Mad Hedge Technology Letter
August 21, 2024
Fiat Lux
Featured Trade:
(SPEND UNTIL REVENUE COMES)
(NVDA), (SMCI), (AVGO)
Spend, spend, and spend some more.
That is the current zeitgeist in the tech community about the direction of generative artificial intelligence.
Companies are trying to outdo each other to see how much cash they can splurge to build out the AI infrastructure.
This is no joke.
Remember that there have been no meaningful explanations about how much revenue will directly come from AI, but my belief is that we are still in the “honeymoon phase” of the AI movement.
Eventually, and gradually, real questions will be asked and results will need to be provided instead of “building” nonstop with no accountability.
We are still in the phase of giving AI a pass which is why many have suggested stocks like Nvidia are turning into a bubble similar to 2001.
How do I know that AI is back?
Look at the chips stocks who were leading the tech rally for most of the year.
They sold off violently because of the unwinding of the Japanese yen carry trade, but the dip was bought because the discounts were too good to pass up for investors and because the AI trade isn’t over yet.
The snapback in chip stocks was v-shaped and set the stage for the rest of the year to power into the close.
I do believe the tech sector will receive better-than-expected news from the wider economy that shows the consumer is in better shape than initially thought.
The bar is extremely low for tech stocks to jump over and I do believe the ones with great balance sheets will use shareholder returns to convince shareholders to stick with their stocks.
AI hardware and chip companies have led the bounce in the Nasdaq from its August low, with Nvidia the index’s top performer, up almost 30% and just 6.1% short of the all-time high, as of its last close. Similar stocks like Micron, Marvell Technology, Super Micro Computer, and Broadcom have all participated in the snapback.
Strong monthly sales from Taiwan Semiconductor Manufacturing similarly pointed to robust AI demand.
The build-out of AI infrastructure is expected to be both enormous and long-lasting and investment in data center infrastructure needed to support GenAI could reach $6 trillion.
Capex from big tech could potentially increase by as much as 25% in 2025, well above the consensus expectation for 10-15% growth. This is especially positive for AI enablers in the semiconductors field.
Nvidia’s expensive valuation is completely justified when you understand that they carry the entire tech sector which is carrying the entire market on their back.
Shorting NVDA has probably been one of the worst trades you could have made in the past few years.
(THE PLUNGE IN IRON ORE PRICES IS BAD NEWS FOR AUSTRALIA, BUT GOOD NEWS FOR THE REST OF THE WORLD)
August 21, 2024
Hello everyone,
Iron ore prices have halved since their peak in January. Share prices have had a 20% haircut consequently. That’s bad news for BHP and Rio Tinto and their shareholders.
“Twiggy” Forrest’s Fortescue Metals (FMG) is down an eye-watering 43%, as it is particularly sensitive to the rise and fall of the China-driven iron ore price.
And to top it all off for “Twiggy”, Fortescue’s iron ore is apparently below par in quality when compared with BHP and Rio’s (and Brazil’s Vale).
Obviously, when China is booming and iron ore is in demand, all is good in Fortescue’s world, as the price that this company gets starts to approach the BHP/Rio price.
When the opposite happens, however, its price falls further and faster, and the drop in price comes straight off Fortescue’s profit.
Right now, BHP and Rio are also feeling the pain.
It’s unfortunate for Australia that our entire economic prosperity appears to be built on China.
China drives both the prices of and the volumes of coal and gas that Australia sells into the global market, regardless of whether it buys or doesn’t buy directly from us. It’s a similar story with iron ore.
So, what we need to understand is that if their prices really plunged, and stayed down for any extended period, the Aussie dollar would most likely collapse and Australia’s economy would become a junk heap.
For the rest of the world, that price collapse would be good news. Lower iron ore and energy prices would feed into lower prices for everything across the world.
The new narrative landscape would arguably include near-zero inflation, much lower interest rates, and booming economies.
BHP is now trying to backpedal, to some extent. After going long iron ore and China, by selling out of fossil fuels, BHP is endeavoring to diversify into other commodities.
Rio has invested heavily in Africa, for its iron ore exposure.
The giant Simandou iron ore project in Guinea, set to be the world’s largest and highest-grade new iron ore mine, will commence production by the end of 2025 and will add annual output of around 120 million metric tons of high-quality iron ore after it reaches full capacity.
So, when might we see the bottom in iron ore prices?
Morgan Stanley expects a “rebound in one to two months due to an efficient supply response from marginal units.”
News flow and sentiment influence iron ore prices, so it is not surprising to see that remarks from some of China’s top steel makers have put the market on edge. As cited in the Financial Times, Hu Wangming, chair of China Baowu Steel Group argued that the steel industry “winter” was likely to be “longer, colder and more difficult than we expected.” Furthermore, he warned that current steel market conditions may be more severe than the downturns experienced in 2008 and 2015.
Adding to the angst is recent Chinese economic data, which shows:
New construction fell 20% year-on-year in July, only a slight improvement from June’s 22% fall.
Property investment in China fell 10% in the first seven months of the year.
China’s steel exports fell 10% month-on-month in July, marking a slowing in the annualized run-rate to 88 million tonnes, down from 110 million tonnes earlier this year.
July crude steel output is down 9.5% month-on-month and 9% year-on-year.
China’s portside iron ore inventory is sitting around a one-and-a-half-year high.
Worst case scenario?
A more severe economic slowdown in China was exacerbated by decelerating growth in other regions.
As we approach the December quarter we should be watching the monthly World Steel production data and the 10-day CISA (China Iron & Steel Association) steel output series.
QI CORNER
EMPOWERING PRODUCTIVITY
Proving that everything does not have to be about numbers; letters can be very useful too.
SOMETHING TO THINK ABOUT
Cheers,
Jacquie
Global Market Comments
August 21, 2024
Fiat Lux
Featured Trade:
(THE DEATH OF THE FINANCIAL ADVISOR)
“There’s a 70% chance the whole thing will fail,” said Jeff Bezos when pitching his parents for a $100,000 investment in his startup, Amazon (AMZN) in 1994.
Mad Hedge Biotech and Healthcare Letter
August 20, 2024
Fiat Lux
Featured Trade:
(POX POPULI)
(BVNRY), (EBS), (GOVX), (SIGA), (CMRX), (TNXP), (TMO), (ABT), (MRNA), (PFE)
Hold onto your hazmat suits because the world of infectious diseases just got a lot more interesting. And if you're someone with a stomach for volatility, you might want to pay attention.
Mpox is back, and it's brought a nasty new cousin to the party. The World Health Organization (WHO) just hit the big red button, declaring the mpox outbreak a public health emergency of international concern (PHEIC). That's fancy talk for "this is serious, people."
Let's break it down. We're not dealing with your garden-variety mpox here. This is a new strain, dubbed Clade Ib, and it's tearing through central Africa like a bull in a china shop.
The Democratic Republic of Congo (DRC) has seen over 15,600 cases so far this year, more than all of last year. And it's not staying put.
Kenya, Burundi, Rwanda, and Uganda are all reporting their first-ever mpox cases. It's like watching a virus go on a world tour, minus the t-shirts and overpriced concessions.
Now, before you start panic-buying toilet paper again, the Centers for Disease Control and Prevention (CDC) says the risk to the U.S. is very low.
But they're still telling healthcare providers to keep their eyes peeled for any funky rashes on patients who've been globe-trotting lately.
So, what do we do with this information? Well, let's talk vaccines.
Bavarian Nordic (BVNRY), the company behind the most widely used mpox vaccine, has seen its stock jump more than 30% since the WHO's announcement. It's like they won the pharmaceutical lottery.
And Uncle Sam's not shy about showing them some love – the U.S. Department of Health and Human Services just placed a $156.8 million order for a bulk vaccine product.
But they're not the only player in town.
Emergent Biosolutions (EBS), another vaccine manufacturer, also saw its stock surge when the news broke.
Even GeoVax Labs (GOVX) saw its stock shoot up 40% yesterday morning. Not bad for a company most people had never heard of last week. They're working on an MVA vaccine – that's Modified Vaccinia Ankara for you science nerds out there. It's the go-to choice for folks with weakened immune systems.
But it's not all sunshine and rainbows in vaccine land.
Siga Technologies (SIGA) released some disappointing trial data for their antiviral drug TPOXX. Turns out, it's not much better than a sugar pill for treating mpox.
Other companies are also jockeying for position.
Chimerix (CMRX) is developing brincidofovir, an antiviral that could potentially treat mpox. Tonix Pharmaceuticals (TNXP) is working on TNX-801, a live-virus vaccine candidate.
And let's not forget the diagnostic giants like Thermo Fisher Scientific (TMO) and Abbott Laboratories (ABT). After all, in the world of infectious diseases, being able to spot the bad guy quickly is half the battle.
Even the big guns of the COVID-19 vaccine world, Moderna (MRNA) and Pfizer (PFE), might decide to flex their mRNA muscles in the mpox arena. And with their track record, who's going to bet against them?
But here's the million-dollar question: Is this a golden opportunity for investors, or a potential minefield? The answer, as always in the stock market, is "it depends."
On one hand, companies directly involved in mpox vaccines, treatments, and diagnostics could see their stocks soar if the outbreak worsens.
On the other hand, the biotech sector is about as stable as a jenga tower in an earthquake. Today's miracle drug could be tomorrow's cautionary tale.
The smart money isn't putting all its eggs in the mpox basket. Diversification is still the name of the game. Remember, this outbreak could fizzle out as quickly as it started, leaving one-trick ponies high and dry.
Plus, let's always keep in mind the wild card in all this: government contracts.
In the world of infectious diseases, Uncle Sam often holds the purse strings. Keep your ear to the ground for any whispers of government funding or contracts. That kind of news can send stocks into the stratosphere faster than you can say "public health emergency."
So, what's the bottom line? The mpox outbreak is creating some intriguing opportunities in the biotech sector. But as with any investment, don't let the fear of missing out cloud your judgment.
And remember, in the stock market, as in epidemiology, it's all about managing risk.
In the meantime, maybe skip that bushmeat sandwich on your next African safari. Just a thought.
Global Market Comments
August 20, 2024
Fiat Lux
Featured Trade:
(MY TRIP INTO INFINITI),
(TSLA)
Don’t worry.
I was late with my newsletter today because I fell off some Alp or crashed an airplane. The 200-year-old doors in my Cambridge Airbnb are so thick that they can’t be penetrated by WIFI. The broadband here hasn’t been upgraded since the Roman Empire, but at least it works.
This year, I thrilled you with my glider flight over Eastern Europe. Last year I climbed a shear rock face in the Italian Dolomites. The year before my aerobatic flying of a WWII Spitfire over the White Cliffs of Dover probably sent chills down your spine (click here if you missed it).
Then I one-upped myself.
In appreciation to the early buyers of Model S-1’s, Tesla invited me to submit a photo to be etched on the side of a satellite launch into space. Having purchased chassis no. 125, I certainly qualified. Those who referred 25 other buyers were allowed to send videos.
Of course, I had to send a picture of me piloting a 1929 Travelaire D4D biplane, which you can find below. The photo was inserted into the mosaic on the side of a spacecraft. I sent the Spitfire video on an SD card and it’s in orbit as well.
The blast-off took place at Cape Canaveral, Florida.
You have to hand it to Tesla, they really know how to do PR, and their advertising budget is nearly zero. The Detroit Big 3 spends $50 billion a year on advertising and gets a lesser result.
To watch a video of me blasting off into space on a Space X Falcon 9, or at least my laser-etched image, please click here.
Oh, and buy (TSLA) on any big dips as well. The EV nuclear winter can’t last forever.
As for me, I’m off for a pint of ale at the Churchill Arms.
“If you look at newspaper headlines every day for the past 50 years, they’re almost always negative. If you look at the economy every day for the past 50 years it’s always positive,” said Oracle of Omaha Warren Buffett.
