Mad Hedge Technology Letter
March 31, 2023
Fiat Lux
Featured Trade:
(BUY NOW PAY WHENEVER)
(AAPL), (AFRM), (MSFT)
Apple is stepping into the "buy now, pay later" industry and these lateral moves epitomize the state of the tech sector today.
For a company known for its dazzling innovation, this doesn’t do much to move the needle, but honestly, it doesn’t really need to recreate the wheel at this point either.
"Buy now, pay later" focuses on the bottom feeder consumer who can’t afford to pay full price for something and must elongate the payment cycle.
These are the people who are high-risk consumers that otherwise wouldn’t be able to buy an iPhone without the subsidy.
The good news is that Apple doesn’t need to innovate to stay on top because many other companies aren’t innovating either. The bar is quite low these days.
I would say that Microsoft is probably the one that takes the lead with its artificial intelligence investments, but the jury is also out on that as well with Italy banning its new service.
Without much innovation going on, Apple is moving onto others' turf and leveraging their whole ecosystem against weaker competition like Affirm Holdings, Inc. (AFRM).
Launching Apple Pay Later, which allows Apple Pay users to split purchases into four interest-free payments paid over six weeks without an additional fee.
Apple conducts a soft credit check, which reviews credit scores to understand one’s current credit.
If approved, the Pay Later option is shown when you use Apple Pay online or make in-app purchases on iPhones and iPads. Purchases using the new service will be authenticated using Face ID, Touch ID, or a passcode.
Aside from Affirm, other competitors include Afterpay, Klarna, and PayPal’s “Pay in 4” option. Here’s how Apple Pay Later compares.
I do believe this is a net positive for Apple even if it does increase the risk of non-performing loans.
Apple would easily be able to absorb these losses if they delivered material harm to the company simply because the balance sheet is so healthy.
Apple has been the recipient of the flight to safety trade along with Microsoft during this technology stock melt up.
The expectation of no more interest rates has been the trigger for new capital allocation into Apple stock.
I fully expect Apple’s stock to perform well during a time when liquidity has been poured into the system by the Fed.
They are doing this because the Fed is prioritizing global systemic banking risk as the number one risk to the market.
This has caused the Fed to rid themselves of quantitative tightening meaning the goalposts have suddenly widened for the tech behemoths and Apple is merely obliging to the easier conditions.
Remember, it is more about conditions in the short term than anything else which is why liquidity is so important to share prices.
Therefore, Apple rolling out a “meh” business like "buy now, pay later," which could possibly turn into a "buy now, pay never" business, is not really a big deal.
Rolling out with essentially the same phone over and over again with different colors also doesn’t matter either.
Conversely, this will do material damage to companies like Affirm, Klarna, Afterpay, and PayPal.
Buy the dip in the best and brightest in tech. Apple is obviously one of those candidates.
“Those who rule chips will rule the entire world.” – Said Founder of Softbank Masayoshi Son
Apple and Customer Behaviour
March 29, 2023
Hello everyone,
On Tuesday Apple will introduce Apple Pay Later, which will allow users to split their purchases into four payments spread over the course of six weeks. Individuals can apply for Apple Pay Later loans between $50 and $1000 and use them for in-app and online purchases made through merchants that accept Apple Pay. Apple said purchases using the software will be authenticated using Face ID, Touch ID or a passcode. Users will be asked to link a debit card as their loan repayment method. Credit cards won’t be accepted.
The incentives to spend leave more and more people living paycheck to paycheck.
So, while 62% of people are waiting for their next pay to fund their weekly shop, more and more people are getting savvy about finding other ways to make ends meet. The “side hustle” has become a necessary add-on to the traditional “job”, which enables people to live without difficulty.
But people are also purging useless services. Many families and individuals are getting rid of subscriptions and memberships and premium movie channels that they may never watch. Can you remember all the subscriptions you have?
Do you have funds sitting in your bank account? Transfer them to a high yielding online savings account to earn a better interest rate. Make sure your bank is not charging monthly maintenance or service fees for overdrafts or insufficient funds. Or you can always put more into your brokerage trading account and be ready to pull the trigger on a great trade.
Dialing down on those impulse purchases.
Are you one of those people who go into a shop and see something and say “I just have to have that item”? Or do you walk past a coffee shop and then turn back, purchase a coffee and something to eat? Or do you see something online and think I have always wanted one of those - and then buy it?
Solution: unsubscribe from all those retail newsletters and notifications, stop going into shops to browse (anyway, who has time to do that?). If you really want/need something, go to the nearest charity shop or second-hand warehouse. You are helping the charity and getting a great deal yourself.
So, in conclusion today, below are the takeaways to live well and avoid the debt cycle and Pay Later promotions.
Have a wonderful week.
Cheers,
Jacque
Global Market Comments
March 31, 2023
Fiat Lux
Featured Trade:
(Trade Alert - (SCHW) LEAPS – BUY)
(SCHW)
CLICK HERE to download today's position sheet.
BUY the Charles Schwab (SCHW) January 2024 $60-$65 at-the-money vertical Bull Call debit spread LEAPS at $2.00 or best
Opening Trade
3-31-2023
expiration date: January 19, 2024
Number of Contracts = 1 contract
The brokerage sector has been beaten like the proverbial red-headed stepchild this year, with plunging stock market prices and volumes. However, it should be at the core of any long-term LEAPS portfolio.
The best time to pick up this position will be during a market meltdown day and the Volatility Index is over $30.
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 10:1 in your favor. And the payoff is 2:1. That is the probability that Charles Schwab shares will rise by 9.2% over the next nine months.
(SCHW) essentially doesn’t take risk. It is simply a fee taker in the form of stock commissions. It really has no trading income. It is strictly regulated by the SEC, whose requirements and reporting are far more rigorous than bank regulation.
Its shares seem to have suffered from a 35% hit simply because it is based in California, a one-hour drive from Silicon Valley Bank. You don’t get any more conservative and safer than Charles Schwab.
The regional banking crisis has pulled forward any recession and therefore the recovery. The Fed certainly raised interest rates by 25 basis point because it was already in the mail.
After that, there will be no interest rate rises for a decade. The cuts will start in June and continue rapidly after that. That’s when the economic data catch up with the reality that is happening right now, which is hugely deflationary.
(NVDA) and (TSLA) already know this, which rose sharply last week.
And here is the sweet spot. Fears of a recession have knocked $30, or 35% off the recent $85 high in (SCHW) shares this year.
I am therefore buying the Charles Schwab (SCHW) January 2024 $60-$65 at-the-money vertical Bull Call debit spread LEAPS at $2.00 or best.
Don’t pay more than $2.60 or you’ll be chasing on a risk/reward basis.
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 Charles Schwab (SCHW) January 2024 $60-$65 at-the-money vertical Bull Call debit spread LEAPS are showing a bid/offer spread of $2.00-$3.00, which is typical. Enter an order for one contract at $2.30, another for $2.40, another for $2.50 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.
A lot of people ask me about the appropriate size. Remember, if this stock does NOT rise by 18% in nine months, the value of your investment goes to zero.
The way to play this is to buy LEAPS in ten different names. If one out of ten increases ten times, you break even. If two of ten work you double your money, and if only three of ten work you triple your money.
There is another way to cash in. Let’s say we get half of your double in the next three months, which from these low levels is entirely possible. Then you could earn half of the maximum potential profit in months. Then you can decide whether to keep the fivefold return or go for the full ten bagger. It’s a nice problem to have.
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 an 18% rise in (SCHW) shares will generate a 150% profit with this position, such is the wonder of LEAPS. That gives you an implied leverage of 30:1 across the $60-$65 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 Charles Schwab will not fall below $65 by the January 19, 2024 option expiration in 9 months.
Here are the specific trades you need to execute this position:
Buy 1 January 2024 (SCHW) $60 calls at………….………$9.00
Sell short 1 January 2024 (SCHW) $65 calls at…….……$7.00
Net Cost:………………………….………..…………..........….....$2.00
Potential Profit: $5.00 - $2.00 = $3.00
(1 X 100 X $3.00) = $3.00 or 150% in 9 months.
To see how to enter this trade in your online platform, please look at the order ticket below, which I pulled off of Interactive Brokers.
If you are uncertain on how to execute an options spread, please watch my training video on “How to Execute a Vertical Bull Call Debit Spread” 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.
Mad Hedge Biotech and Healthcare Letter
March 30, 2023
Fiat Lux
Featured Trade:
(ANOTHER MONOPOLY ON THE RISE)
(ZTS), (PFE)
Whether you’re a devoted dog mom or a tough-as-nails cattle rancher, you’ll most likely agree that animals should have healthcare, pretty much like humans. This is where Zoetis (ZTS) comes in, a company that focuses exclusively on developing treatments and other healthcare needs for livestock and, of course, pets.
Zoetis is the only pure-play animal health company in the world. It sells everything related to animal healthcare, from painkillers for your beloved pets to diagnostic equipment needed in veterinary clinics. Spun off from Pfizer (PFE) roughly a decade ago, Zoetis’ profits have consistently climbed thanks to the steady rise in spending on domestic animals.
Admittedly, macroeconomic issues and a pause in earnings growth recently affected the stock negatively, which saw its price fall by almost 13% since 2022. However, short- and long-term catalysts are anticipated to boost the stock this year, with the company expected to report at least a 33% increase in price in the following months.
Pet ownership across the globe has been exhibiting an increase in demand even before the pandemic, with pets gaining more importance and getting treated as part of the family. This indicates lower chances of skimping when it comes to their health, paving the way for more innovative treatments and possibly more expensive trips to the vet.
The increasing demand for animal protein has also called for higher livestock production worldwide, which translates to more sales in the animal healthcare sector. In fact, over half of the antibiotics sold in 2022 were used for the improvement of farm yields.
Incredibly, even concerns over recession have not hampered these trends. If anything, the demands continue to rise.
This is one of the most compelling reasons to consider Zoetis stock. It is already the biggest name in the global markets, particularly for companion animals, cattle, swine, and even fish. Since it is virtually a monopoly in the animal healthcare industry, it is strategically positioned to sustain its momentum and penetrate the market quicker than the up-and-coming competition.
Its total addressable market is estimated to be approximately $45 billion. For context, this market recorded an annual growth of 5.8% over the past 20 years.
Surprisingly, Zoetis only spent $529 million out of its $8 billion revenue for research and development, which means it won’t cost the company too much money to continue churning out new drugs, vaccines, software packages, treatments, and other animal healthcare needs for the foreseeable future.
The company is also expanding faster compared to the broader market, with Zoetis’ earnings forecast to rise at an average of 13% each year over the following five years.
Another underappreciated factor that makes Zoetis attractive is its pipeline of innovation. Unlike competitors that depend on price hikes for their growth, Zoetis leverages its cutting-edge innovations.
An excellent example is its game-changing drug, Simparica Trio, a triple combo product for parasite prevention launched in 2020. By 2022, sales of this drug jumped by an impressive 57% to hit $744 million. Another example is Librela, an osteoarthritis treatment for dogs, which achieved the blockbuster status of $100 million in sales outside the United States and is slated for release in the country sometime this 2023. Meanwhile, a feline counterpart of the drug, Solensia, received FDA approval last year and raked in $30 million in revenue.
These types of innovations provide Zoetis with a competitive edge in the form of a unique organic volume growth trajectory that’s not found in other companies.
Notably, a mere $100 million qualifies an animal health drug as a blockbuster. This is one reason that discourages potential Big Pharma rivals from entering the space and challenging Zoetis. After all, they are used for human drugs worth $1 billion or more.
However, it’s essential to remember that many animal treatments are paid out of pocket. That means there are no insurance companies pressuring the patients to get or switch to cheaper drugs or generics even when Zoetis’ products lose their patent exclusivity. Actually, in 2019, about 75% of the company’s revenue was generated from its products that had already lost patent protection.
Overall, Zoetis is a solid investment thanks to its growth potential and highly competitive moat. It has a strong track record and an impressively diverse revenue stream, making this animal health company well-equipped to sustain its momentum in the years to come at a fast pace. I suggest you buy the dip.
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
March 30, 2023
Fiat Lux
Featured Trade:
Trade Alert - (MS) LEAPS – BUY
(MS)
CLICK HERE to download today's position sheet.