Page 247 - Mad Hedge Fund Trader

Biting Off More Than They Can Chew

"If you build it, they will come." But what happens when they come before you've finished building?

That's the billion-dollar question facing the makers of GLP-1 weight loss drugs.

GLP-1 drugs, the newest darlings of the pharmaceutical world, are selling like hotcakes. Eli Lilly (LLY) and Novo Nordisk (NVO), the current heavyweights in this arena, raked in a whopping $10.4 billion and $6.85 billion respectively last year.

Basically, the demand is there, but the supply? Well, that's another story.

So far, Lilly and Novo have been throwing money at the problem like it's going out of style. We're talking billions here. Novo's earmarked $6.5 billion for production this year alone, while Lilly's already shelled out $5.3 billion to beef up its manufacturing muscle. They're expanding facilities faster than you can say "miracle weight loss drug."

But even that's not enough. Lilly admits the industry needs at least 10 to 15 dedicated sites to even come close to meeting demand.

It's like trying to serve a five-course meal to a packed restaurant with just one chef and a microwave.

And let's not forget about the price tag on these manufacturing sites. Novo just dropped $11 billion to buy three fill-finish sites from Catalent (CTLT). Talk about paying a premium for prime real estate.

While Lilly and Novo scramble to ramp up production, their manufacturing woes have created a window of opportunity for competitors eyeing a slice of the GLP-1 pie.

Boehringer Ingelheim and Zealand Pharma (ZLDPF) are closest to market with their Phase 3 drug survodutide.

Meanwhile, Roche (RHHBY) and Amgen (AMGN) aren't far behind in Phase 2. Even Pfizer's (PFE) dipping its toes in the water with an early-stage drug.

But here's where it gets interesting for us who want a piece of the action. These newcomers are facing a manufacturing dilemma of their own.

Do they build their own facilities and risk being late to the party? Or do they outsource and potentially lose control over production?

Some, like Boehringer and Roche, are already talking about using third-party manufacturers. It's like hiring a catering company instead of building your own restaurant – less upfront cost, but you're at the mercy of someone else's kitchen.

Enter the contract manufacturing organizations (CMOs), the unsung heroes of the pharmaceutical world who might just hold the key to unlocking the full potential of the GLP-1 market.

Let’s take a look at the big players in this space.

Lonza Group (LZAGY), with its $6.6 billion in annual revenue and 10% market share in biologics contract manufacturing, is a force to be reckoned with. They're not just sitting on their laurels either – they're pumping $850 million into a new biologics facility in Switzerland.

Then there's Thermo Fisher Scientific (TMO), the 800-pound gorilla of the industry. With a cool $44.9 billion in revenue last year and an 8% to 10% market share in contract manufacturing, they're a go-to partner for big pharma.

They've been on a shopping spree too, scooping up Pharmaceutical Product Development (PPD) for $17.4 billion to boost their manufacturing capabilities.

And, of course, let's not forget about Catalent. They might have sold some facilities to Novo, but they're still a major player with $4.8 billion in revenue last year. They're betting big on biologics, with plans to increase capacity by 40% by 2025.

As for those looking for growth potential, keep an eye on Samsung Biologics. They're the new kid on the block, with a 30% compound annual growth rate over the past five years and the world's largest single-site biologics manufacturing facility.

So, there you have it. The obesity epidemic is a tragedy, but it's also a trillion-dollar opportunity.

With half the population projected to be obese by 2030, this isn't just a health crisis—it's a financial frontier.

The GLP-1 market is poised to balloon to $130 billion, creating a feeding frenzy for those ready to capitalize on the supply squeeze.

But here's the real meat of the matter: in this gold rush, it's not just the drug developers who are striking it rich. The real winners are the manufacturers—those with the capacity to meet the insatiable demand. They're the ones handing out the "shovels" in this weight loss bonanza.

So while everyone else is focused on the flashy GLP-1 drugs, I suggest you also keep a watchful eye on these behind-the-scenes players.

Now, if you'll excuse me, I'm off to patent my groundbreaking idea: GLP-1-infused kale chips. Who says you can't have your cake and eat it too?

August 22, 2024

Diary, Newsletter, Summary

Global Market Comments
August 22, 2024
Fiat Lux

Featured Trade:

(THE TOP SEVEN CHINESE RETAILIATION TARGETS),
(AAPL), (GM), (WMT), (TGT), (BA), (SBUX), (CAT),
(AND MY PREDICTION IS….)

The Top Seven Chinese Retaliation Targets

Diary, Newsletter

It’s looking like the trade war between the US and China is going to heat up some more, no matter who wins the presidential election. It is no longer a question of “if”, but “how much” and “when.”

Please forgive me, but I am new at this. I have only been covering China for 50 years now since the Cultural Revolution was sweeping an impoverished, starving third-world communist country.

With a massive US trade deficit with China in 2023, the Middle Kingdom has become a top administration target.

A real trade war would cause thousands of businesses in the US to go bankrupt and leave millions unemployed. Transpacific transportation would ground to a halt, filling up harbors with hundreds of redundant ships.

Trillions of dollars of direct investment in the two countries would be held hostage.

In other words, a trade war would be like cutting off our noses to spite our faces.

Just as America has its Tea Party and right-wing conspiracy theorists, so does China.

Their entire worldview revolves around the merciless exploitation of China by the Western powers that took place during the 19^th century.

British trading companies, like Jardine Matheson, imported cheap opium from India and sold it to the Chinese at the point of a gun, triggering three wars. With only primitive weapons at hand, the Chinese were powerless to resist.

By the time of the fall of the Qing Dynasty in 1912, the entire country had been carved up into spheres of influence dominated by the West and Japan.

Then the Japanese invaded in 1937, and 29 million Chinese died. As recently as 1938, my Marine Corps uncle, Colonel Mitchell Paige, was charged with protecting American gunboats cruising the Yangtze River.

To us, this is all ancient history inhabiting dusty textbooks in libraries never visited. Patriotic Chinese feel like this happened yesterday.

You could dismiss all this as academic musings.

But national pride and sovereignty are really big deals in China today.

During China’s last trade war with Japan only five years ago, several Japanese facilities were burned down by angry, uncontrollable mobs, and visiting businessmen were assaulted on the street. Trade ground to a halt.

So it behooves us to analyze which companies will suffer the most from any deterioration in the US-Chinese relationship before markets figure this out. The Chinese are not interested in any “America First” policy in any way, shape, or form.

Here is my hit list:

1) Apple (AAPL) – Yes, Cupertino, CA-based Apple has a big fat bull’s-eye on its back. The company is a vast, finely tuned machine that needs everything to work perfectly to deliver hundreds of millions of iPhones around the world.

The number of things that can go wrong here can’t be counted. What if the one million workers at its Foxconn subcontractor fail to show up for work someday? What if they are not allowed to go to work? What if they burn THAT factory down?

Another problem is that Chinese growth is a key part of Apple’s long-term sales strategy. A Chinese boycott would put a huge dent in those plans.

Remember, Apple is getting it from both sides, with Trump promising a 35% import duty on all Apple products. That would certainly hurt sales.

I’m sure Apple management is on tenterhooks as to how all this will play out in the coming months.

There is no backup plan here. Apple is just too big and too sophisticated to change any part of its incredibly complex supply chain in less than a decade.

2) General Motors (GM) – Is one of the most globalized US companies of all. (GM) can’t build a car in Detroit without 40% of its parts coming from Japan, Mexico, South Korea, or dozens of other countries.

General Motors is also hugely dependent on Chinese sales. It sells more Buicks in China than it does in the US. That is one-third of GM’s total worldwide sales.

Next, the company plans to sell Chinese-made Buicks in America.

While we weren’t looking, General Motors has become a Chinese company, and many others are falling suit.

3) Wal-Mart (WMT) – Imagine walking into your local Walmart one day and finding out that all of the prices have been marked up by 35%.

This is the reason why the company is called the “Chinese Embassy.” I dare you to find anything there that is NOT made in China, except for the food and the flowers (a dozen long stem red roses are only $10!).

Like Apple, the company is so big that any change in its supply chain would take years. You can add Target (TGT) to this hit list for the same reasons.

On top of that, Wal-Mart has 432 stores operating in China. Imagine the effect that a boycott would have there.

4) Boeing (BA) - The local flight school that maintains my plane has been totally taken over by Chinese students. That is because China needs to buy $1 trillion worth of aircraft over the next 20 years, some 6,800 jetliners in all.

Boeing expects to provide the lion’s share of these. The company has already entered the planning phases for the construction of a giant new aircraft assembly plant in China.

It would be really easy for China to switch a major part of these orders over to Europe’s Airbus Industries, which has been aggressively competing to accomplish exactly that.

Boeing didn’t get the business because of the advanced technology seen in the 787 Dreamliner. Chinese were simply attempting to even out the trade balance.

5) Starbucks (STBX) – Starbucks founder Howard Schultz made no secret of his dislike for Donald Trump before the election. With 2,500 stores in China, and plans to double that figure, he had little other choice.

With relations between the US and China turning colder than the firm’s overpriced ice espresso, sales, growth plans, and share prices could take a big hit. Chinese may have to postpone their caffeine addiction until the next Democratic administration.

6) Caterpillar (CAT) – You can’t have an infrastructure boom anywhere in the world without Caterpillar, whose heavy machinery is the gold standard for large public works projects. I have been covering the company for 40 years.

7) Tesla (TSLA) – Tesla’s factory in China is the company’s biggest seller. If the Chinese expropriate or impede in any way such as through strikes, Tesla’s share price would drop by half instantly. I know the Chinese promised to play nice when Tesla made this groundbreaking, technology-transferring investment. But guess what Elon? The Chinese can change their minds.

As a result of the upcoming US round of massive deficit spending, (CAT)’s share has been one of the best performers since the presidential election.

Unfortunately, this time the company is so heavily invested in China that it has also built a large assembly plant there. China accounts for 20% of the firm’s worldwide sales.

Time for a short?

The net effect on the impairment of business at all of these companies will be lower profits, high volatility of profits, and continued uncertainty. The shares will be forced to trade at a discount.

When you are running a mammoth global business, the last thing in the world you want is unpredictability.

It will also bring a rapid rise in inflation, as prices are raised to offset higher costs and a strong dollar.

Who will be the biggest victims?

Working-class Trump voters in Rust Belt states, least able to afford price hikes, especially those who already have jobs in Midwest manufacturing.

Where is the "REFUND" Button?

THE NEW BAROMETER FOR SMART INVESTING

Mad Hedge AI

(GOOG), (GOOGL), (NVDA), (TMC), (DE), (CTVA), (NEE), (FSLR), (UNP), (FDX)

"If you don't like the weather, wait five minutes, and it will change.” This old adage has long been a humorous nod to the weather's fickle nature.

But what if you didn't have to wait? What if you could predict that change before it happened?

Weather prediction has come a long way since the first computerized forecast in 1950. Today, we're looking at a global weather forecasting system market worth a cool $2.7 billion. That's as of 2023, mind you.

By 2029? It’s projected to hit $4.2 billion. Growth like that doesn't just fall from the sky.

Traditional weather models have been the heavyweights for years. The European Centre for Medium-Range Weather Forecasts (ECMWF) and the U.S. National Weather Service's Global Forecast System (GFS) are titans in the field.

They crunch numbers on supercomputers that make your latest smartphone look like a pocket calculator. Take the Cray XC40 used by ECMWF. It's pumping out quadrillions of calculations per second. Impressive, right?

But here's the catch. These models aren't perfect. Far from it. Generating a single forecast can take hours. Hours. In the fast-paced world of weather, that's an eternity.

By the time the forecast is ready, Mother Nature’s already changed her mind. It's like trying to catch a greased pig – frustrating and often futile.

A 2021 study in the Journal of Geophysical Research laid it out plain as day. ECMWF and GFS? They're reliable for short-term forecasts, up to about 10 days.

Beyond that? Their crystal ball gets mighty cloudy. And when it comes to extreme weather, they're often caught with their pants down.

Case in point: Hurricane Beryl in 2024. This Category 5 monster decided to crash the party in early July, becoming the earliest Atlantic storm of its kind on record.

Instead of heading to Mexico as predicted, it decided Texas looked more appealing, leaving a trail of destruction in its wake.

But it's not just hurricanes keeping forecasters up at night. The World Meteorological Organization confirmed 2023 as the hottest year on record.

Global temperatures soared 1.15°C above pre-industrial averages. July 3, 2023? Possibly the hottest day ever recorded globally. Talk about turning up the heat.

The National Oceanic and Atmospheric Administration (NOAA) paints an even grimmer picture. In 2023, the U.S. was hit by 28 weather and climate disasters. Each one racked up at least $1 billion in damages. That ties the record set in 2020. Climate change isn't just knocking at the door – it's kicking it down.

Enter artificial intelligence (AI).

DeepMind's GraphCast is making waves in the forecasting world. It's churning out global weather forecasts in less than a minute. You read that right. Seconds, not hours.

In fact, a 2023 study in Science found GraphCast outperformed ECMWF's high-resolution prediction system in 90% of 1,380 evaluation metrics. That's not just beating the competition – it's lapping them.

But GraphCast isn't the only AI superstar in town.

DeepMind's NeuralGCM combines traditional physics-based methods with machine learning. The result? Potentially game-changing long-range predictions.

We're talking climate patterns decades into the future. Imagine the implications for long-term planning and investment strategies.

These AI models are weather savants. They devour vast amounts of historical data, using advanced neural networks to learn complex atmospheric patterns.

The payoff? More accurate predictions, delivered faster than you can say "partly cloudy with a chance of meatballs."

Needless to say, these are opening up a whole new world of possibilities.

We're talking personalized, hyperlocal forecasts. Better extreme weather warnings. More effective climate change modeling. Where there's innovation, there's opportunity.

Let's break it down with some numbers that really matter. A study in the Journal of Advances in Modeling Earth Systems (2022) found AI models could potentially extend reliable hurricane track predictions from 3 to 5 days in advance.

Two extra days of preparation time. Crucial for both safety and economic reasons.

Speaking of economics, the U.S. National Hurricane Center estimates each mile of coastline evacuated costs about $1 million.

More accurate forecasts could mean fewer unnecessary evacuations. Millions saved. And it's not just about saving money. It's about using resources more effectively.

The Federal Emergency Management Agency (FEMA) reported that pre-positioning resources for Hurricane Irma in 2017 saved an estimated $100 million in recovery costs. Better forecasts mean better resource allocation.

So, where's the smart money going?

Keep your eyes on tech giants like Alphabet (GOOGL, GOOG), parent company of DeepMind. Market cap of $1.75 trillion. Q2 2024 revenue of $88.3 billion, up 15% year-over-year.

Don't forget about NVIDIA (NVDA). Their GPUs are the workhorses powering these AI models. FY 2024 revenue? $60.9 billion. That's a 126% year-over-year growth.

But it's not just about the tech giants.

Companies like The Tomorrow Companies Inc. (TMC) are specializing in AI-powered weather forecasting services. Market cap of $2.1 billion. 2023 revenue of $450 million, up 35% year-over-year. They're proving that sometimes, it pays to be a specialist.

And let's not overlook the industries that stand to benefit from better forecasts.

Agriculture giants like Deere & Company (DE) and Corteva Inc. (CTVA) are integrating weather data into their precision agriculture solutions.

In the energy sector, companies like NextEra Energy (NEE) and First Solar (FSLR) are using improved weather predictions to optimize renewable energy production.

Even transportation companies like Union Pacific Corporation (UNP) and FedEx Corporation (FDX) stand to gain. Weather-related disruptions cost the transportation industry billions annually. Better forecasts could lead to significant efficiency improvements.

The bottom line? The AI revolution in weather forecasting isn't just changing how we predict the weather. It's creating a perfect storm of investment opportunities across multiple fields.

I advise you to keep a close watch on this sector because we all know that sometimes the biggest opportunities come from seeing which way the wind is blowing before everyone else does.

And right now, that wind is blowing towards AI-powered weather forecasting. Don't get left out in the cold.

August 21, 2024

Tech Letter

Mad Hedge Technology Letter
August 21, 2024
Fiat Lux

Featured Trade:

(SPEND UNTIL REVENUE COMES)
(NVDA), (SMCI), (AVGO)

Spend Until Revenue Comes

Tech Letter

Spend, spend, and spend some more.

That is the current zeitgeist in the tech community about the direction of generative artificial intelligence.

Companies are trying to outdo each other to see how much cash they can splurge to build out the AI infrastructure.

This is no joke.

Remember that there have been no meaningful explanations about how much revenue will directly come from AI, but my belief is that we are still in the “honeymoon phase” of the AI movement.

Eventually, and gradually, real questions will be asked and results will need to be provided instead of “building” nonstop with no accountability.

We are still in the phase of giving AI a pass which is why many have suggested stocks like Nvidia are turning into a bubble similar to 2001.

How do I know that AI is back?

Look at the chips stocks who were leading the tech rally for most of the year.

They sold off violently because of the unwinding of the Japanese yen carry trade, but the dip was bought because the discounts were too good to pass up for investors and because the AI trade isn’t over yet.

The snapback in chip stocks was v-shaped and set the stage for the rest of the year to power into the close.

I do believe the tech sector will receive better-than-expected news from the wider economy that shows the consumer is in better shape than initially thought.

The bar is extremely low for tech stocks to jump over and I do believe the ones with great balance sheets will use shareholder returns to convince shareholders to stick with their stocks.

AI hardware and chip companies have led the bounce in the Nasdaq from its August low, with Nvidia the index’s top performer, up almost 30% and just 6.1% short of the all-time high, as of its last close. Similar stocks like Micron, Marvell Technology, Super Micro Computer, and Broadcom have all participated in the snapback.

Strong monthly sales from Taiwan Semiconductor Manufacturing similarly pointed to robust AI demand.

The build-out of AI infrastructure is expected to be both enormous and long-lasting and investment in data center infrastructure needed to support GenAI could reach $6 trillion.

Capex from big tech could potentially increase by as much as 25% in 2025, well above the consensus expectation for 10-15% growth. This is especially positive for AI enablers in the semiconductors field.

Nvidia’s expensive valuation is completely justified when you understand that they carry the entire tech sector which is carrying the entire market on their back.

Shorting NVDA has probably been one of the worst trades you could have made in the past few years.

August 21, 2024

Jacque's Post

(THE PLUNGE IN IRON ORE PRICES IS BAD NEWS FOR AUSTRALIA, BUT GOOD NEWS FOR THE REST OF THE WORLD)

August 21, 2024

Hello everyone,

Iron ore prices have halved since their peak in January. Share prices have had a 20% haircut consequently. That’s bad news for BHP and Rio Tinto and their shareholders.

“Twiggy” Forrest’s Fortescue Metals (FMG) is down an eye-watering 43%, as it is particularly sensitive to the rise and fall of the China-driven iron ore price.

And to top it all off for “Twiggy”, Fortescue’s iron ore is apparently below par in quality when compared with BHP and Rio’s (and Brazil’s Vale).

Obviously, when China is booming and iron ore is in demand, all is good in Fortescue’s world, as the price that this company gets starts to approach the BHP/Rio price.

When the opposite happens, however, its price falls further and faster, and the drop in price comes straight off Fortescue’s profit.

Right now, BHP and Rio are also feeling the pain.

It’s unfortunate for Australia that our entire economic prosperity appears to be built on China.

China drives both the prices of and the volumes of coal and gas that Australia sells into the global market, regardless of whether it buys or doesn’t buy directly from us. It’s a similar story with iron ore.

So, what we need to understand is that if their prices really plunged, and stayed down for any extended period, the Aussie dollar would most likely collapse and Australia’s economy would become a junk heap.

For the rest of the world, that price collapse would be good news. Lower iron ore and energy prices would feed into lower prices for everything across the world.

The new narrative landscape would arguably include near-zero inflation, much lower interest rates, and booming economies.

BHP is now trying to backpedal, to some extent. After going long iron ore and China, by selling out of fossil fuels, BHP is endeavoring to diversify into other commodities.

Rio has invested heavily in Africa, for its iron ore exposure.

The giant Simandou iron ore project in Guinea, set to be the world’s largest and highest-grade new iron ore mine, will commence production by the end of 2025 and will add annual output of around 120 million metric tons of high-quality iron ore after it reaches full capacity.

So, when might we see the bottom in iron ore prices?

Morgan Stanley expects a “rebound in one to two months due to an efficient supply response from marginal units.”

News flow and sentiment influence iron ore prices, so it is not surprising to see that remarks from some of China’s top steel makers have put the market on edge. As cited in the Financial Times, Hu Wangming, chair of China Baowu Steel Group argued that the steel industry “winter” was likely to be “longer, colder and more difficult than we expected.” Furthermore, he warned that current steel market conditions may be more severe than the downturns experienced in 2008 and 2015.

Adding to the angst is recent Chinese economic data, which shows:

New construction fell 20% year-on-year in July, only a slight improvement from June’s 22% fall.

Property investment in China fell 10% in the first seven months of the year.

China’s steel exports fell 10% month-on-month in July, marking a slowing in the annualized run-rate to 88 million tonnes, down from 110 million tonnes earlier this year.

July crude steel output is down 9.5% month-on-month and 9% year-on-year.

China’s portside iron ore inventory is sitting around a one-and-a-half-year high.

Worst case scenario?

A more severe economic slowdown in China was exacerbated by decelerating growth in other regions.

As we approach the December quarter we should be watching the monthly World Steel production data and the 10-day CISA (China Iron & Steel Association) steel output series.

QI CORNER

EMPOWERING PRODUCTIVITY

Proving that everything does not have to be about numbers; letters can be very useful too.

SOMETHING TO THINK ABOUT

Cheers,

Jacquie

August 21, 2024

Diary, Newsletter, Summary

Global Market Comments
August 21, 2024
Fiat Lux

Featured Trade:

(THE DEATH OF THE FINANCIAL ADVISOR)

August 21, 2024 - Quote of the Day

Diary, Newsletter, Quote of the Day

“There’s a 70% chance the whole thing will fail,” said Jeff Bezos when pitching his parents for a $100,000 investment in his startup, Amazon (AMZN) in 1994.