Mad Hedge Biotech and Healthcare Letter
May 9, 2023
Fiat Lux
Featured Trade:
(WEIGHT LOSS DRUGS: THE NEXT BIG THING OR JUST HYPE?)
(LLY), (NVO), (PFE), (JNJ), (AMGN), (ALT)
Selling hot products and crushing the competition is where the real money's at. However, the challenge is to avoid falling for the hype. You need to assess a company's growth to know if it's worth investing in for the long haul.
If you have heard of tirzepatide, then you know that this drug has taken the pharma world by storm, making Eli Lilly (LLY) the talk of the town. In fact, this popular treatment helps patients drop more than 20% of their weight. No wonder it's got everyone hyped up.
But it's not just Eli Lilly that's causing a stir. Novo Nordisk (NVO) has a similar drug that's making waves, too.
In the world of pharmaceuticals, few drugs have generated as much buzz as Lilly's tirzepatide and Novo's semaglutide. These medications are projected to be among the top sellers of the decade.
These game-changing treatments have joined the ranks of iconic meds like the birth control pill, Prozac, and Pfizer’s (PFE) Viagra.
As expected, the share prices of both Eli Lilly and Novo Nordish have gone through the roof. They're already valued at around $400 billion each, placing them right behind industry leader Johnson & Johnson (JNJ).
Still, drug development is unpredictable.
A recent reminder of this was the biotech company Altimmune's (ALT) disclosure in March that a significant number of patients in a closely watched trial of its new weight-loss drug dropped out due to gastrointestinal issues.
That’s why it's essential to distinguish between opportunity and hype. More importantly, it’s critical to determine what exactly makes Lilly's tirzepatide and Novo's semaglutide so game-changing.
First, it's crucial to know that these two drugs come in various forms and are marketed for different conditions.
Novo's semaglutide is sold under the names Ozempic and Wegovy for Type 2 diabetes and obesity treatment, respectively, as well as Rybelsus, a pill for Type 2 diabetes. Lilly's tirzepatide, on the other hand, is currently only available as Mounjaro, an injection for Type 2 diabetes, but may soon have a new name added to the roster.
The real revolutionary aspect of these drugs is their effectiveness in lowering blood sugar and promoting weight loss. They mimic natural hormones that stimulate insulin production and slow digestion, making people feel fuller for longer.
Weight loss has long been a tricky area for drug development, with previous attempts being either ineffective or dangerous, resulting in many weight loss drugs being removed from the market.
But these drugs from Novo and Lilly are proving to be safe, albeit with significant side effects, and their efficacy is impressive.
In one trial, patients using Lilly's tirzepatide lost an average of 22.5% of their body weight, while patients on Novo's semaglutide lost 14.9% of their body weight in a separate trial. By comparison, a previous Novo drug called Saxenda only cut patients' body weights by 7.4%.
Another pressing question is about the availability of these drugs.
Mounjaro and Novo's Ozempic, Wegovy, and Rybelsus are already available on the market but have been in high demand and short supply.
To address this issue, both companies have announced plans to increase production. In April, Novo revealed that it had secured a new contract manufacturer, while Lilly has stated that it plans to double its production capacity for Mounjaro and similar drugs by the end of 2023.
Considering the market size and potential for these treatments, it comes as no surprise that competitors are already emerging.
Pfizer is currently developing a similar pill to tirzepatide and semaglutide, while Amgen (AMGN) is testing a weight-loss drug that uses a different mechanism.
Lilly has other weight-loss drugs in its pipeline, including a pill called orforglipron, which could launch in 2027. This is projected to generate $9.9 billion in sales in 2030.
Despite the emergence of competition, the weight-loss market is substantial enough to accommodate several drugs. Sales of obesity drugs are estimated to reach $30 billion by 2030, not including the Type 2 diabetes indication.
It's no secret that obesity and Type 2 diabetes are among the most prevalent health issues affecting millions worldwide. But did you know that the combined market for drugs targeting these conditions is expected to skyrocket to $90 billion globally by 2030?
Given the alarming statistics provided by the Centers for Disease Control and Prevention, such a staggering figure is not hard to fathom.
Almost 42% of American adults are obese, and about one in ten have diabetes. No wonder drug companies are racing to develop effective treatments to cater to this massive patient pool.
But what's interesting is that these drugs, which are not curative, could be a cash cow for pharmaceutical companies, as patients will likely need to take them for a long time.
This is why it’s easy to be bullish on the earnings potential of drugs like Mounjaro, with estimates for peak sales ranging from a heady $100 billion a year to a still impressive $40 billion.
In the pharmaceutical industry, buzz-worthy drugs are a dime a dozen, but game-changing medications that can revolutionize an entire market are few and far between.
Lilly's tirzepatide and Novo's semaglutide are just that.
These drugs have demonstrated significant weight loss in patients and are projected to be top sellers for the next decade. Despite the risks, Lilly and Novo's drugs are impressive, as they mimic natural hormones in the body, stimulate insulin production, and slow digestion to promote weight loss.
With the weight-loss market projected to reach staggering amounts by 2030, the potential is significant, but drug development is unpredictable, and competitors will inevitably emerge. Needless to say, investors must determine if these drugs' sky-high expectations are already factored into current share prices or if there's still room for growth.
While the weight-loss drug race is far from over, it’s clear that Lilly and Novo are off to a good start.
Global Market Comments
May 9, 2023
Fiat Lux
Featured Trades:
(THURSDAY, MAY 18, 2023 TAMPA, FLORIDA STRATEGY LUNCHEON)
(HOW TO JOIN THE EARLY RETIREMENT STAMPEDE)
CLICK HERE to download today's position sheet.
(THE MONDAY BRIEF ACCORDING TO JOHN)
May 8, 2023
Hello everyone,
According to John, the U.S. banking sector may be in for a shake-up in the future.
• It’s the last unconsolidated U.S. industry along with healthcare.
• In the U.S. there are five railroads, four airlines, three trucking companies, three telephone companies & two cell phone providers … and 4000 banks.
• England has five major banks.
• Australia has four major banks.
• Germany has two major banks.
• Do you think the banking system in America could be seen as a bit anachronistic?
•
Much like its federal system where the 50 states run themselves like mini countries.
The U.S. could pivot from 4000 banks to 4 major banks.
And the JPMorgan takeover of First Republic may be the genesis of such a movement.
John boils down the details here:
Look at the details of the (JPM)/(FRC) deal and you will become utterly convinced.
(JPM) bought a $90 billion loan portfolio for 87 cents on the dollar, despite the fact that the actual default rate was under 1%. The FDIC agreed to split losses for five years on residential losses and seven years on commercial ones. The deal is accretive to (JPM) book value and earnings. (JPM) gets an entire wealth management business, lock, stock, and barrel. Indeed, CEO Jamie Diamond was almost embarrassed by what a great deal he got.
It was the deal of the century, a true gift for the ages. If this is the model going forward, you want to load the boat with every big bank share out there.
So, I guess that is a big hint to buy the big banks or at least one of them now or in the future. Perhaps Bank of America could be a good pick – that’s Warren Buffett’s choice. But JPMorgan, Citibank, Wells Fargo – are all good choices too.
The next question to consider here is where are the big banks concentrated?
The East Coast – New York.
So, there will be a transfer of funds out of the Midwest and the South to the coast, which may well collapse local economies because of lack of funding. The west coast will do well because of technology companies churning out large cash flows.
John says the other big story here is:
… the dramatic change in the administration’s antitrust policy. Until now, it has opposed every large merger as an undue concentration of economic power. Then suddenly, the second largest bank merger in history took place on a weekend, and there will be more to come.
John’s performance details …
So far in May, I have managed a modest +0.55% profit. My 2023 year-to-date performance is now at an eye-popping +62.30%. The S&P 500 (SPY) is up only a miniscule +8.40% so far in 2023. My trailing one-year return reached a 15-year high at +120.45% versus -3.67% for the S&P 500.
That brings my 15-year total return to +659.49%. My average annualized return has blasted up to +48.86%, another new high, some 2.79 times the S&P 500 over the same period.
Some 40 of my 43 trades this year have been profitable. My last 20 consecutive trade alerts have been profitable.
John says that…
You Only Need to Buy Seven Stocks This Year, as the rest are going nowhere. That include (AAPL), (GOOGL), (META), (AMZN), (TSLA), (NVDA), (CRM). Watch out when the next rotation broadens out to the rest of the market.
The next drama in the works is the Government Default date which has been moved up to June 1. Expect a lot of people to talk about this endlessly.
What would happen to the market if they didn’t raise the ceiling?
Maybe a 20% dive in the market. Jot it down on a sticky label and paste it to your laptop as a reminder that it could happen, so you can be prepared.
Non-Farm Payroll jumps by 253,000 – further proof that the labour market is still hiring, and AI is creating more jobs than it is destroying keeping the Fed focused on the wrong data.
So, do we conclude that rate hikes are over for now or perhaps we pause for a time and then hike again? (These are my thoughts).
Monday, May 8 – Consumer Inflation Expectations are out.
Wednesday, May 10 – U.S. Inflation rate is printed.
I’ll sign off today with thoughts from Warren Buffett. He held his annual general meeting in Omaha, Nebraska on Saturday.
“It’s been an incredible period for the economy but that’s coming to an end”. Buffett expects earnings at the majority of Berkshire’s operations to fall this year as a long-predicted downturn slows economic activity. Berkshire posted an almost 13% gain in operating earnings to $8.07 billion for the first quarter.
Wishing you all a fantastic week.
Health, wealth, and wisdom to you all.
Cheers,
Jacque
Mad Hedge Technology Letter
May 8, 2023
Fiat Lux
Featured Trade:
(DON’T LET THESE 3 GET AWAY)
(SNOW), (WDAY), (NOW)
Even though the tech market isn’t in a renaissance, that doesn’t mean there aren’t any good choices to park capital.
I’d like to bring readers' attention to 3 cloud stocks that still have some upside.
It’s true that tech stocks no longer go up in a straight line, that auto-pilot mindset blew up spectacularly in 2022 when tech stocks finally stopped defying gravity.
The 16% the Nasdaq has gained this year is somewhat due to the expectations of a rebound and better-than-expected earnings.
With that in mind, software still has legs and it would be a shame to not go where the value is in tech.
After the big 7 behemoths, there are some tech plays that readers need to target because workloads will migrate to the cloud over the next decade.
There has been a significant shift to the cloud in recent years from legacy on-premise workloads and infrastructure. Cloud computing allows organizations to rent rather than buy IT and other functions.
Given the cost savings, scalability, flexibility, productivity gains, and improved security features, it’s obvious why this shift is happening.
These advantages mean more workloads will continue moving to the cloud. SaaS growth stocks are expanding despite the current macro uncertainty.
IT service management giant ServiceNow (NOW) is one to slide into your black leather wallet.
The company is a leader in the cloud-based IT service management and digital workflow solutions sphere. Its software helps businesses streamline operations, automate workflows and improve customer experience.
NOW recently grew revenues by 24% year-over-year last quarter.
It reported a healthy 35% free cash flow margin, which ranks in the top quartile among SaaS growth stocks.
Another one to keep an eye on is Snowflake (SNOW).
Data migration to the cloud is a secular trend that will support growth for years. Snowflake is a cloud-based data warehousing, processing, and analytics company.
Their data platform provides businesses with a scalable and flexible service for managing their data. It enables organizations to store, analyze and share large amounts of data in real-time, helping them to make better decisions and improve their operations.
Over the last five years, it has reported a net revenue retention rate above 150%.
Its platform capabilities are critical for any enterprise, and it has been winning customers in various industries.
On March 1, they reported quarterly revenues of $589 million, a 53% year-over-year growth rate.
Just as impressive, the company announced a plan to return cash to shareholders through a $2 billion buyback.
Lastly, Workday (WDAY) is a cloud-based software company that provides businesses with human capital management, financial management, and analytics solutions.
The company’s cloud software helps businesses improve workforce management, financial management, and decision-making processes.
It counts many Fortune 500 companies as customers. The company hit the 10,000 customers milestone lately with revenue increasing 19.6% year-over-year.
The runway is long for WDAY with a total addressable market for this subsector at $73 billion, respectively. Considering that organizations will continue to modernize HR and finance operations, Workday is one of the top SaaS stocks to buy to play this trend.
Global Market Comments
May 8, 2023
Fiat Lux
Featured Trades:
(MARKET OUTLOOK FOR THE WEEK AHEAD,
or THE GOLDEN AGE OF BIG BANKING HAS JUST BEGUN)
(JPM), (FRC), (BAC), (C), (WFC), (AAPL), (GOOGL), (META),
(AMZN), (TSLA), (NVDA), (CRM), ($VIX), (USO), (TLT), (QQQ)
CLICK HERE to download today's position sheet.
The United States is about to change beyond all recognition.
Most investors have missed the true meaning of the JP Morgan takeover of First Republic Bank for sofa change, some $10.6 billion. It in fact heralds the golden age of big banking. The US is about to move from 4,000 banks to four, with all of the profits accruing at the top.
Look at the details of the (JPM)/(FRC) deal and you will become utterly convinced.
(JPM) bought a $90 billion loan portfolio for 87 cents on the dollar, despite the fact that the actual default rate was under 1%. The FDIC agreed to split losses for five years on residential losses and seven years on commercial ones. The deal is accretive to (JPM) book value and earnings. (JPM) gets an entire wealth management business, lock, stock, and barrel. Indeed, CEO Jamie Diamond was almost embarrassed by what a great deal he got.
It was the deal of the century, a true gift for the ages. If this is the model going forward, you want to load the boat with every big bank share out there.
And the amazing thing was that (JPM) made the highest bid among a half dozen contenders.
Along with Health Care, banking is the last unconsolidated US industry. We have five railroads, four airlines, three trucking companies, three telephone companies, two cell phone providers….and 4,000 banks?
Other countries get by with much less. England has five major banks, Australia four, and Germany two, one of which goes bankrupt every decade (I’m not naming names). America’s financial system is an anachronism of its federal system where each of the 50 states is treated like a mini country.
The net net of this will be a massive capital drain from the entire country to New York where the big banks are concentrated. Local economies in the Midwest and the South will collapse for lack of funding. The West Coast will be OK with behemoth technology companies spinning off gigantic cash flows.
The other big story here is the dramatic change in the administration’s antitrust policy. Until now, it has opposed every large merger as an undue concentration of economic power. Then suddenly, the second largest bank merger in history took place on a weekend, and there will be more to come.
All it takes is a Twitter run by depositors. Every weekend has become a waiting game for the foreseeable future.
Needless to say, this makes all the big banks a screaming buy. Hoover up every one of the coming dip, including (JPM), (BAC), (C), and (WFC).
Big is beautiful.
To prove I am not perfect, my position in First Republic Bank (FRC) still sits on my broker statement a week after it filed for bankruptcy, dead, moribund, and worthless as if it is some form of punishment. It’s a very small position but it stings nonetheless.
It’s like they want to punish me for leading them astray. They have been copying my trades for ages without paying for them and I hope they took a big one in (FRC).
So far in May, I have managed a modest +0.55% profit. My 2023 year-to-date performance is now at an eye-popping +62.30%. The S&P 500 (SPY) is up only a miniscule +8.40% so far in 2023. My trailing one-year return reached a 15-year high at +120.45% versus -3.67% for the S&P 500.
That brings my 15-year total return to +659.49%. My average annualized return has blasted up to +48.86%, another new high, some 2.79 times the S&P 500 over the same period.
Some 40 of my 43 trades this year have been profitable. My last 20 consecutive trade alerts have been profitable.
I initiated no new trades last week, content to run off existing profitable ones. With the Volatility Index at a two-year low at 15.78%, opportunities are few and far between. Those include both longs and shorts in Tesla (TSLA), a long in the bond market (TLT), and a short in the (QQQ).
That leaves me with only one remaining position, a short-dated long in the bond market. I now have a very rare 90% cash position due to the lack of high-return, low-risk trades.
The Fed Raises Rates 0.25%, likely the last such move in this cycle. Futures markets are now discounting a 25-basis point CUT by September, the beginning of a new decade-long falling rate cycle. The problem is that AI is creating more jobs than it is destroying, keeping the Fed fixated on the wrong data.
Nonfarm Payroll Jumps by 253,000, another hot number. The headline Unemployment Rate dropped to a half-century low of 3.4%. These figures suggest for rate hikes to come.
The JP Morgan Buys First Republic Bank from the FDIC, for $10.6 billion, thus wiping out the shareholders. It’s a huge win for (JPM), which picked up 87 branches and $90 billion in loans in the wealthiest part of the country, taking the share up $5. What you lost on (FRC) you made pack on (JPM) LEAPS. Live and learn. On to the next trade! The FDIC got out for nearly free, a big win for the government.
Government Default Date Moved Up to June 1, by US Treasury Secretary Janet Yellen, smacking the bond market for three points. The House remains an albatross around the bond market’s debt.
Europe Ekes Out 0.1% Growth in Q1, versus a 1.1% rate for the US. This is despite the drag of the Ukraine War, energy shortages, high inflation, and Brexit. What’s the difference between the US and Europe? We allow immigrants who become customers, while the continent doesn’t.
You Only Need to Buy Seven Stocks This Year, as the rest are going nowhere. That include (AAPL), (GOOGL), (META), (AMZN), (TSLA), (NVDA), (CRM). Watch out when the next rotation broadens out to the rest of the market.
Is Volatility Bottoming Now? The Fed announcement of a 25 basis point hike on Wednesday could end the move up in stocks. After that, shares will only have an imminent debt default and US government downgrade to focus on. ($VIX) seven-week fade will end that revisit the old highs in the high $20’s. Great shorting opportunities are setting up.
Oil (USO) Crashes 5% on US debt default fears in the biggest drop since January. This is the worst asset class to own going into a recession. EV competition is also starting to take a bite. No gas needed here. $66 a barrel here we come.
More Tesla Price Cuts to Come, with swelling inventories forcing Musk’s hand. The only consolation is that Detroit will suffer more. Musk is cutting profits while the big three are accelerating losses. Tesla has excess inventory for the first time in its 20-year history.
Apple (AAPL) Earnings Beat, led by stronger than expected Q1 iPhone sales at $53.1 billion. EPS came in at $1.53 versus $1.42 expected, revenues at $94.84 billion versus $92.96. Mac and iPad sales are down YOY. Services rose 5.3%. Apple bought back a stunning $90 billion of its own shares and paid dividends. The shares popped $3. The long-term growth play here is low prices phone in India where second hand phone sales have been burgeoning. That's why Apple is now offering to buy your old phone. Next stop: New Delhi.
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, May 8 at 7:30 AM EST, the Consumer Inflation Expectations are out.
On Tuesday, May 9 at 6:00 AM, the NFIB Business Optimism Index is announced.
On Wednesday, May 10 at 11:00 AM, the US Inflation rate is printed.
On Thursday, May 11 at 8:30 AM, the Weekly Jobless Claims are announced. We also get the Producer Price Index.
On Friday, May 12 at 8:30, the University of Michigan Consumer Sentiment Index for April is released.
As for me, I have been going down memory lane looking at my old travel photos looking for new story ideas and I hit the jackpot.
Most people collect postcards from their foreign travels. I collect lifetime bans from whole countries.
During the 1970s, The Economist magazine of London sent me to investigate the remote country of Nauru, one half degree south of the equator in the middle of the Pacific Ocean.
At the time, they had the world’s highest per capita income due to the fact that the island was entirely composed of valuable bird guano essential for agriculture. Before the Haber-Bosch Process to convert nitrogen into ammonia was discovered, guano was the world’s sole source of high grade fertilizer.
So I packed my camera, extra sunglasses, and a couple of pairs of shorts and headed for the most obscure part of the world. That involved catching Japan Airlines from Tokyo to Hawaii, Air Micronesia to Majuro in the Marshall Islands, and Air Nauru to the island nation in question.
There was a problem in Nauru. Calculating the market value of the bird crap leaving the island, I realized it in no way matched the national budget. It should have since the government owned the guano mines.
Whenever numbers don’t match up, I get interested.
I managed to wrangle an interview with the president of the country in the capital city of Demigomodu. It turns out that was no big deal as visitors were so rare in the least visited country in the world that he met with everyone!
When the president ducked out to take a call, I managed to steal a top-secret copy of the national budget. I took it back to my hotel and read it with great interest.
I discovered that the president’s wife had been commandeering Boeing 727s from Air Nauru to go on lavish shopping expeditions to Sydney, Australia where she was blowing $200,000 a day on jewelry, designer clothes, and purses, all at government expense. Just when I finished reading, there was a heavy knock on the door. The police had come to arrest me.
It didn’t take long for missing budget to be found. I was put on trial, sentenced to death for espionage, and locked up to await my fate. The trial took 20 minutes.
Then one morning I was awoken by the rattling of keys. My editor at The Economist, the late Peter Martin, had made a call and threatened the intervention of the British government. Visions of Her Majesty’s Navy loomed on the horizon.
I was put in handcuffs and placed on the next plane out of the country, a non-stop for Brisbane Australia. When I was seated next to an Australian passenger, he asked “Jees, what did you do mate, kill someone?” On arrival, I sent the story to the Australian papers.
I dined out on that story for years.
Alas, things have not gone well for Nauru in the intervening 50 years. The guano is all gone, mined to exhaustion. It is often cited as an environmental disaster. The population has rocketed from 4,000 to 10,000. Per capita incomes have plunged from $60,000 a year to $10,000. The country is now a ward of the Australian government to keep the Chinese from taking it over.
If you want to learn more about Nauru, which many believe to be a fictitious country, please click here.
As for me, I think I’ll pass. I don’t ever plan to visit Nauru again. Once lucky, twice forewarned.
Stay healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
“Fear of missing out is losing to fear of looking stupid,” said Roelof Botha, partner at venture capital firm Sequoia Capital.
(TREMORS IN THE FINANCIAL SYSTEM)
May 5, 2023
Hello everyone,
Tremors are being felt in the financial system and the feeling is that they will become a lot stronger.
What will be the consequence of those tremors??
We’re not sure yet, but things could get “interesting” in the markets in the next few months.
Let’s look at what Cathie Wood is saying.
She thinks a credit crunch is underway, and it’s going to get a whole lot worse. Wood has said that customer deposits are still leaving regional banks and are going into Treasury funds, limiting the ability for banks to potentially produce loans in the future.
Treasury funds can’t be loaned out, and therefore can’t encourage business activity. So, her idea is that we are in the early stages of a credit crunch that is going to be much more serious than most are expecting.
Wood has cited the downward trajectory of the SPDR S&P Regional Banking ETF (KRE) as a basis to forecast a continued deposit outflows from regional banks. The ETF has declined roughly 14% in the past five days alone. It’s also down about 17% over the past month.
Most of us are aware that regional banks have most definitely been hammered since the collapse of the Silicon Valley Bank and Signature Bank, which has stoked worries over the health of the U.S. banking system. Last weekend, First Republic was taken over by JPMorgan Chase.
Wood argues that the Federal Reserve will be forced to cut benchmark interest rates to stop the bleeding from these losses.
Wood points out that the (KRE) has broken down, which tells us deposits will continue to outflow until the Fed reverses its position – until it pivots. The Fed hiked rates by 25 basis points Wednesday, even as tighter monetary policy appears to have exacerbated the banking issues.
DoubleLine Capital CEO Jeffrey Gundlach agrees with Wood’s sentiment. He says that the Fed will need to pivot to end the regional banking crisis. On Thursday, European Central Bank chief, Christine Lagarde said tighter credit conditions would similarly weaken further bank lending.
Wishing you all a wonderful weekend.
Cheers
Jacque
The wealth which enslaves the owner isn’t wealth.