Mad Hedge Technology Letter
August 23, 2024
Fiat Lux
Featured Trade:
(TECH STOCKS LAUNCHED INTO ORBIT BY JEROME)
($COMPQ), ($TNX)
The job is done – The Fed won against inflation.
When is the parade?
That was largely the message that was delivered to us this morning by U.S. Federal Reserve Chairman Jerome Powell.
Migrating into rate-cutting mode means that tech stocks ($COMPQ) are about to explode into orbit.
We will only know how much higher tech stocks will go when we can understand how much Powell’s Fed will cut.
If he cuts the Fed Funds rate from 5.25% to 2% then tech stocks will be up at least another 50% from these levels.
What is bizarre is that Powell is cutting rates ($TNX) with housing prices, grocery costs, stock market, and a price for one ounce of gold at all-time highs.
Things are about to get more expensive – that is guaranteed.
Ironically, the Fed is planting the seeds for the next rip-roaring wave of inflation, because 3% inflation levels will be the new floor and not the ceiling.
Once the CPI hit 2.9% just a few days ago, the Fed went into the “the job is done” mode which is extremely dangerous.
Either way, tech stocks are in for a spectacular monster rally heading into the year's close and we just added a big position in chip stock Micron (MU).
There should be two to three .25% cuts by the end of the year which is highly bullish for equities.
"The direction of travel is clear," Powell added.
Powell acknowledged recent softness in the labor market in his speech and said the Fed does not "seek or welcome further cooling in labor market conditions."
The July jobs report rattled markets earlier this month, revealing that there were just 114,000 jobs added to the economy last month while the unemployment rate rose to 4.3%, the highest since October 2021.
Data earlier this week also showed that 818,000 fewer people were employed in the US economy as of March, suggesting reports have been overstating the strength of the job market over the last year.
Powell's remarks on Friday were reminiscent of those he delivered at Jackson Hole in 2022, in which the Fed chair offered a direct assessment of the economic outlook and, at the time, the need for additional rate increases.
The similar part of the speech was his call to action to change the direction of policy and he did just that.
We are about short-term trading and trade alerts here in what moves the market with tech trades.
I do believe long-term, what Fed chair Jerome Powell did, will turn out to be a policy mistake that will result in a lot higher bond yields.
The Fed's slow walking the rate hikes on the way up and then now slow walking the rate cuts on the way down is a recipe for disaster and the wrong way to approach this problem.
The ironic thing here is that tech stocks are the only equities, apart from energy and supermarket stocks, to do well in a higher inflation backdrop and part of that has to do with their monopolistic power which continues unabated.
Not that tech needed any help, but help is arriving in terms of lower rates and I do believe tech stocks will do well as we move closer to year-end.
Buckle up, put on your cowboy hat, and enjoy the tech rally!
“A brand for a company is like a reputation for a person. You earn reputation by trying to do hard things well.” – Said CEO and Founder of Amazon Jeff Bezos
(‘THE LUCKY COUNTRY’ IS UNDER PRESSURE)
August 23, 2024
Hello everyone
AUSTRALIAN CORNER
The consequence of a slowing Australian economy
According to a new report, some 100,000 people could lose their jobs in Australia over the next 12 months.
The unemployment rate, currently at 4.2% could peak at 4.5%, according to the report.
This is slightly higher than the 4.4% peak in unemployment tipped by the Reserve Bank of Australia (RBA) by June 2025.
It attributes the stagnation of jobs and economic growth to the RBA’s interest rate hikes aimed at cutting inflation back to a rate of 2-3%.
David Rumbens, Deloitte Access Economics partner explained to SBS News that the labour market has continued to generate jobs so far in 2024, but not at a high enough rate to absorb all the additional job seekers that have come onto the labour market.
He further highlighted the probability that the slowdown would mean about 100,000 more people would be unemployed.
He explained that “high interest rates are taking money out of the economy that’s affecting consumer spending.”
Even though business investment is low, and business insolvencies are going up, Rumbens argued that the economic dip was not at recessionary levels, even though a lot of sectors would see it as a recession.
Consumer-facing sectors such as construction, retail, and hospitality are usually the hardest hit by an economic slowdown.
However, the focus on homebuilding and infrastructure should keep construction workers in high demand. Deloitte is forecasting a 2% expansion in the blue-collar workforce – 74,300 workers – this financial year.
In the same period, the group forecasts a dip in white-collar jobs of 0.4% or 23,599, as businesses “look to kickstart activity without increasing headcount.”
Australians are being squeezed…
According to the Australian Bureau of Statistics, almost a million people are now working two jobs or more to keep up with the cost of living.
Money.com.au warned the average Aussie needs to earn $107,730 a year to weather the cost-of-living crisis, with the figure even worse for homeowners at $120,294 a year to absorb rising interest rates too.
Mortgage repayment costs have jumped by $12,564 a year for a loan that averaged $555,600 in mid-2021, according to money.com.au expert Sean Collery, with average owner occupier home loan rates rising from 2.84 per cent to 6.03 per cent in the past few years.
Research shows that teachers and accountants, are among other professionals working two or more jobs to keep up with expenses.
Queensland teacher, Sebastian Kath, says the “cost of housing in Queensland is astronomical.” He is considering looking overseas “for better value for my money.”
Gold Coast, Queensland, Australia.
QI CORNER
SOMETHING TO THINK ABOUT
Cheers
Jacquie
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
Mad Hedge Biotech and Healthcare Letter
August 22, 2024
Fiat Lux
Featured Trade:
(BITING OFF MORE THAN THEY CAN CHEW)
(LLY), (NVO), (CTLT), (ZLDPF), (RHHBY), (AMGN), (PFE), (LZAGY), (TMO)
"If you build it, they will come." But what happens when they come before you've finished building?
That's the billion-dollar question facing the makers of GLP-1 weight loss drugs.
GLP-1 drugs, the newest darlings of the pharmaceutical world, are selling like hotcakes. Eli Lilly (LLY) and Novo Nordisk (NVO), the current heavyweights in this arena, raked in a whopping $10.4 billion and $6.85 billion respectively last year.
Basically, the demand is there, but the supply? Well, that's another story.
So far, Lilly and Novo have been throwing money at the problem like it's going out of style. We're talking billions here. Novo's earmarked $6.5 billion for production this year alone, while Lilly's already shelled out $5.3 billion to beef up its manufacturing muscle. They're expanding facilities faster than you can say "miracle weight loss drug."
But even that's not enough. Lilly admits the industry needs at least 10 to 15 dedicated sites to even come close to meeting demand.
It's like trying to serve a five-course meal to a packed restaurant with just one chef and a microwave.
And let's not forget about the price tag on these manufacturing sites. Novo just dropped $11 billion to buy three fill-finish sites from Catalent (CTLT). Talk about paying a premium for prime real estate.
While Lilly and Novo scramble to ramp up production, their manufacturing woes have created a window of opportunity for competitors eyeing a slice of the GLP-1 pie.
Boehringer Ingelheim and Zealand Pharma (ZLDPF) are closest to market with their Phase 3 drug survodutide.
Meanwhile, Roche (RHHBY) and Amgen (AMGN) aren't far behind in Phase 2. Even Pfizer's (PFE) dipping its toes in the water with an early-stage drug.
But here's where it gets interesting for us who want a piece of the action. These newcomers are facing a manufacturing dilemma of their own.
Do they build their own facilities and risk being late to the party? Or do they outsource and potentially lose control over production?
Some, like Boehringer and Roche, are already talking about using third-party manufacturers. It's like hiring a catering company instead of building your own restaurant – less upfront cost, but you're at the mercy of someone else's kitchen.
Enter the contract manufacturing organizations (CMOs), the unsung heroes of the pharmaceutical world who might just hold the key to unlocking the full potential of the GLP-1 market.
Let’s take a look at the big players in this space.
Lonza Group (LZAGY), with its $6.6 billion in annual revenue and 10% market share in biologics contract manufacturing, is a force to be reckoned with. They're not just sitting on their laurels either – they're pumping $850 million into a new biologics facility in Switzerland.
Then there's Thermo Fisher Scientific (TMO), the 800-pound gorilla of the industry. With a cool $44.9 billion in revenue last year and an 8% to 10% market share in contract manufacturing, they're a go-to partner for big pharma.
They've been on a shopping spree too, scooping up Pharmaceutical Product Development (PPD) for $17.4 billion to boost their manufacturing capabilities.
And, of course, let's not forget about Catalent. They might have sold some facilities to Novo, but they're still a major player with $4.8 billion in revenue last year. They're betting big on biologics, with plans to increase capacity by 40% by 2025.
As for those looking for growth potential, keep an eye on Samsung Biologics. They're the new kid on the block, with a 30% compound annual growth rate over the past five years and the world's largest single-site biologics manufacturing facility.
So, there you have it. The obesity epidemic is a tragedy, but it's also a trillion-dollar opportunity.
With half the population projected to be obese by 2030, this isn't just a health crisis—it's a financial frontier.
The GLP-1 market is poised to balloon to $130 billion, creating a feeding frenzy for those ready to capitalize on the supply squeeze.
But here's the real meat of the matter: in this gold rush, it's not just the drug developers who are striking it rich. The real winners are the manufacturers—those with the capacity to meet the insatiable demand. They're the ones handing out the "shovels" in this weight loss bonanza.
So while everyone else is focused on the flashy GLP-1 drugs, I suggest you also keep a watchful eye on these behind-the-scenes players.
Now, if you'll excuse me, I'm off to patent my groundbreaking idea: GLP-1-infused kale chips. Who says you can't have your cake and eat it too?
Global Market Comments
August 22, 2024
Fiat Lux
Featured Trade:
(THE TOP SEVEN CHINESE RETAILIATION TARGETS),
(AAPL), (GM), (WMT), (TGT), (BA), (SBUX), (CAT),
(AND MY PREDICTION IS….)
It’s looking like the trade war between the US and China is going to heat up some more, no matter who wins the presidential election. It is no longer a question of “if”, but “how much” and “when.”
Please forgive me, but I am new at this. I have only been covering China for 50 years now since the Cultural Revolution was sweeping an impoverished, starving third-world communist country.
With a massive US trade deficit with China in 2023, the Middle Kingdom has become a top administration target.
A real trade war would cause thousands of businesses in the US to go bankrupt and leave millions unemployed. Transpacific transportation would ground to a halt, filling up harbors with hundreds of redundant ships.
Trillions of dollars of direct investment in the two countries would be held hostage.
In other words, a trade war would be like cutting off our noses to spite our faces.
Just as America has its Tea Party and right-wing conspiracy theorists, so does China.
Their entire worldview revolves around the merciless exploitation of China by the Western powers that took place during the 19th century.
British trading companies, like Jardine Matheson, imported cheap opium from India and sold it to the Chinese at the point of a gun, triggering three wars. With only primitive weapons at hand, the Chinese were powerless to resist.
By the time of the fall of the Qing Dynasty in 1912, the entire country had been carved up into spheres of influence dominated by the West and Japan.
Then the Japanese invaded in 1937, and 29 million Chinese died. As recently as 1938, my Marine Corps uncle, Colonel Mitchell Paige, was charged with protecting American gunboats cruising the Yangtze River.
To us, this is all ancient history inhabiting dusty textbooks in libraries never visited. Patriotic Chinese feel like this happened yesterday.
You could dismiss all this as academic musings.
But national pride and sovereignty are really big deals in China today.
During China’s last trade war with Japan only five years ago, several Japanese facilities were burned down by angry, uncontrollable mobs, and visiting businessmen were assaulted on the street. Trade ground to a halt.
So it behooves us to analyze which companies will suffer the most from any deterioration in the US-Chinese relationship before markets figure this out. The Chinese are not interested in any “America First” policy in any way, shape, or form.
Here is my hit list:
1) Apple (AAPL) – Yes, Cupertino, CA-based Apple has a big fat bull’s-eye on its back. The company is a vast, finely tuned machine that needs everything to work perfectly to deliver hundreds of millions of iPhones around the world.
The number of things that can go wrong here can’t be counted. What if the one million workers at its Foxconn subcontractor fail to show up for work someday? What if they are not allowed to go to work? What if they burn THAT factory down?
Another problem is that Chinese growth is a key part of Apple’s long-term sales strategy. A Chinese boycott would put a huge dent in those plans.
Remember, Apple is getting it from both sides, with Trump promising a 35% import duty on all Apple products. That would certainly hurt sales.
I’m sure Apple management is on tenterhooks as to how all this will play out in the coming months.
There is no backup plan here. Apple is just too big and too sophisticated to change any part of its incredibly complex supply chain in less than a decade.
2) General Motors (GM) – Is one of the most globalized US companies of all. (GM) can’t build a car in Detroit without 40% of its parts coming from Japan, Mexico, South Korea, or dozens of other countries.
General Motors is also hugely dependent on Chinese sales. It sells more Buicks in China than it does in the US. That is one-third of GM’s total worldwide sales.
Next, the company plans to sell Chinese-made Buicks in America.
While we weren’t looking, General Motors has become a Chinese company, and many others are falling suit.
3) Wal-Mart (WMT) – Imagine walking into your local Walmart one day and finding out that all of the prices have been marked up by 35%.
This is the reason why the company is called the “Chinese Embassy.” I dare you to find anything there that is NOT made in China, except for the food and the flowers (a dozen long stem red roses are only $10!).
Like Apple, the company is so big that any change in its supply chain would take years. You can add Target (TGT) to this hit list for the same reasons.
On top of that, Wal-Mart has 432 stores operating in China. Imagine the effect that a boycott would have there.
4) Boeing (BA) - The local flight school that maintains my plane has been totally taken over by Chinese students. That is because China needs to buy $1 trillion worth of aircraft over the next 20 years, some 6,800 jetliners in all.
Boeing expects to provide the lion’s share of these. The company has already entered the planning phases for the construction of a giant new aircraft assembly plant in China.
It would be really easy for China to switch a major part of these orders over to Europe’s Airbus Industries, which has been aggressively competing to accomplish exactly that.
Boeing didn’t get the business because of the advanced technology seen in the 787 Dreamliner. Chinese were simply attempting to even out the trade balance.
5) Starbucks (STBX) – Starbucks founder Howard Schultz made no secret of his dislike for Donald Trump before the election. With 2,500 stores in China, and plans to double that figure, he had little other choice.
With relations between the US and China turning colder than the firm’s overpriced ice espresso, sales, growth plans, and share prices could take a big hit. Chinese may have to postpone their caffeine addiction until the next Democratic administration.
6) Caterpillar (CAT) – You can’t have an infrastructure boom anywhere in the world without Caterpillar, whose heavy machinery is the gold standard for large public works projects. I have been covering the company for 40 years.
7) Tesla (TSLA) – Tesla’s factory in China is the company’s biggest seller. If the Chinese expropriate or impede in any way such as through strikes, Tesla’s share price would drop by half instantly. I know the Chinese promised to play nice when Tesla made this groundbreaking, technology-transferring investment. But guess what Elon? The Chinese can change their minds.
As a result of the upcoming US round of massive deficit spending, (CAT)’s share has been one of the best performers since the presidential election.
Unfortunately, this time the company is so heavily invested in China that it has also built a large assembly plant there. China accounts for 20% of the firm’s worldwide sales.
Time for a short?
The net effect on the impairment of business at all of these companies will be lower profits, high volatility of profits, and continued uncertainty. The shares will be forced to trade at a discount.
When you are running a mammoth global business, the last thing in the world you want is unpredictability.
It will also bring a rapid rise in inflation, as prices are raised to offset higher costs and a strong dollar.
Who will be the biggest victims?
Working-class Trump voters in Rust Belt states, least able to afford price hikes, especially those who already have jobs in Midwest manufacturing.
Where is the "REFUND" Button?
(GOOG), (GOOGL), (NVDA), (TMC), (DE), (CTVA), (NEE), (FSLR), (UNP), (FDX)
"If you don't like the weather, wait five minutes, and it will change.” This old adage has long been a humorous nod to the weather's fickle nature.
But what if you didn't have to wait? What if you could predict that change before it happened?
Weather prediction has come a long way since the first computerized forecast in 1950. Today, we're looking at a global weather forecasting system market worth a cool $2.7 billion. That's as of 2023, mind you.
By 2029? It’s projected to hit $4.2 billion. Growth like that doesn't just fall from the sky.
Traditional weather models have been the heavyweights for years. The European Centre for Medium-Range Weather Forecasts (ECMWF) and the U.S. National Weather Service's Global Forecast System (GFS) are titans in the field.
They crunch numbers on supercomputers that make your latest smartphone look like a pocket calculator. Take the Cray XC40 used by ECMWF. It's pumping out quadrillions of calculations per second. Impressive, right?
But here's the catch. These models aren't perfect. Far from it. Generating a single forecast can take hours. Hours. In the fast-paced world of weather, that's an eternity.
By the time the forecast is ready, Mother Nature’s already changed her mind. It's like trying to catch a greased pig – frustrating and often futile.
A 2021 study in the Journal of Geophysical Research laid it out plain as day. ECMWF and GFS? They're reliable for short-term forecasts, up to about 10 days.
Beyond that? Their crystal ball gets mighty cloudy. And when it comes to extreme weather, they're often caught with their pants down.
Case in point: Hurricane Beryl in 2024. This Category 5 monster decided to crash the party in early July, becoming the earliest Atlantic storm of its kind on record.
Instead of heading to Mexico as predicted, it decided Texas looked more appealing, leaving a trail of destruction in its wake.
But it's not just hurricanes keeping forecasters up at night. The World Meteorological Organization confirmed 2023 as the hottest year on record.
Global temperatures soared 1.15°C above pre-industrial averages. July 3, 2023? Possibly the hottest day ever recorded globally. Talk about turning up the heat.
The National Oceanic and Atmospheric Administration (NOAA) paints an even grimmer picture. In 2023, the U.S. was hit by 28 weather and climate disasters. Each one racked up at least $1 billion in damages. That ties the record set in 2020. Climate change isn't just knocking at the door – it's kicking it down.
Enter artificial intelligence (AI).
DeepMind's GraphCast is making waves in the forecasting world. It's churning out global weather forecasts in less than a minute. You read that right. Seconds, not hours.
In fact, a 2023 study in Science found GraphCast outperformed ECMWF's high-resolution prediction system in 90% of 1,380 evaluation metrics. That's not just beating the competition – it's lapping them.
But GraphCast isn't the only AI superstar in town.
DeepMind's NeuralGCM combines traditional physics-based methods with machine learning. The result? Potentially game-changing long-range predictions.
We're talking climate patterns decades into the future. Imagine the implications for long-term planning and investment strategies.
These AI models are weather savants. They devour vast amounts of historical data, using advanced neural networks to learn complex atmospheric patterns.
The payoff? More accurate predictions, delivered faster than you can say "partly cloudy with a chance of meatballs."
Needless to say, these are opening up a whole new world of possibilities.
We're talking personalized, hyperlocal forecasts. Better extreme weather warnings. More effective climate change modeling. Where there's innovation, there's opportunity.
Let's break it down with some numbers that really matter. A study in the Journal of Advances in Modeling Earth Systems (2022) found AI models could potentially extend reliable hurricane track predictions from 3 to 5 days in advance.
Two extra days of preparation time. Crucial for both safety and economic reasons.
Speaking of economics, the U.S. National Hurricane Center estimates each mile of coastline evacuated costs about $1 million.
More accurate forecasts could mean fewer unnecessary evacuations. Millions saved. And it's not just about saving money. It's about using resources more effectively.
The Federal Emergency Management Agency (FEMA) reported that pre-positioning resources for Hurricane Irma in 2017 saved an estimated $100 million in recovery costs. Better forecasts mean better resource allocation.
So, where's the smart money going?
Keep your eyes on tech giants like Alphabet (GOOGL, GOOG), parent company of DeepMind. Market cap of $1.75 trillion. Q2 2024 revenue of $88.3 billion, up 15% year-over-year.
Don't forget about NVIDIA (NVDA). Their GPUs are the workhorses powering these AI models. FY 2024 revenue? $60.9 billion. That's a 126% year-over-year growth.
But it's not just about the tech giants.
Companies like The Tomorrow Companies Inc. (TMC) are specializing in AI-powered weather forecasting services. Market cap of $2.1 billion. 2023 revenue of $450 million, up 35% year-over-year. They're proving that sometimes, it pays to be a specialist.
And let's not overlook the industries that stand to benefit from better forecasts.
Agriculture giants like Deere & Company (DE) and Corteva Inc. (CTVA) are integrating weather data into their precision agriculture solutions.
In the energy sector, companies like NextEra Energy (NEE) and First Solar (FSLR) are using improved weather predictions to optimize renewable energy production.
Even transportation companies like Union Pacific Corporation (UNP) and FedEx Corporation (FDX) stand to gain. Weather-related disruptions cost the transportation industry billions annually. Better forecasts could lead to significant efficiency improvements.
The bottom line? The AI revolution in weather forecasting isn't just changing how we predict the weather. It's creating a perfect storm of investment opportunities across multiple fields.
I advise you to keep a close watch on this sector because we all know that sometimes the biggest opportunities come from seeing which way the wind is blowing before everyone else does.
And right now, that wind is blowing towards AI-powered weather forecasting. Don't get left out in the cold.