Global Market Comments
October 30, 2024
Fiat Lux
Featured Trade:
(TAKE A LEAP INTO LEAPS)
How would you like to make 15 or 20 cents on every dollar invested? That is what we have been doing many times a month all year, and in fact, since Mad Hedge started 16 years ago.
Would you like to make better than that, say 100% a year? How about 1,000% a year?
Such a return is likely, if not probable. All you have to do is learn about LEAPS.
LEAPS, or Long Term Equity Participation Securities, are just a fancy name for a stock option with a maturity of more than one year.
You execute orders for these securities on your options online trading platform, pay options commissions, and endure option-like volatility.
Another way of describing LEAPS is that they offer a way to rent stocks instead of buying them, with the prospect of enjoying many years’ worth of stock gains for a fraction of the price.
While this may sound risky, in fact, 39 of the 40 LEAPS I have issued over the last three years have expired at maximum profits of 100%, 1,000%, or even 2,000%
Do I have your interest now?
While these are highly leveraged instruments, you can’t lose any more money than you put into them. Your risk is well-defined.
And there are many companies in the market where LEAPS are a very good idea, especially on those gut-wrenching 1,000-point down days, which may be coming soon.
Interested?
Currently, LEAPS are listed all the way out until June 2027.
However, the further expiration dates will have far less liquidity than near-month options, so they are not a great short-term trading vehicle. That is why limit orders in LEAPS, as opposed to market orders, are crucial.
These are really for your buy-and-forget investment portfolio, defined benefit plan, 401k, or IRA.
Because of the long maturities, premiums can be enormous. However, there is more than one way to skin a cat, and the profit opportunities here can be astronomical.
Like all options contracts, a LEAPS gives its owner the right to "exercise" the option to buy or sell 100 shares of stock at a set price for a given time.
LEAPS have been around since 1990 and trade on the Chicago Board Options Exchange (CBOE).
To participate, you need an options account with a brokerage house, an easy process that mainly involves acknowledging the risk disclosures that no one ever reads.
If a LEAPS expires "out-of-the-money" – when exercising, you can lose all the money that was spent on the premium to buy it. There's no toughing it out waiting for a recovery, as with actual shares of stock. Poof, and your money is gone.
LEAPS are also offered on exchange-traded funds (ETFs) that track indices like the Standard & Poor's 500 index (SPY) and the Dow Jones Industrial Average (INDU), so you could bet on up or down moves of the broad market.
Please note that these options are illiquid, and it may take some work to get in or out. Executing these trades is more an art than a science.
Notice that the day-to-day volatility of LEAPS prices is miniscule, less than 10%, since the time value is so great, and you have a long position simultaneously offset by a short one.
This means that the day-to-day moves in your P&L will be small. It also means you can buy your position over the course of a month, just entering new orders every day. I know this can be tedious but getting screwed by overpaying for a position is even more tedious.
Not all stocks have options, and not all stocks with ordinary options also offer LEAPS.
Note that a LEAPS owner does not vote proxies or receive dividends because the underlying stock is owned by the seller, or "writer," of the LEAP contract until the LEAP owner exercises.
Despite the Wild West image of options, LEAPS are actually ideal for the right type of conservative investor.
They offer more margin and more efficient use of capital than traditional broker margin accounts. And you don’t have to pay the usurious interest rates that margin accounts usually charge.
And for a moderate increase in risk, they present outsized profit opportunities.
For the right investor, they are the ideal instrument.
Let me go through some examples to show you their inner beauty.
By now, you should all know what are vertical bull call debit spreads. If you don’t, then please click here for a quickie video tutorial (you must be logged in to your account).
Let’s go back to February 9 when the Dow Average plunged to its 23,800 low for 2018. I begged you to buy the Apple (AAPL) June 2018 $130-$140 call spread at $8.10, which most of you did. A month later, that position is worth $9.40, up some 16.04%. Not bad.
Now let’s say that instead of buying a spread four months out, you went for the full year and three months to June 2019.
That identical (AAPL) $130-$140 would have cost $5.50 on February 9. The spread would be worth $9.40 today, up 70.90%, and worth $10 on June 21, 2019, up 81.81%.
So, by holding a 15-month-to-expiration position for only a month, you get to collect 86.67% of the maximum potential profit of the position.
So, now you know why we leap into LEAPS.
When the meltdown comes, use this strategy to jump into longer term positions in the names we have been recommending and you should be able to retire early.
“You can reduce discretionary spending down to zero and it won’t have much impact on our fiscal problems because it’s such a small proportion of the total,” said Ben Bernanke, former chairman of the Federal Reserve.
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
October 28, 2024
Fiat Lux
Featured Trade:
(WHEN WALL STREET MET PHARMA)
(PFE), (TSLA), (AAPL)
If corporate America were a dinner party (and let's face it, sometimes it absolutely is), Pfizer (PFE) would be that guest who showed up fashionably late with an award-winning bourbon pecan pie during the pandemic, and is now being quietly judged for bringing Trader Joe's crackers to the latest soirée. The pharmaceutical giant, which briefly enjoyed the kind of celebrity usually reserved for Tesla (TSLA) and Apple (AAPL), finds itself in the midst of what we might delicately call a boardroom intervention. With its stock price taking a dive, Pfizer attracted the attention of Starboard Value, a hedge fund with a billion dollars' worth of opinions about how to run things better.
Unfortunately for Starboard, these problems are not that simple to fix. Here's the thing about making breakthrough drugs: 9 out of 10 fail, each costs about $2 billion to develop, and even the most brilliant scientists can't tell you which one will work until the very end. This uncertainty sits at the heart of Pfizer's current predicament. After delivering a ratings blockbuster with its COVID-19 vaccine and Paxlovid treatment, the company now faces the pharmaceutical industry's dreaded sophomore album syndrome.
On top of that, every successful drug faces the same issue: it comes with its own expiration date. Patents run out, generic competitors swoop in, and suddenly everyone's asking, "What's next?"
And here's where it gets more interesting, in the way that all corporate power plays are interesting if you enjoy watching incredibly wealthy people disagree about how to become even wealthier. Take Starboard's critique of Pfizer's performance. It has all the subtlety of a CNN town hall debate, spiced up with the potential involvement of former Pfizer CEO Ian Read and CFO Frank D'Amelio — a plot twist as unsurprising as finding a filibuster in the Senate.
Having previously applied its corporate reconstruction techniques to the restaurant industry (think less Thomas Keller, more Olive Garden optimization), the hedge fund now fancies itself as something of a pharmaceutical expert. This is like suggesting that because someone successfully managed a food truck, that same person is qualified to run a three-Michelin-star restaurant.
Granted, Starboard has an impressive track record in corporate makeovers, much like the HGTV stars of Wall Street. Still, renovating a pharmaceutical company isn't the same as flipping a restaurant chain. There's something uniquely challenging about applying fast-casual dining turnaround principles to the development of life-saving medications. Some processes simply can't be rushed unless you enjoy explaining to the FDA why you thought clinical trials were more of a suggestion than a requirement.
As we try to figure out what's happening with the pharma giant right now, it helps to keep in mind that the key question isn't just whether Pfizer needs a makeover (though that's certainly part of it), but whether Wall Street's "time is money" philosophy can successfully coexist with the "science takes time" reality of drug development. It's the corporate equivalent of trying to teach quantum physics to a day trader - theoretically possible, but likely to result in some interesting misunderstandings along the way.
So, what's the play here? Looking at Pfizer's current stock price of around $28.45 (down 2.47%), the chart looks about as exciting as a waiting room magazine collection.
While the stock hovers below its 50-day moving average and sits near the lower end of its $25.20 - $31.54 yearly range, there are a few bright spots: a healthy 5.91% dividend yield and several promising projects in the pipeline - an RSV vaccine and an obesity treatment that could have customers lining up around the block again.
But here's my recommendation: Keep this one on your watchlist, but hold off on placing your order just yet.
Think of Pfizer as that once-trendy restaurant that's neither closing its doors nor winning any new Michelin stars - it's simply simmering on medium heat while the new chef (courtesy of Starboard) debates menu changes with the original kitchen staff.
Will Starboard's intervention prove to be the corporate equivalent of a breakthrough drug, or more like one of those miracle cures you see advertised at 3 AM?
The answer, like most things in the pharma world, will take time to develop. And in this battle of wits within corporate America, sometimes the hardest pill to swallow is patience - though I suspect Starboard would prefer it in fast-dissolving form.
After all, when Wall Street meets Pharma, it's less about whether the patient needs the medicine and more about timing the market's appetite.
For now, let's keep this one in the "worth watching" category until we see some signs of the stock's vital signs improving.
Global Market Comments
October 29, 2024
Fiat Lux
Featured Trade:
(RIGHT SIZING YOUR TRADING)
In an era where artificial intelligence is reshaping nearly every aspect of our lives, retirement planning stands on the cusp of a dramatic transformation. The traditional model of retirement planning – annual meetings with financial advisors, static spreadsheets, and one-size-fits-all investment strategies – is giving way to a more dynamic, personalized, and AI-driven approach that promises to democratize financial planning for millions of Americans
The Dawn of AI Financial Planning
Financial technology experts predict that by 2030, the majority of Americans will rely on AI assistants as their primary tool for retirement planning. These digital advisors won't just crunch numbers; they'll serve as personal financial coaches, available 24/7 to help individuals navigate the complex landscape of retirement preparation.
"We're moving from a world where retirement planning was something you thought about quarterly or annually to one where it's an ongoing, dynamic conversation," says Dr. Sarah Chen, Director of Financial Technology Research at Stanford University. "AI assistants will continuously monitor your financial situation, making micro-adjustments to your retirement strategy in real-time."
Personalization at Scale
One of the most significant advantages of AI-powered retirement planning is the ability to create highly personalized strategies. Traditional financial planning often relies on broad demographic categories and general rules of thumb. In contrast, AI systems can analyze thousands of variables specific to each individual, including:
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Spending patterns and habits
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Career trajectory and earning potential
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Health data and life expectancy predictions
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Family circumstances and obligations
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Regional economic conditions
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Personal risk tolerance and financial goals
Mark Rodriguez, CEO of RetireTech Solutions, explains: "AI assistants can process and analyze data points that human advisors simply don't have the capacity to consider. This means retirement strategies can be tailored not just to broad demographics, but to the individual level – down to suggesting specific timing for major purchases or identifying the optimal moment to begin Social Security benefits."
Real-Time Adjustments and Dynamic Planning
Unlike traditional retirement planning tools, AI assistants can provide continuous monitoring and adjustment of retirement strategies. These systems can:
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Automatically rebalance investment portfolios based on market conditions
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Adjust savings recommendations based on spending patterns
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Modify investment strategies in response to major life events
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Provide immediate guidance during market volatility
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Optimize tax strategies throughout the year
"The days of static retirement plans are over," notes Financial Planning Association President Jennifer Wong. "AI assistants can detect subtle changes in your financial situation and make immediate adjustments to keep you on track for your retirement goals."
Democratizing Access to Financial Expertise
Perhaps the most revolutionary aspect of AI-powered retirement planning is its potential to make sophisticated financial guidance accessible to a broader population. Traditional financial advisors often require minimum investment amounts or charge fees that put their services out of reach for many Americans.
"AI assistants are democratizing access to high-quality financial planning," says Dr. Michael Patel, an economist at the Brookings Institution. "These tools can provide professional-grade retirement planning advice at a fraction of the cost of traditional advisors, making comprehensive retirement planning accessible to millions of Americans who previously couldn't afford it."
The Human-AI Partnership
Despite the growing capabilities of AI assistants, experts emphasize that they won't completely replace human financial advisors. Instead, the future will likely involve a partnership between AI systems and human professionals.
"AI assistants excel at data analysis, pattern recognition, and continuous monitoring," explains Rachel Martinez, CFP, of Fidelity Investments. "But human advisors bring emotional intelligence, complex problem-solving abilities, and the capacity to understand nuanced family dynamics that AI systems might miss."
This hybrid approach is already emerging, with many financial advisory firms incorporating AI tools into their practice while maintaining the human relationship aspect of their service.
Enhanced Decision-Making Through Behavioral Analytics
One of the most promising aspects of AI-powered retirement planning is the ability to help individuals overcome common behavioral biases that can derail long-term financial planning. AI assistants can:
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Identify and alert users to emotional decision-making patterns
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Provide behavioral nudges to encourage better financial habits
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Offer context-aware guidance during market volatility
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Help users maintain long-term perspective during short-term market events
"Financial decisions are often emotional decisions," says Dr. Lisa Thompson, a behavioral economist at MIT. "AI assistants can help identify when emotions might be clouding judgment and provide objective, data-driven recommendations to keep retirement plans on track."
Privacy and Security Considerations
As AI assistants become more integral to retirement planning, privacy and security concerns take center stage. The industry is developing robust frameworks to protect sensitive financial data while maintaining the effectiveness of AI systems.
"Security isn't just about protecting data; it's about maintaining trust," says cybersecurity expert David Chang. "The future of AI-powered retirement planning depends on creating systems that are both powerful and secure, giving users confidence that their financial information is protected."
The Role of Regulatory Oversight
As AI assistants take on greater responsibility in retirement planning, regulatory frameworks are evolving to ensure appropriate oversight. The Securities and Exchange Commission and other regulatory bodies are developing new guidelines for AI-powered financial advice.
"We're working to strike the right balance between innovation and consumer protection," says former SEC Commissioner Elizabeth Barrett. "The goal is to harness the benefits of AI while maintaining the high standards of fiduciary responsibility that consumers expect and deserve."
Looking Ahead: The Next Decade
As we look toward the future, experts predict several key developments in AI-powered retirement planning:
Enhanced Predictive Capabilities
AI systems will become increasingly sophisticated at predicting future financial needs and market conditions, allowing for more accurate long-term planning.
Integration with Other Financial Services
Retirement planning AI will seamlessly integrate with other financial services, from banking to insurance, creating a more holistic approach to financial management.
Improved Natural Language Processing
AI assistants will become more conversational and intuitive, making complex financial concepts more accessible to the average user.
Greater Customization
AI systems will offer even more personalized recommendations, taking into account an expanding array of personal and economic factors.
Conclusion
The future of retirement planning is being reshaped by AI assistants that offer unprecedented levels of personalization, accessibility, and continuous optimization. While these tools won't completely replace human financial advisors, they will democratize access to sophisticated financial planning tools and help millions of Americans better prepare for retirement.
"We're entering an era where quality retirement planning isn't just for the wealthy," concludes Dr. Chen. "AI assistants are making it possible for everyone to have a personal financial advisor in their pocket, working around the clock to help them achieve their retirement goals."
As these systems continue to evolve and improve, they promise to help address the retirement savings crisis facing many Americans by making expert-level financial guidance more accessible, affordable, and effective than ever before. The future of retirement planning isn't just about better technology – it's about creating a more financially secure future for everyone.
Mad Hedge Technology Letter
October 28, 2024
Fiat Lux
Featured Trade:
(THE FUTURE OF TECH STOCKS)
(AI), (NVDA), (XLU), (XLE), (AAPL), (GOOGL), (AMZN), (META), (MSFT)
Through the vast whole spectrum of public markets, the U.S. stock market, and specifically technology stocks, are dominating versus their peers from other countries.
Heck, even Apple, just one company from a small suburb in California, is valued at a price that is greater than the entire German economy.
Does that speak to how bad the German economy is, or does it speak to the potency of public tech companies in America?
The truth is probably a bit of both.
Then, take a second and try to absorb the fact that Apple hasn’t even integrated AI into its own products yet.
The future is bright for many tech stocks, and the rally will broaden out to non-Magnificent 7 stocks.
More granularly, the US will continue to lead by market cap share as artificial intelligence benefits expand beyond a few large tech names that have dominated the market rally over the past year to companies in various industries.
Revenue production and margin improvement will be the critical levers of expansion.
The first will come from the money pouring into AI benefiting companies outside of Big Tech. This plays out as tech companies buy AI chips from the likes of Nvidia (NVDA), and as they need more power, these AI operators are forced to spend with companies in the Utilities (XLU) and Energy (XLE) sectors.
As AI makes companies more efficient and eliminates the simplest work, eventually cutting down costs, US corporates should get a boost to profit margins.
Global equity markets, including retirement allocations to equities, are basically leveraged to Nvidia.
A non-US tech company will rise over the next decade and unseat the large tech companies currently driving the US market share, like Apple (AAPL), Nvidia, Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOGL), and Meta (META) are almost zero.
When we look at the revenue possibilities and understand that AI will directly cut expenses by creating efficiencies, it’s hard to see tech stocks do anything but go higher in the long term.
Even then, there will be some dips, and they should absolutely be characterized as buying opportunities.
Just look at a 3-month chart of Apple, and each month has presented a dip buying opportunity on August 6th, September 16th, and October 7th.
Apple stock is up 7.5% in the past 3 months.
When everyone complains that tech stocks are too expensive, well, they will get more expensive.
As long as leverage is able to be tapped, institutions will tap it and look for that asymmetric trade to the upside.
Tesla has also proved how hard it is to bet against tech and Elon Musk.
It usually is a terrible idea.
The setup to Tesla’s earnings meant a very low bar, and Musk jumped over it to the tune of a 22% pop in Tesla stock.
Tech is clearly in a secular bull trend, and trying to get artsy to squeeze in a microdip on the short side usually has meant a loss-taking event.
Why even try?
It’s my job to tell readers to bet on tech going to the upside, especially the quality companies that accelerate revenue by harnessing the superpowers of AI.
