Mad Hedge Technology Letter
November 22, 2021
Fiat Lux
Featured Trade:
(RENOMINATION BOOSTS BIG TECH)
(FB), (GOOGL), (AMZN), (MSFT), (AAPL)
U.S. President Joe Biden is doing all he can do to make sure that the US Central Bank stays accommodative to big tech investors.
He let the doves back in the driving seat which is highly positive for corporate America and terrible for penny-pinching savers.
Biden’s decision to re-elect incumbent Fed Chair Jerome Powell was cheered by the market locking in his ultra-low interest rate policies for yet another term.
Even more brazen was the appointment of Vice Chair, an even more pronounced dove Dr. Lael Brainard.
The second in command often helps signal Fed policy and gives it a dovish twist and clears the way for all systems go in 2022.
Any inclination that interest rates would rise faster than expected is now a non-starter, and the Fed will push its "lower for longer" mantra in the face of surging inflation for as long as they can make excuses for it.
Ostensibly, the path of easiest conjecture leads me to say that the five biggest stocks in the S&P 500 – Facebook, Apple, Amazon, Microsoft, and Google, which are around 30% of the market and growing, will do well in 2022.
Long-term, they have comprised an average of about 14% of the entire stock market, and 2022 should be the year they knock on the 35% threshold.
This essentially means that the stock market is techs to win or lose and everyone else is just a footnote.
And yeah I know…it’s been like that for quite a while now; but it’s more prevalent than ever.
We are rolling into a year where big tech will weaponize their cash horde to issue low-interest corporate bonds of their own company debt and then spin those cash harvests into higher rate corporate bonds that cheapen their cost of doing business because they pocket the higher interest payments as profits.
Industry leaders are able to borrow more cheaply and in greater quantities, and the size of their balance sheets also offers incredible optionality.
This also means they can buy back more shares and also leverage up their balance sheets.
Preferential access to cheap money also cheapens the process of expansion, or in buying rivals, more easily. In effect, lower rates give leading companies an unfair set of tools to accelerate their dominance and which no regulator dares to prevent.
What does this mean in practice for investors? If falling rates have spiced up valuations of the biggest tech stocks on the way up, it implies they may struggle if rates rise, particularly as this would mean investors place less of a premium on future earnings.
But since the expectations are lower for longer, the market will be comfortable with the nominal rate even in the face of surging inflation, meaning it’s a net positive for tech stocks in 2022.
Powell and Baird will move as slow as needed and anything faster than that will shock the tech market and we will get a 5% drop which will be a golden buying opportunity.
I have read many experts’ take on tech preaching that regulation is here and coming fast to take down big tech.
However, I am in the camp that Congress will do hardly anything, and any investigation will end with a slap on the wrist which is fine.
I don’t subscribe to this ridiculous idea that superstars eventually tend to fall to earth.
I believe the current climate has set up big tech to gain an even bigger market share, crush the little guy faster, and trigger EPS to grow uncontrollably.
That’s what I am seeing on the ground with my own eyes, as opposed to baseless claims that big tech will revert back to the mean.
This sets the stage for big tech to benefit from such elevated rates of profitability next year, they will be happy to overpay for smaller companies to whom they will give an ultimatum to either sell up or get killed by them.
Numerous signs point to a devastatingly profitable and comically successful 2022 for the most recognizable and biggest tech firms who will refine their tech and harness their balance sheets in a systematically lethal way.
Unprofitable startups have a mountain climb as it relates to competing in their industries and they can thank President Joe Biden for that; they will be unduly penalized as a group that will result in lower share prices that force them to crawl on their knees to venture capitalists for capital injections.
“By giving people the power to share, we're making the world more transparent.” – Said Mark Zuckerberg
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
Global Market Comments
November 22, 2021
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or THE WORST-CASE SCENARIO)
(BITO), (ETHE), (TLT), (TBT), (NVDA), (DE)
In the investment business, you’re only as good as your last trade. If that is the case, that makes me a pretty worthless person in the wake of a record four stop-losses at the November 19 option expiration.
Days before, the market closed with all ten of our positions profitable. But the pandemic lockdown in Austria on Friday morning shattered those plans. Fears of a new Covid wave and another mini-recession send bonds soaring and interest rates crashing. That trashed financial stocks, where I had a heavy exposure.
If you work in the business long enough, you see a black swan on an options expiration day every five or ten years. This was our turn. As a result, we traded a double-digit gain for November for a moderate loss. That still leaves us with a heroic 80% gain for 2021 and 15 consecutive profitable months.
There is nothing to do but pick yourself up, dust yourself off, and go on to the next trade. I wouldn’t be surprised to see all of the Friday losses reversed in the coming weeks. Banks are still outrageously profitable and the cheapest sector in the market. If you have a six-month to one-year view, the action on Friday changed nothing.
You live by the sword, you die by the sword.
There was a lot going on Friday than just another Covid wave. November option expirations used to be a snore. But this year, brokerage firms have stampeded so many retail investors into the options markets where they make the most money that they have become major events.
Some 70% of all options trading now takes place in securities with less than two weeks to expiration. In the meantime, professional traders limit their personal accounts to long term LEAPS which are the subject of the Mad Hedge Concierge Service. Instead of rolling the dice for a 10% profit in a month, you get a very safe 100% return in a year.
Of course, while financials were getting wrecked, falling interest rates were acting as a steroid for tech stocks. (MSFT) and Google (GOOG) hit new highs for the year. Concierge members in my (ROM) LEAPS were rolling in clover.
The barbell strategy wins again!
Infrastructure Bill is signed on Monday, injecting another $1.2 trillion into the economy today. This assured the economy will keep booming through 2024. The bond market hates it, down $6.00 in three days. It adds another 3% to GDP over the next five years. Keep selling (TLT) on rallies.
Bitcoin Forks for the first some since 2017, making it much more competitive with Ethereum. It enables the lead crypto to use defi and third party apps. Miner Marathon (MARA) is raising a $500 million bond issue to buy Bitcoin. Keep buying (BITO) and (ETHE) on dips.
US Retail Sales roar, up 1.7% in October compared to 0.8% in September, far more than expected. Receipts for all items are rising. Higher wages are immediately translating into increased spending.
Builder Sentiment jumps, up 3 points to 83, according to the National Association of Homebuilders. A decade-long structural shortage of housing is a huge tailwind. Good luck hiring a contractor right now. The Midwest and the south are the leaders in demand.
Dollar hits 16-Month High, on the strength of yesterday’s red hot Retail Sales. It means higher interest rates soon, which is great for the buck. Currencies with the fastest rising interest rates are always the strongest.
NVIDIA kills it, with revenues up 50% YOY and earnings up 60%. It’s well on the way to becoming the next trillion-dollar company. It’s another Mad Hedge 20 bagger. Buy (NVDA) on dips.
Biden may try an SPR Release to cap gasoline prices. There are 741 barrels in the Strategic Petroleum Reserve, enough for 21 days of US consumption. It’s sitting there costing money, essentially a government subsidiary for the energy industry. Why have it if the US is now a net energy exporter? The concern has been enough to drop oil prices by 10%.
Rents for single-family homes are up 10.2% YOY, and will continue to rise. Miami has the highest rent inflation in the country, and the highest-priced homes are seeing the fastest increases.
Weekly Jobless Claims drop to new post-pandemic low, to 268,000, just fractionally. There are 2 million continuing claims. The great resignation continues.
John Deere strike ends, with some of the best terms for workers in 40 years. It cost the company $2.5 billion. They get an immediate 10% raise and $7,500 bonus, larger out-year raises, and big performance bonuses. There is a lot of making up for 30 years of no real wage growth going on here. It points a loaded gun at the head of the “transitory” argument for inflation. Buy (DE) on dips.
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 800% to 240,000 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 240,000 here we come!
With the disastrous November options expiration, my November month-to-date performance plunged to -7.73%. My 2021 year-to-date performance took a haircut to 80.82%. The Dow Average is up 16.34% so far in 2021.
My entire portfolio expired on Friday, and I am 100% in cash. Of our ten positions, six made money and four lost. In addition, subscribers to the Mad Hedge Technology letter had another five winners, as tech stocks are still on a tear.
That brings my 12-year total return to 503.37%, some 2.00 times the S&P 500 (SPX) over the same period. My 12-year average annualized return has ratcheted up to 42.24%, easily the highest in the industry.
My trailing one-year return popped back to positively eye-popping 96.56%. 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 48 million and rising quickly and deaths topping 772,000, which you can find here at https://coronavirus.jhu.edu.
The coming week will be all about the inflation numbers.
On Monday, November 22 at 7:00 AM, Existing Homes Sales for October are released.
On Tuesday, November 23 at 6.45 AM, the Flash Manufacturing PMI is announced.
On Wednesday, November 24 at 5:30 AM, US Q3 GDP second estimate is published. At 7:00 AM we get New Home Sales for October. Minutes from the last Fed meeting are printed at 2:00 PM.
On Thursday, November 25 markets are closed for Thanksgiving Day.
On Friday, November 26 at 2:00 PM, the Baker Hughes Oil Rig Count are disclosed.
As for me, when I was shopping for a Norwegian Fiord cruise for next summer, each stop was familiar to me because a close friend had blown up bridges in every one of them.
During the 1970s at the height of the Cold War, my late wife Kyoko flew a monthly round trip from Moscow to Tokyo as a British Airways stewardess. As she was checking out of her Moscow hotel, someone rushed at her and threw a bundled typed manuscript that hit her in the chest.
Seconds later a half dozen KGB agents dog-piled on top of her. It turned out that a dissident was trying to get Kyoko to smuggle a banned book to the West and she was arrested as a co-conspirator and bundled away to Lubyanka Prison.
I learned of this when the senior KGB agent for Japan contacted me, who had attended my wedding the year before. He said he could get her released, but only if I turned over a top-secret CIA analysis of the Russian oil industry.
At a loss for what to do, I went to the US Embassy to meet with ambassador Mike Mansfield, who as The Economist correspondent in Tokyo I knew well. He said he couldn’t help me as Kyoko was a Japanese national, but he knew someone who could. Then in walked William Colby, head of the CIA.
Colby was a legend in intelligence circles. After leading the French resistance with the OSS, he was parachuted into Norway with orders to disable the railway system. Hiding in the mountains during the day, he led a team of Norwegian freedom fighters who laid waste to the entire rail system from Tromso all the way down to Oslo. He thus bottled up 300,000 German troops, preventing them from retreating home to defend themselves from an allied invasion.
During the Vietnam war, Colby became notorious for running the Phoenix assassination program.
I asked Colby what to do about the Soviet request. He replied, “give it to them.” Taken aback, I asked how. He replied, “I’ll give you a copy.” Mansfield was my witness so I could never be arrested for being a turncoat. Copy in hand, I turned it over to my KGB friend, and Kyoko was released the next day and put on the next flight out of the country. She never took a Moscow flight again.
I learned that the report predicted that the Russian oil industry, its largest source of foreign exchange, was on the verge of collapse. Only massive investment in modern western drilling technology could save it. This prompted Russia to sign deals with American oil service companies worth hundreds of millions of dollars.
Ten years later, I ran into Colby at a Washington event, and I reminded him of the incident. He confided in me “You know that report was completely fake, don’t you?” I was stunned. The goal was to drive the Soviet Union to the bargaining table to dial down the Cold War. I was the unwitting middleman. It worked. That was Bill, always playing the long game.
After Colby retired, he campaigned for nuclear disarmament and gun control. He died in a canoe accident in the lake near his Maryland home in 1996.
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 Technology Letter
November 19, 2021
Fiat Lux
Featured Trade:
(THE TECH FIRM RESPONSIBLE FOR THE METAVERSE AVATAR)
(NVDA)
Nvidia (NVDA) is one of those tech companies you elevate to the top pantheon of tech companies and readers can’t take a glimpse into the future just by getting to know the chip company better.
Bluntly speaking, it’s a can’t miss tech company that every reader should have as part of their portfolio.
How are they part of the avant-garde of tech?
They are flagbearers of accelerated computing and will contribute part of the groundwork upon which the metaverse and its future business opportunities will be constructed upon.
Sounds sexy, right?
Nvidia deals in chips — chips are enablers, but chips don't create markets, software creates market.
At this point, accelerated computing is very different than general-purpose computing, it’s just at another level with the amount of data these need to be processed and the functionality of it.
Artificial intelligence, robotics, and most of the cutting-edge applications in the world need support from accelerated computing because GPUs run out of steam and that people are saying that not because it's not true, it is abundantly clear that the amount of instruction in parallel that you can squeeze out of a system is although not zero, is incredibly hard.
Accelerated computing delivers great benefits and does not require a lot of work and yet the work basically says for every domain, for every application — to have a whole stack.
What is a stack?
A stack is a linear data structure that follows a particular order in which the operations are performed.
And so whenever you want to open a new market by accelerating those applications or that domain of applications, you have to come up with a new stack, and the new stack is hard because you have to understand the application, you have to understand the algorithms, the mathematics, you have to understand computer science to distribute it across, to take something that was single-threaded and make it multi-threaded and make something that computer specialists have done sequentially and make it process in parallel.
You break everything, you break storage, you break networking, you break everything.
And so it takes a fair amount of expertise and that's why over the course of 30 years Nvidia has become a full-stack company because they solve complex problems consistently practically through decades basically integrating and connecting all that needs to be connected in a fluid type of way.
The ultimate benefit, once you have the ability, then you can open new markets and Nvidia has played a really large role in democratizing artificial intelligence and making it possible for anybody to be able to do it.
Democratized scientific computing is one of Nvidia’s biggest achievements so that researchers and scientists, computer scientists, data scientists, scientists of all kinds can get access to this incredibly powerful tool that we call computers to do advanced research.
This brilliant, advanced computing is thrusting Nvidia to the forefront of the metaverse where they have been working on perfecting the technology to populate a high-quality 3D avatar.
They call this business division the Omniverse and it took half a decade to start building Omniverse, but its largely built on a quarter century of work.
Nvidia is developing an AI to be able to speak in a human way so that people feel more comfortable and more engaged with the AI.
They are being built in pieces and will be integrated to create what is called Omniverse Avatar.
How quickly will they deploy this?
I believe Omniverse Avatar will be in drive-throughs and restaurants, fast food restaurants, check out with restaurants, in retail stores, all over the world within less than five years.
And we're going to need it in all kinds of different applications because there is such a great shortage of labor and there is such a wonderful way that you can now engage with a 3D Avatar.
This 3D avatar doesn't get tired and it's always on and it will certainly be cloud-native.
This revenue and growth essentially are generated by accelerated computing and is a full-stack challenge.
So I am not focusing on the 50% quarterly revenue growth or the 83% in quarterly EPS growth, because that will all fall into place naturally if they keep their lead in accelerated computing refining their full-stack capabilities.
It takes software to open new markets. Chips can't open new markets. If you build another chip, you can steal somebody's share, but you can't open a new market and it takes software to open new markets.
Lastly, the Omniverse opportunity is a great opportunity for Nvidia who could be responsible for creating the avatars in the metaverse.
They are ostensibly one of the foundational companies of the Metaverse.
Nvidia are one of our favorite tech companies at the Mad Hedge Technology Letter.
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