Mad Hedge Technology Letter
May 5, 2023
Fiat Lux
Featured Trade:
(HIGHER FOR LONGER)
(AAPL), (JOBS)
Non-farm payroll matters.
The job numbers have serious consequences for the tech sector - the biggest being there will be no recession in 2023 because everybody has a job.
Not only does everyone have jobs, they are also getting double the wage gains the Fed forecasted at 0.5% annualized to 6% year over year.
The tech sector has gotten rid of many good-paying jobs, many of those jobs were fake jobs that were absorbed to hoard talent when rates were at 0%.
It’s interesting that many of these tech stocks have exploded to the upside upon announcing job cuts, meaning investors don’t view the cuts through the prism of lost revenue but rather increasing productivity and delivering added efficiency.
Now, the entire bond investing complex is waiting on a Fed cut, which is why as of yesterday, 4 quarter percent rate cuts were priced in.
Fast forward 1 day and Fed future pricing is now pricing in 3-quarter percent rate cuts as investors believe we will stay higher for longer.
Higher for longer is bad for tech shares.
This extinguishes any hope of reducing inflation in the medium term.
It could be that we only get 1-2 quarter-point rate cuts in 2023 if the bond market is correct.
The Nasdaq has performed exquisitely in 2023 gaining 15% so far amid a souring backdrop of shrinking margins, increasing interest rates, federal government mismanagement on an epic level, domestic banking contagion from regional banks, and geopolitical strife.
The not so bad – not so good situation in tech stocks has manifested itself in the best tech stock Apple, which reported earnings yesterday.
Apple’s earnings report validated what I am seeing in the data.
The report was nothing special but good enough to believe that tech will narrowly avoid a recession in 2023.
The balance sheet is so ironclad that Apple even initiated a stock buyback of $90 billion.
Not too shabby.
Granted, there are few that can wield a strong balance sheet in the ways CEO Tim Cook can, but that’s not taking anything away from him.
Apple also told us about the 975 million paying subscribers to their services and that’s 150 million more than one year ago.
The takeaway is that Apple has a highly loyal customer base that continues to drive its dollars into the ecosystem.
Customer retention is incredibly high because they deliver products customers want.
Even their flagship product the iPhone and its revenue was up 2% year over year and beat forecast by $2.5 billion coming in at $51.33 billion when overall revenue decreased year over year.
iPhone revenue is just over half of Apple’s revenue.
A recession data point would be one in which to expect negative growth from iPhone revenue, so low single digits are fine.
The bottom line is that the US economy added 253,000 jobs to the overall job market and the unemployment rate is defying gravity.
US consumers keep spending, spending, and spending more.
Tech has turned into a 7 stock market and generous shareholder returns.
I admit that 2% iPhone revenue growth isn’t eye-popping, but that is where we are at this point in a late economic cycle.
Squeeze the juice out of the iPhone before the next big pivot to the next technology.
Similar can be said about the job market, everyone is trying to make their last buck before this whole thing gets a reset with 0% Fed fund interest rates.
Many even wish that 0% rates were already here.
Tech stocks will grind up as investors will bid up tech stocks, because they believe the Fed will cut sooner than initially thought. We’ll go back to that narrative for better or worse.
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
May 5, 2023
Fiat Lux
Featured Trade:
(THURSDAY, MAY 18, 2023 TAMPA, FLORIDA STRATEGY LUNCHEON)
(THE IRS LETTER YOU SHOULD DREAD),
(PANW), (CSCO), (FEYE),
(CYBR), (CHKP), (HACK), (SNE)
CLICK HERE to download today's position sheet.
“Statistics building off an extremely small base is extremely misleading. The recent economic gains look like typos in some of these categories. Let me know when you have gains from the January base and I’ll believe in the recovery, ” said Josh Brown, an investment advisor.
Mad Hedge Biotech and Healthcare Letter
May 4, 2023
Fiat Lux
Featured Trade:
(A BIOPHARMA THAT KEEPS BEATING THE ODDS)
(LLY), (BIIB), (ESALY)
If you're on the hunt for a stock that has a history of outperforming the market, then Eli Lilly (LLY) may have caught your attention.
Unlike many dividend and pharma stocks, Eli Lilly has a knack for beating the market. Just take a look at the company's shares, which have skyrocketed by 153% since the end of April 2020. That's three times more than the market's return of only 50% during the same period.
Now, I know what you're thinking - is this performance sustainable? After all, with a tumultuous economic and market environment causing investors everywhere to hit the brakes, it's possible that Eli Lilly's past success might not be repeated. Some may question whether this stock is still worth buying now or if they've missed the boat altogether.
Investors are always on the lookout for a good deal, so it's natural to question whether Eli Lilly is still a worthwhile investment following a less-than-stellar first-quarter earnings report.
Like many companies in the healthcare industry, Eli Lilly felt the pandemic's impact on its bottom line. Its coronavirus therapeutics segment contracted, leading to an 11% drop in sales to approximately $7 billion and a 38% decrease in EPS to $1.49.
But don't let the numbers scare you off just yet.
The decline in coronavirus sales was expected, and the company's other medicines saw a 10% YoY increase in revenue. Besides, it's essential to remember that a single quarter's results don't necessarily reflect a company's long-term value for dividend investors.
While Eli Lilly may have taken a hit, it's still a company with plenty of potential for the future.
That is, Eli Lilly’s expansion journey isn't about to stop anytime soon. For one, the pharmaceutical giant is waiting for regulators to approve four programs, including donanemab, a treatment for Alzheimer's disease, and tirzepatide, which could help combat diabetes and obesity.
If approved, Eli Lilly's latest offerings will enter contested markets, but there's still a substantial opportunity for them to outperform their competitors and gain market share, particularly with tirzepatide. Although the company may not see rapid revenue growth as a behemoth drug company, with 21 programs in phase 3 clinical trials, moderate-paced growth is still on the horizon.
Going back to its Alzheimer’s treatment candidate, it looks like the company has finally found a working formula to combat this lifelong disease.
Recently, Eli Lilly released positive results from the latest phase 3 study of its donanemab treatment for early Alzheimer's disease. The news pushed the stock to soar over 6% today, tacking over $20 billion to the company's market value.
Dubbed the Trailblazer-ALZ 2 study, the trial aimed to determine whether donanemab could help slow the debilitating effects of Alzheimer's by reducing the decline in a key rating scale of Alzheimer's-induced impairment. And the results? They were nothing short of promising.
Patients taking donanemab experienced a 35% reduction in the rate of decline, and a 40% smaller decline in their ability to perform daily activities, even 18 months into the study.
And that's not all: nearly half of the participants, a whopping 47%, showed no decline on a scale measuring clinical dementia after a year of treatment - compared to just 29% taking a placebo.
This is fantastic news for Eli Lilly and for the millions of people suffering from Alzheimer's worldwide. With such promising results, the company's donanemab treatment could be a game-changer in the fight against this devastating disease.
In comparison, Biogen (BIIB) and Eisai's (ESALY) Leqembi slowed cognitive decline by 27% compared to placebo in a similar patient group.
Notably, the trials for these two drugs had vital differences, so direct comparisons are difficult to make at this stage. Nevertheless, Lilly is determined to move forward with donanemab, despite the risks associated with the drug.
If approved, donanemab could help patients maintain their cognitive function for longer, allowing them to continue their daily activities such as managing finances, driving, and engaging in hobbies.
Thus far, Eli Lilly's donanemab has shown a potential best-in-class clinical profile, leading to the company planning to file for FDA approval later this quarter.
The estimated peak sales for the drug have yet to reach a consensus due to shifting clinical profiles and changing market dynamics over the past year. However, the market's initial estimate suggests it could reach $5 billion-plus per year, as evidenced by Lilly's $20 billion increase in market capitalization following the announcement.
While this estimate may seem reasonable, it's important to note that there is a safety signal in the latest clinical data - brain swelling - that could potentially hinder the drug's commercial uptake. Full trial results will be crucial for investors to consider once they become available.
Nonetheless, the dire need for new Alzheimer's therapeutics and the significant untapped market make the drug's potential highly compelling.
Overall, Eli Lilly is an excellent long-term investment. It has a long history of success, and its strong position in the pharmaceutical industry speaks volumes. While there are no guarantees when it comes to the stock market, this biopharma has a proven track record of delivering impressive returns to its shareholders.
Despite its current high price tag, this leading pharmaceutical company has some exciting growth prospects that could make it the top dog in healthcare before the decade is out. With drugs like donanemab, a potential game-changer for Alzheimer's treatment, and Mounjaro, a type 2 diabetes medication with promising results, Eli Lilly's stock may indeed be worth considering for investors looking for growth potential.
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
May 4, 2023
Fiat Lux
Featured Trade:
(WHY THE REAL ESTATE BOOM HAS A DECADE TO RUN),
(DHI), (LEN), (PHM), (ITB)
CLICK HERE to download today's position sheet.
(WHAT’S NEXT FOR BANK STOCKS AFTER THE FAILURE OF FIRST REPUBLIC)
MAY 3, 2023
Hello everyone,
It’s the latest theme in social investment circles. Are there cracks underneath regional banks or are they good bets in the future or is something bubbling we are not aware of?
The seizure and sale of First Republic Bank over the weekend closed the book on the most glaring problem left from the U.S. regional banking crisis, but now investors will turn to see if new stresses emerge and evaluate whether midsize banks can become good bets in the future.
First Republic’s failure was the third regional bank failure since early March, when Silicon Valley Bank and Signature Bank folded with days of each other. There seems to be cautious optimism on Wall Street that First Republic will be the last failure of this period.
Bank of America analyst, Ebrahim Poonawalla said that he believes the FRC sale should likely end forced sales of banks due to deposit flight. Although, there is no guarantee that other banks will not experience profitability challenges in the future.
First Republic’s final slide came after its first-quarter earnings report on April 24, which showed a 40% drop in deposits over the first three months of the year. Reports from other banks were not nearly as dire, with many reporting that deposits had stabilized and were growing again.
For example, PacWest Bancorp – which was seen as a potential area of stress after SVB’s collapse, and whose shares fell more than 10% Monday – said last week that it had brought in about $1.8 billion of deposits since March 20.
While the immediate crisis is over, the failure of First Republic could cause some more turbulence, at least in the short term, for both deposits and bank stocks.
The effect of SVB and other recent failures on the broader banking system is far from fully realized. The Federal Reserve report on the bank’s collapse hinted at regulatory changes that could make life tougher for midsize regionals for years to come.
KBW analyst David Konrad said yesterday that he believes banks with assets > $500B and <$60 are the clearest winners in the new world order, while there is likely to be a no-man’s land between $80 -120B, as banks in this range may need to shrink to avoid new regulations or more actively engage in M&A to increase scale and absorb regulatory costs.
Konrad went on to say that regulatory shifts could create a wave of asset sales and small deals as banks try to adjust to a new rule book.
Goldman Sachs analyst, Ryan Nash expects regional banks to likely respond by reducing capital returns, optimizing lending, and potentially disposing of assets to strengthen capital.
It is possible that commercial real estate concerns could be one area that causes bank stress, with Charlie Munger among the many investors warning the public about that sector.
Investors may want to sit on the sidelines until the coast is clear.
Happy Wednesday.
Enjoy the rest of the week.
Cheers,
Jacque