Mad Hedge Technology Letter
October 22, 2021
Fiat Lux
Featured Trade:
(BOMBSHELL HITS AD TECH)
(SNAP), (FB), (GOOGL), (AAPL)
So, first the good news — SNAP expanded revenue by 57% year-over-year.
It was only a few years ago that this tech company was the backwater of social media, but it’s done its bit to catch up with the crowd.
SNAP targets the 18–29-year-olds and although not minted, there are pathways for a lifetime of revenue generation from this cohort.
In a rough environment battling Google (GOOGL) and Facebook (FB) and despite these challenges, they crossed $1 billion in quarterly revenue for the first time.
That was the good news and now you might want to cover your ears so put on those earmuffs.
The reason SNAP missed guidance by $3 million was because there have been changes to advertising tracking in Apple’s iOS system.
These ongoing changes to digital advertising were introduced as part of iOS 14.5 and were announced ahead of time, and now that move is started to suppress the bottom line for the social media giants.
SNAP anticipated some degree of business disruption, and unfortunately, their provided measurement solution did not scale as expected.
Basically what’s happening is that it’s more difficult for advertising partners to measure and manage ad campaigns for iOS.
Advertisers are no longer able to understand the impact of their unique campaigns based on things like the time between viewing an ad and taking an action or the time spent viewing an ad.
Real-time campaigns and creative management are hindered by extended reporting delays and advertisers are unable to target advertising based on whether or not people have already installed an app.
Without these business analytics, SNAP’s platform is less attractive because sale conversions are a great deal lower.
This impact was compounded by the ongoing macroeconomic effects of the global pandemic with advertising partners facing a variety of supply chain interruptions and labor shortages.
The ongoing magnitude and duration of these global supply and labor disruptions are inherently unpredictable.
Also, businesses do not have the inventory or operational capacity to support incremental demand.
SNAP expect customers to cut marketing budget given the diminished need to drive incremental demand at a time when supply chains are not able to operate at peak capacity.
This in turn that reduces their short-term appetite to generate additional customer demand through advertising at a time when their businesses are already supply-constrained.
The big question is: how bad will the Apple changes impact SNAP in the future?
SNAP is down 25% in today’s trading and that’s just them.
Facebook is down around 6% and Google is also off 3%.
Apple has signaled that they aren’t willing to accommodate the tracking techniques of the social media companies.
Clearly, investors are worried about the magnitude of the drop in shares, and this does a great deal to kill the momentum in the stock.
This isn’t the end of the world because I would like to point out that these changes happened in June and July, yet SNAP was still able to grow revenue by 57% year over year.
But I will say this will crimp the growth elements in the business model and lower the ceiling.
Growth rates of high 50% could start trending towards the lower 40% and investors hate that.
The company is still quite small — less than $90 billion of market cap.
This is exactly what SNAP didn’t want because comparatively speaking, Google and Facebook will be able to absorb this better with their war chest of capital readying itself to plug in the gaps.
The stock essentially gave back a year of performance in one morning, but I do view this as a buying opportunity and readers who have a long-term view will certainly profit once SNAP work itself through this problem, but it will be closer to a crawl up than big gaps up in prices.
“In the old world, you devoted 30% of your time to building a great service and 70% of your time shouting about it. In the new world, that inverts.” – Said Founder and CEO of Amazon Jeff Bezos
Global Market Comments
October 22, 2021
Fiat Lux
Featured Trade:
(OCTOBER 20 BIWEEKLY STRATEGY WEBINAR Q&A),
(DIS), (TLT), (TBT), (FXI), (BABA), (BIDU), (JD), (USO), (JPM), (MS), (GS), (BITO), ($BTCUSD)
Below please find subscribers’ Q&A for the October 20 Mad Hedge Fund Trader Global Strategy Webinar broadcast from the safety of Silicon Valley.
Q: Why are stocks so high? Won’t inflation hurt companies?
A: Inflation hurts bonds (TLT), not companies, which is why we are short the bond market and have been short for most of this year. Inflation actually helps companies because it allows them to raise prices at a faster rate. The ability to raise prices is the best that it’s been in 45 years, and that is enabling them to either maintain or increase profit margins.
Q: Where is all this liquidity coming from to drive the stocks high after the Fed ends Quantitative easing?
A: In the last 20 years, the liquidity of the US has gone from 6% of GDP to 47% of GDP. That is an enormous increase, and most of that money has gone into stocks and real estate, which is why both have been on a tear for the last 11 years. And I expect that to continue; the Fed isn’t even hinting at taking liquidity out of the system until well into 2023. On top of that, you have corporate profit exploding from $2 trillion last year to $10 trillion this year, adding another $8 trillion to the system, and outpacing any Fed taper by a five to one margin. Corporations alone are using these profits to buy back more than $1 trillion of their own stock this year.
Q: I’m hearing so much about the supply chain problems these days. Is that just a short-term fixable problem or a long-term structural one?
A: Absolutely it’s short-term. This actually isn’t a pandemic-related problem but a private capital investment one. It’s being caused by the record growth of the US economy which is sucking in more imports than it has ever seen before. We’ve actually exceeded pre-pandemic levels of imports a while ago. Import infrastructure isn’t big enough to handle it. If it was there wouldn’t be enough truckers to handle it. We had a shortage of 50,000 truckers before the pandemic, now we’re short 100,000. Some of these guys are making up to $100,000 a year, not bad for a high school level education. Expect it to get worse before it gets better, but it will get better eventually. That is why Amazon is having trouble, because supply chain problems may bring a weak Christmas, which is the most profitable time of year for them. If we get any big selloff at Amazon for this reason, you want to buy that bottom because it’ll double again in 3 years.
Q: Walt Disney (DIS) has pretty much sideways the whole year around $70, is this going down or should I buy?
A: I would look to buy but I would buy an in-the-money LEAPS, like a $150-$170 one year out. Disney’s been hit with a lot of slowdowns lately, slowdowns with park reopening, movie releases, new streaming customers. But these are all temporary slowdowns and will pick up again next year. Disney is the classic reopening play, so you will get another bite at the apple with a second reopening. Maybe “bite of the mouse” is a better metaphor.
Q: Global growth is down because of China (FXI) with their PMI under 50; do you think they will drag down the entire global economy in 2022?
A: No, if we recover, their largest customer, they will recover too. Remember their pandemic cases are only a tiny fraction of what ours were, some 4,000 or so, and their economy is still export-driven. You can't have major port congestion in Los Angeles and a weak economy in China, those are just two ends of one chain. I would look for a recovery in China next year. As for the stocks, I don’t know because that’s an entirely political issue; Baidu (BIDU), (JD), and Alibaba (BABA) are still getting beaten like a redheaded stepchild. We don’t know when that’s going to end; it’s an unknown. So, stand aside on Chinese plays, especially when the stuff at home is so much better with all these financials and tech stocks to invest in.
Q: What do you think about meme stocks?
A: I think you should avoid them like the plague. When there are so many good quality stocks with long term uptrends, why bother dumpster diving? You’re better off buying a lottery ticket.
Q: Which US bank should I invest in?
A: If you want the gold standard, you buy JP Morgan (JPM) which just announced blowout earnings. If you want a broker, go for Morgan Stanley (MS), which also just announced blowout earnings last week. And I want you to make my monthly pension payment secure, as it comes from Morgan Stanley. Keep those checks coming!
Q: Are we headed to $150 oil (USO)?
A: No, what we’re seeing here is a short-term spike in prices due to supply chain problems, OPEC discipline, a booming economy, and Russia trying to squeeze Europe on energy supplies. I don’t see it continuing much per year as the stocks could be popping out, so avoid oil and energy plays. The solar plays, like (TAN), (FSLR), and (SPWR) on the other hand, all look like they have miles to go.
Q: You said in your Webinar that you can still get a 50% Return on the United States Treasury Bond Fund (TLT) LEAPS. Can you give me the specifics?
A: If you went a year out on Tuesday when I recorded this webinar, you could buy the (TLT) October 2022 $150-$150 vertical bear put spread for $3.40 for a maximum profit on expiration at $5.00 of $47%. That’s where you buy the $155 put and sell short the $150 put against it. Since then, bonds have fallen by $3.00, and it is now trading at $3.60 giving you a 39% return. Try to establish this position on the next (TLT) rally.
Q: What is your yearend target for Bitcoin?
A: Now that we have broken the old high at $66,000, we should be able to make it to $100,000 by January. The SEC approving that new ProShares Bitcoin Strategy ETF (BITO) ETF unlocks trillions of dollars which can now go into Bitcoin, those regulated by the Investment Company Act of 1940. Crypto is now the fastest-growing segment of the financial markets. It’s inflation that driving this, and the Fed is throwing fuel on the fire by taking no action in the face of a red hot 5.4% Consumer Price Index. Even if the Fed does taper, the action will be more than offset by the massive $8 trillion increase in corporate profits. Companies are not only buying their own stocks, they are also using these profits to buy Bitcoin. I see this as a Bitcoin node myself. Be sure to dollar cost average your position by putting in a little bit of money every day because Bitcoin is wildly volatile, up 140% since August 1. By the way, it’s not too late to subscribe to the Mad Hedge Bitcoin Letter, which we are taking down from the store on Monday for a major upgrade by clicking here. We are raising prices after that.
To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in to www.madhedgefundtrader.com, go to MY ACCOUNT, click on the paid service you are currently in (GLOBAL TRADING DISPATCH, TECH LETTER, or BITCOIN LETTER), then select WEBINARS, and all the webinars from the last ten years are there in all their glory.
Good luck and stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
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
Mad Hedge Biotech and Healthcare Letter
October 21, 2021
Fiat Lux
Featured Trade:
(A DIVIDEND ARISTOCRAT THAT DELIVERS LIKE CLOCKWORK)
(JNJ), (PFE), (MRNA), (BNTX), (NVS), (RHHBY), (MGTX)
There have been two narratives as far as COVID-19 vaccine developers go. One story centers on companies with fortunes essentially built and exploding thanks to their COVID-19 vaccines, like Moderna (MRNA), Novavax (NVAX), and BioNTech (BNTX).
The second story involves larger biopharmaceutical companies, such as Johnson & Johnson (JNJ) and BioNTech’s partner, Pfizer (PFE), which barely felt their shares move in the past 18 months.
While it’s easy to understand the excitement over the achievements of the likes of Moderna, is it reasonable for Pfizer and JNJ investors to feel bad over the lack of movement in their shares?
Not at all, especially in the case of JNJ.
After all, these huge companies have decided to sell their vaccines on a not-for-profit basis until the major wave of the pandemic ends—a move that can be seen as a sound strategy for JNJ to rebuild some goodwill especially following the recent scandals involving the company.
Nevertheless, JNJ might still get a boost (pun intended) from its COVID-19 vaccine booster shots.
Just last week, a prominent advisory committee to the US FDA unanimously voted to recommend the booster shots, which likely means that the 15 million people who got jabbed with JNJ’s candidate will get a second shot as well.
If the FDA agrees with this recommendation, then the boosters could be available within the month. This comes after the agency also approved booster shots from Pfizer-BioNTech and Moderna.
Last month, the US government decided to provide Pfizer booster shots to the older population and high-risk groups, with Moderna following suit almost immediately.
So far, there have been 8 million people who have already received their Pfizer booster doses, while 1.6 million got the third dose for Moderna.
This is another lucrative market for vaccine makers, considering that to date, there are over 104 million people vaccinated with Pfizer, roughly 69 million with Moderna, and approximately 15 million with JNJ.
Amid the talks about the boosters, JNJ stands firm that its vaccine’s potency increases over time and doesn’t wane, unlike Pfizer’s candidate. This means there’s no urgency for a booster shot when it comes to JNJ’s candidate.
Nevertheless, considering that JNJ isn’t exactly attempting to earn from its COVID-19 vaccine aggressively, there’s no point in investors worrying about this issue too much.
The fundamental aspects that will impact the stock price can be found elsewhere.
One of the more exciting projects of JNJ lately is its move to become more active in the gene-editing field.
Following the buzz from the multi-billion dollar acquisitions of companies like Novartis (NVS) and Roche (RHHBY) several years ago, it looks like JNJ might be the next big name to enter the fray.
Since 2018, JNJ has been working closely with a small-cap gene-therapy company called MeiraGTx Holdings (MGTX).
While highly secretive of the details, MeiraGTX, which has a market capitalization of just below $600 million, has been developing a gene-regulation technology—an innovation that could revolutionize gene therapy.
For context, this kind of innovation was applied to Novartis’ Zolgensma, a one-time treatment for spinal muscular atrophy worth a whopping $2.1 million—the most expensive medication in the world.
In terms of MeiraGTX’s work with JNJ, the two companies are focusing on creating therapies for various eye diseases. Looking at their timeline, the first candidate should be ready by 2023.
While there remain questions about its COVID-19 vaccine candidate, their earnings are expected to reach roughly $2.5 billion or merely 2.65% of JNJ’s total revenue. This would barely make a dent in the overall performance of the company.
What comes clear in the performance reports from the company is that its core business remains the primary moneymakers.
In the second quarter of 2021, JNJ recorded $23.3 billion in sales, reporting a notable 27.1% from the $18.3 billion revenue it generated from the same quarter in 2020.
Its gross profit also climbed from $11.7 billion to $15.7 billion, showing a 33.8% improvement. As for its EPS, it skyrocketed by 72.8% year-over-year from $1.36 to $2.35.
Meanwhile, JNJ’s guidance for 2021 has been updated to reflect its expected 13.% to 14.% year-over-year increase between the range of $93.8 billion and $94.6 billion.
Its pipeline and current portfolio also all but guarantee that JNJ will deliver mid to high single-digit earnings in the years to come.
Another indicator of the stock’s quality is its dividend record, with JNJ priding itself on a 59-year streak—making it an undisputed dividend aristocrat.
Overall, I see JNJ as an impressive $433 billion behemoth in the biopharmaceutical sector. The company has been consistent in delivering remarkable top and bottom lines every quarter.
Mad Hedge Bitcoin Letter
October 21, 2021
Fiat Lux
Featured Trade:
(HIGH INFLATION IS A GIFT TO CRYPTO)
(BTC)
The writing is on the proverbial wall with central banks late to the party to tame the inflationary beasts.
We are receiving a torrent of data points from around the world that is indicative of the financial situation in so many countries now.
Central Banks are hellbent on slow-playing this rate rise thing simply because they don’t want to be the ones responsible for crashing the system.
It’s just easier to go lower for longer than try to raise rates too fast.
Bitcoin’s (BTC) appreciation is directly correlated with a rise in the pace of hyperinflation.
Just look at Canada today — it released some bowel-disturbing inflation data.
Consumer prices in Canada rose at their fastest rate in 18 years in September, as the country continued to get smacked around with global supply chain issues.
The annual inflation rate hit 4.4%, up from 4.1% in August, its highest level since February 2003.
The costs of transport, housing, and food all jumped, the country's official statistics agency said.
Canada's central bank, which meets next week to decide whether to raise interest rates, is watching the chaos in real-time.
Inflation will get worse before it gets betters and that’s what this 4th wave of the pandemic hitting the European continent tells us.
Don’t think that supply chains are going back to smooth management anytime soon.
A combination of surging consumer demand, global supply chain issues, product shortages, and rising oil prices are driving up the cost of living from pandemic-era lows.
It was only a few weeks ago when The British army began delivering gas to British gas stations on Monday after 100,000 Polish truck drivers decided it wasn’t worth the money to go through a bevy of draconian restrictions from PCR testing, harsh visa rules, and the uncertainty of even spending nights in their truck.
They decided to go back to their families in Poland and Europe is going through a worker shortage similar to the US.
Almost 200 military tanker personnel, 100 of which were drivers, were deployed to provide temporary support as part of the government's wider action to further relieve pressure on gas stations.
If gas deliveries fail to make it to the gas station, might as well sit home and use that fat finger to buy up some crypto.
Of course, this kind of inflation is a tax on the consumer, on the public, on businesses. And it's a regressive tax that will over time undermine the purchasing power of salaries.
If one were happy over an $8,000 per year raise, most everyday Joe would be, that money is pretty much going back to the servicers one already pays because prices are higher for the same services.
Not much bang for the buck which is why readers are connecting the dots to splurge in crypto investing.
Billionaires are starting to come out of the woodwork to tell everybody that they “underinvested” in crypto.
Hindsight is 20 — 20.
If this winter delivers nasty weather, then expect logistics to slow to a crawl.
In the U.S., meat was one of the food items most affected by inflation, becoming more than 10% more expensive over the course of a year.
Eggs’ price increase even exceeded 12%, while fruits and vegetables rose by 3%, fats by 7%, and eating out by almost 20%.
And these prices could look cheap by January if we get a perfect storm of pandemic-related logistic problems, driver shortages, more countries executing a hard lockdown like Latvia just did, panic buying, and historically bad global governance.
Can the global governance these days get worse?
Effectively, the rise in crypto prices is symptomatic of lost ironclad faith in certain bedrock institutions that have seen better times.
It’s hard not seeing bitcoin going ballistic into year-end and $100,000 in 2022.
