Global Market Comments
June 21, 2018
Fiat Lux
SPECIAL BIOTECH ISSUE
Featured Trade:
(HERE COMES THE NEXT REVOLUTION),
(CVS), (AET), (BRK.A), (AMZN), (JPM), (CI),
(BIIB), (CELG), (REGN)
Technology and biotechnology are the two seminal investment themes of this century.
And while many tech companies have seen share prices rise 100-fold or more since the millennium, biotech and its parent big pharma have barely moved the needle.
That is about to change.
You can thank the convergence of big data, supercomputing, and the sequencing of the human genome, which overnight, have revolutionized how new drugs are created and brought to market.
So far, only a handful of scientists and industry insiders are in on the new game. Now it's your turn to get in on the ground floor.
The first shot was fired in December 2017 when CVS (CVS) bought Aetna (AET) for an eye-popping $69 billion, puzzling analysts. A flurry of similar health care deals followed, with Berkshire Hathaway (BRK.A), Amazon (AMZN) with its Verily start-up, and J.P. Morgan (JPM) joining the fray.
March followed up with a Cigna (CI) bid for Express Scripts, a pharmacy benefits manager. Apple (AAPL) has suddenly launched a bunch of health care-based apps designed to accumulate its own health data pool.
What's it all about? Or better yet, is there a trade here?
No, it's not a naked bid for market share, or an attempt to front run the next change in health care legislation. It's much deeper than that.
In short, it's all about you, or your data to be more precise.
We have all seen those clever TV ads about IBM's (IBM) Watson mainframe computer knowing what you want before you do. In reality we are now on the third generation of Watson, known as Summit, now the world's fastest super computer.
Summit can process a mind-numbing 4 quadrillion calculations per second. This is computing muscle power that once was associated with a Star Trek episode.
Financed by the Department of Defense to test virtual nuclear explosions and predict the weather, Summit has a few other tricks up its sleeve. It can, for example, store every human genome and medical record of all 330 million people in the United States, process that data instantly, and spit out miracle drugs almost at whim.
You know all those lab tests, X-rays, MRI scans, and other tests you've been accumulating over the years? They add up to some 30% of the world daily data creation, or some 4 petabytes (or 4,000 gigabytes) a day. That's a lot of zeroes and ones.
Up until a couple of years ago, this data just sat there. It was like having a copy of the Manhattan telephone book (if it still exists) but not knowing anyone there. Thanks to Summit we now not only have a few friends in Manhattan, we know everyone's most intimate details.
I have been telling readers for years that if you can last only 10 more years you might be able to live forever, as all major human diseases will be cured during this time. Summit finally gives us the tools to achieve this.
Imagine the investment implications!
The U.S. currently spends more than $3 trillion on health care, or about 15% of GDP, and costs are expected to rise another 6% this year. To modernize this market, you will need to create from scratch four more Apples or six more Facebooks (FB) in terms of market capitalization. You can imagine what getting in early is potentially worth.
Crucial to all of this was Craig Venter's decoding of his own DNA in 2000 for the first time, which cost about $1 billion. Today, you and I can get 23andMe, Ancestry.com or Family Tree DNA to do it for $100, with most of the work done in China.
Of course, key to all of this is getting the medical data for every U.S. citizen on line as fast as possible. The Obama administration began this effort seven years ago. Remember those gigantic overstuffed records rooms at your doctor's office? You don't see them anymore.
But we have a long way to go, and 20% of the U.S. population who don't HAVE any medical records, including all of the uninsured, will be a challenge.
To give you some idea of the potential and convince that I have not gone totally MAD let me tell you about Amgen's (AMGN) sudden interest in Iceland. Yes, Iceland.
There, a struggling, young start-up named deCode sequenced the DNA of the entire population of the country, about 160,000 individuals. It tried to monetize its findings but it was early and lost money hand over fist. So, the company sold out to Amgen in 2012 for $415 million.
Until then targeting molecules for development was based on a hope and a prayer, and only a hugely uneconomic 5% of drugs made it to market. Using artificial intelligence (yes, those NVIDIA graphics processors again) to pretest against the deCode DNA data based it was able to increase that hit rate to 75%.
It's not a stretch to assume that a 15-fold increase in success rates leads to a 15-fold improvement in profitability, or thereabouts.
Word leaked out setting off a gold rush for equivalent data pools that led to the takeover boom described above. And what happens when the pool of data explodes from 160,000 individuals to 330 million? It boggles the mind.
As a result, the health care industry is now benefiting from a "golden age" of oncology. Average life expectancy for chemotherapies is increasing by months at a time for specific cancers.
All of this is happening at a particularly fortuitous time for drug, health care, and biotech companies, which are only just now coming out of a long funk.
Traders seemed to have picked up on this new trend in May, which is why I slapped on a long position in the iShares Nasdaq Biotechnology ETF (IBB) (click here for a full description).
Like many companies in the sector it is coming off of a very solid one-year double bottom and is going ballistic today.
The area is ripe for rotation. Other names you might look at include Biogen (BIIB), Celgene (CELG), and Regeneron (REGN).
If you have grown weary of buying big cap technology stocks at new all-time highs, try adding a few biotech and pharmaceutical stocks to spice this up. The results may surprise you.
As for living forever, that will be the subject of a future research piece. The far future.
Global Market Comments
June 20, 2018
Fiat Lux
Featured Trade:
(ANNOUNCING THE MAD HEDGE LAKE TAHOE, NEVADA, CONFERENCE, OCTOBER 26-27, 2018),
(THE CHINA TRADE WAR TURNS HOT),
(GM), (AAPL), (SOYB), (WEAT), (CORN)
The trade war with China has suddenly gone from small beer to a big deal. In just two months, we have gone from campaign promises to threats, to an increase in duties from $50 billion to $250 billion worth of Chinese imports.
The risk of destroying the current strength of the economy and the stock market is now on the table. Already, the Dow Average has given up all its 2018 gains and is now down 1.1% on the year.
All we will be left with is a big tax cut for corporations, $3 trillion in new government debt, and a recession.
As a result, the current rally in the stock market will fail, and a test of the 2018 lows is on the menu. My 2018 range for stocks until the midterm election lives!
Of the past 10 years, China has generated 50% of global economic growth, the U.S. 35%, and the rest of the world the balance. Imports from the U.S. to China were already on a sharp upswing, and it is now our third largest trading partner.
Imports of U.S. autos has soared from 125,356 units in 2011 to 267,473 in 2017, and that doesn't count American cars, such as the GM Buick, built in China. It now looks like all of this will suddenly grind to a halt.
Not only will Chinese middle-class consumers buy European and Japanese going forward, the American brand has been destroyed by our open hostility and insults. Apple (AAPL) sells more iPhones in China than the U.S., but I'm not sure that will last either.
China only imported $150 billion worth of goods from the U.S. last year. That means to implement a tit-for-tat, dollar-for-dollar retaliation China will have to hit the U.S. services sector hard. Similarly, you can bet that Chinese investment in the U.S. will be sharply curtailed.
The true cost of the trade war isn't in the dollar amounts involved ... yet. But the impact on business confidence has been catastrophic.
Investment globally is slowing because nobody knows if their industry, or their company will get hit next by American off-the-cuff policies. Just ask any soybean (SOYB) farmer who is looking at a de facto ban on Chinese purchases of their products. The price of their commodity has collapsed by 16% in a week.
In the end, Trump will get what he wants, a lower U.S. trade deficit. But it will come in the form of collapsing demand from U.S. consumers generated by the next recession. That is the only way the American trade deficit has fallen for the past century.
Be careful what you wish for.
Global Market Comments
June 19, 2018
Fiat Lux
Featured Trade:
(REPORT FROM AMERICA)
The country is positive about the economy, nervous about the stock market, horrified about what's coming out of Washington, and universally opposed to a trade war. It is prospering, but most people are carefully looking over both shoulders, biting their nails over how soon it all will end.
That is my takeaway from the Mad Hedge Fund Trader 2018 Spring U.S. Road Show, where I traveled around the country listening to subscribers, individual investors, hedge fund managers, portfolio managers, and financial advisors.
My Global Strategy Luncheons gave guests a welcome respite from the week's never-ending freak show of the G7 meltdown, the Singapore photo ops, a Fed interest rate rise, and the latest immigration atrocity.
The markets cooperated nicely for the week, with the Mad Hedge Trade Alert Service up four out of five days. That took my trailing 12-month performance up to 61.12%, a new decade high. It was a week of listening to tales of mortgages and student loans paid off, second homes and third cars paid for, and life changes.
Fortunately, I take adulation well. In fact, I can take that all week long.
It is also looking like we'll get a good turnout this year at the Mad Hedge Lake Tahoe Conference on October 26-27 (click here for the link).
I visited Fort Worth, TX; New Orleans, LA; Washington, DC; Philadelphia, PA; New York, NY; and Denver, CO, and a lot of places in between. It all gave me a great 30,000-foot view on the state of the country in general and the risks posed to your retirement portfolio specifically.
What follows is not as anything as grand as a broad unified view nor as micro as a Trade Alert but a series of random observations, thoughts, and impressions.
When I first hitchhiked my way through downtown Fort Worth, TX, during the 1960s, it was nothing better than a deteriorating slum. Today, it is an art deco architectural masterpiece, reborn through billions of dollars' worth of Bass Brothers investment.
When I visited the Kimbell Art Museum I found a van Gogh worth at least $50 million donated by a Bass spouse. I thought "Damn, if only had done that trade that would be my name on that donation, not theirs."
At my New Orleans luncheon I dined with one of the most knowledgeable oil players I ever have met. Venezuela is the next failed state, and 1.5 million barrels a day of Texas tea isn't coming back to the market anytime soon. That is a headache for the many south coast refineries built specifically to process their heavy crude.
Of course, Bourbon Street at night is always an eye-opener, with strippers casually flaunting their wares and the tourists eating it all up. It seems to be getting bigger, more neon lights, and more gaudy every year. The crawfish gumbo at Antoine's is to die for as usual, the city's oldest restaurant.
During my free hour, I ran through The National WWII museum, which my uncle helped open 15 years ago. I spent the most time in the "Solomon Victory Theater" section, where both my father and my uncle fought on Guadalcanal and took the photo below of the plaque describing Mitch's Medal of Honor citation.
In fact, many visitors were there honoring long dead fathers, grandfathers, and uncles, and great aunts who served. It was all very inspirational, showing the greatness the country can achieve when we all pull together.
I landed late in Washington DC and decided to drive past the White House, which is beautiful at night bathed in light. After circling the block several times, Google Maps said it was right in front of me, but I couldn't see it.
It was only when I stopped the car that I realized that while every other government building was brightly illuminated, the White House was totally blacked out. This hasn't happened since 9/11. I guess I have to believe the Secret Service when they tell me that death threats are up 400%.
After a fabulous Chesapeake Bay crab chowder, I visited the Naval Academy at Annapolis where I had to make a brief stop for some government work. Seeing the young midshipmen walking briskly to classes in their starched white uniforms wistfully reminded me of my youth.
I made the biggest mistake of my life when I was accepted here (my dad was politically very well connected) but didn't attend because it was politically unpopular during the Vietnam War.
It was a battle getting to my Philadelphia lunch on time since the rural Maryland speed limit is only 55 miles per hour. Still, it was a joy seeing all those bright red barns and sagging farmhouses.
At one point, Google Maps humorously had me on a freeway that wasn't built yet, it still clogged with earth movers and Caterpillar tractors. Once across the state line into Pennsylvania, the speed limit rose to 65, but the traffic slowed to 30.
The Union League Club in the City of Brotherly Love is a spectacular Victorian red brick edifice run by an ebullient retired Marine master sergeant. I was gratified to learn that everyone around the table had earned 50% a year from my Trade Alerts, some for many years.
One guest was the chief scientist for The Seeing Eye, the chief provider of guide dogs for the blind, who said he had been bitten 2,000 times during his career.
Driving out of town I paused at the Barnes Foundation to visit the world's largest private collection of Renoir's. I reckoned the massive collection of early blue period Picasso's, van Gogh's, Matisse's, Gauguin's, and Monet's was worth at least $1 billion a room, and there were a lot of rooms. I have been trying to get into this private collection for 45 years, and it only recently opened to the public.
Coming in from New Jersey, the Big Apple still looks incomplete to me missing its Twin Towers, even though it's been 17 years.
New York City is more crowded than ever, and it is now almost impossible to get cross town during the day. I had to jump out of cabs and run the last few blocks to make appointments with the big hedge funds. Hamilton has mercifully run its course, with ticket prices finally under $1,000, and a revival of Hello Dolly now taking the Great White Way by storm.
Leaving town was a headache. The Uber cab took 1 1/2 hours to JFK. Then after we left the terminal, the captain announced there were 30 planes ahead of us awaiting takeoff. We didn't leave the ground for 90 minutes.
I couldn't understand why I had such great difficulty getting a hotel reservation in Denver two months in advance. When I arrived, I found out why. The Mile High City was hosting both Gay Pride Week and Comecon on the same weekend attracting 200,000 visitors.
The lobby of the Sheraton was packed with groups of women holding hands with women and men holding hands with men, mixing with groups of lightsaber wielding Wookiee's, Darth Vader's, and Princess Leia's.
Only in America.
My Uber driver told me that the bloom was off the rose for the marijuana boom, legalized only in 2012. Wages for retail pot sellers had made the round trip from $8 an hour to $80, then back to $8.
Big money from out of town has turned it into a low-margin high-volume business with market share going to the lowest cost provider. Prices are collapsing. Companies don't bother to drug test anymore since no one can pass, but drunk driving convictions are down 25%.
Getting out of town was yet another nightmare. The Sheraton promised to buy me a new suitcase after the bell desk broke the handle off mine. Traffic was horrendous. United Airlines (UAL) threatened to bump me off an overbooked flight unless I upgraded my seat, a sympathetic Marine infantryman's wife in customer support making sure I made the flight.
I made it back home in time for Father's Day where I received my breakfast in bed "Best Dad in the Galaxy T-Shirt." With five kids versus the national average of 1.7, I am doing my part to save America.
I can't wait for the 2018 European Road Show to start in two weeks. Is anyone from a city I missed interested in a Mad Hedge Fund Trader 2018 FALL U.S. Road Show?
"Luck helped me every day of my life. And I'd rather be lucky than smart 'cause a lot of smart people ain't eatin' regular," said wildcatting oil pioneer Sid Richardson about his success in business.
Global Market Comments
June 18, 2018
Fiat Lux
Featured Trade:
(TEN REASONS WHY APPLE IS STILL GOING TO $220),
(AAPL)
Here it is mid-June, and Apple is already closing in on my 2018 target of $200. Indeed, with a market capitalization today of $930 billion, Apple is on the verge of becoming the world's first $1 trillion publicly traded company.
And here's the really great thing about this year for Apple bulls. If you had the right cajones you had a chance to load the boat just above $150 only five weeks ago.
Now for the good news. The best is yet to come. In fact, there are 10 reasons why Apple shares should hit my lofty target sometime this year.
1) Share buybacks are first and foremost. With $280 billion worth of cash in the bank abroad, and two thirds of that committed to buy back Apple stock, shareholders essentially have a free put option.
Indeed, you could see the company's invisible hand in the marketplace during the recent correction, soaking up shares at every opportunity. We won't learn the true numbers until the next quarterly earnings report in August.
2) Valuation is still the overwhelming factor driving institutions into Apple stock. With a price earnings multiple of 18X and a dividend yield of 1.40%, Apple is trading not only at a discount to the main market, but a discount to most of tech as well. No one ever got fired for buying Apple, at least not recently.
3) Apple's sales are as good as ever. The expected draw down in between new phone launches is proving less than expected. All of the channel checks suggesting a bigger drop have proved unfounded.
4) The rest of technology is on fire. Even if Apple was stumbling now, which it isn't, it would get dragged up by the meteoric moves seen in the rest of the FANGs.
5) The administration's nixing of the Broadcom (AVGO) takeover of QUALCOMM (QCOM), protects the principal supply of propriety chips for Apple phones safe from foreign interference. Broadcom could have chopped the research budget or transferred crucial technology to foreign competitors.
6) Apple is broadening its product lines, shifting to a new business model that delivers multiple new phones at the same time. This will include low-priced models that will compete in new markets such as India, as well as go head to head with the market share leaders, Samsung. This will increase market share and profitability.
7) While Apple possesses only 8% of the global cell phone market, it accounts for a staggering 92% of cell phone profits. Apple effectively has a monopoly on cell phone profits.
8) Its new lease program promises to deliver a faster upgrade cycle that will allow higher premium prices for its products and demand more phones. That will bring larger profits.
9) Apple continues to inexorably move into new products and services. While the company was late with the HomePod to compete against Amazon's (AMZN) Alexa and Alphabet's (GOOGL) Google Home, integration with the rest of the Apple ecosystem will enable the company to have the last laugh. Watch out for Apple Pay. Health care is another big target area.
10) Standards of living are rising worldwide. And guess what the first thing a newly enriched middle class does around the planet? They dump their Samsung Galaxies and Google Androids and join the iPhone club for the enhanced status alone.
I Hear Apple is Diversifying
"U.S. stock performance will be good in 2017, but is set to be outperformed by Japan, Europe, and emerging markets," said a top manager at bond giant PIMCO.
