Mad Hedge Biotech and Healthcare Letter
January 18, 2022
Fiat Lux
Featured Trade:
(THE PERFECT COUNTERBALANCE FOR A VOLATILE TECH)
(CI), (ANTM), (CVS)
Investing in quality stocks is a surefire way to slowly build a healthy portfolio over the years.
As long as you buy and hold stocks that have the potential to expand and offer stable financials continuously, then you’ll be securing your long-term success.
Obviously, this strategy is less risky compared to jumping on every new bandwagon and believing hyped ideas.
Then, there are breakthrough ideas that look too good to pass up. A good example is the cryptocurrencies such as Bitcoin and Ethereum.
Both operate on blockchain technology, which holds the potential to revolutionize practically all industries by decentralizing them and utilizing data in more efficient ways.
While investing in this kind of technology can definitely be exciting and thrilling, it’s undeniably scary for some who are still unfamiliar with it.
But, what if there’s a safer and more traditional way to get your foot in this groundbreaking technology?
Here’s where Cigna (CI) comes in.
Cigna is one of the handful of companies that are looking into integrating blockchain into their business, such as accepting cryptocurrencies as an additional form of payment.
Needless to say, investing in Cigna would offer you exposure to this new and emerging blockchain technology sans the risk that comes with every new technology.
This is a unique move considering that health insurance stocks are not exactly widely known as proponents of cutting-edge technology.
Aside from Cigna, other providers have been looking into leveraging blockchain to improve their operations. Some names associated with this project include Anthem (ANTM), CVS (CVS), and Cleveland Clinic.
Although blockchain remains in the early innings in terms of its existence in the healthcare industry, investors seeking some exposure would benefit from this reasonably safe option.
After all, Cigna is nothing but a safe stock.
Everyone has practically heard of the company.
Cigna provides Medicare and Medicaid products and insurance coverages not only within the United States but also in some international markets.
Known as a “global health service company,” it has approximately $64.5 billion in marketing capitalization and is considered the fifth-biggest healthcare organization in terms of revenue.
In 2021, it reported over $160 billion in revenue and has managed to rake in profits consistently.
With a net margin of roughly less than 6% of its sales, Cigna has been an investor darling by being consecutively in the black in the last 5 years.
For its 2022 plans, Cigna aims to grow its addressable market to add 3 new states and 93 new countries to reach 1.5 million new customers eventually.
The company also recently secured a new 7-year deal with the US Department of Defense, which would hand over the handling of the healthcare services of roughly 9.6 million active-duty service members to Cigna.
Moreover, Cigna has been working on targeting high-margin sectors like specialty pharmacies.
One of these businesses is Accredo, which manages individuals suffering from complex and hard-to-treat chronic ailments. These conditions include HIV, hepatitis C, and even cancer.
These types of illnesses demand a lifetime’s worth of medications with astronomical price tags. Clearly, being able to get a foothold in this segment would open up a lucrative revenue stream for Cigna.
Basically, Cigna is not your typical flashy stock that gains much attention from the market or the news. Nonetheless, it’s a solid pick that never fails to get the job done.
If anything, investing in Cigna would mean buying and forgetting about it while you collect a stable dividend yield of roughly 2% from this healthcare provider—a solid yield that’s better compared to the 1.3% average of the S&P 500.
So, for cryptocurrency fans, buying Cigna shares would simply be a way to diversify into a sector where you won’t really anticipate that much bullishness on blockchain.
Mad Hedge Bitcoin Letter
January 18, 2022
Fiat Lux
Featured Trade:
(SELL THE RALLIES)
(BTC)
The interest rate hangover continues to hammer the leveraged crypto markets as the price of bitcoin (BTC) is stuck in neutral.
The silver lining around this whole situation is that Bitcoin hasn’t crashed and is clinging onto that $40,000 level which appears to be the proverbial line in the sand.
I can’t say the same for tech stocks who have been shown no respect whatsoever in this sell-off and will continue to get shut down until investors feel an interest rate bottom can be formed.
Short-term bearish signals are running riot with retail investor sentiment on social media turning negative since late last year with the recent downward price momentum providing a self-fulfilling prophecy.
Taking a barometer of the social media forums shows us what’s bubbling under the trading surface because bitcoin traders coalesce around these forums to offer us insight into the real mentality of traders.
Bitcoin’s market capitalization has tracked the growth of the global money supply since late 2013.
The annual change in money supply hit a high-water mark in February 2021, while bitcoin’s annual growth rate reached a peak a month later in March and these two are very much correlated.
In the long run, cryptocurrency’s usage as a payment exchange of value is what will give us higher prices.
The problem I have right now is with how the market is starting to view crypto assets in the short term as a speculative type of technology asset even though that’s not entirely true.
To get down to the nuts and bolts, crypto and its nascent industry haven’t matured enough to shake that speculative label and now they are getting penalized for it with higher interest rates.
Truthfully, crypto still needs the perfect storm of variables to go its way to supercharge the price of crypto, and recently many of these variables have reversed.
The result is the incremental Bitcoin trader fleeing the asset like rats fleeing a sinking ship.
Recent data showed that bitcoin’s correlation with the M1 money supply has risen to 0.77, suggesting a strong statistical relationship between the two.
But with the Build Back Better legislation halted, where does the incremental free money come from?
There are still many long-term positive signals coming from the crypto industry like rampant hiring.
Crypto jobs pay well and offer high salaries — even more importantly, they are highly appealing to Generation Z which has a good 50 years of work in them ahead.
The positive trend in crypto careers will mean more innovation leading to a better product.
Crypto hiring outstripped price action in 2021, as crypto job searches soared by 395% in the United States alone, according to LinkedIn.
Critically, the crypto industry outpaced the wider tech industry, which also saw overwhelming hiring success, almost doubling its number of job listings. However, at 98% growth, the tech industry pales in comparison to crypto jobs, which gained a whopping 395%.
Also, I’d like to point out that tech jobs are starting to bleed over into crypto jobs as the early iterations of the metaverse are being hammered out.
This is occurring through the gaming industry which has been earmarked as the launching pad for the future internet 3.0 or metaverse.
Eventually, these two sectors will fuse together which is highly bullish for the price of crypto.
Some type of crypto offspring will be needed as a payment vehicle inside the metaverse.
Sure, we aren’t there yet but it’s coming soon.
The lions’ share of job postings was in software and finance, other industries are also seeing a rise in demand for crypto talent.
These include professional services like accounting and consulting, as well as the staffing and computer hardware sectors.
Platforms with the most generous crypto hiring - Coinbase has over 250 openings, Kraken over 300, and the world’s most active exchange, Binance, lists more than 600 job posts.
There are healthy signs under the surface but hiring will be killed if Bitcoin is cut in half.
At this level of $40,000ish, the price still justifies another wave of hiring which is why holding these levels is utmost critical to the short-term direction of Bitcoin.
From a trading point of view, I would sell any substantial rally short-term in Bitcoin until we get more visibility about monetary policy.
“We must ensure that technology is accessible, affordable, and adds value.” – Said Indian politician serving as the 14th and current prime minister of India Narendra Damodardas Modi
Global Market Comments
January 18, 2022
Fiat Lux
Featured Trades:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or SOARING WITH THE EAGLES)
(SPY), (TLT), (MSFT), (JPM), (AAPL)
Here I am, locked up again. Another day, another pandemic. There is nothing left for me to do but think.
When I turned negative on technology stocks at the end of November, many readers protested, accusing me of high treason, sedition, perfidy, and insisted I be hung from the nearest lamppost.
After last week’s drubbing on technology stocks, those claims are fading fast.
As a math graduate from UCLA, I can tell you it’s not about incompetence, delusion, or dementia, it’s simply all about the numbers.
Over the last five years, the S&P 500 (SPY) rose by 2X, while NASDAQ jumped by 3X, a 50% premium to the main market.
Most of this outperformance was due to multiple expansions. As interest rates fell further and further, investors were willing to pay ever more for tech stocks. As a result, 30% of tech stocks lose money and 30% trade for a nosebleed 10X sales or more.
Roll the interest rate move in reverse, and the tech premium disappears in a puff of smoke. And that has been happening with a vengeance since early December, with yields on the ten-year US Treasury bond soaring an eye-popping 58 basis points, from 1.34% to 1.82%.
Tech stocks are also coming off a pandemic tailwind of hurricane force. Now that every home in the country is equipped with four home offices and the hardware and software to support them, the turbocharger is failing.
Apple (AAPL) is a perfect example. From 2015 to 2019, Steve Jobs creation grew earnings by an average of 4% a year. Then the perfect storm hit, and earnings grew by an astonishing 60% in 2021. That delivered a gobsmacking 58% gain in the share price since March.
Tech momentum is now dead. In two-thirds of the tech market, a Dotcom bust has already played out, with non-earning pandemic darlings like Peloton (PTON) and Zoom (ZM) falling by 60%-70%.
It is not, however, the end of the world (usually, the world doesn’t end). If you are a long-term investor, big (earning) tech won’t fall enough to make it worth selling out and buying back lower. Non-earning small tech has already fallen so much it's no longer worth selling down here.
Back to the numbers, me the mathematician.
It’s all about margins, which are still expanding, and will be up by another 40-basis point in 2022 for the S&P 500 as a whole. For big tech, it’s just a matter of time before earnings catch up with valuations and it's off to the races again. It will take longer for small tech, possibly a lot longer.
The Economy is the Strongest in Decades, according to JP Morgan CEO Jamie Diamond. I agree. That’s because banks prosper most early in an interest-raising cycle. The Fed could raise rates four times this year. Keep buying financials on dips.
Quantitative Tightening to Start in July, says Goldman Sachs. That’s when the Fed starts selling its vast holdings of US Treasury bonds, about $8.5 trillion worth. They will continue QT until the pain becomes too great. Four rate hikes in 2022 are in the bag. It’s not a stock market-friendly scenario.
This is Not the Year to Own Money-Losing Tech, says my friend Goldman’s David Kostin. For investors, the glass has gone from half full to half empty. The big ones will be OK but are still due for a pullback. NASDAQ price-earnings are still at a 20 year high at 38X. Rising interest rates were the stick that broke the camel’s back. Don’t buy the dip too soon.
What is the Cheapest Sector in the Market? Biotech and Healthcare, which are at valuation lows not seen since the 2009 and 2000 lows. It also has the best decade-long growth outlook after technology. The problem is that no one wants to buy them on the back nine of a global pandemic. They will rally hard….someday.
Inflation Hits 7.0%, with the Consumer Price Index hitting a 39-year high. Bonds ended a $3.00 rally and resumed a downtrend. Rents and used cars led the gains. I remember 1982 well. My first home mortgage had an 18% interest rate. Expect worse to come.
S&P 500 Profits Jump 22.4% in Q4, possibly taking the full-year figure up an incredible 49%. It makes stocks look like a bargain, which were up only 27% in 2021. Expect cooler numbers and a quieter stock market in 2022.
Wholesale Prices Soar 9.7% YOY, the most in 11 years. It augers for more interest rate hikes sooner, with overnight rates targeting 1.25% by yearend.
Weekly Jobless Claims Hit Two-Month High at 230,000. No doubt it is due to the omicron surge. A million cases a day is certainly going to make a dent in the workforce. Some people are afraid to get sick, while others know they can get away with it.
Auto Stocks Will Be Top Performers in 2022, says value legend Mario Gabelli. Dealers are extremely short of inventory and demanding more production. Used car prices are soaring. Average industry sales prices have soared from $40,000 to $45,000 in a year. Buy (F) on a dip. (TSLA) has topped out for now with the rest of the tech stocks.
Bitcoin Breaks $40,000, as the flight from all interest-bearing securities continues. Don’t buy the dip yet.
China Posts Record Trade Surplus in 2021 at $676 billion on global economic recovery. The US ran a massive deficit with the Middle Kingdom last year, which is clearly dollar negative. None of the trade deals negotiated by Trump were honored. Exports were up 21% YOY in December.
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 a new year at hand, it’s off to the races once again. I exploded out of the gate with a hardy 2.5% profit last week. I used fleeting rallies to sell short the S&P 500, Microsoft (MSFT), and the bond market (TLT). The Friday collapse in JP Morgan (JPM) tempted me into a long position there.
Yes, last year’s mighty 90.02% performance is a lot to top. But even the highest mountain is climbed with the first step (been there, done that).
That brings my 12-year total return to a record 515.11%, some 2.00 times the S&P 500 (SPX) over the same period. My 12-year average annualized return has ratcheted up to a record 42.62%, easily the highest in the industry.
We need to keep an eye on the number of US Coronavirus cases at 66 million and rising quickly and deaths topping 851,000, which you can find here.
On Monday, January 17 markets are closed for Martin Luther King Day.
On Tuesday, January 18 at 7:00 AM, the NAHB Housing Index for January is released.
On Wednesday, January 19 at 8:30 AM, Housing Starts for December are announced.
On Thursday, January 20 at 7:00 AM, the Existing Homes Sales for December are printed. At 8:30 AM, the Weekly Jobless Claims are disclosed.
On Friday, January 21 at 2:00 PM, the Baker Hughes Oil Rig Count is out.
As for me, during the 1980s, my late wife and I embarked on a National Geographic Expedition to the remote Greek islands, including Santorini, which in those days didn’t have an airport.
At dinner, we sat at our assigned table and I noticed that the elderly gentleman next to me spoke the same unique form of High German as I. I asked his name and he replied “Adolph.”
And what did Adolph do for a living? He was a pilot. And what kind of plane did he fly?
A Messerschmitt 262, the world’s first jet fighter.
What was his last name? Galland. Adolph Galland.
I couldn’t believe my luck. Adolph Galland was the most senior Luftwaffe general to survive WWII. He was one of Germany’s top aces and is credited with 109 kills. He only survived the war because he was shot down during the final weeks and ended up in a military hospital.
And that was the end of the cruise for the rest of the table, as Galland and I spent the rest of the week discussing the finer points of aviation history.
It was made especially interesting by the fact that I had already flown most of the allied planes that Galland went up against, including the P51 Mustang and the Spitfire.
Galland started life as a Versailles Treaty glider pilot and joined the civilian airline Lufthansa in 1932. He transferred to the Luftwaffe in 1937 to fight with Franco in the Spanish Civil War and participated in the invasion of Poland in 1939.
He flew a Messerschmitt 109 as cover for German bombers during the Battle of Britain. In 1941, he was promoted to the general in charge of Germany’s fighter force until 1945 when he was sidelined due to his opposition to Goring and Hitler.
It was a fascinating opportunity for me to learn many undisclosed historical anecdotes. Germany actually had a functioning jet fighter in 1939. But Hitler, with a WWI mindset, diverted development money to twin-engine bombers and artillery.
The army eventually produced a canon that fired a monster one-meter-wide shell but was so heavy that it needed double railroad tracks to move anywhere. The canon was virtually useless in a modern war and was a colossal waste of money. Galland believed the decision cost Germany the war.
The ME 262 was a fabulous plane. But it was too little too late. Of the 1,000 produced, 500 were destroyed on the ground and most of the rest during takeoff and landing.
A big problem with the plane was that its jet engines were made out of steel and would only last ten hours. Turkish titanium needed for longer-lived engines was embargoed by the allies.
Today, a beautiful example hangs from the ceiling of the Deutsches Museum in Munich.
Galland negotiated the handover of his jet fighter wing to the Americans from a hospital bed so they could be used in an imminent war against the Russians. The atomic bomb ended that idea.
Galland was one of the few German generals never subjected to a war crimes trial. Pilots on both sides saw themselves as modern knights of the air with their own code of conduct. Parachuting pilots were never attacked and lowering your landing gear was a respected sign of surrender.
After the war, Galland emigrated to Argentina to train Juan Peron’s Air Force. He also test flew Gloster Meteor jets for the Royal Air Force. He participated in the 1972 film, The Battle of Britain and many WWII memorials. By the time I met him, his eyesight was failing. He died in 1996 at 84 of natural causes.
I give thanks to the good luck I had in meeting him, and that I had the history behind me to understand the historical figure I was sitting next to. It isn’t everyone that gets six dinners with Germany’s top fighter ace.
A year later saw me on a top-secret mission flying from Cyprus back to the American airbase at Ramstein. I plotted my course directly over Santorini.
When I approached the volcanic island, I put my Cessna 340 into a steep descent, dove straight into the mouth of the volcano, and leveled out at 100 feet above the water, no doubt terrifying the many yachts at anchor.
Greek Military Air Control gave me hell, but it was my own private way of honoring the principlals of Adolph Galland.
Stay Healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Mad Hedge Technology Letter
January 14, 2022
Fiat Lux
Featured Trade:
(AVOID ARKK INNOVATION FUND LIKE THE PLAGUE)
(ARKK), (GOOGL), (TDOC), (ZM)
I was a little taken aback by the content and attitude of boutique investment fund CEO and CIO of Ark Invest Cathie Woods as I watched her podcast -- set in a palatial estate with vaulted ceilings.
The line that stuck out to me was when she began to explain that the ARK Innovation ETF (ARKK) is made up of “real companies with real revenue.”
Well, so is the liquor store down the street and that doesn’t mean we should all bandy together with each other, sing kumbaya and bet the ranch on this ETF fund that dabbles in ultra-high growth tech stocks.
She continued to praise her strategy by comparing ARKKs relative success with the dot com crash where companies were based on thin air and accrued massive valuations for nothing.
That’s a bad comparison because it was a different era and time, and just because that market then was frothy, it has nothing to do with a higher ARKK stock price in the short term.
She then explains to us viewers that she has never been so convinced by companies like Teledoc (TDOC) and this is a company that has experienced about a 400% drop in share price in the past 365 days.
The reason she gives support for TDOC is because they do $2 billion in annual revenue and then she followed that up by saying how great Zoom Video (ZM) is because their revenue has gone up “4-fold during the coronavirus” but fails to mention that their stock is down about 400% since October 2020.
She laments that these stocks have recently been treated as “stay at home” stocks and I believe that giving such an excuse to why these stocks have been performing poorly lately makes her look like she doesn’t know what she is doing.
If she champions TDOC for doing $2 billion in annual revenue, then why not invest in Alphabet (GOOGL) which does $180 billion of revenue per year. According to her math, GOOGL is a 90X better investment than TDOC.
In her video interview, she starts to explain the inflationary monster which of course, she has an incentive to downplay. Low rates mean a better environment for growth stocks to operate in.
She continues to explain that used car prices are up 60% but that “bubble has burst” because sales are down 4 recently.
Again, she is grasping for straws here because she has an incentive to.
Another data point she tries to spin off as anti-inflationary is the increase in average wages and explains that a 0.6% increase is the “lower end of the guidance” so that certainly will trend down.
Again, nominal wages have exploded in all industries, and this is again proof she likes to reverse engineer stats to fit her own interests.
During this interview or fireside chat, Woods appears to be an expert at cherry-picking data points that are in her best interest.
She fails to acknowledge that her timing of equity purchases is just as important as the type of stocks bought, and her recent timing has been terrible.
Her response to the underperformance was to blame the market and pontificate that the “dismissal (of her ARKK fund ETF) is misplaced” and “analysts and investors aren’t doing their homework.”
Her attempt to shift blame on the market is comical and the real traders in the room know that the market decides the prices of assets and not anyone or any organization can dictate the market to the market.
Showing a little humility might do her a little good as Ark Innovation ETF suffered an outflow of $352 million Wednesday, the biggest one-day drop since March.
She explains the Fed policy towards higher rates as just “jawboning” and begins to explain how she is seeing some anti-inflationary data coming down the pipeline imminently.
I will tell Woods that this “jawboning” isn’t just that, it’s real. The Fed is poised to react to combat inflation and not raising interest rates as fast as she thought doesn’t mean the narrative immediately evolves into something even close to anti-inflationary.
We are so far from that sentiment and her reaction is to dismiss anything that is a threat to her fund.
Sadly enough, she wants things how it was in 2020, massive amounts of quantitative easing for that capital to flow into her ARKK fund.
I am not saying that won’t ever happen again, but the zeitgeist must overcome the higher rates narrative that has completely consumed the broader market which is why tech growth has been hammered lately.
Her failure to act has meant her investors are down 50% in the last 13 months. Buying at tops are dangerous and even more important, she doesn’t describe the current market and describes only what she wants to happen in the future as it relates to higher ARKK prices.
I wouldn’t call that breaching her fiduciary responsibilities, but she is playing a snake oil saleswoman at her finest.
This could be a case of her thinking that she is playing with houses’ money, a longer time frame shows that ARKK is still up more than 300% since 2017.
If you ever feel like getting into high tech growth, avoid this fund, just buy the stocks you like outright.
This is an example of how ETFs will not work in today’s climate, as ETFs only function properly if they go up every year.
The markets could spend the first third of the year grappling with higher rates, and there will be another time to buy tech growth. For Woods to completely ignore her failure of timing the tech growth market, it shows she isn’t looking out for your best interest as an investor.
Avoid tech growth today until we get through the short-term challenges.
"Software is like Lego. You can make anything with it, but it may not be appropriate." - CEO of IMC Worldwide Stuart Sherman
