Page 188 - Mad Hedge Fund Trader

January 3, 2025

(THE GLOBAL FINANCIAL SYSTEM COULD BE REVOLUTIONIZED WITHIN THE NEXT DECADE)

January 3, 2025

Hello everyone,

In the NYSE, investors make upwards of 1 billion trades per day. Many of those trades appear to happen in milliseconds, except when you investigate further, that’s not the reality.

Trades on Wall Street take days to settle, and lots of people to make them happen. Take market makers, for example. They are the middlemen handling all those trades on Wall Street, and the top 5% of market makers handle nearly 30% of all trades. The fact is these intermediaries help with volatility, but they create a gap between buyers and sellers in the markets, and there are a lot of gaps in the financial system (which are beyond our control.)

Have you ever noticed how long some bank transfers take?

Some of the big banks think they may have a solution. JP Morgan, Citibank, and Goldman Sachs want to push the financial system into the next generation and to do that, they need to borrow a tool from crypto – blockchain. Presently all large-scale global financial infrastructure is highly warehoused or functions through different silos. In other words, money moves on one set of rails, assets move on a different set of rails. They operate independently, and information cannot be shared because of system limitations.

But being able to move money 24/7 365 is what we are moving towards.

These banks believe it could become a 5 trillion-dollar industry. In other words, we could see 5 trillion in combined tokenized asset-trading volume by 2030.

Why do these big banks think blockchain can turbo-charge the financial system?

Wall Street still operates in T+2. Trade + two days. That’s how long it takes for the standard securities settlement – for cash and assets to change hands. So, for instance, if you sell some stock on Tuesday, the cash won’t hit your bank until Friday.

Electronic trading and modern payment processing have accelerated the global financial system to move assets much faster. You don’t have to be an investment banker to feel the lag in the financial system. ACH transfers, credit card refunds, and all kinds of money that move in our economy take time to go from one person to another. Part of the slowness is how many steps and people are involved. On Wall Street, for example, brokers help set up a transaction, and they can charge a commission. Then market makers connect brokers to the assets they are trying to buy or sell. They charge a fee, too, on the difference or spread of the asking price of an asset and what someone is willing to pay. Very large transactions will need to go through even more steps for security and fraud prevention.

Some big banks are hoping that tokenization on blockchains can streamline the process of trading assets and maybe make it cheaper. It would revolutionize and rewrite financial market infrastructure.

To understand how tokenization works, we need to talk about ownership in the digital era. Right now, it’s hard to transfer ownership of real-world items over the web.

We all know that you can buy a car through an online marketplace, but the title that proves your ownership of this car only arrives in the mail a few weeks later. Inefficient in the modern world, wouldn’t you say? In the hope of bringing ownership online, developers are creating tokens that represent real-world items. You can do this with any kind of asset: stocks, bonds, or a token that could represent ownership of a building or a car. Banks backing this believe that it may create new investments altogether, and that’s why they are putting their money behind it. For example, JPMorgan has Onyx, a blockchain platform they launched in 2020. In the short time since then, it’s handled 700 billion in short-term loans through its private blockchain. JPMorgan describes it as a “killer app” for the future of finance. Larry Fink, the CEO of BlackRock, called digital asset innovation and tokenization the next generation for markets.

A blockchain is basically a database of all the transactions. There are many copies of the database, which helps to keep it secure. Each block is cryptographically signed so that any tampering is immediately evident. Additionally, you have a consensus mechanism to control how you update that database.

If technology provides you with the capability to use one rail line to transfer value, assets, and information, a lot of the inefficiencies and friction that exist in the regular financial infrastructure start to disappear.

Blockchains are meant to be transparent, cutting down the need for intermediaries that could charge fees or the need for extra due diligence. Proponents say it could enable P2P transactions across many parts of the economy.

In addition, this technology would allow for brand new forms of ownership, like splitting, fractionalizing ownership of property through real estate tokens, or tokenized deposits in bank accounts to allow for quick transfer of money between people using P2P transactions.

The IMF said in February that tokenising stocks and bonds could cut trading costs but requires the money paying for those assets to be tokenised as well, which would lead banks to make tokenised cheque accounts for faster payments.

The global financial system is one of the most regulated systems in the world and making any changes will be slow going. There will be a gradual movement forward in small steps.

Citibank has recently introduced Citi Token Services, which is a new blockchain-based service that will transform how institutional clients deposit and trade assets. In the evolving world of blockchains and smart contracts, Citibank has enhanced its products and services, including digital money, trade, securities, custody, asset servicing, and collateral mobility.

Cheers

Jacquie

January 3, 2025

Diary, Newsletter, Summary

Global Market Comments
January 3, 2025
Fiat Lux

Featured Trade:

(A COW-BASED ECONOMICS LESSON)

January 3, 2025 - Quote of the Day

Diary, Newsletter, Quote of the Day

“When you think you know more than everyone else about the consumer, you’re in trouble,” said Mickie Drexler, the legendary CEO of J Crew and Apple board member.

January 2, 2025

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
January 2, 2025
Fiat Lux

Featured Trade:

(YOUR NEXT MIRACLE DRUG WAS WRITTEN IN PYTHON)

(IQV), (EXAI), (CRL), (ICLR), (PRXL)

Your Next Miracle Drug Was Written In Python

Biotech Letter

I had an interesting conversation with my daughter last week during one of her rare appearances from her computer science lab. She was telling me about her latest project - using artificial intelligence to predict protein folding, something that used to take months and now happens in hours.

"Dad," she said, looking up from a bowl of ramen that probably cost me 50 cents, "this is going to change everything about how we make medicine."

She's right, and it got me thinking about the transformation happening in clinical trials - a market currently valued at $57.76 billion that's expected to more than double by 2032.

We're looking at a 7.1% compound annual growth rate, but these numbers only tell part of the story.

I spent some time digging through the data and talking to folks at companies like IQVIA (IQV), where they're using AI to match patients to trials 40% faster than traditional methods.

Think about that for a second - we’re looking at a process that used to take months now happening in weeks, while managing to maintain the kind of accuracy that makes FDA regulators sleep well at night.

Speaking of the FDA, they're cooking up new diversity action plans that aim to make clinical trials look more like actual America. It's definitely the right thing to do, but like most regulatory shifts, it's moving at the speed of government bureaucracy.

This is keeping Contract Research Organizations (CROs) on their toes, though the smart ones are already adapting.

Take Exscientia (EXAI), for example. They're not just using artificial intelligence - they are letting this technology design drug candidates that are already in clinical trials. It's like having a thousand researchers working 24/7 without coffee or bathroom breaks.

But before you rush to buy companies in this sector, it pays to remember that not everyone in this space is thriving.

Charles River Laboratories (CRL) and Icon (ICLR) have been dealing with declining revenues faster than a tech startup burning through venture capital.

The global biotechnology market itself tells an interesting story. Currently valued at $1.55 trillion, it's expected to grow at nearly 14% annually through 2030.

Meanwhile, AI is estimated to generate up to $110 billion in annual economic value for the pharmaceutical industry. That's not pocket change, even by Silicon Valley standards.

Last weekend, while refinishing an antique desk I picked up at an estate sale (turns out it's worth more than my first car), I got a call from a biotech analyst friend. He was worried about the shift in clinical trial geography.

Europe's share of global trials has dropped from 22% to 12% over the past decade, while Asia-Pacific is becoming the new hotspot.

Companies like Parexel (PRXL) and Headlands Research are capitalizing on this trend, particularly in China and India, where regulatory frameworks are streamlining faster than a Formula 1 pit crew.

The traditional factors that used to drive this industry - pure research horsepower and deep pockets - are being replaced by computational efficiency and AI-driven insights.

It's similar to what happened in the financial markets when algorithmic trading took over from floor traders. The winners will be those who adapt fastest to this new reality.

Looking ahead to 2025 and beyond, I'm watching two potential party crashers: a return of regulatory uncertainty and the ever-present possibility of a new pandemic.

But barring these black swan events, we're looking at a sector that's transforming faster than my daughter's college curriculum.

Speaking of which, she just texted me about her latest assignment - using machine learning to optimize clinical trial protocols. Maybe I should start asking her for stock picks.

January 2, 2025

Diary, Newsletter, Summary

Global Market Comments
January 2, 2025
Fiat Lux

Featured Trade:

(NEW VIDEO UPDATE ON EXECUTING A VERTICAL BULL CALL DEBT SPREAD),
(AAPL), (GS)

Thursday, January 16, 2025 Sarasota, Florida Strategy Luncheon

Diary, Luncheon, Newsletter

Come join me for lunch at the Mad Hedge Fund Trader’s Global Strategy Luncheon, which I will be conducting in Sarasota, Florida on Thursday, January 16, 2025. The cost of the luncheon will be $277.

An excellent meal will be followed by a wide-ranging discussion and an extended question and answer period.

I’ll be arriving early and leaving late in case anyone wants to have a one-on-one discussion, or just sit around and chew the fat about the financial markets.

The lunch will be held at an exclusive Sarasota hotel. The precise location will be emailed with your purchase confirmation. Mad Hedge guests will be assigned their own dedicated table in a ballroom with 200 other participants.

I look forward to meeting you, and thank you for supporting my research.

To purchase tickets for this luncheon, please click here.

December 31, 2024

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
December 31, 2024
Fiat Lux

Featured Trade:

(SOMETIMES WALL STREET GETS IT WRONG)

(BMY), (AAPL), (MRK)

Sometimes Wall Street Gets It Wrong

Biotech Letter

Sitting in my stateroom aboard the Coral Princess, about 200 miles off Mexico's west coast, I found myself chuckling at the market's reaction to Bristol-Myers Squibb’s (BMY) latest developments. Sometimes Wall Street reminds me of my old physics professor - brilliant but occasionally missing the forest for the quantum trees.

Here's what caught my attention: BMY's stock has outperformed the broader market by +15% since July, yet still trades at a measly 7.91x forward P/E while its sector peers strut around at 20.53x. It's like finding a Ferrari in a used car lot, priced like a Corolla.

The cynics, of course, point to the patent cliff. "What about Eliquis in 2026? Opdivo in 2028?" they ask, wringing their hands. But that's exactly where it gets interesting.

Just earlier this month, BMY announced FDA approval for Opdivo Qvantig - their new subcutaneous version that cuts treatment time from 30 minutes to 5 minutes. If you've ever spent time in cancer treatment centers like I have, you know those 25 minutes make a world of difference.

BMY's commercial team expects this version to capture 75% of Opdivo's business, with 30-40% of patients switching from IV. That's not just convenience - it's strategic patent life extension.

Speaking of strategy, let's talk about their growth portfolio, which has quietly expanded 20% year-over-year and now represents 48.7% of their business.

Remember when Apple (AAPL) transformed from computers to mobile devices? BMY is pulling a similar pivot, just without the flashy keynotes.

Take their $14 billion Karuna acquisition. Their newly approved schizophrenia treatment, Cobenfy, targets a market projected to hit $15.23 billion by 2034. The timing here is masterful - monetization starts in early 2025, well before the patent cliffs hit.

Meanwhile, they're cleaning up their balance sheet faster than a neat freak with a new vacuum. They've already slashed $4.31 billion in debt this year, with plans to cut $10 billion by 2026.

Their free cash flow has grown to $13.8B, up 18.1% sequentially. At this rate, they'll have plenty of dry powder for more strategic moves.

But here's what really makes me scratch my head: while everyone's fixated on the patent cliff, BMY has quietly added 8 new oncology registrational trials in the past year. Their oncology trio - Opdivo, Yervoy, and Opdualag - is growing at 7.6% year-over-year.

Sure, Merck's (MRK) Keytruda is the 800-pound gorilla with $25 billion in sales, but BMY's playing a different game - diversification with shots on goal across multiple therapeutic areas.

Now, I'm not suggesting you back up the truck tomorrow morning. The stock might see some pressure after the January 3, 2025 ex-dividend date, possibly testing support at $51 or even $48. But with a 4.45% dividend yield and a valuation at half its historical average, patient investors might find this an interesting entry point.

Speaking of timing - Wall Street's greatest fortunes were made by investors who saw value where others saw problems. Right now, most analysts are staring at BMY's patent cliff like deer in headlights.

Meanwhile, I'm seeing a company with a 4.45% dividend yield, a growth portfolio expanding at 20% annually, and a valuation that's practically begging to double.

As I wrap this up from somewhere off the Mexican coast (where I'm supposedly on vacation but can't help analyzing stocks between rounds of Monopoly), I'm reminded of something I learned in my decades of trading: The crowd is usually looking through the wrong end of the telescope.

While they're zoomed in on 2026's patent expirations, they're missing the transformation happening right now in front of their eyes.

Maybe that's why I've averaged +50% returns for over a decade - I tend to look where others don't. BMY just might be one of those opportunities that makes next year's Christmas gift to my subscribers an even bigger winner than this year's +75.25% return.

Now, if you'll excuse me, my banjo needs tuning, and I have a Monopoly empire to build. But remember - in both board games and markets, the best players are always thinking three moves ahead. BMY's management certainly is.