April 2025

April 16, 2025

(SURVIVING THE TARIFFIED WORLD)

April 16, 2025

Hello everyone

The global economic landscape is being reshaped as we speak. There are now heightened concerns about economic growth, currency stability, and financial retaliation. We need to consider China’s potential response via US Treasury yields and other retaliatory measures.

On April 2, 2025, President Trump signed Executive Order 14257, imposing a 34% tariff on Chinese imports, pushing total levies above 70% for some goods. China retaliation on April 4 with a matching 34% tariff on US imports, plus rare earth export curbs. This is reminiscent of the 2018 trade war.

The US aims to boost manufacturing and cut reliance on China, whose share of US imports fell from 21% in 2018 to 14% in 2023. Yet, higher tariffs will likely raise consumer prices for electronics and machinery. The US-China Business Council estimates that revoking China’s trade status could cost 744,000 jobs. With a $36.2 trillion national debt, the US faces refinancing challenges in 2025 as Treasury yields rise, a vulnerability China could exploit.

The US faces a delicate moment in its fiscal policy. With national debt exceeding $36.2 trillion, the Treasury is set to refinance substantial portions in 2025 amid rising yields. The 10-year Treasury yield has surged recently, reflecting market unease over tariffs and inflation expectations. If China leverages its $1.11 trillion in US Treasury holdings, it could exacerbate this pressure.

China’s economy, slowed by post-COVID recovery and property debt, faces a tariff hit. The Economist Intelligence Unit predicts as 20% US tariff increase could cut GDP growth by 0.6 points through 2027, with a 60% tariff costing 2.5 points. Exports to the US (2.9% of GDP in 2023) remain key. China plans a 6.9 trillion-yuan stimulus and rate cuts to hit a 5% growth target, but success is uncertain amid trade disruptions.

The yuan has weakened to its lowest since September 2023, with the People’s Bank of China (PBOC) seemingly willing to let it go lower. A weaker yuan could offset tariffs by cheapening exports, potentially sliding to 7.7 to 7.8 if tensions rise. However, this risks capital outflows and higher import costs, as well as global ripple effects from a broader monetary breakdown.

Alongside the changed economic environments, China holds several strategic tools for retaliation against the US.

China holds $1.11 trillion in US Treasuries and could sell or halt purchases to spike yields, raising US borrowing costs as $6 trillion in debt matures in 2025-2026. This is China’s primary trade war weapon.

It dominates the global rare earth supply chain – critical to military and high-tech industries – supplying roughly 72 per cent of US rare earth imports, by some estimates.

On March 4, China placed 15 American entities on its export control list, followed by another 12 on April 9. Many were US defence contractors or high-tech firms reliant on rare earth elements for their products.

Export restrictions on rare earths could further pressure US tech and defence sectors, though escalation risks backlash.

China also retains the ability to target key US agricultural export sectors such as poultry and soybeans – industries heavily dependent on Chinese demand and concentrated in Republican-leaning states. China accounts for about half of US soybean exports and nearly 10 per cent of American poultry exports. On March 4, Beijing revoked import approvals for three major US soybean exporters.

And on the tech side, many US companies – such as Apple and Tesla – remain deeply tied to Chinese manufacturing. Tariffs threaten to shrink their profit margins significantly, something Beijing believes can be used as a source of leverage against the Trump administration. Already, Beijing is reportedly planning to strike back through regulatory pressure on US companies operating in China.

Let’s not forget the position that Elon Musk holds. As we understand it, he is a senior Trump insider who has clashed with US trade adviser Peter Navarro against tariffs. Furthermore, we know he has major business interests in China. These facts could be a strong wedge that Beijing could exploit to divide the Trump administration.

As I pointed out last week in my Post on Friday (WHO’S IN CONTROL – TRUMP OR XI?) the changing dynamics could significantly reshape the geopolitical landscape of East Asia, bringing together countries to take advantage of a strategic opportunity to displace American hegemony.

Southeast Asian countries could see a strengthened alliance and an “all-round cooperation”, which offers an opportunity to directly erode US sway in the Indo-Pacific.

A promising strategic opportunity is building in Europe too, with the European Union contemplating strengthening its own previously strained trade ties with China. Both sides have jointly condemned US trade protectionism and advocated for free and open trade. EU and Chinese officials are holding talks over existing trade barriers and considering a full-fledged summit in China in July.

China is watching the US dollar. It sees in Trump’s tariff policy a potential weakening of the international standing of the US dollar. Widespread tariffs imposed on multiple countries have shaken investor confidence in the US economy, contributing to a decline in the dollar’s value.

Traditionally, the dollar and US Treasury bonds have been viewed as haven assets, but recent market turmoil has cast doubt on that status. At the same time, steep tariffs have raised concerns about the health of the US economy and the sustainability of its debt, undermining trust in both the dollar and US Treasurys.

The tariff standoff between the US and China is more than a trade dispute, it may well reveal a world at a historic inflection point, where economic strategies and asset choices will define the next decade. For the US, higher costs and refinancing woes loom; for China, growth hangs in the balance, with yuan depreciation a risky but viable counter.

China’s potential to sway US Treasury yields adds a financial warfare dimension – a weapon that should not be taken lightly. It has the tools to inflict meaningful damage on US interests. Perhaps, more significantly, we need to understand that Trump’s all-out trade war is providing China with a rare and unprecedented strategic opportunity that could forever change the economic landscape.

AND

Cheers

Jacquie

Trade Alert - (PLTR) April 16, 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

April 16, 2025

Diary, Newsletter, Summary

Global Market Comments
April 16, 2025
Fiat Lux

Featured Trade:

(THE IRS LETTER YOU SHOULD DREAD),
(TESTIMONIAL)

April 16, 2025 - Quote of the Day

Diary, Newsletter, Quote of the Day

Trade Alert - (NFLX) April 17, 2025 - EXPIRATION AT MAX PROFIT

Trade 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

April 15, 2025

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
April 15, 2025
Fiat Lux

Featured Trade:

(THE WEIGHT OF EXPECTATIONS)

(LLY), (NVO)

The Weight Of Expectations

Biotech Letter

You know that feeling when you've found the perfect restaurant? The food is exquisite, the atmosphere divine, and then you get the bill—and suddenly you're calculating if selling a kidney is a viable financial strategy.

That's essentially my relationship with Eli Lilly (LLY) right now. Phenomenal company, stellar performance, price tag that makes my wallet weep.

I've had a complicated romance with this pharmaceutical juggernaut. Back in my hedge fund days, I learned that timing is everything with pharma stocks. It's like catching the perfect wave off Malibu – ride it too early, you're just splashing in the shallows; too late, and you're eating sand.

When I first spotted Lilly in June 2023, it was set up beautifully. Shares rocketed 56.2% before I downgraded to a 'hold' last February, while the broader market trudged along with a mere 12.3% gain.

Since then, the stock has performed almost exactly as predicted—just a 0.2% gain compared to the S&P 500's 1.33%. More recently, it's dropped 6.9% since January, looking positively rosy next to the broader market's 12.2% decline.

The company's fourth-quarter results read like a biotech investor's fantasy novel. Revenue soared 44.7% year-over-year to $13.53 billion, driven by its dynamic weight-loss duo.

Mounjaro's sales jumped 60.1% to $3.53 billion, while Zepbound exploded from $175.8 million to a jaw-dropping $1.91 billion.

I've watched patients in clinical trials shed substantial weight on these medications—one of my research contacts dropped 43.4 pounds since starting treatment—and I can tell you these drugs are creating waves not just in waistlines but across the entire healthcare sector.

Other stars in Lilly's portfolio include Verzenio for breast cancer (up to $1.56 billion from $1.15 billion), Jardiance for diabetes (climbing to $1.20 billion), and solid gains from Taltz and Humalog.

Only Trulicity disappointed, watching its revenue tumble from $1.67 billion to $1.25 billion—predictably cannibalized by Lilly's newer weight-loss offerings. It's like watching your reliable sedan gathering dust after buying a Tesla.

With this revenue bonanza, profits naturally skyrocketed. Net income more than doubled to $4.41 billion, adjusted profits surged to $4.81 billion, and operating cash flow swung from negative $311.9 million to positive $2.47 billion.

In my decades of following pharmaceutical stocks from Tokyo to Wall Street, I've rarely seen a quarterly performance this impressive. If Lilly were a student, it would be the annoying one breaking the curve for everyone else.

Looking ahead, management projects 2025 revenue between $58-61 billion (a 32.1% increase at midpoint) and adjusted EPS between $22.50-24.

For the upcoming Q1 report on May 1st, analysts anticipate revenue of $12.77 billion (45.6% higher year-over-year) and EPS of $4.70 (nearly double last year's $2.48).

So with all this financial wizardry, why maintain a 'hold'? One word: valuation.

Even using 2025's projected figures, Lilly trades at eye-watering multiples: forward P/E of 33.3, price-to-cash-flow of 27.6, and EV/EBITDA of 21.2.

For context, pharmaceutical peers trade significantly lower. Novo Nordisk (NVO), perhaps the most comparable given its similar weight-loss market success, trades at a P/E of 19.0, price-to-cash-flow of 15.9, and EV/EBITDA of 14.6.

It's like comparing Manhattan real estate to Cleveland—both might be perfectly fine places to live, but one demands a significant premium.

Don't mistake my caution for bearishness. Lilly's product pipeline is robust, highlighted by Retatrutide, which has shown even more impressive weight-loss results—patients lost an average of 24.2% of their body weight (58 pounds) in clinical trials.

The company is also expanding its manufacturing footprint with four new US sites, creating 3,000 permanent jobs. It's acquiring promising treatments like Scorpion Therapeutics' STX-478 for $2.5 billion upfront.

Meanwhile, shareholders enjoyed $4.7 billion in dividends and $2.5 billion in buybacks last year, with a new $15 billion repurchase program and a 15% dividend increase announced for 2025.

I'd compare Lilly's stock to its own weight-loss drugs: remarkably effective, potentially life-changing, but priced at a level that makes you question whether the benefits justify the cost.

If May's results blast past expectations with raised guidance, I'll happily reconsider. Until then, I'm maintaining my 'hold'—admiring from across the room, but not ready to propose just yet.

April 15, 2025

Diary, Newsletter, Summary

Global Market Comments
April 15, 2025
Fiat Lux

Featured Trade:

(HOW TO HANDLE THE THURSDAY, APRIL 17 OPTIONS EXPIRATION)

How to Handle the Thursday, April 17 Options Expiration

Diary, Homepage Posts, Newsletter

Followers of the Mad Hedge Fund Trader alert service have the good fortune to own FIVE in-the-money options positions that expire on Thursday, April 17, and I just want to explain to the newbies how to best maximize their profits.

These involve the:

Risk On

(COST) 4/$840-$850 call spread 10.00%

(TSLA) 4/$160/$170 put spread 10.00%

(NFLX) 4/$800-$810 call spread 10.00%

(NVDA) 4/$70-$75 call spread 10.00%

Risk Off

(MSTR) 4/$340-$350 put spread -10.00%

Provided that we don’t have a monster move in the market in three trading days, these positions should expire at their maximum profit points.

So far, so good.

I’ll take the example of the (NVDA) 4/$70-$75 call spread.

Your profit can be calculated as follows:

Profit: $5.00 expiration value - $4.50 cost = $0.50 net profit

(25 contracts X 100 contracts per option X $0.50 profit per option)

= $1,250 or 11.11% in 9 trading days.

Many of you have already emailed me asking what to do with these winning positions.

The answer is very simple. You take your left hand, grab your right wrist, pull it behind your neck, and pat yourself on the back for a job well done.

You don’t have to do anything.

Your broker (are they still called that?) will automatically use your long position to cover your short position, canceling out the total holdings.

The entire profit will be credited to your account on Monday morning, April 21, and the margin freed up.

Some firms charge you a modest $10 or $15 fee for performing this service.

If you don’t see the cash show up in your account on Monday, get on the blower immediately and find it.

Although the expiration process is now supposed to be fully automated, occasionally, machines do make mistakes. Better to sort out any confusion before losses ensue.

If you want to wimp out and close the position before the expiration, it may be expensive to do so. You can probably unload those pennies below their maximum expiration value.

Keep in mind that the liquidity in the options market understandably disappears and the spreads substantially widen when a security has only hours or minutes until expiration on Thursday. So, if you plan to exit, do so well before the final expiration at the Thursday market close.

This is known in the trade as the “expiration risk.”

One way or the other, I’m sure you’ll do OK, as long as I am looking over your shoulder, as I will always. Think of me as your trading guardian angel.

I am going to hang back and wait for good entry points before jumping back in. It’s all about keeping that “Buy low, sell high” thing going.

I’m looking to cherry-pick my new positions going into the next quarter's end.

Take your winnings and go out and buy yourself a well-earned dinner.

Well done, and on to the next trade.

You Can’t Do Enough Research

OPENAI'S CASH BURN PARADOX

Mad Hedge AI

(NVDA), (MSFT), (GOOG),(AMZN)

You know what's crazy? A company that burns $5 billion a year in computing costs getting valued at $300 billion.

Yet here we are. OpenAI just closed a monster funding round, raising up to $40 billion from investors including SoftBank Group at a staggering $300 billion valuation. That's nearly double what the company was valued at just six months ago.

I've seen this movie before, both as a hedge fund manager and while dodging Russian artillery in Ukraine. Euphoria rarely ends well, whether in markets or on battlefields.

The company behind ChatGPT has become the darling of the investment world despite the fact that it won't be profitable until 2029, according to Sam Altman's own projections. 2029! That's four years and several AI generations from now.

This is a company that expects to generate $13 billion in revenue this year, which sounds impressive until you realize they'll likely spend more than that on computing costs alone. In fact, in 2024, OpenAI reported revenue of around $4 billion while racking up $5 billion in computing costs just to train and run their models.

When I was running hedge funds in the 1990s, we had a technical term for businesses like this: money pits.

Let's dive deeper into these numbers. Over 90% of OpenAI's 500 million users worldwide pay absolutely nothing to use the service. In 2025, the company projects that just under 5% of users might pay the $20-a-month charge to access their more advanced AI models. That would generate about $5.5 billion. Another 0.3% might opt for ChatGPT Pro, contributing another $3.6 billion.

The trouble is that a whopping 70% of OpenAI's revenue comes with expenses that may keep rising faster than the top line. According to reporting from The Information, by the end of the decade, OpenAI will still probably spend 60% to 80% of its annual revenue just to train or run its models.

Meanwhile, competition is heating up. OpenAI's market share of enterprise large language models (LLMs) has already fallen to 34% in 2024 from 50% a year ago, according to Menlo Ventures data. Companies like Anthropic, Meta, Google, and Mistral AI are eating into their lead.

And there's another problem: intense pricing competition. As companies like Mistral AI and Anthropic offer competitive alternatives, OpenAI's ability to charge premium prices for its API services is under pressure.

During my decades reporting from Asia, I witnessed countless companies with "revolutionary technology" that eventually became commoditized faster than anyone expected. When I covered the Japanese semiconductor industry in the 1970s, companies that once had seemingly unassailable leads saw their margins evaporate within years.

So why are investors like SoftBank's Masayoshi Son so eager to pour billions into this cash-burning machine? The answer lies in the potential of achieving artificial general intelligence (AGI) – AI systems that can perform any intellectual task that a human can. If OpenAI succeeds in developing AGI, the economic rewards could be incalculable.

In a fascinating twist, OpenAI just made its first cybersecurity investment, putting money into a startup called Cosmic. This signals a strategic expansion beyond its core AI development work. Smart move, considering that as AI becomes more ubiquitous, securing it becomes increasingly critical.

Additionally, there are rumors that OpenAI may release an open-source model, which would be a significant shift in strategy. This could be a play to expand their ecosystem and solidify their position as the standard-bearer in AI development.

For investors trying to play the AI revolution, the question becomes: is it better to invest directly in pure AI plays like OpenAI (if and when it goes public), or in the companies that actually make money from the AI boom today?

The smartest money might be in NVIDIA (NVDA), which supplies the crucial GPUs that power AI development. Despite trading at seemingly high multiples, NVIDIA continues to see explosive growth in data center revenue as AI development accelerates. Even with competition from AMD and Intel, NVIDIA maintains a commanding lead in AI chip technology.

Microsoft (MSFT) provides another interesting angle, given its deep partnership with OpenAI. The company has exclusive rights to commercialize OpenAI's technology and has already integrated ChatGPT capabilities across its product line, from Bing to Office 365.

For those looking at pure AI plays beyond the giants, Anthropic (backed by Google (GOOG) and Amazon (AMZN)) and Mistral AI represent interesting alternatives to OpenAI, though they remain private for now.

Is AI revolutionary? Absolutely. Are most AI companies going to make money anytime soon? Don't bet your retirement on it. For OpenAI to hit Altman's projected $125 billion revenue target by 2029, they need to grow 10-fold while dramatically shifting from money-losing free users to enterprise clients that actually pay the bills.

That's a tall order, even for a company with seemingly unlimited access to capital. I've witnessed too many "guaranteed successes" implode over my five decades in the markets. After covering countless bubbles from Tokyo to Silicon Valley, I've learned that eventually, cash flow matters. Always.

If I were allocating capital today, I'd be putting my money on companies with proven ability to convert AI hype into actual profits. Let others chase the AGI dream while you count real returns.

At this late stage in my life, I've learned that what seems inevitable rarely is, and what looks impossible often becomes routine within years. Will OpenAI justify its $300 billion valuation? Perhaps. But at these prices, investors are paying for perfection when the company hasn't even figured out a sustainable business model.

That's not investing – that's speculation.

And if there's one thing my bullet wound from Ukraine taught me, it's that life's too short for bad bets.