January 2025

January 3, 2025

(THE GLOBAL FINANCIAL SYSTEM COULD BE REVOLUTIONIZED WITHIN THE NEXT DECADE)

January 3, 2025

Hello everyone,

In the NYSE, investors make upwards of 1 billion trades per day. Many of those trades appear to happen in milliseconds, except when you investigate further, that’s not the reality.

Trades on Wall Street take days to settle, and lots of people to make them happen. Take market makers, for example. They are the middlemen handling all those trades on Wall Street, and the top 5% of market makers handle nearly 30% of all trades. The fact is these intermediaries help with volatility, but they create a gap between buyers and sellers in the markets, and there are a lot of gaps in the financial system (which are beyond our control.)

Have you ever noticed how long some bank transfers take?

Some of the big banks think they may have a solution. JP Morgan, Citibank, and Goldman Sachs want to push the financial system into the next generation and to do that, they need to borrow a tool from crypto – blockchain. Presently all large-scale global financial infrastructure is highly warehoused or functions through different silos. In other words, money moves on one set of rails, assets move on a different set of rails. They operate independently, and information cannot be shared because of system limitations.

But being able to move money 24/7 365 is what we are moving towards.

These banks believe it could become a 5 trillion-dollar industry. In other words, we could see 5 trillion in combined tokenized asset-trading volume by 2030.

Why do these big banks think blockchain can turbo-charge the financial system?

Wall Street still operates in T+2. Trade + two days. That’s how long it takes for the standard securities settlement – for cash and assets to change hands. So, for instance, if you sell some stock on Tuesday, the cash won’t hit your bank until Friday.

Electronic trading and modern payment processing have accelerated the global financial system to move assets much faster. You don’t have to be an investment banker to feel the lag in the financial system. ACH transfers, credit card refunds, and all kinds of money that move in our economy take time to go from one person to another. Part of the slowness is how many steps and people are involved. On Wall Street, for example, brokers help set up a transaction, and they can charge a commission. Then market makers connect brokers to the assets they are trying to buy or sell. They charge a fee, too, on the difference or spread of the asking price of an asset and what someone is willing to pay. Very large transactions will need to go through even more steps for security and fraud prevention.

Some big banks are hoping that tokenization on blockchains can streamline the process of trading assets and maybe make it cheaper. It would revolutionize and rewrite financial market infrastructure.

To understand how tokenization works, we need to talk about ownership in the digital era. Right now, it’s hard to transfer ownership of real-world items over the web.

We all know that you can buy a car through an online marketplace, but the title that proves your ownership of this car only arrives in the mail a few weeks later. Inefficient in the modern world, wouldn’t you say? In the hope of bringing ownership online, developers are creating tokens that represent real-world items. You can do this with any kind of asset: stocks, bonds, or a token that could represent ownership of a building or a car. Banks backing this believe that it may create new investments altogether, and that’s why they are putting their money behind it. For example, JPMorgan has Onyx, a blockchain platform they launched in 2020. In the short time since then, it’s handled 700 billion in short-term loans through its private blockchain. JPMorgan describes it as a “killer app” for the future of finance. Larry Fink, the CEO of BlackRock, called digital asset innovation and tokenization the next generation for markets.

A blockchain is basically a database of all the transactions. There are many copies of the database, which helps to keep it secure. Each block is cryptographically signed so that any tampering is immediately evident. Additionally, you have a consensus mechanism to control how you update that database.

If technology provides you with the capability to use one rail line to transfer value, assets, and information, a lot of the inefficiencies and friction that exist in the regular financial infrastructure start to disappear.

Blockchains are meant to be transparent, cutting down the need for intermediaries that could charge fees or the need for extra due diligence. Proponents say it could enable P2P transactions across many parts of the economy.

In addition, this technology would allow for brand new forms of ownership, like splitting, fractionalizing ownership of property through real estate tokens, or tokenized deposits in bank accounts to allow for quick transfer of money between people using P2P transactions.

The IMF said in February that tokenising stocks and bonds could cut trading costs but requires the money paying for those assets to be tokenised as well, which would lead banks to make tokenised cheque accounts for faster payments.

The global financial system is one of the most regulated systems in the world and making any changes will be slow going. There will be a gradual movement forward in small steps.

Citibank has recently introduced Citi Token Services, which is a new blockchain-based service that will transform how institutional clients deposit and trade assets. In the evolving world of blockchains and smart contracts, Citibank has enhanced its products and services, including digital money, trade, securities, custody, asset servicing, and collateral mobility.

Cheers

Jacquie

January 3, 2025

Diary, Newsletter, Summary

Global Market Comments
January 3, 2025
Fiat Lux

Featured Trade:

(A COW-BASED ECONOMICS LESSON)

A Cow-Based Economics Lesson

Diary, Newsletter

SOCIALISM
You have 2 cows.
You give one to your neighbor.

COMMUNISM
You have 2 cows.
The State takes both and gives you some watered-down milk.

FASCISM
You have 2 cows.
The State takes both and sells you some milk at an inflated price.

NAZISM
You have 2 cows.
The State takes both and sends you to a concentration camp.

BUREAUCRATISM
You have 2 cows.
The State takes both, shoots one, milks the other, and then throws the
milk away.

TRADITIONAL CAPITALISM
You have two cows.
You sell one and buy a bull.
Your herd multiplies and the economy grows.
You sell them and retire on the income but worry about your cholesterol level and blood pressure.

ROYAL BANK OF SCOTLAND (VENTURE) CAPITALISM
You have two cows.
You sell three of them to your publicly listed company, using letters of
credit opened by your brother-in-law at the non tax treaty offshore bank, then execute a debt/equity swap with an associated general offer so that you get all four cows back, with a tax exemption for five cows.
The milk rights of the six cows are transferred via an anonymous intermediary to a Cayman Island Company secretly owned by the majority shareholder, who sells the rights to all seven cows back to your listed company. The annual report says the company owns eight cows, with an option on one more. You sell one cow to buy a new president of the United States, leaving you with nine cows. No balance sheet was provided with the release. The public then buys your bull. You are lauded as a titan of free market capitalism.

SURREALISM
You have two giraffes.
The government requires you to take harmonica lessons.

AN AMERICAN CORPORATION
You have two cows.
You sell one and force the other to produce the milk of four cows.
Later, you hire a consultant to analyze why the cow has dropped dead. PETA sues you and pickets your office.

A FRENCH CORPORATION
You have two cows.
You go on strike, organize a riot, and block the roads because you
want three cows. And you have a fabulous time doing all this. The world is shocked.

A JAPANESE CORPORATION
You have two cows.
You redesign them so they are one-tenth the size of an ordinary cow and
produce twenty times the milk.
You then create a clever cow cartoon image called a Cowkimona and market
it worldwide. Then your stock crashes.

AN ITALIAN CORPORATION
You have two really fine, stylish cows which cost a fortune, but you don't know where they are.
You decide to have lunch with a fine bottle of Antinori and top it all off with a potent grappa and double espresso.

A SWISS CORPORATION
You have 5000 cows. None of them belong to you.
You charge the owners for storing them. The US IRS launches a criminal investigation and arrests every Swiss banker when they go shopping in New York.

A CHINESE CORPORATION
You have two cows.
You have 300 people milking them.
You claim that you have full employment and high bovine productivity.
You arrest the newsman who reported the real situation. Then your stock crashes.

AN INDIAN CORPORATION
You have two cows.
You worship them and feed them all your garbage.

A BRITISH CORPORATION
You have two cows.
Both are mad but drink great beer.

AN IRAQI CORPORATION
Everyone thinks you have lots of cows.
You tell them that you have none.
No one believes you, so they bomb the ** out of you and invade your
country.
You still have no cows, but at least you are now a Democracy.

AN AUSTRALIAN CORPORATION
You have two cows.
Business seems pretty good.
You close the office and go for a few beers at the bar to celebrate.

January 3, 2025 - Quote of the Day

Diary, Newsletter, Quote of the Day

“When you think you know more than everyone else about the consumer, you’re in trouble,” said Mickie Drexler, the legendary CEO of J Crew and Apple board member.

January 2, 2025

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
January 2, 2025
Fiat Lux

Featured Trade:

(YOUR NEXT MIRACLE DRUG WAS WRITTEN IN PYTHON)

(IQV), (EXAI), (CRL), (ICLR), (PRXL)

Your Next Miracle Drug Was Written In Python

Biotech Letter

I had an interesting conversation with my daughter last week during one of her rare appearances from her computer science lab. She was telling me about her latest project - using artificial intelligence to predict protein folding, something that used to take months and now happens in hours.

"Dad," she said, looking up from a bowl of ramen that probably cost me 50 cents, "this is going to change everything about how we make medicine."

She's right, and it got me thinking about the transformation happening in clinical trials - a market currently valued at $57.76 billion that's expected to more than double by 2032.

We're looking at a 7.1% compound annual growth rate, but these numbers only tell part of the story.

I spent some time digging through the data and talking to folks at companies like IQVIA (IQV), where they're using AI to match patients to trials 40% faster than traditional methods.

Think about that for a second - we’re looking at a process that used to take months now happening in weeks, while managing to maintain the kind of accuracy that makes FDA regulators sleep well at night.

Speaking of the FDA, they're cooking up new diversity action plans that aim to make clinical trials look more like actual America. It's definitely the right thing to do, but like most regulatory shifts, it's moving at the speed of government bureaucracy.

This is keeping Contract Research Organizations (CROs) on their toes, though the smart ones are already adapting.

Take Exscientia (EXAI), for example. They're not just using artificial intelligence - they are letting this technology design drug candidates that are already in clinical trials. It's like having a thousand researchers working 24/7 without coffee or bathroom breaks.

But before you rush to buy companies in this sector, it pays to remember that not everyone in this space is thriving.

Charles River Laboratories (CRL) and Icon (ICLR) have been dealing with declining revenues faster than a tech startup burning through venture capital.

The global biotechnology market itself tells an interesting story. Currently valued at $1.55 trillion, it's expected to grow at nearly 14% annually through 2030.

Meanwhile, AI is estimated to generate up to $110 billion in annual economic value for the pharmaceutical industry. That's not pocket change, even by Silicon Valley standards.

Last weekend, while refinishing an antique desk I picked up at an estate sale (turns out it's worth more than my first car), I got a call from a biotech analyst friend. He was worried about the shift in clinical trial geography.

Europe's share of global trials has dropped from 22% to 12% over the past decade, while Asia-Pacific is becoming the new hotspot.

Companies like Parexel (PRXL) and Headlands Research are capitalizing on this trend, particularly in China and India, where regulatory frameworks are streamlining faster than a Formula 1 pit crew.

The traditional factors that used to drive this industry - pure research horsepower and deep pockets - are being replaced by computational efficiency and AI-driven insights.

It's similar to what happened in the financial markets when algorithmic trading took over from floor traders. The winners will be those who adapt fastest to this new reality.

Looking ahead to 2025 and beyond, I'm watching two potential party crashers: a return of regulatory uncertainty and the ever-present possibility of a new pandemic.

But barring these black swan events, we're looking at a sector that's transforming faster than my daughter's college curriculum.

Speaking of which, she just texted me about her latest assignment - using machine learning to optimize clinical trial protocols. Maybe I should start asking her for stock picks.

January 2, 2025

Diary, Newsletter, Summary

Global Market Comments
January 2, 2025
Fiat Lux

Featured Trade:

(NEW VIDEO UPDATE ON EXECUTING A VERTICAL BULL CALL DEBT SPREAD),
(AAPL), (GS)

Thursday, January 16, 2025 Sarasota, Florida Strategy Luncheon

Diary, Luncheon, Newsletter

Come join me for lunch at the Mad Hedge Fund Trader’s Global Strategy Luncheon, which I will be conducting in Sarasota, Florida on Thursday, January 16, 2025. The cost of the luncheon will be $277.

An excellent meal will be followed by a wide-ranging discussion and an extended question and answer period.

I’ll be arriving early and leaving late in case anyone wants to have a one-on-one discussion, or just sit around and chew the fat about the financial markets.

The lunch will be held at an exclusive Sarasota hotel. The precise location will be emailed with your purchase confirmation. Mad Hedge guests will be assigned their own dedicated table in a ballroom with 200 other participants.

I look forward to meeting you, and thank you for supporting my research.

To purchase tickets for this luncheon, please click here.

New Video Update on How to Execute a Vertical Bull Call Debit Spread

Diary, Newsletter

I have just updated the training video for Vertical Bull Call Debit Spreads that goes out with every trade alert. With a market meltdown forecast for the new year, some great entry points for these will be setting up.

Since then, we have learned a lot from customer questions. The nature of the options markets has also changed. So, the new video extends to 27:43 minutes. To watch it in its entirety, please click here.

I recommend watching it on full screen so you can read all the numbers on my options trading platform.

We have recently had a large influx of new subscribers.

I have no idea why. Maybe it’s my sterling personality and rapier-like wit.

Most investors make the mistake of investing in positions that have only a 50/50 chance of success, or less. They’d do better with a coin toss.

The most experienced hedge fund traders find positions that have a 99% chance of success and then leverage up on those trades. Stop out of the losers quickly and you have an approach that will make you well into double digits, year in and year out, whether markets go up, down, or sideways.

Bring on the Vertical Bull Call Debit Spread.

This is a matched pair of positions in the options market that will be profitable when the underlying security goes up, sideways, or down in price over a defined limited period of time.

It is the perfect position to have onboard during markets that have declining or low volatility, much like we have experienced for most of the last several years, and will almost certainly see again.

I have strapped on quite a few of these babies across many asset classes this year, and they are a major reason why I am up so much last year.

To understand this trade, I will use the example of Apple trade, which most people own and know well.

On October 8, 2018, I sent out a Trade Alert by text message and email that said the following. Please note these are pre-split prices.

BUY the Apple (AAPL) November 2018 $180-$190 in-the-money vertical BULL CALL spread at $8.80 or best.

At the time, Apple shares were trading at $216.17. To accomplish this, they had to execute the following trades:

Buy 11 November 2018 (AAPL) $180 calls at….………$38.00

Sell short 11 November 2018 (AAPL) $190 calls at….$29.20

Net Cost:…………………….………..………….…..................$8.80

A screenshot of my own trading platform is below:

This gets traders into the position at $8.80, which costs them $9,680 ($8.80 per option X 100 shares per option X 11 contracts).

The vertical part of the description of this trade refers to the fact that both options have the same underlying security (AAPL), the same expiration date (November 16, 2018), and only different strike prices ($180 and $190).

The maximum potential profit can be calculated as follows:

+$190.00 Upper strike price
-$180.00 Lower strike price
+$10.00 Maximum Potential Profit

Another way of explaining this is that the call spread you bought for $8.80 is worth $10.00 at expiration on November 16, giving you a total return of 13.63% in 27 trading days. Not bad!

The great thing about these positions is that your risk is defined. You can’t lose any more than the $9,680 you put up.

If Apple goes bankrupt, we get a flash crash, or suffer another 9/11-type event, you will never get a margin call from your broker in the middle of the night asking for more money. This is why hedge funds like vertical bull call spreads so much.

As long as Apple traded at or above $190 on the November 16 expiration date, you will make a profit on this trade.

As it turns out, my take on Apple shares proved dead-on, and the shares rose to $222.22, or a healthy $32 above my upper strike.

The total profit on the trade came to:

($10.00 expiration - $8.80 cost) = $1.20

($1.20 profit X 100 shares per contract X 11 contracts) = $1,320.

To summarize all of this, you buy low and sell high. Everyone talks about it but very few actually do it.

Occasionally, Vertical Bull Call Spreads don’t work and the wheels fall off. As hard as it may be to believe, I am not infallible.

So if I’m wrong and I tell you to buy a vertical bull call spread, and the shares fall not a little, but a LOT, you will lose money. In those rare cases when that happens, I’ll shoot out a Trade Alert to you with stop-loss instructions before the damage gets out of control.

I start looking at a stop loss when the deficit hit 10% of the size of the position or 1% of the total capital in my trading account.

To watch the video edition of How to Execute a Vertical Bull Call Spread complete with more detailed instructions on how to execute the position with your own online platform, please click here.

Good luck and good trading.