the buybacks, meaning they are comfortable expending that cash in the current economic climate as opposed to holding onto it as reserves or using it for R&D.
There is always unpredictability in the economic environment, but these tech stocks are saying, things are a lot better than 2020 and there are many CFOs out there pulling the trigger on dividends, buybacks, and reducing share count which is a highly bullish signal to the rest of the tech market.
Since 2009, asset inflation has gripped global equity funds everywhere and the most convincing winner in terms of asset classes has to be the Nasdaq index which has experienced a 900% return during that 12-year time span.
You must believe that buybacks are just another reason why this overperformance of 900% has happened.
Tech is still where almost all earnings’ growth resides and that capital flow is being recycled into shareholders’ pockets and catalyzing tech CFOs to execute financial gymnastics by reducing share count.
It’s hard to discount that strength which is why there are always buyers on the dips whether that buyer is a domestic pension fund, short-term speculator, a multibillion-dollar family office, or a foreign hedge fund.
“The only constant in the technology industry is change.” – Said CEO of Salesforce Marc Benioff
Global Market Comments
June 25, 2021
Fiat Lux
Featured Trade:
(BACK FROM MY 50-MILE HIKE)
I realized that perhaps I had bitten off too much taking the Boy Scouts on a 50-mile hike one minute into the adventure.
Cutting everything to the bone, I was only able to trim my pack down to 50 pounds. That was with chopping my food ration in half, leaving an extra cell phone battery behind, and bringing only one set of clothes.
However, I had to bring a five-pound first aid kit to care for the 14 scouts, my own tent, and all the maps needed to keep us on course.
Then at the last minute, another five pounds of medical releases, a satellite phone, and an electronic thermometer were dumped on me by worried parents, taking my load up to a bone-breaking 55 pounds.
That’s a lot for a 68-year-old. That’s a lot for anyone.
But then the Desolation Wilderness, the roof of the High Sierras, is one of the most stunningly beautiful places on the planet. All other outdoor trips for the Boy Scouts this year had been cancelled, thanks to the pandemic. And at my age, who knows how many 50-mile hikes I have ahead of me? It was now, or maybe never.
But then the Desolation Wilderness, the roof of the High Sierras, is one of the most stunningly beautiful places on the planet. All other outdoor trips for the Boy Scouts this year had been cancelled thanks to the pandemic. And at my age, who knows how many 50-miles hikes I have ahead of me? It was now, or maybe never.
We took temperatures every morning. All 50 miles were hiked with masks, as did every other group we ran into. Carpooling was banned and every parent had to bring up their own kid to Lake Tahoe. It all worked as no one got sick.
We didn’t do just any 50-mile hike. We attacked one of the toughest in the United States. The first two days demanded a 3,200-vertical climb, from Meeks Bay to Phipps Pass, from 6,200 to 9,400 feet. The kids barely noticed the altitude. The adults did.
The Desolation Wilderness (click here for permits at https://www.recreation.gov/permits/233261 ) is a 50-mile by 30-mile slab of granite left behind by the last ice age. It is graced with 100 brilliant blue lakes. It looks like a giant’s playground, with enormous boulders and huge fallen trees scattered about the landscape.
Black bears were an ever-present danger, as the area was undergoing an unprecedented “bear bloom.” Other hikers reported being harassed all night by the ursine creatures, one even invading a tent in search of food. A Cliff Bar beats clawing termites out of a dead log any day.
However, we observed the strictest of bear practices, bagging our food every night and hanging it from tall trees. It became our nightly entertainment, to see who could do the best bear bag hang. Of course, getting it down the next morning was another story.
The area had changed a lot since my grandfather brought me up to Desolation 60 years ago with a horse, a mule, a Winchester, and all the fishing gear we could carry. Then wilderness survival meant bringing in plenty of canned food and a nice 16-inch iron skillet, not the tasteless freeze-dried versions of today.
You never saw a single soul for a week. You caught your full limit of ten rainbow and brook trout as fast as you could bait the hooks. For fun, we would rummage through old log cabins outfitted with potbellied stoves for 100-year-old supplies left behind by the 19th century California gold rush. Once, we even found a crashed airplane that had been missing since the 1930s.
Nobody ever went up there.
This time around, we passed other hikers once an hour. Every lake was completely fished out. In fact, the park saw record crowds with people flocking to the safety of the great outdoors to flee the epidemic at home. Inexperienced with the outdoors, they attracted even more hungry bears.
The scouts developed a daily routine of cooking breakfast, breaking camp, hiking ten miles, searching for the ideal camping spot, setting up tents, and cooking dinner. In the process, they learned organization, self-sufficiency, responsibility, and survival skills. They don’t teach these in schools anymore.
Free time was spent playing cards for food. Winners accumulated highly sought-after beef stroganoff. The losers ended up with the despised chicken tetrazzini. I stuck to my granola bars.
On the last day, we straggled back to Meeks Bay worn, bleeding, exhausted, but exhilarated. Every morning, we woke up to a Christmas calendar view. The parents couldn’t believe we finished the entire challenging 50 miles without a major injury.
I was especially proud of my own 15- and 16-year old daughters, who are probably the first girls to ever complete a 50 miler in a Boy Scout event. The apples don’t fall far from the tree.
Everyone became eligible for the elite Boy Scout 50-Mile Patch, which few in the scouting movement ever achieve.
During much of the week, scouts were carping about the difficulty of the trail, the mosquitoes, and the sparse offerings of food. They fantasized about the first thing they would eat on return to civilization (banana split, pancakes with whipped cream, a Big Mac, or all three).
By the end of the week, they were talking about the next 50-mile hike. With their 2021 spring break trip to the Boy Scout Florida Sea Base cancelled, suddenly California’s Lost Coast looks very inviting.
That is, providing we can deal with the bears and the mosquitoes.
Mad Hedge Biotech & Healthcare Letter
June 24, 2021
Fiat Lux
FEATURED TRADE:
(AN ANIMAL HEALTH CARE STOCK WORTH A LOOK)
(ZTS), (PFE), (ELAN), (LLY), (IDXX), (CHWY), (FRPT)
The animal health industry has been expanding rapidly over the past years, particularly on the pet side.
If you’re treating your pets more like people, then you’re part of the growing number of customers doing the same thing.
While the “humanization” of animals has actually been going on for years, house pets have made an inexorable transition from the backyard to the couch as more and more people treat their pets as family, especially during the pandemic.
Sales for pet supplies continue to surge as pet owners splurge on everything for their furry friends, from kibble to supplements.
In fact, animal health product sales went up 7% in 2020, generating roughly $11 billion despite the pandemic—a trend that’s expected to gain even more momentum as retail sales start to shift from vet clinics to stores and online platforms.
Pfizer’s (PFE) spinoff company, Zoetis (ZTS), is the undisputed leader in the animal healthcare industry with a proven track record and a rich history spanning 65 years.
The way the company handled the challenges in 2020 showcased its ability to not only rise to the occasion but also turn red-hot despite the setbacks.
Meanwhile, Zoetis stock experienced continuing growth in 2021.
Revenues from its Simparica franchise, which fights off heartworms and other parasites in dogs and cats, grew by 133% year-on-year in the first quarter of 2021 thanks to its expansion in the US, Europe, Australia, and Canada markets.
Next to the US, Zoetis’ biggest market is China. In the first quarter of this year, the company saw a 75% climb in its revenues in the region, raking in $123 million for the period.
Simparica Trio, which generated $90 million in the first quarter alone, also received approvals in new markets, such as Japan and Mexico.
Its predecessor, Simparica, also continues to rake in good numbers, with $74 million in sales during the same period.
However, another player appears to be making big moves to dethrone the company.
Elanco Animal Health (ELAN), which is a spinoff of Eli Lilly (LLY), struck an impressive $440 million deal to acquire Kindred Biosciences (KIN) in an effort to bolster its drug pipeline.
This deal, which is expected to close in the third quarter of this year, will focus primarily on Elanco’s pet dermatology segment.
The move to invest in dermatology is a great decision for Elanco. Dermatology has become one of the fastest growing divisions of pet care.
For context, Zoetis’ 2020 revenues for this segment reached $925 million, recording a $170 million boost from its 2019 earnings.
The dermatology segment grew 24% year on year in the first quarter of 2021 as well, recording $245 million in revenues for this period.
Looking at the performance of the products in this segment, Zoetis is on track to exceed the $1 billion revenue estimate for 2021.
Outside its dermatology segment, Zoetis also enjoyed a 47% year-on-year growth in its diagnostics sector in the first quarter—a trend that’s anticipated to improve in the long run due to the company’s continuous expansion globally.
Zoetis stock is projected to continue its momentum throughout 2021 and well beyond 2022.
For this year, the company estimates revenue growth by 9% to 11%, which would be driven by the pet care segment, additional product launches, and rising demand for their existing drugs. The reopening of the economy also plays a key role in this growth.
Other than Elanco and Zoetis, some companies working on dominating the booming animal health care sector include Idexx Laboratories (IDXX), Chewy (CHWY), and FreshPet (FRPT).
Overall, Zoetis stock has offered excellent returns for its investors. Looking at its pipeline programs and future plans, the company shows great potential for growth in the coming years.
Investors on the lookout for a stock in the animal health industry would be wise to take Zoetis into serious consideration.
