Global Market Comments
April 11, 2025
Fiat Lux
SPECIAL VOLATILITY ISSUE
Featured Trade:
(TESTIMONIAL)
(MAKING VOLATILITY YOUR FRIEND),
(VIX), (VXX), (XIV),
(THE ABC’s OF THE VIX),
(VIX), (VXX), (SVXY)
Ingenious writing John in your Monday morning strategy letter. I forwarded it to all my family and kids, and made my 16-year old read it out loud to my wife. I made sure he understood what he was reading. I got choked up by the whole article.
Go Ukraine!
Best regards,
Greg
Las Vegas, NV
With the Volatility Index back down to a bargain of $16, I am getting deluged with emails from readers asking if it is time to start hedging portfolios one more time and buying the iPath S&P 500 VIX Short Term Futures ETN (VXX).
The answer is not yet, but soon, possibly very soon. And here is the anomaly in the market today. Volatility is not reflecting actual short-term movements in the S&P 500.
While we have seen several 200-point moves in the market in the past three weeks, the volatility Index (VIX) has spent only hours over the $20 level. That is because the ($VIX) measures anticipated 30-day volatility, and for the past 30 days, the overall net move in the market has been zero.
They are inquiring at absolutely the wrong time.
And here is the problem. When the (VIX) rises, it usually spikes straight up, and then right back down again. This time, it spiked but has since hung around the $20 level rather than collapse back down. That suggests that there is another leg up to go in volatility until it hits $50 or more before it takes a much-deserved break. That means the stock market has one more sharp selloff left before we hit bottom and bounce.
Markets can ignore trade wars, rising interest rates, rocketing interest rates, and international political instability (Gaza, Ukraine) for a while, but not forever. When the time DOES come to pay the piper, prices will fall and volatility will rocket.
So I am more than usually interested in hedging the downside risk for my trading book. A good rule of thumb is to let the (VIX) sit at a bottom for a week, and then go buy the (VXX). Two weeks is even better. That way, you can ignore expensive and unnecessary time decay.
Which all brings me to the subject at hand.
If you are new to the service and have no longs, you probably should skip this trade and just watch it as a learning experience.
This can also be a great hedge for any long positions we may want to add in the coming weeks, such as in “trade peace” or technology plays.
As I never tire of telling people, no one ever complains when they buy fire insurance and their house doesn’t burn down.
If you are new to this service, don’t freak out. My daily research newsletters are not always about exploring the esoterica of options, or volatility trading.
I’ll let you know when I’m ready to pull the trigger with a Trade Alert.
I am always trying to get better prices.
If you are new to the (VIX) game, please read the educational piece below.
I am one of those cheapskates who buy Christmas ornaments by the bucket load from Costco in January for ten cents on the dollar because my 11-month theoretical return on capital comes close to 1,000%.
I also like buying flood insurance in the middle of the summer drought, when the forecast in California is for endless days of sunshine. That is what we had at the end of July when the (VIX) was plumbing the depths of $12.
Get this one right, and the profits you can realize are spectacular.
It gets better.
If the bottom in volatility exactly coincides with the peak in the stock market that it measures, volatility could be headed back up to the 30% handle, and maybe more.
I double dare you to look at the charts below and tell me this isn’t happening.
Watch carefully for other confirming trends to affirm this trade is unfolding. Those would include a strong dollar, and a weak Japanese yen, Euro, and rising fixed-income instruments of any kind.
Notice that every one of these is happening this week!
Reversion to the mean, anyone?
You may know of this from the many clueless talking heads, beginners, and newbies who call (VIX) the “Fear Index”.
For those of you who have a PhD in higher mathematics from MIT, the (VIX) is simply a weighted blend of prices for a range of option contracts on the S&P 500 index (SPX).
The formula uses a kernel-smoothed estimator that takes as inputs the current market prices for all out-of-the-money calls and puts for the front-month and second-month expirations.
The (VIX) is the square root of the par variance swap rate for a 30-day term initiated today. To get into the pricing of the individual options, please go look up your handy dandy and ever-useful Black-Scholes equation.
You will recall that this is the equation that derives from the Brownian motion of heat transference in metals. Got all that?
For the rest of you who do not possess a PhD in higher mathematics from MIT, and maybe scored a 450 on your math SAT test, or who don’t know what an SAT test is, this is what you need to know.
When the market goes up, the (VIX goes down. When the market goes down, the (VIX) goes up. Period. End of story. Class dismissed.
The (VIX) is expressed in terms of the annualized monthly movement in the S&P 500 (SPX) which, with the (VIX) today at $10, is at $72.54.
So for example, a (VIX) of $10 means that the market expects the index to move 2.89%, or $72.54 S&P 500 points, over the next 30 days.
You get this by calculating $10/3.46 = 2.89%, where the square root of 12 months is 3.46.
The volatility index doesn’t really care which way the stock index moves. If the S&P 500 moves more than the projected 2.89% in ANY direction, you make a profit on your long (VIX) positions.
I am going into this detail because I always get a million questions whenever I raise this subject with volatility-deprived investors.
It gets better.
Futures contracts began trading on the (VIX) in 2004, and options on the futures since 2006.
Since then, these instruments have provided a vital means through which hedge funds control risk in their portfolios, thus providing the “hedge” in hedge fund.
“You always sound smarter when you’re a bear than when you’re a bull,” said Adam Parker formerly of Morgan Stanley.
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
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
April 10, 2025
Fiat Lux
Featured Trade:
(THE $5 BILLION SECRET I SPOTTED IN MY DOCTOR'S WAITING ROOM)
(AMGN), (NVO), (LLY), (MRK), (REGN)
Last Tuesday, my orthopedist kept me waiting 40 minutes past my appointment time – just long enough for me to witness what Wall Street's finest analysts have somehow managed to miss.
As I sat thumbing through a dog-eared copy of Golf Digest from 2018, I counted eight different patients called in for Prolia injections.
By the sixth one, I'd put down the magazine and started taking notes on my phone. By the eighth, I was already mentally calculating position sizes for my portfolio.
"You know what you just saw?" my doctor asked when he finally saw me. "That's Amgen's cash cow – $5.4 billion in sales last year for a twice-yearly injection. And guess what? Half these patients will be on it for life."
When I pressed him on competing drugs, he just laughed. "Their sales reps bring the best lunches. But seriously, it works, patients tolerate it, and insurance covers it. In medicine, that's the holy trinity."
While half of Wall Street hyperventilates about which pharmaceutical giant will dominate the weight loss market, and the other half chases whatever shiny tech story came out this morning, they're all missing Amgen (AMGN) – a money-printing machine trading at just 14.9 times earnings with a 3.1% dividend that grows like clockwork.
I've been investing in pharmaceutical companies since I covered Merck's (MRK) explosive growth for The Economist in the late 1970s, and one lesson has remained constant: the market consistently underestimates companies with proven track records during transitions.
Amgen, trading at $307, is a textbook example of this phenomenon right now.
The headline numbers don't initially spark excitement – management is guiding for modest 5% revenue growth and 4% EPS growth this year. But having analyzed hundreds of pharma companies over five decades, I know these conservative guidance figures are often the prelude to significant outperformance.
What matters more is their $5.9 billion R&D investment last year (up 25% from 2023) and the underappreciated potential of their pipeline.
Look beyond the surface, and you'll find Amgen has quietly built something remarkable. While everyone's fixated on Novo Nordisk’s (NVO) Ozempic and Wegovy, few have noticed that Amgen's existing product portfolio is delivering solid results.
Inflammation drug TEZSPIRE grew 71% year-over-year and is approaching the $1 billion annual sales milestone. Oncology drug BLINCYTO jumped 41%, and their cholesterol drug Repatha, combined with bone health treatment EVENITY, delivered $1 billion in year-over-year growth.
The real hidden value lies in Amgen's obesity program. The anti-obesity market that barely existed a few years ago has exploded to $2.2 billion and is projected to grow at 30% annually through 2030.
Eli Lilly (LLY) and Novo Nordisk have seen their market caps soar into the stratosphere on the strength of their GLP-1 drugs, but Amgen's market valuation doesn't reflect any meaningful potential from MariTide, their Phase 3 obesity candidate.
This reminds me of 2012 when I began accumulating Regeneron (REGN) while the market was completely missing the potential of Eylea. That position delivered a 580% return over the following three years.
What's particularly attractive about Amgen is the margin of safety it offers. With a 3.1% dividend yield (backed by a manageable 45% payout ratio and 13 consecutive years of growth), a forward P/E of just 14.9, and a fortress-like 46.3% operating margin, you're being paid to wait for the pipeline to deliver.
The company has been aggressively paying down the debt from its Horizon Therapeutics acquisition, reducing long-term obligations by $6.6 billion last year alone.
Their financial discipline stands in stark contrast to many of the speculative biotech plays I've been pitched recently. At a dinner with venture capitalists in Boston last week, I listened to presentation after presentation about pre-clinical assets with billion-dollar valuations and no revenue in sight.
Meanwhile, Amgen generated $33.4 billion in sales last year with industry-leading EBITDA margins of 45%.
Of course, there are risks. The upcoming patent expiration of osteoporosis drug Prolia this year creates a revenue gap that needs filling.
The Trump administration's Department of Government Efficiency (DOGE) initiative could potentially impact FDA testing labs, slowing approval timelines. But these concerns are already priced into the stock, while the potential upside from MariTide and other late-stage candidates is not.
Having navigated multiple market cycles since the 1970s, I've learned that the best investments often come when solid companies are temporarily overlooked during market rotations. Amgen remains a proven pharmaceutical innovator with strong cash flows, growing dividends, and a promising pipeline that offers compelling value.
I started building a substantial position in Amgen at around $260 during the post-election pharmaceutical sell-off and have continued to accumulate shares on weakness.
With a reasonable valuation, strong pipeline optionality, and dividend income that beats 10-year Treasury yields, Amgen represents the kind of steady compounder that has consistently outperformed over full market cycles.
In my decades of investing, I've found that buying excellent businesses during periods of unwarranted pessimism is the closest thing to a guaranteed winning formula.
With Amgen, you're essentially being paid a 3.1% annual dividend to own a company that could deliver a major surprise in the obesity market – the same market that transformed Novo Nordisk and Eli Lilly into two of the world's most valuable companies.
Sometimes the smartest investments are like colonoscopies – nobody's excited to talk about them at parties, but they'll save your financial health in the long run.
In today's rapidly evolving economic landscape, finance chiefs are under constant pressure to optimize spending, enhance efficiency, and drive profitability. A powerful weapon in their arsenal is digitalization, the integration of digital technologies into all areas of a business, fundamentally changing how it operates and delivers value. This transformation is no longer a futuristic concept but a present-day imperative for finance functions aiming to not only survive but thrive.
Recent surveys underscore the profound impact of digitalization, particularly through technologies like Artificial Intelligence (AI). A staggering 94% of finance leaders acknowledge that AI has already improved their decision-making capabilities. Even more compelling is the fact that 74% report tangible positive effects on both cost and risk reduction. These figures highlight a significant shift in the perception and adoption of digital tools within finance, moving from experimental phases to recognized drivers of tangible benefits.
This article delves into the multifaceted ways in which finance chiefs are leveraging digitalization to aggressively cut costs, enhance operational efficiency, and ultimately contribute more strategically to the overall success of their organizations. We will explore the key technologies being adopted, the specific areas within finance where these technologies are making the most significant impact, and the strategic considerations necessary for a successful digital transformation journey.
The Digital Revolution in Finance: A Multi-Pronged Approach to Cost Reduction
Digitalization in finance is not a monolithic endeavor. It encompasses a wide array of technologies and applications, each contributing to cost reduction in unique yet often interconnected ways. Finance chiefs are strategically deploying these tools across various functions, creating a synergistic effect that drives down expenses and improves overall performance.
- Automation of Routine Tasks: Freeing Up Human Capital
One of the most immediate and significant cost-saving benefits of digitalization is the automation of repetitive, manual tasks. Technologies like Robotic Process Automation (RPA) are being widely adopted to handle high-volume, rule-based activities such as data entry, invoice processing, account reconciliation, and report generation.
- Reduced Labor Costs: By automating these tasks, organizations can significantly reduce the need for manual labor, leading to lower salary expenses and overhead costs associated with a large workforce. For instance, automating invoice processing can drastically cut the time and personnel required to handle vendor payments.
- Improved Accuracy and Reduced Errors: Human error is an inherent risk in manual processes. Automation eliminates this risk, leading to more accurate data and fewer costly mistakes that require time and resources to rectify. Accurate financial records are crucial for informed decision-making and regulatory compliance, further preventing potential financial penalties.
- Increased Efficiency and Faster Turnaround Times: Automated processes can operate 24/7, significantly reducing turnaround times for critical financial operations. This speed and efficiency can lead to better cash flow management, improved vendor relationships through timely payments, and faster closing of financial periods.
- Reallocation of Human Resources: By freeing up finance professionals from mundane tasks, organizations can redeploy their talent to higher-value activities such as strategic analysis, forecasting, risk management, and business partnering. This shift maximizes the utilization of human capital and enhances the overall strategic contribution of the finance function.
- Artificial Intelligence and Machine Learning: Intelligent Cost Optimization
Beyond basic automation, Artificial Intelligence (AI) and Machine Learning (ML) are enabling finance chiefs to achieve more sophisticated levels of cost reduction through intelligent insights and predictive capabilities.
- Enhanced Forecasting and Budgeting: AI/ML algorithms can analyze vast datasets, including historical financial data, market trends, and macroeconomic indicators, to generate more accurate financial forecasts and budgets. This allows for proactive cost management by identifying potential overspending areas and optimizing resource allocation.
- Fraud Detection and Prevention: AI-powered systems can analyze transaction patterns and identify anomalies that may indicate fraudulent activity. Early detection and prevention of fraud can save organizations significant amounts of money in potential losses and investigation costs.
- Risk Management: AI can assess and predict various financial risks, such as credit risk, market risk, and operational risk, with greater accuracy than traditional methods. This enables finance teams to implement proactive mitigation strategies, reducing the likelihood and impact of costly adverse events.
- Personalized Customer Service and Reduced Service Costs: In customer-facing financial services, AI-powered chatbots and virtual assistants can handle a large volume of customer inquiries, providing instant support and2 resolving basic issues without the need for human intervention. This significantly reduces customer service costs while improving response times and customer satisfaction.
- Optimized Investment Strategies: AI algorithms can analyze market data and identify investment opportunities that align with an organization's financial goals and risk tolerance. This can lead to higher returns on investments and better capital allocation.
- Streamlined Spend Management: AI-driven spend analytics tools provide real-time visibility into organizational spending patterns, identifying areas of inefficiency and potential cost savings in procurement, travel, and other operational expenses. Some reports suggest that AI-driven spend management can reduce costs by as much as 20%.
- Cloud Computing: Scalability and Reduced Infrastructure Costs
The adoption of cloud computing has revolutionized IT infrastructure management and offers significant cost advantages for finance functions.
- Reduced Capital Expenditure: Cloud-based solutions eliminate the need for large upfront investments in hardware, software licenses, and IT infrastructure. Finance departments can access the computing resources they need on a subscription basis, turning capital expenditure into operational expenditure.
- Scalability and Flexibility: Cloud platforms offer the flexibility to scale computing resources up or down based on business needs. This eliminates the risk of over-provisioning (wasting resources) or under-provisioning (hindering performance), ensuring cost efficiency and agility.
- Lower Maintenance and Operational Costs: Cloud service providers handle the maintenance, upgrades, and security of the underlying infrastructure, reducing the burden and cost associated with in-house IT management.
- Enhanced Collaboration and Accessibility: Cloud-based finance systems enable seamless collaboration among team members, regardless of their location. Data and applications are accessible from anywhere with an internet connection, improving efficiency and enabling remote work arrangements, which can further reduce overhead costs.
- Big Data and Analytics: Data-Driven Cost Optimization
The exponential growth of data presents both a challenge and an opportunity for finance chiefs. Big Data analytics tools enable them to process and analyze vast amounts of financial and non-financial data to extract valuable insights for cost reduction.
- Identifying Cost Drivers: By analyzing large datasets, finance teams can identify the key factors that drive costs within the organization. This granular understanding allows for targeted cost-cutting initiatives in the areas with the most significant impact.
- Predictive Analytics for Cost Management: Predictive analytics techniques can forecast future cost trends based on historical data and other relevant variables. This allows finance leaders to anticipate potential cost increases and take proactive measures to mitigate them.
- Performance Monitoring and Benchmarking: Data analytics enables continuous monitoring of key financial performance indicators (KPIs) and benchmarking against industry peers. This helps identify areas where the organization is underperforming in terms of cost efficiency and highlights opportunities for improvement.
- Improved Decision-Making: Data-driven insights empower finance chiefs to make more informed decisions regarding resource allocation, investment strategies, and operational improvements, ultimately leading to better cost outcomes.
- Digital Payment Solutions: Streamlining Transactions and Reducing Fees
The shift towards digital payment solutions offers significant cost savings compared to traditional paper-based methods.
- Reduced Transaction Costs: Digital payments typically involve lower processing fees compared to checks and other manual payment methods.
- Faster Payment Cycles: Digital payment systems enable faster and more efficient payment processing, improving cash flow and reducing the administrative costs associated with managing paper-based transactions.
- Improved Security and Reduced Fraud: Digital payment platforms often incorporate advanced security features, reducing the risk of fraud and associated financial losses.
- Enhanced Transparency and Audit Trails: Digital payment systems provide clear and auditable records of all transactions, simplifying reconciliation and reducing the costs associated with error resolution and compliance.
Strategic Considerations for Successful Digital Transformation
While the potential for cost reduction through digitalization is immense, realizing these benefits requires a well-defined strategy and careful execution. Finance chiefs must consider the following key aspects to ensure a successful digital transformation journey:
- Clear Vision and Objectives: Define specific, measurable, achievable, relevant, and time-bound (SMART) objectives for the digital transformation initiative, with a clear focus on cost reduction targets and desired efficiency gains.
- Robust Technology Infrastructure: Invest in a scalable and secure technology infrastructure that can support the chosen digital solutions and ensure seamless integration with existing systems. Addressing complex legacy systems is a significant challenge that requires careful planning and expert consulting.
- Data Governance and Management: Establish strong data governance frameworks to ensure data quality, security, and compliance with relevant regulations. Effective data management is crucial for leveraging the full potential of AI, ML, and big data analytics.
- Talent Acquisition and Upskilling: Build a finance team with the necessary digital skills and competencies. This may involve hiring new talent with expertise in areas like data science and AI, as well as providing training and upskilling opportunities for existing employees to adapt to new technologies. Change management and addressing employee resistance to new technologies are critical aspects of this process.
- Cybersecurity and Risk Management: Implement robust cybersecurity measures to protect sensitive financial data and mitigate the increasing cyber threats associated with digitalization. This includes adopting AI-based security systems and advanced encryption methods.
- Phased Implementation and Continuous Improvement: Adopt a phased approach to digital transformation, starting with pilot projects and gradually scaling successful initiatives across the finance function. Continuously monitor the performance of digital solutions and make necessary adjustments to optimize their effectiveness.
- Collaboration and Communication: Foster strong collaboration between the finance team, IT department, and other business units to ensure alignment and effective implementation of digital initiatives. Clear and consistent communication is essential to manage expectations and address any concerns.
- Regulatory Compliance: Ensure that all digital solutions and processes comply with relevant financial regulations and data privacy laws. This requires a proactive approach to monitoring regulatory updates and adapting digital strategies accordingly.
Conclusion: The Digitally Empowered Finance Function
In conclusion, finance chiefs are increasingly recognizing digitalization not just as a technological advancement, but as a strategic imperative for achieving significant and sustainable cost reductions. By strategically deploying technologies like RPA, AI/ML, cloud computing, big data analytics, and digital payment solutions, finance functions can automate routine tasks, gain intelligent insights, optimize resource allocation, and streamline financial processes.
The impressive statistics highlighting the positive impact of AI on decision-making and cost/risk reduction serve as a testament to the transformative power of digitalization in finance. However, realizing the full potential of this digital revolution requires a clear vision, a robust strategy, careful execution, and a commitment to continuous learning and adaptation. As the economic landscape continues to evolve, the digitally empowered finance function will be a critical driver of organizational efficiency, profitability, and long-term success. Finance chiefs who embrace digitalization proactively will be well-positioned to navigate future challenges and capitalize on emerging opportunities, transforming their departments from cost centers to strategic value creators.