January 2025

Humanoids To The Rescue Or Not

Dr. Doom Nouriel Roubini needs to lay off the fear porn – I’m not taking the bait this time. Sorry Roubs!

Roubini is sounding the alarm bells on humanoid robots, but I think it is more of a case of fear-mongering than anything else.

After all, like most economists, Roubini isn’t a trader, he is an academic who sits behind the scenes and goes after those juicy sound bites that the media need to publish stories.

He wasn’t taking profits in great tech trades like when I captured profits on Netflix just the other day.

His idea goes like this…

He thinks the big breakthrough right now is the evolution of humanoid robots that essentially follow individual workers on the factory floor, on a construction site, even a chef in a restaurant, or a housekeeper. It's terrifying, but it's happening in the next literally year or two.

For this level of transformation in one year, I believe the percentage chance of this coming to fruition is less than 2%.

My understanding of the humanoids is that the software will take 10 years to figure out the nuances.

Roubini — known as Dr. Doom for his bleak economic forecasts — said human jobs would be lost to humanoids.

Instead, an LLM (large language mode) learns about everything in the world, the entire internet follows your job, my job or anybody else's job in a few months, then learns everything that a construction worker, factory worker, or any other service worker can do, and then can replace them. And I think that it's going to be a revolution — it's going to affect blue-collar jobs like we've never, ever seen before.

The humanoid robot market could reach $7 trillion by 2050, Citi research recently found. Those robots — such as Tesla's (TSLA) Optimus — may be able to do everything from cleaning your home to folding your laundry. The robots could create job loss as routine tasks get automated.

There is a higher likelihood that this humanoid from Tesla will be used as staging to convince investors to buy more tech stocks.

Tech companies have a huge problem on their hands and there hasn’t been a lot of great brain activity to find a real solution.

Venture capitalists have been lamenting the lack of real innovation in tech products like Mark Andreessen and Peter Thiel.

The humanoid is here to get investors to buy more tech stocks in companies that aren’t innovating.

Tech companies are cutting staff to beat earnings and that isn’t a sign for top-notch growth.

Investors need to separate the fluff from reality.

The reality is that big tech companies still make enormous amounts of profit but have failed miserably in finding something new.

Apple CEO Tim Cook is still figuring out what next to do after selling the iPhone to Chinese people.

The humanoid operating on AI software might give tech stocks an extra 6-month cushion before investors pull the rug.

Enjoy the bull market while it lasts. I executed a bullish trade in Dell which is part of the AI story.

AI stocks will go higher and humanoid stocks will too – not because they will make money, but because investors still buy the hype.

January 24, 2025

Jacque's Post

(PRESIDENT TRUMP IS PRIORITIZING AI)

January 24, 2025

Hello everyone

President Trump is prioritizing the push forward of AI.

Which companies are likely to benefit?

Think of (ORCL) Oracle, (MSFT) Microsoft, and (ANET) Arista Networks

Earlier this week, a $500 billion joint venture was announced between OpenAI Oracle, and Softbank, which aims to strengthen artificial intelligence infrastructure in the U.S.

Shares of Oracle and Microsoft have rallied nearly 15% and 3%, respectively, since the start of the week. Microsoft is an investor in OpenAI.

Solita Marcelli from UBS notes that the project requires more computing and electricity, which may point to greater investments in grid infrastructure and power transmission.

Kash Rangan, a Goldman Sachs analyst, believes Oracle and Microsoft are prime winners from the government’s prioritization of AI.

Rangan notes that Microsoft is in a prime position to benefit from this project as the company has a strong balance sheet and capital expenditure for 2025. Oracle, however, may take longer to benefit, but the tailwind will certainly gather strength in the years to come. Analysts are seeing the probability of more capital AI investments for Oracle, which could boost its cloud infrastructure revenues at a compounded annual growth rate exceeding 50% through 2027.

The Stargate venture also sees Arista Networks as a potential big winner too. The company has exposure to Oracle, Microsoft, and OpenAI, as well as the strength of its ethernet switching portfolio. Piper Sandler’s James Fish argues that “given switching represents >50% of networking spends, and Arista’s? 30% share of high-end datacentre switching, we see this as a +$6B [serviceable addressable market] over 5 years.”

Fish also points to (PSTG) Pure Storage, as an “underappreciated way” to invest behind Stargate to meet storage capacity, estimating a $10 billion total addressable market.

(I recommended Oracle, Microsoft, and Arista Networks on January 6, 2024.

Oracle was at $104, Microsoft was at $372, and Arista Networks was at $248.00. Arista Networks had a stock split on December 4, 2024, which took it back to $62.00.

TRADE ALERT

(TPB) TURNING POINT BRANDS

Turning Point Brands manufactures, markets, and distributes branded consumer products. The company operates through three segments: Zig-Zag Products, Stoker’s Products, and Creative Distribution Solutions. Zig-Zag Products segment markets and distributes rolling papers, tubes, finished cigars, make-your-own cigar wraps, and related products as well as lighters and other accessories under the Zig-Zag brand. The Stoker’s Products segment manufactures and markets moist snuff tobacco and loose-lead chewing tobacco products under the Stocker’s, Beech-Nut, Durango, Trophy, and Wind River brands. Its Creative Distribution Solutions segment markets and distributes other products without tobacco and/or nicotine to individual consumers through the VaporFi B2C online platform, as well as non-traditional retail through Vapor Beast. In addition, it markets and distributes cannabis accessories and tobacco products. The company sells its products to wholesale distributors and retail merchandising, drug stores, and non-traditional retail channels. The company was formerly known as North Atlantic Holding Company Inc. It changed its name to Turning Point Brands Inc in November 2015. The company was founded in 1988 and is headquartered in Louisville, Kentucky.

A shareholder return of 138% over the last 12 months is not too shabby for this company. Most analysts rate it a strong buy or a buy and see it rising more than 20%. Earnings are forecast to grow by 14.04% per year. Earnings grew by 294.6% over the last year.

Recommendation: Scale into the stock. And/or you could try a bull call spread like a 60/65 with an April 17 expiration, or a 60/65 with a July expiration.

So, your trade would look like this:

Buy 1 TPB 60 call

Sell 1 TPB 65 call

When I was looking at these trades the limit price for the April expiration was $1.48 and the limit price for the July expiration was $1.95.

Prices will be all over the place by the time you receive this, so purchase at best.

QI CORNER

SOMETHING TO THINK ABOUT

Cheers

Jacquie

January 24, 2025

Diary, Newsletter, Summary

Global Market Comments
January 24, 2025
Fiat Lux

Featured Trade:

(SOME SAGE ADVICE ON ASSET ALLOCATION)

Some Sage Advice About Asset Allocation

Diary, Newsletter

Asset allocation is the one question that I get every day, which I absolutely cannot answer.

The reason is simple: no two investors are alike.

The answer varies whether you are young or old, have $1,000 in the bank or $1 billion, are a sophisticated investor or an average Joe, are in the top or the bottom tax bracket, and so on.

This is something you should ask your financial advisor if you haven’t fired him already, which you probably should.

Having said all that, there is one old hard and fast rule, which you should probably dump.

It used to be prudent to own your age in bonds. So, if you were 70, you should have had 70% of your assets in fixed-income instruments and 30% in equities.

Given the extreme overvaluation of all bonds today, and that we are probably already in a 30-year bear market, I would completely ignore this rule and own no bonds whatsoever.

This is especially true of government bonds, which are yielding near zero interest rates in Europe and Japan, and only 2.23% in the US.

Instead, you should substitute high dividend-paying stocks for bonds. You can get 4% a year or more in yields these days, and get a great inflation hedge, to boot.

You will also own what everyone else in the world is trying to buy right now, high-yield US stocks.

You will get this higher return at the expense of higher volatility. So just turn the TV off on the down days so you won’t get panicked out at the bottom.

That is until we hit the next recession. Then all bets are off. That may be three years off, or more.

I hope this helps.

John Thomas
The Diary of a Mad Hedge Fund Trader

Under or Over 70?

January 24, 2025 - Quote of the Day

Diary, Newsletter, Quote of the Day

“Fair value doesn’t mean you have to go down. It just means you have to be cautious,” said hedge fund legend David Tepper of Appaloosa Management.

Trade Alert - (DELL) January 23, 2025 - BUY

Tech Alert

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

January 23, 2025

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
January 23, 2025
Fiat Lux

Featured Trade:

(THE HARD TRUTH ABOUT THIS BIOTECH'S PIPELINE THAT WALL STREET DOESN'T GET)

(MRK), (AMGN), (AAPL)

The Hard Truth About This Biotech's Pipeline That Wall Street Doesn't Get

Biotech Letter

Earlier this month, while reviewing my biotech holdings during a layover at Chicago O'Hare, I got an interesting call from a long-time reader.

He was panicking about Merck (MRK) after seeing it trading near its 52-week lows, convinced the pharmaceutical giant was headed for trouble.

"Have you seen what Medicare negotiations did to Januvia?" he asked, referencing the 79% price reduction. "And Keytruda's patent expires in 2028!"

Here's the hard truth about this biotech's pipeline that Wall Street doesn't get: while everyone's fixated on Keytruda's patent cliff, Merck has quietly tripled their late-stage pipeline in just over three years.

We're talking more than 20 unique assets in late-stage development, plus another 50 in early stages.

The last time I saw this kind of pipeline expansion was during the early days of Amgen (AMGN), which turned out pretty well for investors who saw past the obvious.

Actually, Merck's current "crisis" also reminds me of the time I bought Apple (AAPL) right after Steve Jobs announced the iPhone. Everyone worried about the risk, while I saw the opportunity.

Merck just posted Q3 2024 numbers that would make most CEOs envious: revenue up 7% year-over-year to $16.7 billion.

Keytruda, their cancer blockbuster, grew 21% to $7.4 billion. Even their Animal Health division jumped 11%. These aren't the numbers of a company in trouble.

Speaking of investors, they've enjoyed a 126% total return over the past decade with Merck, despite more ups and downs than my last flight through turbulence.

The company's 5-year average Return on Equity sits at 25% (recently climbing to 28%), with Return on Invested Capital steady at 20%.

With a Weighted Average Cost of Capital around 8%, there's plenty of room for growth.

Yesterday, I was discussing these numbers with a former FDA commissioner (who shall remain nameless) over coffee.

He pointed out something fascinating: Merck's R&D spending is increasing alongside revenue growth. That's like a tech company doubling down on product development – exactly what you want to see in pharma.

For dividend hunters (and I know many of you are), Merck offers a 3.3% yield with a 7% five-year dividend growth rate.

The payout looks sustainable too, consuming 68% of earnings and 55% of free cash flow. It's not going to make you quit your day job, but it's better than the 1.4% you'll get from the S&P 500.

Looking at valuation, Merck trades at a P/E of 20.5, below its historical average of 22.3.

My own growth projections suggest a 13% annual rate going forward. Optimistic? Perhaps. But with their robust pipeline and near-term analyst projections, I've seen crazier things work out.

The company just announced a $15 billion share repurchase program, including plans to spend $7.5 billion over the next 12 months. When management puts that kind of money where their mouth is, I tend to pay attention.

Yes, Keytruda's patent cliff in 2028 is real. But so is Merck's late-stage pipeline of antibody-drug conjugates (ADCs) – think smart missiles in the war against cancer.

And unlike some biotechs, Merck has the financial muscle to weather any storm, with decreasing net debt and a solid cash position.

Remember what I always say about buying straw hats in winter? Merck right now is like finding a premium pharma stock in the discount bin.

Just like my friend who panicked and sold everything after the November 8 election (and missed the subsequent rally), sometimes the best opportunities come disguised as problems.

As for me, I'm looking at Merck as a potential long-term hold. The company's fundamentals remind me of other great turnaround stories I've traded successfully over the years.

With the healthcare sector currently out of favor and Merck trading near its 52-week lows, this might be one of those moments we look back on and wish we'd bought more.

And speaking of patents, maybe I should patent my strategy: “Buy great companies when everyone else is afraid.” Though I suspect Warren Buffett already beat me to that one.

January 23, 2025

Diary, Newsletter, Summary

Global Market Comments
January 23, 2025
Fiat Lux

Featured Trades:

(WHY WATER WILL SOON BE WORTH MORE THAN OIL),
(CGW), (PHO), (FIW), (VE), (TTEK), (PNR),
(WHY WARREN BUFFETT HATES GOLD),
(GLD), (GDX), (ABX)

Why Water Will Soon Become More Valuable Than Oil

Diary, Newsletter

If you think that an energy shortage is bad, it will pale in comparison to the next water crisis. So, investment in freshwater infrastructure is going to be a great recurring long-term investment theme.

One theory about the endless wars in the Middle East since 1918 is that they have really been over water rights.

Although Earth is often referred to as the water planet, only 2.5% is fresh, and three-quarters of that is locked up in ice at the North and South poles. In places like China, with a quarter of the world's population, up to 90% of the freshwater is already polluted, some irretrievably so by heavy metals.

Some 18% of the world population lacks access to potable water, and demand is expected to rise by 40% in the next 20 years.

Aquifers in the US, which took nature millennia to create, are approaching exhaustion, especially in Northern Indiana and California’s Central Valley. While membrane osmosis technologies exist to convert seawater into fresh, they use ten times more energy than current treatment processes, a real problem if you don't have any, and will easily double the end cost of water to consumers.

While it may take 16 pounds of grain to produce a pound of beef, it takes a staggering 2,416 gallons of water to do the same. Beef exports are really a way of shipping water abroad in highly concentrated form.

The UN says that $11 billion a year is needed for water infrastructure investment, and $15 billion of the 2008 US stimulus package was similarly spent.

It says a lot that when I went to the University of California at Berkeley School of Engineering to research this piece, most of the experts in the field had already been retained by major hedge funds!

At the top of the shopping list to participate here should be the Claymore S&P Global Water Index ETF (CGW), which has appreciated by 14% since the October low.

You can also visit the PowerShares Water Resource Portfolio (PHO), the First Trust ISE Water Index Fund (FIW), or the individual stocks Veolia Environment (VE), Tetra-Tech (TTEK), and Pentair (PNR).

Who has the world's greatest per capita water resources? Siberia, which could become a major exporter of H2O to China in the decades to come.

The New Liquid Gold?