Mad Hedge Bitcoin Letter
October 20, 2022
Fiat Lux
Featured Trade:
(LOOKING TO MAKE A DIFFERENCE)
(BTC), (NFT)
A non-fungible token (NFT) is a unique digital identifier that cannot be copied, substituted, or subdivided, that is recorded in a blockchain, and that is used to certify authenticity and ownership.
Like cryptocurrencies, they are also digital tokens.
But compared to cryptocurrencies, which are fungible, or interchangeable, NFTs are singular and unique. Like cryptocurrencies, they exist on the blockchain as cryptographic assets.
The price direction of NFTs is a good way to take a barometer of a speculative technology market underpinning crypto.
I can tell you that the NFT marketplace is dead as a doornail and like how the price of Bitcoin has been engulfed in a crypto winter, it’s even worse in the NFT world.
How bad?
Multimillion-dollar NFT purchases marked down to $100 kind of bad.
In times when the crypto industry is bullish, NFT prices benefit from being a second derivative industry.
One might say that it’s just a 3X ETF of Bitcoin and for speculators, this can be either good or bad.
If you don’t believe me about the state of NFTs, let's roll through some of the data points.
In sectors from art to gaming, trading volume and prices for NFTs across all sectors have plunged about 95% since this time last year.
Since the start of September, NFT trading volumes have averaged $35 million per week.
The NFT capitulation is solid proof that NFTs are not stores of wealth and definitely aren’t inflation hedges.
I can also say that Bitcoin has pretty much failed every test of legitimacy as well during this crypto winter.
NFTs and Bitcoin are speculative assets that only do well during a time of increasing liquidity. The reverse holds true as liquidity tightens.
Many of those art NFTs are being bought and sold on OpenSea, the most prominent peer-to-peer marketplace.
Trading volume on the platform has plummeted from around $3 billion in September 2021 to $350 million in September 2022, an 88% drop.
Personally, I don’t believe in NFTs long term, I don’t get how a digital certificate will hold weight.
I rather have a real physical certificate that shows I own something like a real estate deed.
For those who might think NFTs could hold more utility in the future, then I am another hater you must convince.
Preaching to me about how long-term prospects are positive and investors should buy the dip is laughable.
Any serious asset doesn’t go down 95% in one year without a crisis and in the short-term survival of NFTs isn’t guaranteed.
This was a fad that caught on and rode the hysteria of Bitcoin to relevance and now is being dumped faster than one can imagine.
As we approach a Fed-induced recession, it’s hard to believe what Americans would be interested in buying an NFT when they get fired from their job.
Only 50% of Americans have even heard about NFTs, but most understand that securing shelter and food during unemployment is more important than throwing money down the toilet.
Avoid the NFT asset class, period.
“We're running the most dangerous experiment in history right now, which is to see how much carbon dioxide the atmosphere... can handle before there is an environmental catastrophe.” – Said Founder and CEO of Tesla Elon Musk
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
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
Hello everyone,
A very good day to you all
First, let’s welcome our new members:
Martha Ellis
Kumar Dant
Elizabeth Anthony
Kayode Olagnuju
Wf Mide
Casey Riggs
I hope I haven’t missed anybody out.
This post will summarize John’s bi-weekly webinar, which was done yesterday.
John called the webinar: Whiplash Market (and hasn’t it been just that)
In 2022 YTD John is up 75.88%.
His trailing one-year return is 78.54%
His average annualized return is 44.23%
John says the Bottom is in. (We will bounce around in ranges from here on until the bull market takes off).
- Midterm election noise is about to depart from the news
- We are 9 months into a 12–18-month bear market
- Oil prices continue to fall
- Inflation is plunging – may not show up until later in the year
- Bear market in bonds may be ending with the 10-year rates topping 4.00%
- VIX pops to $35
The global economy is recessionary.
PPI – comes in hot at 0.4% in September.
Non-Farm Payrolls falls short 263,000 in September
JP Morgan sees recession in 6-9 months’ time according to CEO Jamie Diamond.
Supply chain problems are disappearing as two years of port congestion ease.
Unemployment rate 3.5% = 2022 low.
IT’S TIME TO INVEST
Capitulation is near
Sweet spot for LEAPs setting up. (Only get this opportunity 2 to 3 times in a decade) GRAB IT!!!
Look for a strong 2nd half-scenario to continue
Junk Bonds might find a place on John’s list soon.
HYG = 8.2% yield to date
U.S.$ will start to top out around here. Maybe one last dash to the top before exhaustion. Then you can buy the Euro, the Aussie, and the Pound as the U.S.$ falls. (Please don’t do this in the forex market unless you know what you are doing)
LEAP candidates are numerous.
Look at Netflix
ROM
NVDA
TSLA
BRKB
But don’t expect these to go up in a straight line. Put the expiry in 2025.
Bull markets start 6-9 months before a recessionary environment ends.
John also mentioned Snowflake as a stock to put on your list.
U.K. Prime Minister, Liz Truss, is out. She has resigned. She lasted 45 days – the shortest tenure of a Prime Minister ever. So, Britain is on the hunt for its next leader. There is a lot to fix in this county.
Does anyone remember Yes, Minister, the TV series about the minister and how he was controlled by his aides
about what he said and didn’t say,
about what he knew and didn’t know,
about what he could do and not do,
and which areas he should dabble in and not dabble in.
It seems that Liz did not have enough quality aides with the necessary knowledge to direct her properly. And was Liz listening well? It seems there were failures all round.
Rental stress is still a thing in Australia. It is now cheaper to buy a house than rent. People with mortgages are passing on the extra cost to their tenants. The great shift is still going on. People are moving to the regional areas to secure cheaper housing. Small-town neighbourhoods – once thought of as no-go zones are being gentrified. Businesses are moving in and changing the whole environment. House prices are starting to come down.
Wishing you all a wonderful weekend.
Take care.
Cheers,
Jacque
Life’s most persistent and urgent question is, "What are you doing for others?"
-- Martin Luther King, Jr.
Global Market Comments
October 20, 2022
Fiat Lux
Featured Trade:
(Berkshire Hathaway B Shares (BRKB) January 2025 $420-$430
deep out-of-the-money vertical Bull Call spread LEAPS)
(BRKB)
BUY the Berkshire Hathaway B Shares (BRKB) January 2025 $420-$430 deep out-of-the-money vertical Bull Call spread LEAPS at $1.00 or best
Opening Trade
10-20-2022
expiration date: January 17, 2025
Number of Contracts = 1 contract
You don’t necessarily need to enter this position today. A big selloff would be ideal. But Berkshire Hathaway should be at the core of any long-term LEAPS portfolio.
If you are looking for a lottery ticket, then here is a lottery ticket.
While the chance of winning a real lottery is something like a million to one, this one is more like 2:1 in your favor. And the payoff is 9:1. That is the probability that (BRKB) shares will double over the next two years and four months.
We have one of the greatest double bottoms on the charts of all time setting up for Berkshire Hathaway right here.
With the Volatility Index (VIX) above $32 today, it’s time to start loading the boat with risk again.
Berkshire Hathaway is the investment vehicle managed by Oracle of Omaha Warren Buffet. The 40-year average annualized increase in book value is 19.0%. It is heavily weighted in high cash flow financials and domestic recovery stocks. Its sole major technology stock is Apple, which it has recently been selling.
The top holdings of (BRKB) are Apple (AAPL), Bank of America (BAC), Coca-Cola (KO), American Express (AXP), and Kraft Heinz (KHC).
Berkshire Hathaway “B” shares are the seventh largest component of the S&P 500 (SPY) with a market capitalization of $609 billion, and the only class of shares that trade options. It is a great play on the domestic cyclical recovery half of the US economy. For more about Berkshire Hathaway, please read my extended research piece below.
To learn more about the company, please visit their website at https://berkshirehathaway.com.
I am therefore buying the Berkshire Hathaway B Shares (BRKB January 2025 $420-$430 deep out-of-the-money vertical Bull Call spread LEAPS at $1.00 or best.
Don’t pay more than $1.50 or you’ll be chasing on a risk/reward basis.
January 2025 is the longest expiration currently listed. Please note that these options are illiquid, and it may take some work to get in or out. Executing these trades is more an art than a science.
Let’s say the Berkshire Hathaway B Shares (BRKB) January 2025 $420-$430 deep out-of-the-money vertical Bull Call spread LEAPS are showing a bid/offer spread of $0.50-$1.50, which is typical. Enter an order for one contract at $0.50, another for $0.60, another for $0.70, and so on. Eventually, you will enter a price that gets filled immediately. That is the real price. Then enter an order for your full position at that real price.
Notice that the day-to-day volatility of LEAPS prices is miniscule since the time value is so great. This means that the day-to-day moves in your P&L will be small. It also means you can buy your position over the course of a month just entering new orders every day. I know this can be tedious but getting screwed by overpaying for a position is even more tedious.
Look at the math below and you will see that a mere 60% rise in (BRKB) shares will generate a 900% profit with this position, such is the wonder of LEAPS. That gives you an implied leverage of 9:1 across the $420-$430 space.
Only use a limit order. DO NOT USE MARKET ORDERS UNDER ANY CIRCUMSTANCES. Just enter a limit order and work it.
This is a bet that (BRKB) will not fall below $430 by the January 17, 2025 options expiration in 2 years and 3 months.
Here are the specific trades you need to execute this position:
Buy 1 January 2025 (BRKB) $420 calls at………….………$7.00
Sell short 1 January 2025 (BRKB) $430 calls at…………$6.00
Net Cost:………………………….………..…………...........….....$1.00
Potential Profit: $10.00 - $1.00 = $9.00
(1 X 100 X $9.00) = $900 or 900% in 2 years and 3 months.
If you are uncertain on how to execute an options spread, please watch my training video by clicking here.
The best execution can be had by placing your bid for the entire spread in the middle market and waiting for the market to come to you. The difference between the bid and the offer on these deep in-the-money spread trades can be enormous.
Don’t execute the legs individually or you will end up losing much of your profit. Spread pricing can be very volatile on expiration months farther out.
Keep in mind that these are ballpark prices at best. After the alerts go out, prices can be all over the map.
The Barbell Play with Berkshire Hathaway
It’s time to give myself a dope slap.
I have been pounding the table all year about the merits of a barbell strategy, with equal weightings in technology and domestic recovery stocks. By owning both, you’ll always have something doing well as new cash flows bounce back and forth between the two sectors like a ping-pong ball.
After all, nobody gets sector rotation right, unless they have been practicing for 50 years, like me.
Full disclosure: I have to admit that after 50 years of following him, I love Buffet. He was one of the first subscribers to my newsletter when it started up in 2008. Some of his best ideas have come from the Mad Hedge Fund Trader, like buying Bank of America for $5 in 2008.
Oh, and he hates Wall Street for constantly fleecing people. Ditto here.
In reading Warren Buffet’s annual letter (click here for the link), it occurred to me that his Berkshire Hathaway (BRKB) shares were in effect a one-stop barbell investment.
For a start, Warren owns a serious slug of Apple (AAPL), some $120 billion worth, or 2.5% of the total fund. That gives (BRKB) some technology weighting. It cost him only $20 billion. The dividends he received entirely paid for the initial cost. So he owns 4% of Apple for free.
I remember the battle over the initial “BUY” five years ago. Warren fought it, insisting he didn’t understand the smartphone business. In the end, he bought Apple for its global brand value alone.
That is Warren Buffet to a tee.
The next five largest publicly listed holdings are Bank of America (BAC), Coca-Cola (KO), American Express (AXP), and Verizon Communications (VZ). These are your classic domestic recovery sectors. And with a heavy weighting in other banks (BK) (USB), Buffet is effectively short the bond market (TLT), another position I hugely favor.
Also included in the package is a liberal salting of pharmaceuticals, Merck (MRK) and AbbVie (ABBV). He has a small energy weighting with Chevron (CVX). He even has a position in old heavy metal America with General Motors (GM).
Berkshire is also one of the world’s largest property & casualty insurance owners. Its current “float” is $138 billion. You all know his flagship holding, GEICO. And the gecko mascot isn’t going anywhere as long as Warren lives. It was Warren’s idea.
It all seems to work for Warren. In 2020, he earned a staggering $42.5 billion. All told, Berkshire’s businesses employ 360,000, second to only Amazon (AMZN), and is the largest taxpayer in the United States, accounting for 3% of government revenues. Berkshire is also the largest owner of capital goods & equipment in the US worth $156 billion, topping (AT&T).
Many of Warrens's early 1956 $1,000 investors are millionaires many times over….and over 100 years old, prompting him to muse if ownership of his shares extended life.
Warren’s annual letter, which he spends practically the entire year working on, is always one of the best reads in the financial markets. There isn’t a better 50,000-foot view out there. He also admits to his mistakes, such as his disastrous purchase of Precision Castparts (PCC) in 2016 for $37 billion, which later suffered from the crash in the aerospace industry. In 2020, Buffet wrote off $11 billion of that acquisition.
He can do worse. In 1993, he bought the Dexter Shoe Company for $433 million worth of Berkshire stock. The company went under, but the Berkshire stock today is worth $8.7 billion.
Buffet’s letters always refer back to some of his “greatest hits,” today legends in the business history of the United States: GEICO, Furniture Mart, Berkshire Hathaway Energy, and See’s Candies, one of the largest employers of women in the US using 150-year-old recipes. Its peanut brittle is to die for.
In 2009, Buffet snatched away from me BNSF for a song, now the most profitable railroad in the country, an amalgamation of 360 railroads over 170 years. I say “snatched away” because it was my favorite railroad trading vehicle for decades until he bought the entire company. I hear its trains run by my home every night as a grim reminder.
Another benefit to owning (BRKB) is that Buffet is far and away the largest buyer of his own shares, soaking up $25 billion worth in 2020. And he is buying the shares of other companies that are also aggressively buying their own shares, like Apple ($200 billion last year). It all sounds like the perfect money-creation machine to me.
It gets better. Berkshires “B” shares trade options, meaning you can buy LEAPS (Long Term Equity Anticipation Securities), which by now, you all know and love. I’ll run some numbers for you.
With (BRKB) now trading at $254, you can buy the January 2023 $300-$310 call spread for $2.50. If the shares close anywhere over $310 by the 2023 expiration, the position will be worth $10.00, giving you a gain of 300%. And you only need an appreciation of $56, or 22% in the shares to capture this blockbuster profit, giving you upside leverage of an eye-popping 13.63X in the best-run company in America.
See, I told you you’d like it.
This is how poor people become rich. In fact, my target for (BRKB) is $300 for end of 2021 and $400 for 2022, right when the two-year LEAPS expire.
One question I often get about Berkshire is what happens when Warren Buffet goes to his greater reward, not an impossible concept given that he is 90 years old.
I imagine the shares will have a bad day or two, and then recover. Buffet has been hiring his replacements for a decade or more, and he handed off day-to-day operation years ago (I didn’t want to move to Omaha, no mountains).
When that happens, it will be the best buying opportunity of the year. And another chance to load up on those LEAPS.
Mad Hedge Technology Letter
October 19, 2022
Fiat Lux
Featured Trade:
(IGNORE THE APOCALYPSE RUMORS)
(NFLX), (FED)
Netflix (NFLX) adding 2.41 million global subscribers means the technology sector will not have the earnings apocalypse that many thought was around the corner.
It’s good news for tech stocks as a whole.
This is why tech stocks have rallied hard the last few days as well as news that there is a 100% probability of a .75% rate hike at the November 2nd Fed meeting priced into current tech valuations.
The market always loves certainty.
The multi-million subscribers added is commendable for the streaming company, but like many things in life, the devil is in the details.
Later in the earnings report, Netflix management says that “aggregate annual direct operating losses this year alone could be well in excess of $10 billion, compared with our +$5-$6 billion of annual operating profit.”
In short, Netflix is adding subscribers, at least this past quarter, but not in a profitable way.
They have had to dilute the quality of their services by integrating an ad model which goes against the spirit of what Neflix was intended to be.
Not only tech companies, but companies around the world are decreasing the quality of services through shrinkflation or “smart” packaging or just offering a worse version of a previously better iteration.
Costs have come up for everyone too but I don’t believe losing over $10 billion in annual operating losses will sit well with tech investors.
That means that Netflix must either raise the quality of their content so customers are inclined to pay higher prices or integrate more ads into their ad models.
The question must be asked, how much are Netflix subscribers willing to pay for a monthly service?
The premium package is already $19.99 and my bet is that NFLX experiences serious attrition if they go to $25 per month.
The ad version being priced at $6.99 is being too hyped up and I see it as a net negative for NFLX.
I don’t believe NFLX can do the undoable which is ramping up the quality of content in the short term.
Earnings apocalypse is off the table precisely because Americans are still spending because they still have jobs.
Yet, this sets the stage for weaker and shorter bear market rallies followed by thundering sell-offs.
This isn’t just about one indicator versus the next.
It was current US Treasury Secretary Janet Yellen who responded to a reporter in the past that she wasn’t worried about America’s large federal debt because “interest rates were low.”
Well, now there is finally a cost to rolling over that federal debt and tech stocks are valued lower for it.
Netflix is a symptom, not the main virus.
That is why Netflix adds over 2 million subscribers but will lose $10 billion annually to do it. This is also why the US economy boasts of full employment but has a negative GDP. As the zombie companies pile up, the key is to preserve free cash flow and as for the tech market, sell any big bear market rally.
US consumers still have money and they will have enough if they don’t lose their jobs, but the Fed is hoping to artificially induce a job crisis.
