Page 144 - Mad Hedge Fund Trader

Tech Shares Recover on Macro News

Expect this type of showmanship to be the new normal as the U.S. government goes pedal to the medal hoping to extract better trade terms.

In the short term, expect wild swings in the prices of US tech stocks.

U.S. President Trump unilaterally raised the US tariff rate on China (FXI) to 125% and instituted a 90-day pause on steep 'reciprocal' tariffs.

The Nasdaq shot up by an intraday 10% - an unprecedented type of market reaction stemming from short-covering.

The entire tech index was heavily weighted for lower Nasdaq ($COMPQ) share prices and this one announcement torpedoed the short-term momentum to the downside.

2025 is presenting itself to be one of the hardest environments to trade in the last two decades plus as tech shares are the trajectory of them are reliant on the whims of an aggressive new federal government.

People are scared – scared more about the uncertainty this presents.

Uncertainty creates an environment to sell stock resulting in meaningful lower-tech shares.

Additionally, it is very obvious the federal government will target China and the way it does business to reign them in. They are the big fish.

Remember that China has a massive youth unemployment rate problem inching towards 30% and the Chinese Communist Party (CCP) knows they are playing with fire if Trump’s tariffs result in millions of new job layoffs.

Trump on Tuesday claimed that China, as well as other countries, are keen to negotiate. Those talks have reportedly begun with Japan and South Korea. But he has remained defiant as members of his own party and Wall Street billionaires start to push back.

On the negotiations front, both markets and trading partners still seem to be searching for what exactly Trump is seeking.

The president’s approach has prompted retaliation from China and caused other countries to draw up their own plans to hit American exports. As a result, economists have raised their expectations for a recession in the United States, and many now consider the odds to be a coin flip.

During the trade fight with China in Mr. Trump’s first term, U.S. agricultural exports plummeted after China imposed high retaliatory duties on soybean, corn, wheat, and other American imports, and the United States spent about $23 billion to support American farmers.

The Retail Industry Leaders Association, which represents major companies like Walmart, Target, and Best Buy, said this could drive up prices for the American consumer.

In the short term, this should first alleviate the pressure on the U.S. dollar and the price hikes for tech products.

I would stay away from companies that have exposure to China like Tesla and Micron.

Gradually, we will see countries come to the table and if this gets through, even in diluted form, it would be considered a victory for US tech stocks.

Sure, the Federal Government could again jump back on its horse and go insane with the tariffs, but I do believe this pause highlights the fact that they aren’t willing to nuke the economy and tech sector just yet.

I also believe there is a roadmap to claim victory in all of this.

It starts with East Asian countries like Japan and South Korea which will take a “bad deal” in exchange for stability.

We have seen this a few times with Japan and I don’t believe they will reject America’s approach when Japan’s economy, society, and direction are even worse than Europe and America combined.

Once we get a little bit more settled and predictable, it should be a great buy-the-dip opportunity in tech shares.

April 9, 2025

Jacque's Post

(THE FED WON’T RUSH TO SAVE THE MARKET)

April 9, 2025

Hello everyone

Tariffs will spur inflation, and then slow growth. It is very doubtful that the Fed will come to the rescue.

Morgan Stanley sees gross domestic product growth almost coming to a complete standstill and core inflation ending the year well above the central bank’s 2% target. The Fed, then, is very likely to sit on its hands and maintain its holding pattern on interest rates.

Last week, Fed Chair Jerome Powell said he expects policymakers to “wait for greater clarity” on trade policy ramifications before adjusting any further. The Fed currently targets its key overnight lending rate in a range between 4.25% and 4.5%, where it has been since December.

In a stagflation scenario of high inflation and slow growth, Morgan Stanley expects the Fed to lean toward controlling inflation rather than boosting growth. And that means, probably no rate cuts in 2025 and not one until March 2026. The investment bank then sees several cuts throughout next year. However, a recession could change that and bring forward rate cuts.

Below is a chart of the S&P 500. I show the Fib. Retracements. I have already expressed the view that the S&P500 could fall as far down as 4500, and I still see the possibility of that move happening. It may find a base between 4600 and 4500. I also show the support level with the horizontal line which marks the 4400 level. This support level should hold.

Trump’s steeper “reciprocal” tariffs are set to go into effect at midnight and are in addition to the 10% baseline tariff that took effect Saturday. A 104% tariff rate on Chinese imports is among those the U.S. will impose.

China has said that it will continue to take ‘resolute and forceful’ countermeasures as U.S. tariffs kick in. And China has wasted no time. Just this evening the country has slapped 84% tariffs on the U.S.

With Trump seeking to rebalance global trade, a byproduct of that will be capital outflows from the U.S.

U.S. exceptionalism is not shining now – financial markets are suffering.

QI CORNER

Jeffrey Gundlach is speaking here on CNBC about the market turmoil. Worth a listen.

https://youtu.be/SEcoQJNb8Hw?si=cIhZxm9jbBTVV-pa

Cheers

Jacquie

Trade Alert - (TLT) April 9, 2025 - STOP LOSS - SELL

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

Trade Alert - (TLT) April 8, 2025 - BUY

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 8, 2025

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
April 8, 2025
Fiat Lux

Featured Trade:

(YOUR ALL-WEATHER HEALTHCARE FORTRESS)

(CI)

Your All-Weather Healthcare Fortress

Biotech Letter

I've stared down bears in Yellowstone, MiGs over Moscow, and market crashes that would make your financial advisor need therapy. But nothing gets my pulse racing like finding a massively mispriced asset hiding in plain sight.

Ladies and gentlemen, I give you Cigna (CI) – the financial equivalent of discovering an abandoned Ferrari with the keys still in the ignition.

Two nights ago, at a private dinner with three healthcare CEOs, I heard something that confirmed what my models have been screaming for months: Cigna isn't just surviving healthcare's perfect storm – it's secretly thriving in it.

At $331 per share, we're looking at a rare beast: a value play with growth-stock upside.

I've spent enough time hanging around hospital C-suites to know when something smells like money.

Healthcare has been absolutely battered these past couple of years – staffing shortages, skyrocketing utilization rates, and the mother of all pandemic hangovers. Yet here's Cigna, delivering 8-9% year-over-year earnings growth.

What really gets my investment juices flowing is watching Cigna’s strategy play out beautifully. In fact, they just closed their Medicare business sale to HCSC in Q1, a move so smart it makes me want to applaud slowly from across the room.

I was having dinner with Medicare Advantage executives last month, and these folks were practically in tears over reimbursement rates. "It's like trying to run a restaurant where customers expect filet mignon but only want to pay for ground beef," one said, nursing his third scotch.

By reducing Medicare exposure, Cigna is saying, "We'd rather control our destiny than beg government bureaucrats for pennies." Companies that pivot away from heavily regulated, margin-compressed businesses typically emerge looking like they've been on a financial fitness program.

Here's the cherry on top – practically all proceeds from the Medicare divestiture are funding stock buybacks.

Cigna already has a track record of reducing share count that would make other CEOs jealous. One of my former students who now runs healthcare equity research at a bulge bracket bank messaged me privately that his team is dramatically underestimating the EPS impact – like forecasting a drizzle when there's a monsoon coming.

As both an insurer and pharmacy benefits manager, Cigna occupies rarefied air. Their ability to steer members toward lower-cost biosimilars isn't just smart business – it's practically printing money.

During my last Mad Hedge Fund Trader conference, I arranged a private tour of Cigna's specialty pharmacy operations for some of our Concierge members, and what I saw confirmed my thesis: their integration of medical and pharmacy data gives them insights that would make McKinsey consultants salivate.

And can we talk about prior authorization? If you've dealt with health insurance, you know it's bureaucratic torture that makes the DMV seem like a day spa. Remarkably, Cigna is reducing these requirements.

A Cigna EVP I've known since our Harvard Business School days told me over golf that their internal data shows customer retention improving by double digits from these changes alone.

Let's get down to the numbers. Like I said earlier, even during healthcare's darkest days, Cigna delivered 8-9% EPS growth. Using that as my bear case and applying a conservative 3% terminal growth rate, we're looking at a fair value of $432.79 per share.

But if they execute on their 10-14% EPS growth strategy, the fair value jumps to $508.40. That's 33-53% upside from current levels – the kind of return profile that usually comes with significantly more risk.

In 40 years of trading everything from Japanese derivatives during the Nikkei bubble to Texas fracking plays, I've learned that when everyone panics about an industry, the smart money quietly pounces on the gems.

Cigna isn't just any healthcare company – it's the one with enough foresight to shed Medicare exposure right before what my Washington contacts warn will be a reimbursement bloodbath.

Mark my words: By this time next year, when I'm recounting this trade over sake in Tokyo, Cigna won't be our little secret anymore – and neither will the 33%+ returns sitting on the table right now.

Well, that's enough financial wisdom for one day. My trading screens are flashing, my yacht captain's texting, and somewhere in the Himalayas, a summit is wondering where I've been.

April 8, 2025

Diary, Newsletter, Summary

Global Market Comments
April 8, 2025
Fiat Lux

Featured Trade:

(A REFRESHER COURSE AT SHORT SELLING SCHOOL),
(SH), (SDS), (PSQ), (DOG), (RWM), (SPXU), (AAPL), (TSLA),
(VIX), (VXX), (IPO), (MTUM), (SPHB), (HDGE)

MICROSOFT'S AI HOSTAGE

Mad Hedge AI

(CRWV), (MSFT)

My old college roommate owes me. Big time.

"It'll be fun," he promised, arm around my shoulder at our reunion. "Just judge one high school investment competition. They're brilliant kids!"

Twenty years of friendship, and this is how he repays me for helping him land his first bulge-bracket banking gig? Sitting through PowerPoint presentations from teenagers explaining cryptocurrency to me like I'm their technologically-challenged grandfather?

I'm adding this to my mental ledger, right next to the time he convinced me to go mountain climbing in Nagano during a blizzard while we were both covering the Japanese financial markets in the '80s. I still have the frostbite scars to match the losses in my first Nikkei futures account.

The grand finale was a particularly confident team pitching CoreWeave (CRWV) with the kind of unbridled enthusiasm usually reserved for Marvel movie premieres and PlayStation launches.

"It's the backbone of the AI revolution!" declared their 16-year-old team leader. When I gently asked about profitability timelines, they looked at me like I'd suggested valuing companies by counting their office furniture.

"That's old-economy thinking, sir," the young man informed me, actually patting my shoulder sympathetically.

I'm plotting my revenge – maybe I'll volunteer my friend to chaperone his daughter's senior prom – but I couldn't help laughing because these kids perfectly captured today's market psychology: growth at all costs, profitability as an optional future feature.

CoreWeave has certainly turned heads with its 9.75% jump to $61.36 since publication - outperforming the S&P's modest 1.62% gain.

The market loves a good AI story, and CoreWeave is spinning a compelling narrative as the specialized cloud infrastructure company powering the next generation of artificial intelligence.

But as my father used to say while reviewing balance sheets, "Revenue is vanity, profit is sanity, and cash is reality."

And CoreWeave's reality? It's burning through $5 billion in cash annually with the enthusiasm of a lottery winner on their first Vegas trip.

To put that burn rate in perspective, that's like buying a new private jet every week and using it exclusively for paper airplane competitions.

The company's $5.2 billion in net debt (even after its $1.5 billion IPO raise) isn't just concerning – it's downright alarming. In my experience, tech companies carrying debt exceeding 20% of their market cap tend to underperform the market by about 30% over the following three years.

Even more concerning than the debt is CoreWeave's customer concentration. With 60% of business coming from Microsoft (MSFT), they're not in a partnership – they're in a hostage situation.

During my hedge fund days, I witnessed a promising analytics startup derive 40% of revenue from a single client. "We're diversifying rapidly," the CEO assured investors before their anchor client cut spending by half, and the company's valuation followed suit.

Microsoft isn't known for charity work – they're calculating, strategic, and hold all the leverage in this relationship. If Microsoft catches a cold, CoreWeave catches pneumonia and has to be rushed to financial intensive care.

The growth numbers are admittedly eye-popping – 1,346% revenue growth in FY2023 followed by 737% in FY2024. These are the kind of statistics that make investors jump in without reading the fine print.

And CoreWeave's biggest red flag? $2.5 billion of debt coming due in the next 12 months while the company only has $2.8 billion cash on hand.

That's cutting it closer than the time I had to navigate through the Kyber Pass in a questionable Land Rover with a failing transmission and half a tank of gas. Both scenarios keep you wide awake at night wondering if you'll make it to your destination.

Could CoreWeave defy financial gravity? It's possible. Markets aren't always rational, especially when AI is involved.

The stock could double to $100 per share in the coming weeks purely on speculative fever. I've watched stocks with worse fundamentals moonshot on nothing more than wishful thinking and buzzwords.

Another upside scenario: what if another major tech player becomes a significant customer? That would diversify away from the Microsoft dependency and potentially create a competitive bidding situation.

But betting on a white knight scenario is like buying real estate in a flood zone because someone might build a dam upstream – technically possible, but not the way smart money plays the game.

I'm an inflection investor – I look for companies at the point where their prospects improve, not where hopes and dreams collide with financial reality. When the fundamentals are this challenging, I prefer to watch from the bleachers with my popcorn rather than take the field.

This might turn into the next meme-stock frenzy – and if it does, I'll tip my hat to the traders who time it right – but sustainable businesses build wealth, not speculation.

I'll be watching CoreWeave's next earnings report with interest, but my investment dollars are staying far away from this particular AI rollercoaster. Some thrill rides just aren't worth the ticket price, no matter how exciting the promotional materials make them look.

And as for those bright-eyed high school students who pitched CoreWeave with such conviction? I'm sending them each a copy of "Security Analysis" by Graham and Dodd with the profitability chapters highlighted in neon yellow.

My college roommate can handle the shipping costs. After all, he still owes me.

April 7, 2025

Tech Letter

Mad Hedge Technology Letter
April 7, 2025
Fiat Lux

Featured Trade:

(THE NEW NORMAL FOR SEARCH ENGINES)
(GOOGL), (TRIP)

The New Normal For Search Engines

Tech Letter

Google (GOOGL) search has altered the way it does business by implementing AI in its headline search engine.

When an internet user searches through Google’s engine, Google’s “AI Overview” offers a short summary as the first result at the top of the page.

This is the new normal so get used to it.

The data they use for the AI Overview is scraped from third-party websites and that has meant many websites have suffered a massive hemorrhage of page views since 2024.

In some cases, independent websites have reported a reduction of up to 90% of website traffic on their own pages and many of these have gone out of business.

The traffic pullback has been felt across the web and has spanned topics — fashion and lifestyle, travel, DIY and home design, and cooking.

Some creators say Google has recently made so many changes to search, coinciding with its testing of AI-powered features and an effort to rid its results of AI-generated spam, that it has choked traffic to independent websites in favor of forums like Reddit and Quora, as well as larger media brands.

Other times, once-popular sites whose domains were sold and repurposed by clickbait farms have been highlighted by Google.

According to the data firm BrightEdge, the sites receiving the most referral traffic from AI Overviews are primarily big players, like TripAdvisor (TRIP), Wikipedia, Mayo Clinic, and Google’s own YouTube, rather than smaller publishers.

The power dynamic between Google and individual creators is so lopsided that many publishers have no leverage to even negotiate anything substantial.

At a stock level, this is great news for Google as they will be able to command a more reliable ad revenue model because internet users won’t need to migrate out of the Google ecosystem.

Many of the big tech platforms are designed as “wall gardens” – a one-stop shop for everything digital.

Smaller content creators relied on Google to help catalyze web traffic and those days are long gone.

Content creators should expect a 90% drop in traffic via Google.

This development is healthy for Google’s chances to stay in the AI competition.

No doubt, they are competing with X.com’s Grok AI and ChatGPT’s AI. That is no small feat.

Unfortunately, the smaller content creators will get elbowed out of the way.

Even Google Maps has integrated with Travelocity reviews lately.

Travelocity integrates with Google Maps to help users find hotels, motels, and inns on an easy-to-use map view, allowing them to plan their trips and share their itineraries.

I believe there will be a continuous reliance on priority bigger platforms for data partnerships precisely because they have the money to pay for it.

“AI Overview” will keep Google Search relevant for longer while increasing Google ad revenue, but it has an uphill battle to climb because I believe the quality of its AI still lags behind the leaders.

IT would make sense to start the dollar cost average into Google shares at $135 per share and $120.