Mad Hedge Technology Letter
February 7, 2025
Fiat Lux
Featured Trade:
(TESLA IS IN A PICKLE)
(TSLA)
Tesla stock has been falling since the mid of last December, and I expect the short-term trajectory of the stock to be a real slippery slope.
There are a variety of factors causing the stock to struggle.
I won’t ignore the issue that the eccentric and strongly opinionated CEO Elon Musk has aggressively inserted himself into European politics and turning off the political establishment in Europe, which has always been radically left, is just asking for trouble.
It’s my opinion that he has essentially written off doing business in Europe and is throwing his efforts on making political inroads in the old continent.
Long term, I am not sure Musk can compete against the Chinese pricing power, and securing political gains in Western government will help his empire grow.
His sights have shifted away from EVs to rockets, and the stock will likely suffer from this.
Don’t forget that Europeans are facing a stark and grueling cost of living crisis that is degrees of magnitudes worse than what is happening in the United States.
Interesting that Americans complain that rental costs consume half the salary, but in Europe, tenant obligations via leases consume 100% of the average white-color job salary.
The end result is that young Europeans cannot afford to buy cars, whether it be gas powered or electric.
How bad are things for Tesla?
Sales of its EVs dropped 13% in the European Union in 2024.
They are also facing growing pressure as Chinese and Euorpean rivals launch a wave of cheaper electric vehicles.
Tesla saw big drops in sales in major markets dominated by ultra-progressive politics like Germany, France, and Italy.
In Germany, the hub of Europe's auto industry and the home of Tesla's Berlin gigafactory, sales of Tesla vehicles fell by 41% in 2024, outstripping the 27% sales decline in the general battery EV market.
Swedish brand Volvo, which is owned by Chinese conglomerate Geely, saw its sales rise nearly 30% in the EU last year, driven by the popularity of its $40,000 EX30 electric crossover.
Several German companies have announced they will stop buying Tesla vehicles over Musk's political and social comments in recent months.
This trend is likely to grow in 2025.
Musk has also become entangled in UK politics, feuding with British Prime Minister Keir Starmer.
I expect Musk's active political involvements to have a damaging impact on Tesla's European sales for the foreseeable future, and rivals would likely reap the benefit of disgruntled Tesla owners ditching their vehicles.
Tesla makes a great car – I don’t deny that.
Musk has already sold 2 to 3 EVs to every Western progressive that could ever want an EV. Conservatives aren’t interested in EVs. Try selling a Tesla in rural Poland to a Polish milk farmer where it would be almost impossible to find a charging station. EVs are almost entirely reserved for an urban environment where EV infrastructure is beefy and widespread.
Since Musk cannot get that EV sales growth boost in the short-term, he is riding on the coattails of the global populist movement to secure political victories, and it is working to his benefit.
At the end of the day, consumers would ultimately be more concerned about factors such as price and performance, rather than Musk's politics, but with people who can afford buying multiple EVs in Europe, they care about the name on your passport, the university you went to, and especially your political views.
Europe is just like that, and Musk is going ahead and alienating the European market.
In the short-term, I don’t see a lot of individual catalysts that could boost Tesla in the short-term, although after the Deepseek black swan, Tesla could ride a general tech market revision to the mean rally.
Let’s hope the general tech market heals itself from the Deepseek nuclear bomb, but I would stay away from Tesla in the short-term and opt for something more attractive in tech like Meta or Netflix in 2025.
“It's OK to have your eggs in one basket as long as you control what happens to that basket.” – Said Founder and CEO of Tesla Elon Musk
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
(IS THE AI WAKE UP CALL FROM CHINA A STORM IN A TEACUP OR SOMETHING BIGGER?)
February 7, 2025
Hello everyone
China and Australia are having a spat, or Is China & the world having a spat?
Australia has moved to ban the Chinese AI company Deep Seek from all its government systems and devices on national security grounds. Australia joins Taiwan and the U.S. state of Texas, which have similar Deep Seek restrictions on government phones. One European country – Italy – has gone even further. It has banned Deep Seek entirely by forcing its removal from app stores.
China has accused Australia of ideological discrimination and following in the footsteps of the U.S., which is also approaching the app with caution.
In the U.S., both NASA and the Pentagon have ordered staff to steer clear of Deep Seek.
I think there could be further shocks to the market from the AI corner.
Palantir has catapulted itself into the clouds
I recommended Palantir on March 20, 2024, when it was $23.00.
We are still holding this stock. At its closing price on Thursday at $111.28, we have made 383% on this stock. So, you would be wise to take some profits off the table.
Shares of the government contractor and artificial intelligence play are trading at a 62 forward price-to-sales ratio, the highest of any company in the S&P500. The next closest nonfinancial stock in terms of forward price-to-sales is Texas Pacific Land Corp, at 32 times estimates for sales over the next year, according to FactSet data.
Palantir’s valuation comes after a 24% jump in its shares last Tuesday as the company reported a 36% increase in sales for the last quarter and raised its sales forecast for the full year.
Analysts agree that Palantir’s stock price is not sustainable even if it does become a primary contractor for the U.S. government that is looking to modernize processes and increase efficiency.
Jefferies software analyst Brent Thill notes that although the stock’s fundamentals are strong, PLTR would have to raise growth to 50% for 4 years and trade at 13.5x CY28E revenue just to hold its stock price. Thill’s stock price target is $28.00. Palantir closed at $111.28 on Thursday.
Could this rally be typical of retail trader enthusiasm, which often represents late-stage bull markets?
QI CORNER
Cheers
Jacquie
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
Global Market Comments
February 7, 2025
Fiat Lux
(A NOTE ON ASSIGNED OPTIONS OR OPTIONS CALLED AWAY)
(TLT), (TSLA)
I just received an excited text message from an excited Concierge client. His short position in the (TSLA) February 2025 $540-$550 vertical bear put debit spread had just been called away. That meant he would receive the maximum profit a full 11 trading days before the February 21 option expiration.
With the heightened volatility this week, I am seeing an increasing number of options positions assigned or called away.
I know all of this may sound confusing at first. But once you get the hang of it, this is the greatest way to make money since sliced bread.
I still have five positions left in my model trading portfolio that is deep in-the-money, and about to expire in 9 trading days on the February 21 options expiration day. Those are the
Current Capital at Risk
Risk On
(TSLA) 2/$300-$310 call spread 10.00%
(TSLA) 2/$310-$320 call spread 10.00%
(NVDA) 2/$90-$95 call spread 10.00%
(VST) 2/$100-$110 call spread 10.00%
Risk Off
(TSLA) 2/$540-$550 spread -10.00%
Total Net Position 30.00%
Total Aggregate Position 50.00%
That opens up a set of risks unique to these positions.
I call it the “Screw up risk.”
As long as the markets maintain current levels, this position will expire at its maximum profit value.
There is a heightened probability that your short position in the options may get called away.
Although the return for those calling away your options is very small, this is how to handle these events.
If exercised, brokers are required by law to email you immediately, and I know all of this may sound confusing at first. But once you get the hang of it, this is the greatest way to make money since sliced bread.
If it happens, there is only one thing to do: fall down on your knees and thank your lucky stars. You have just made the maximum possible profit for your position instantly.
Most of you have short option positions, although you may not realize it. For when you buy an in-the-money vertical option spread, it contains two elements: a long option and a short option.
The short options can get “assigned” or “called away” at any time, as it is owned by a third party, the one you initially sold the put option to when you initiated the position.
You have to be careful here because the inexperienced can blow their newfound windfall if they take the wrong action, so here’s how to handle it correctly.
Let’s say you get an email from your broker telling you that your call options have been assigned away.
I’ll use the example of the Berkshire Hathaway (BRK/B) August 2024 $405-$415 in-the-money vertical Bull Call spread since so many of you had these.
For what the broker had done in effect is allow you to get out of your call spread position at the maximum profit point 11 days before the August 16 expiration date.
In other words, what you bought for $8.70 on July 12 is now worth $10.00, giving you a near-instant profit of $1,300 or 14.94% in only 11 trading days.
All you had to do was to call your broker to instruct them to “exercise your long position in your (BRK/B) August 16 $405 calls to close out your short position in the (BRK/B) August 2024 $410 calls.”
You must do this in person. Brokers are not allowed to exercise options automatically, on their own, without your expressed permission.
You also must do this the same day that you receive the exercise notice.
This is a perfectly hedged position. The name, the ticker symbol, number of shares, and number of contracts are all identical, so you have no exposure at all.
Call options are a right to buy shares at a fixed price before a fixed date, and one option contract is exercisable into 100 shares.
Short positions usually only get called away for dividend-paying stocks or interest-paying ETFs like the (BRK/B). There are strategies out here that try to capture dividends the day before they are payable. Exercising an option is one way to do that.
Weird stuff like this happens in the run-up to options expirations like we have coming.
A call owner may need to sell a long (BRK/B) position after the close, and exercising his long (BRK/B) call, which you are short, is the only way to execute it.
Adequate shares may not be available in the market, or maybe a limit order didn’t get done by the market close.
There are thousands of algorithms out there that may arrive at some twisted logic that the puts need to be exercised.
Many require a rebalancing of hedges at the close every day, which can be achieved through option exercises.
And yes, options even get exercised by accident. There are still a few humans left in this market to blow it by writing shoddy algorithms.
And here’s another possible outcome in this process.
Your broker will call you to notify you of an option called away and then give you the wrong advice on what to do about it.
There is a further annoying complication that leads to a lot of confusion. Lately, brokers have resorted to sending you warnings that exercises MIGHT happen to help mitigate their own legal liability.
They do this even when such an exercise has zero probability of happening, such as with a short call option in a LEAPS that has a year or more left until expiration. Just ignore these, or call your broker and ask them to explain.
This generates tons of commissions for the broker but is a terrible thing for the trader to do from a risk point of view, such as generating a loss by the time everything is closed and netted out.
There may not even be an evil motive behind the bad advice. Brokers are not investing a lot in training staff these days. In fact, I think I’m the last one they really did train.
Avarice could have been an explanation here, but I think stupidity, poor training, and low wages are much more likely.
Brokers have so many ways to steal money legally that they don’t need to resort to the illegal kind.
This exercise process is now fully automated at most brokers, but it never hurts to follow up with a phone call if you get an exercise notice. Mistakes do happen.
Some may also send you a link to a video of what to do about all this.
If any of you are the slightest bit worried or confused by all of this, come out of your position RIGHT NOW at a small profit! You should never be worried or confused about any position tying up YOUR money.
Professionals do these things all day long, and exercises become second nature, just another cost of doing business.
If you do this long enough, eventually you get hit. I bet you don’t.
Calling All Options!
Mad Hedge Biotech and Healthcare Letter
February 6, 2025
Fiat Lux
Featured Trade:
(YOU MIGHT NEED ASPIRIN FOR THIS ONE)
(PFE)
Last Tuesday, while filing away some tax documents, I found myself staring at an old prescription bottle from 2020. The Pfizer (PFE) logo caught my eye, and ironically, that same morning they dropped their Q4 earnings report.
The timing felt symbolic – much like that old bottle, Pfizer's COVID glory days are now just a memory on their financial statements.
The numbers looked good on the surface. EPS of $0.63 beat expectations by $0.17, and revenue came in at a healthy $17.8B, crushing estimates by $540M.
But in the pharmaceutical world, today's blockbuster is tomorrow's generic, and Wall Street knows it. After all, the market's reaction was about as enthusiastic as a patient reading medication side effects.
Let me paint you a picture of what we're dealing with here. Imagine going from making $100.3B in 2022 (those glory days of COVID) to $58.5B in 2023. That's not a haircut – that's a full-blown scalping.
Sure, they bounced back to $63.6B in 2024, but their 2025 guidance of $61.0B to $64.0B suggests they're treading water at best.
Now, here's where it gets interesting, and not in a good way. Remember how I always tell you to look under the hood? Well, Pfizer's engine is about to lose some major parts.
By 2030, they're saying goodbye to patents on Eliquis (a $6.7B revenue generator) and Ibrance (worth $4.8B). That's like losing your two best-performing stocks in your portfolio – it hurts.
Speaking of pain, I had lunch last week with a pharmaceutical industry veteran who couldn't stop talking about the "LOE wave" – that's "loss of exclusivity" in pharma-speak. CEO Albert Bourla puts it at about $17-18 billion in lost revenue over the next 3-4 years.
To put that in perspective, that's like losing the annual GDP of Mongolia. The company's solution? They're promising to deliver $20 billion in new revenues by 2030 through their pipeline of new drugs.
One bright spot worth watching is their oncology division, which grew an impressive 27.4% year-over-year in 2024.
Their promising candidate Atirmociclib, a CDK4i inhibitor for metastatic breast cancer, enters Phase 3 studies in the first half of 2025.
With a 44% historical success rate for these types of studies, it's targeting a massive market – the global breast cancer therapeutics market hit $34.63 billion in 2024 and is expected to reach $89.01 billion by 2034, growing at a healthy 9.90% annually.
That's the kind of growth potential that gets my attention.
The stock currently sports a 6.7% dividend yield, which might look tempting – like that last piece of chocolate cake in the refrigerator at midnight.
But here's the rub: pharmaceutical companies are like Silicon Valley startups with lab coats. They constantly need to innovate just to stay alive. It's not enough to have one hit wonder – you need a whole playlist of blockbusters.
Trading at 8.91x forward earnings with a PEG ratio of 0.20 and 2.5x price/sales, Pfizer does look cheap. But as I always say, sometimes things are cheap for a reason.
Want a shocking comparison? While attending the J.P. Morgan Healthcare Conference, I noticed that analysts are projecting Pfizer's 2029 revenues to be over $5 billion lower than 2024. That's not exactly the inspiring growth story I was hoping to hear.
For those of you hunting for yield (and I know many of you are), let me give you a reality check. That juicy 6.7% dividend looks appetizing until you realize it comes from a company that needs to spend billions just to replace what it's about to lose.
While I love a good yield as much as the next investor, watching a pharmaceutical company's patents march toward expiration is about as comforting as sitting in a dentist's waiting room.
Sometimes the best high-yield investment is the one you don't make – at least until the business fundamentals match the dividend's promise.
Want my advice? Keep an eye on their oncology developments, but keep your powder dry. There's a difference between buying a great company and buying a great stock at the right time.
Right now, Pfizer needs to prove it can fill an $18 billion revenue gap before I'm ready to write them a prescription for my portfolio.
