As I glance up at my trading screen this morning and I see First Republic Bank (FRC) shares scoring hot, I know it means only one thing for tech stocks ($COMPQ) and that’s nothing positive.
Tech was trusted as the safety ground for investors during the global bank contagion that wreaked havoc on the supposed jewels of western banking like Credit Suisse in Switzerland.
It wasn’t supposed to happen like this.
Instead, investors coalesced around tech shares and precious metals.
They benefited as they caught a serious bid up in price.
That’s all unwinding as FRC prepares for its earnings report which most likely will signal that the worst of the storm has passed.
That’s on the heels of “too big to fail” banks like JP Morgan, Bank of America, and Wells Fargo reporting better than expected.
April will most likely turn into quite a dud for tech shares which is why I have cooled it on issuing trade alerts.
To prevent panic from spreading, governments and central banks stepped in literally overnight and offered a lifeline to financial institutions delivering historic rescue packages and emergency deals.
Western taxpayers bailing out the institutions has been a common theme since 2001.
Eventually, UBS, Switzerland’s biggest bank, was required by the government to buy its long-time rival Credit Suisse for three billion Swiss francs ($3.25 billion).
Clearly, failure is not an option. The impact would be devastating not only for Switzerland but for the global financial system. It should not be forgotten that 15 years ago, UBS itself needed rescuing by the Swiss government and central bank.
This doesn’t necessarily stop what was happening before meaning high indebtedness, excessive risk-taking, unreasonable exposure to liquidity risk, mismatch between assets and liabilities, poor investment performance, mismanagement.
Customer trust eroded for one sector means that often another sector wins in the short-term with capital flight hitting tech shares.
Some days it's important to notice that Apple shares could act as a second bank account.
APPL also rolled out a new savings account delivering Apple customers 4.15% of interest on their money. That was a smart move by CEO Tim Cook.
Now an unhealthy mix of soaring inflation, rising interest rates, and weaker economic growth could leave banks facing new problems, ranging from steep losses in bond value to higher funding costs and lower loan demand.
After the acute banking stress of the past weeks, a credit crunch could be looming. To adjust to an increasingly unfavorable macroeconomic context, banks have already substantially tightened their credit standards for all loan categories. But that is an additional blow to recession-stricken economies.
If there is another banking crisis following the last one we just experienced, expect big tech to get another avalanche of investors looking for a safe haven.
Although I am not one hoping for another disaster, the savvy investor must do what is right to preserve capital.
These are choppy water we see ourselves in and I do believe the sideways action in tech shares in April has been a big victory for tech.
April was the month investors were planning to dump shares and run for the hills, and that didn’t manifest itself.
The little volatility means that there was very little action taking place.
I understand that as a wildly bullish setup for tech earnings because much of the “bad” tech earnings have been priced into the news.
Conditions favor a mild bullish push in tech shares in May after they report better than first thought earnings.
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“A founder is not a job, it's a role, an attitude.” – Said CEO of Twitter Jack Dorsey
https://www.madhedgefundtrader.com/wp-content/uploads/2021/10/jensen-huang.png546550Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2023-04-24 15:00:352023-04-25 11:33:02Quote of the Day - April 24, 2023
When Netflix (NFLX) announced surprise subscriber growth, triggering a monster 10% pop in the stock, we got the good cop.
When Goldman Sachs (GS) revealed the true cost of their disastrous foray into the retail market, taking the stock 10% we got the bad cop.
Good cop.
Bad cop.
Good cop.
Bad cop.
No wonder the stock market is confused, trapped in the narrowest trading range in recent memory, and taking the Volatility Index ($VIX) down to a subterranean $15.
Welcome to the Q1 earnings season, which is turning out better than expected, but which is befuddling nonetheless. And it may be months before the markets breakout, not until we get an actual interest rate CUT from the Federal Reserve.
The economic data is now steadily weakening across the board. Yet, stocks won’t crash because institutional investors are holding stocks for the end of the year, not for the end of the day. We are so close to the end of this bear market that it is not worth selling, incurring tax liabilities, then buying back in.
As a result, option-implied volatilities are falling off a cliff. (NVDA) plunged from 60% to 40%, while Tesla absolutely cratered from 100% to 50%, including 10% on Friday alone. That’s why most Mad Hedge followers were unable to get into my (TSLA) short strangle unless they moved the strike prices by $10 quickly. This will be the big one that got away.
I never saw the market enter May with a worse setup than this one. It has “SELL” written all over it. That’s why I have flipped from a fantastically aggressive 100% long position in financials to a market neutral 40% long, 40% short trading book.
But I doubt we will fall more than 10%.
If you are a long-term investor, you might as well take a long cruise, as I am planning to do this summer.
My big bet-the-ranch long in banks and brokers turned out to be the trade of the decade and paid off huge. We are now looking at an incredible +10.52% profit so far in April. My 2023 year-to-date performance is now at an eye-popping +57.14%. The S&P 500 (SPY) is up only a miniscule +11.05% so far in 2023. My trailing one-year return maintains a sky-high +112.63% versus -8.21% for the S&P 500.
That brings my 15-year total return to +654.33%, some 2.77 times the S&P 500 (SPY) over the same period. My average annualized return has blasted up to +49.07%, another new high.
I executed a boatload of trades last week. As April long positions reached max profit in (C), (FCX), (TSLA), (BAC), (IBKR), (MS), and (BRK/B), I rolled the cash into new May positions. Those include longs in the (TLT), (BA), and (TSLA), and shorts in the (SPY), (QQQ), and (TSLA) for a net market neutral position.
The Fed is Looking for “One and Done” with the next 25-basis rate hike on May 3. The regional banking crisis and slowing economic data are doing its work for it.
Cash is Pouring into Money Market Funds, as fears of a stock market correction mount. Yields on 90-day T-bills reached 5.175%, a 16-year high. It’s the 5th week in a row of inflows.
Earnings Season Sees Best Start in a Decade, with 90% beating estimates, albeit low ones. Only 10% (SPY) companies have reported so far with (JPM), out biggest long, leading the charge. Consensus (SPY) earnings are currently $220 a share giving a moderate price/earnings multiple of 18.77X.
Bank of America Rips, on a great earnings report. Customers increased spending by 8% in Q1 according to credit card transactions. The bank expects a mild recession in the second half of this year.
Space X Starship Explodes on Takeoff, setting back Elon Musk’s efforts to colonize Mars. The largest rocket ever built flew 50 miles before self-destructing. It’s clear from watching the video the gyroscope failed, causing the rocket to flip over. The launch was made from the company’s Boca Chica facility. The 400-foot rocket is expected to carry a staggering 100 tons into space.
Tesla Earnings Disappoint, taking the profit margin down to a two-year low. It’s all about market share now, spending profits to maintain global dominance in EVs. The company still made $2.5 billion in Q1. The shares dropped $18 on the news. Tesla still makes money selling EVs while the competition is losing billions.
Existing Home Sales Slide in March, down 2.4% to a 4.44 million annual rate. Some 28% of sales were above the asking price. Inventories remain extremely short at 980,000.
Goldman Sachs (GS) Bombs with an earnings shortfall, including a $470 billion write-off on their Marcus loans. The retreat from retail banking is proving costly. Q1 Revenues fell from $12.79 billion
Chile Nationalizes the Lithium Industry, sending (SQM) and (ALB) into a tailspin. The official reason is to make the industry more efficient. The real reason is so the government can skim off more profits in this exploding industry. Chile is the world’s second largest producer of lithium essential for EV batteries.
Weekly Jobless Claims Hit One-Year High at 239,000, a gain of 11,000. The Fed’s stiff medicine is finally starting to work.
My Ten-Year View
When we come out the other side of the recession, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. The economy decarbonizing and technology hyper-accelerating, creating enormous investment opportunities. The Dow Average will rise by 800% to 240,000 or more in the coming decade. The new America will be far more efficient and profitable than the old.
Dow 240,000 here we come!
On Monday, April 24 at 7:30 AM EST the Dallas Fed Manufacturing Index is out.
On Tuesday, April 25 at 6:00 AM, the S&P Case Shiller National Home Price Index is announced. On Wednesday, April 26 at 11:00 AM, the US Durable Goods Orders are printed. On Thursday, April 27 at 8:30 AM EST, the Weekly Jobless Claims are announced. We also get an update on Q1 US GDP.
On Friday, April 28 at 8:30 AM, the Personal Income & Spending is released.
As for me, someone commented that I walk kind of funny the other day, and the memories flooded back.
In 1975, The Economist magazine in London heard rumors that a large part of the population was getting slaughtered in Cambodia. We expected this to happen after the fall of Vietnam, but not in the Land of the Khmers, historically a kind and gentle people. So my editor, Peter Martin, sent me to check it out.
Hooking up with a right-wing guerrilla group financed by the CIA was the easy part. Humping 100 miles in 100-degree heat wasn’t. Carrying 20-pound cans of ammo only made the work harder.
We eventually came to a large village made of palm fronds that was completely deserted. Then my guide said, “Over here.” He took me to a nearby cave. Inside were the bodies of over 1,000 women, children, and old men contorted in tortured shapes that had been there for months.
I’ll never forget that smell.
With evidence and plenty of pictures in hand, we started the trek back. Suddenly, there was a large explosion and the man 20 yards in front of me vaporized. He had stepped on a land mine. Then the machine gun fire opened up.
It was an ambush.
I picked up an M-16 to return fire, but it was bent, bloody, and unusable. I picked up a second assault rifle and fired until it was empty. Then everything suddenly went black. A mortar shell had landed nearby.
I woke up days chained to a palm tree, covered in shrapnel wounds, a prisoner of the Khmer Rouge. Maggots infested my wounds, but I remembered from my Tropical Diseases class at UCLA that I should leave them alone because they only ate dead flesh and would prevent gangreen. That class saved my life. Good thing I got an “A”.
I was given a bowl of rice a day to eat, which I had to gum because it was full of small pebbles and might break my teeth. Farmers loaded their crops with these so the greater weight could increase their income. I spent my time pulling shrapnel out of my legs with a crude pair of pliers.
Two weeks later, the American who set up the trip for me showed up with cases of claymore mines, rifles, ammunition, and antibiotics. My chains we cut and I began the long walk back to Thailand.
It’s nice to learn your true value.
Back in Bangkok, I saw a doctor who attended to the 50-caliber bullet that grazed my right hip. One inch to the right and I wouldn’t be writing this today. It was too old to sew up so he decided to clean it instead. “This won’t hurt a bit,” he said as he poured in hydrogen peroxide and scrubbed it with a stiff plastic brush.
It was the greatest pain of my life. Tears rolled down my face.
But you know what? The Economist got their story and the world found out about the Great Cambodian Genocide, where 3 million died. There is a museum in Phnom Penh devoted to it today.
So, if you want to know why I walk funny, be prepared for a long story. I still set off metal detectors.
Doing Research in Asia
Good Luck and Good Trading,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
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“When you come to a fork in the road, take it,” said famed New York Yankees baseball manager Yogi Berra.
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The tech industry is quickly morphing into a "generative artificial intelligence success story or bust" outcome for many involved.
This came pretty much out of nowhere.
December 2022 was the big announcement that ChatGPT went live and everybody in tech has basically been freaking out since then.
Big ideas like the internet and software also had the same type of effect on tech stocks back in the heyday.
What would have Microsoft (MSFT) been without the computer or Windows?
Even more urgent, once-perceived growth tech companies like Tesla are starting to cut prices of products because the consumer is tapped out these days.
That means tech corporations can’t sell the current product by adding incremental iterations and passing it off as something “groundbreaking.”
Consumers need something more.
Consumers will spend on the next big thing and generative artificial intelligence still has a long way to go, but stocks participating in generative AI are starting to get those premium multiples that were only reserved for tech royalty.
Everyone is hoping to get in on the action, and Alphabet is also racing to build a new search engine and add artificial intelligence features to its existing products in the face of rapid growth in the field by rivals such as Microsoft Bing.
Google is testing new features called "Magi," with more than 160 people working full-time on the project.
Google's new products will try to predict users' needs, with features such as helping users write software code and display ads in search results, and Google is also exploring mapping technology that allows users to use Google Earth with the help of AI and search music through conversations with chatbots.
Samsung Electronics is reportedly considering replacing Google with Bing, the main search engine on its phones, because of Bing's artificial intelligence capabilities. The Samsung contract is expected to generate $3 billion in annual revenue for Google, a revenue stream that is now in jeopardy. In addition, Google has a $20 billion contract with Apple for a similar default search engine, which is up for renewal this year.
Google’s search engine could be swept into the dustbin of history if they don’t get a move on it pronto.
The ecosystems like Apple and Samsung can easily opt for a better engine if Google falls behind and that is exactly what we are seeing from Samsung.
I would probably say that Google got a little too cocky and stopped developing itself.
They thought that nobody could topple them.
The panoramic views from the ivory tower can look nice from the terrace for a while until somebody builds a bigger ivory tower that obstructs the view.
It’s been quite fascinating to see Google’s sense of urgency lately because it was always assumed they were part of a stable duopoly with Facebook.
Google’s panic indicates that Microsoft’s Bing is a real threat to their revenue stream, and at the very minimum, bits and pieces of the new technology will be incorporated into a new version of a search engine that will behave as a supercharged version of Google, the likes we have never seen before.
If Google can catch up, then its stock price will go a lot higher from here.
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"Life is not fair; get used to it," said the Founder of Microsoft Bill Gates.
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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
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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
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