“When the Dow was down 3,600 points I felt like hugging our computers. The combination of man and machine is wonderful…Computers, math and game theory are the best decision makers there are,” said Bridgewater founder Ray Dalio.
(MSFT), (GOOGL), (AMZN)
Here’s a fun bit of trivia: The term “artificial intelligence” was coined in 1956 at a Dartmouth College workshop.
The organizers thought they could teach machines to use language, form abstractions, and solve problems reserved for humans. Their estimated timeline? About two months.
Sixty-eight years later, Microsoft (MSFT) just showed us how hilariously wrong that timeline was – and more importantly, how massively profitable being right about AI’s timeline can be.
While everyone’s been watching ChatGPT make headlines, Microsoft has quietly turned its OpenAI partnership into a money-printing machine. We’re talking about 33% growth in Azure cloud sales, with AI services alone responsible for 12 percentage points of that growth.
Let that sink in for a moment.
In the latest quarter, Microsoft’s revenue jumped 16% to $65.6 billion, accelerating from the previous quarter’s 15.2% growth. And here’s what really gets my attention: Microsoft’s net margins are already sitting pretty at 38%, with a clear pathway to 45% as AI scales up.
But wait – it gets better.
Remember when everyone thought the $10 billion OpenAI investment was crazy? Well, management is now projecting $10 billion in annual AI-related sales.
That might seem like pocket change for a company expected to rake in $286 billion, but here’s what the market is missing.
Microsoft 365 Copilot alone is projected to generate $4.6 billion in revenue this fiscal year. And that’s with only 4% of the Office user base signed up. Do the math on full penetration, and you’ll see why I’m getting excited.
Now, let’s talk about OpenAI’s new “o” series models – the secret weapon nobody’s discussing at cocktail parties. Unlike traditional AI that processes queries in one shot, these babies use what the pointy-heads call “chain-of-thought” (CoT) reasoning.
Think of it as AI that can actually think longer and harder about problems, like a chess grandmaster considering multiple moves ahead.
The results on the ARC-AGI-PUB benchmark tests are making Google’s (GOOGL) engineers sweat through their hoodies. And thanks to those exclusivity clauses my legal friends keep raving about, Microsoft gets first dibs on every breakthrough.
But here’s the kicker that makes this a potential portfolio game-changer: Microsoft is sitting on $116.2 billion in cash with only $45 billion in debt. That’s a war chest that makes competitors nervous, especially when you’re talking about the billions needed for those precious Nvidia GPUs that power AI data centers.
Sure, the stock isn’t cheap at 33 times forward earnings. But with double-digit revenue growth locked in for years and quickly expanding margins, that multiple starts looking reasonable.
Now, I’m not saying it’s all sunshine and APIs. Google and Amazon (AMZN) are throwing billions at their own AI programs.
There’s also that pesky clause about OpenAI potentially restricting Microsoft’s access if they achieve artificial general intelligence (though my tech buddies tell me that’s about as likely as San Francisco having affordable housing).
And yes, any broad market tantrum could hit high-multiple tech stocks like a concrete pillow. But here’s what keeps me up at night: What if we’re still underestimating the impact of truly intelligent AI on enterprise software?
Those Dartmouth professors in 1956 thought they could solve AI in two months. They were off by about seven decades. But Microsoft isn’t making the same mistake of underestimating the timeline – they’re playing the long game.
Between the OpenAI partnership, that fortress balance sheet, and enterprise customers practically begging to pay for Copilot, this could be one of those rare moments when a mega-cap tech stock is actually undervalued.
Just remember you heard it here first. By the time the Wall Street Journal catches up, the easy money will already be gone.
Speaking of gone – I just found those original Dartmouth workshop notes buried in my office. Apparently, they also predicted flying cars by 1957 and robot butlers by Christmas.
Maybe I should feed those predictions to ChatGPT and see if it laughs. Though at Microsoft’s current pace, it might just start building those robot butlers instead.
Mad Hedge Technology Letter
January 10, 2025
Fiat Lux
Featured Trade:
(NVIDIA GETS PUT IN PLACE)
(NVDA)
It is uncommon when private tech companies lash out at the government like they are some kind of whipping boy.
Silicon Valley is so successful – they don’t need to target government policy.
Anger comes in many forms but openly criticizing the government could get you in some hot water in places like China.
Just look at Alibaba founder Jack Ma who was taken out to pasture by the Chinese communist party.
Criticism is usually reserved in Silicon Valley because subsidies and relationships are preserved to fight another day.
Nvidia finally felt it was time to let loose on the disastrous Biden Administration as the chip company gets dragged into politics just like almost everything else in American society.
Nvidia viciously criticized new chip export restrictions that are expected to be announced soon, saying the White House was trying to undercut the incoming Trump administration by imposing last-minute rules.
It’s is arguable that many strategic moves the current administration executes are to stymy the next administration.
Private tech companies are just collateral damage and Nvidia is finding that out the hard way.
The looming changes would cap the sale of US artificial intelligence chips on both a country and company basis — a move that would more tightly limit exports to most of the world.
The extreme ‘country cap’ policy will affect mainstream computers in countries around the world, doing nothing to promote national security but rather pushing the world to alternative technologies.
Nvidia has been the biggest beneficiary of a surge in AI spending over the past two years, helping turn the once-niche company into the world’s most valuable chipmaker. Its shares nearly tripled last year, following a 239% gain in 2023.
Speaking at the CES conference in Las Vegas this week, Huang said he expected Trump to bring less regulation.
I can now say with more certainty that tech stocks appear to be in a bubble and it doesn’t help that an obstructionist government is putting in limits to how much they can sell abroad.
Globalization has accelerated to some extreme that many people and businesses are still having a tough time wrapping their minds around what happened.
Putting a cap on the number of AI chips Nvidia can export will just gift the advantage to another competitor.
The Chinese have never played by the rules with their state subsidies and stealing of intellectual property.
These are several hallmarks of their national heavyweights.
Hamstringing Nvidia is the worst thing the US government could do minus shutting them down completely.
In general, the amount of bureaucratic nonsense, dysfunction, red tape, and needless saber-rattling is starting to hit the bottom line of Silicon Valley.
This could all bring forward a selloff from this tech bubble we are currently in.
Granted, I will acknowledge that the federal government isn’t only targeting the tech sector and the inefficiencies run across a wide swath of the U.S. economy system.
But that doesn’t make it better.
We are priced to the point where AI is guaranteed to become our savior and I would say to hold on because we are nowhere near certainty and there are very few use cases of all this AI data center investment.
We are trading at highs and the government going after Silicon Valley will hasten a sharp selloff in expensive tech stocks.
Don’t play with fire or you’ll be burned.
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
(PORTFOLIO PERFORMANCE FOR 2024)
January 10, 2025
Hello everyone
Firstly, I’m deeply sorry for anyone who has been affected by the L.A fires. Losing everything in a fire is traumatic; I do hope the community comes together to give comfort and people support each other during this devastating time.
The market is expressing a topping pattern. So, we would be wise to take some funds off the table. As I said in my Monday newsletter, there is a real possibility that we could expect movement towards $5000 and under in the S&P500. So, let’s bank some profits.
Below I’m showing our portfolio and our end-of-year performance.
On the left, I show the date, ticker symbol, stock, and purchase price, and on the right, I show the price of the stock on December 31, 2024, + the $ gain/loss and the % gain/loss for the year.
Energy was our worst-performing sector. We can expect further lightning bolt movement in oil followed by a low and then a move up. The timing of these moves is hard to nail down.
I have cut and pasted from my Excel spreadsheet, instead of sending the whole thing out to you.
So, if you had bought one stock in each of the above companies when I suggested, you would have been ahead by $2,122.29 or 1480% for the year. (Two people have checked these numbers besides me).
Let’s take some profits now on the following stocks:
On November 8, 2023, we bought Digital Ocean (DOCN) at $26.30. On January 8, 2024, the stock sits at $34.48. Sell the stock and take profits.
Profit = $8.18 OR 31.10%
On November 27, 2023, we bought Dell (DELL) at $75.00.
On January 6, 2024, we scaled in again at $77.50.
Again, on January 17, 2024, we scaled in at $85.00.
On January 8, 2024, the stock sits at $119.31. Sell the stock and take profits.
Profit = $75.00 -$119.31 = $44.31 OR 59.08%
Profit =$77.50 – $119.31 = $41.81 OR 53.94%
Profit = $85.00 -$119.31 = $34.31 OR 40.36%
If you bought any of the Home Builders: Lennar, Pulte Group, D. R. Horton, Toll Brothers, I advise you to sell out of them. Interest rates will stay on the high side.
On October 10, 2024, I presented a list of stocks where you could add weight. The Home Builders were part of this list and looked promising with the prospect of many more interest rate cuts. Now, however, that does not look likely to happen, so we need to cut this sector from our portfolio. On October 10, the stocks were at the following prices. On January 8, 2025, the stocks listed these prices. I advise to scale out on days when the market and these stocks show an uptick.
D.R. Horton $183.39 – $139.90
Lennar $178.20 – $133.54
Toll Brothers $149.07 – $127.03
Pulte Group $138.66 – $110.46
On April 3, 2024, we bought Taiwan Semiconductor (TSM) at $140.22. On January 8, 2024, it’s at $207.12
Profit = $66.90 OR 47.71
QI CORNER
Cheers
Jacquie
Global Market Comments
January 10, 2025
Fiat Lux
Featured Trades:
(A CHEAP HEDGE FOR THIS MARKET)
The S&P 500 is now 3.2% of its all-time high at 6,100 and is showing definientia signs of rolling over.
So financial advisors, pension fund managers, and cautious individuals have been ringing me up asking what is the best way to hedge the heady 23% gain in 2024.
You can forget about buying the Volatility Index (VIX), (VXX). The huge contango, the discount front month futures contracts have too far month ones, almost guarantees that your hedge will be enormously expensive and expire worthless before it has the chance to do any good.
No, there’s a much better way to do this.
Buy deep out-of-the-money, long-dated S&P 500 (SPY) put options. You want to go deep out-of-the-money so your insurance policy is cheap.
You also want to go long-dated, so time decay doesn’t kill you and your option position lives long enough to do some good. By long-dated, I’m thinking five months out, like the June 20, 2025 option expiration date.
All of this logic points to the (SPY) June 2025 $530 puts today priced at $8.00, which as of today are 10% out-of-the-money.
Here is the beauty of this position. A put option rises in value in falling markets. But so does option-implied volatility, creating a leveraged hockey stick effect on the value of your put position. And deep out-of-the-money options always see implied volatilities rise much faster than near-money ones.
You don’t need the market to drop the full 10% to make enough profit in this position to offset losses elsewhere in your portfolio.
A much more likely 5% market correction would cause the value of the June 2025 $530 puts to jump from $8.00 to $14.00, a gain of 75%, as long as that drop happens soon. However, add in an expected pop in implied options volatility and the profit could be as much as 100%.
So how many June 2025 $250 puts should you buy?
Let’s say you have a $100,000 portfolio. Only two put option contracts would provide enough coverage for your entire exposure ($100,000/100 shares per contract/$530 (SPY) strike price) = 1.88 contracts rounded up to two. Two contracts of the June 2025 $530 puts will cost you $1,600 (2 X 100 shares per contract X $8.00).
In other words, $1,600 buys you an insurance policy on $100,000 portfolio exposure for six months. Sounds like a deal to me.
There are endless variations of this strategy. For example, it is a good idea to long-date your longs and short-date your shorts to maximize accelerated time decay in your favor.
In such a scenario you would stay long the six-month put option described above, but sell short one-month options against it, but with a strike 15% out of the money instead of 10%. I could go on and on. That cuts the cost of this hedge by two-thirds.
There are a few qualifications with such a simple hedge. Let’s say that you read the Diary of a Mad Hedge Fund Trader and have a highly concentrated portfolio focused on technology and financial stocks.
In such case, the tracking error between the (SPY) and your portfolio will be large (after all, that is the point), and you may not get all the downside protection you want.
On the other hand, what if we really get the 10% correction? What if the black swans suddenly land in flocks? In that case, the value of your June 2025 $530 puts soar to at least $29, and more likely $32 when you add in the expected effects of rocketing implied volatilities. The value of your hedge rises to $3,200.
Yes, you don’t get complete 1:1 coverage. But it’s better than going into such a route naked, with no downside protection at all.
Let’s say you’re a cheapskate and you want your insurance policy for free. Yes, this can be done.
There is another hedging strategy that is far easier to execute. Just take a long cruise around the world. That way, corrections will come and go and you might not even know about it, unless your butler brings you an online copy of the Wall Street Journal every morning, as mine does.
This is the hedging strategy most of you have pursued for the past nine years and it has worked really well. At least you end up with a nice tan and some pleasant photos.
As for the June 2025 $530 puts, they’re most likely end up expiring worthless, but you’ll sleep better at night. Such is the price of peace.
(NVDA), (MSFT), (GOOGL), (AMD), (META)
You know what keeps catching my attention these days? The way artificial intelligence is sneaking into every corner of the market faster than my daughter can fix those broken calculators in her UC computer science class (more on that later).
Let me throw a number at you that made me sit up during my morning coffee: the global AI market, currently parked at half a trillion dollars, is barreling toward three trillion by 2032.
We’re talking about a 20% compound annual growth rate, the kind of numbers that make even jaded old traders like me take notice.
I recently found myself poring over a 273-page congressional task force report on AI (yes, the things I do for you, dear reader).
Between coffee stains and margin notes that started looking like modern art, I discovered 66 findings and 89 recommendations that actually make sense. Imagine that – Congress getting something right about technology!
Speaking of getting things right, the FDA just pulled off something remarkable. They’ve created what they call “Predetermined Change Control Plans,” which is bureaucrat-speak for letting AI medical companies update their algorithms without filing enough paperwork to deforest the Amazon.
This could help save the healthcare industry $13 billion in 2025 alone – not bad for a government initiative.
As expected, the usual names like Nvidia (NVDA), Microsoft (MSFT), Google (GOOGL), AMD (AMD), and Meta (META) have their hands all over this. They’re building data centers that use enough power to light up Lake Tahoe twice over, and the numbers justify their aggressive expansion.
Corporate AI adoption shot up 270% between 2015 and 2019, with nearly one hundred million new AI-related jobs expected by 2025.
Even the Pentagon is getting into the game, pouring billions into AI development. Which makes sense – when you’re looking at technology that could reshape global competition, you don’t want to be left behind.
And the impact is spreading far beyond Silicon Valley. Take healthcare, for instance. Some 90% of U.S. hospitals are planning to implement AI solutions by 2025, driving the healthcare AI market from $12 billion to over $100 billion by 2030.
Remember when hospitals were still using fax machines? Some still are – probably the same ones with waiting room magazines from 2010. But now they’re racing from those paper jams straight into AI diagnostics.
The congressional report flags what you’d expect – privacy concerns around AI handling sensitive medical data. After all, we’re talking about systems that can access everything from your blood pressure readings to your insurance claims. But unlike those old fax machines, this technology is moving too fast for traditional regulations to keep up.
The task force gets it right: success with AI requires a delicate balance. Just like I tell my daughter about her computer science projects, this isn’t just about the technology. It’s about how we use it.
That means clear government guidelines, aggressive but responsible innovation from industry, and serious intellectual firepower from academia. Get this formula wrong, and we’ll have bigger problems than misrouted faxes.
For those watching this digital gold rush (and I know you are), here’s my take: AI isn’t just another tech bubble filled with hot air and PowerPoint presentations.
The projected $15 trillion in global economic value by 2030 isn’t just a number pulled out of thin air – it’s the kind of growth that creates generational wealth opportunities.
Just remember what I always say about transformative technologies: there’s a time to go all in (like buying tech stocks in 2009), and there’s a time to be strategic.
Right now, we’re in that sweet spot where the technology is real, but the market hasn’t fully priced in the implications.
Speaking of implications, my daughter just texted me that her next computer science project involves teaching AI to recognize broken circuit boards. Given how fast this technology is moving, I wouldn’t be surprised if next semester she’s programming AI to fix the circuits itself.
And that’s exactly why I’m keeping a close eye on this sector. When college sophomores are doing what billion-dollar companies were struggling with just a few years ago, you know you’re onto something big.
Mad Hedge Technology Letter
January 8, 2025
Fiat Lux
Featured Trade:
(BUY THE MICROSOFT DIP)
(MSFT)