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Yen Could Drag Down Tech Stocks

The Japanese yen has helped boost tech stocks ($COMPQ).

Institutional money is borrowing Japanese yen (FXY) by the bucketful because Japanese interest rates have been anchored at 0% and betting big on tech stocks.

The strategy has worked like clockwork and Japanese stocks have also felt the wind at its sails.

What now?

Lurking in the shadows is a potentially catastrophic problem called Japanese tech company Softbank.

Softbank reported a "shocking" Q2-2 loss, revealing, in particular, how dangerously exposed they are to a Japanese yen devaluation.

Selling in Softbank stock would trigger panic selling in Japanese Banks. The contagion risk here is crystal clear.

JGB yields will spike following the US Treasury yields overnight trend. This will put even further pressure on banks' liquidity with a risk of exacerbating the sell-off.

What's important to understand here is the risk of Softbank triggering a $226 billion (the total amount of Softbank balance sheet liabilities) credit event right now.

To begin with, with a BB rating from S&P, Softbank has a pitiful credit rating tying its hands.

Now Softbank has liabilities mostly in US dollars while on the hook to repay $48 billion in the next 12 months.

Days before WeWork (WEWKQ) filed for bankruptcy, Softbank paid $1.5 billion to WeWork bank lenders.

In total, Softbank had to write off more than $14 billion in US dollars on that terrible WeWork investment while the Japanese yen crashed.

Now here the big problem is that Softbank doesn't disclose the amount of "off-balance-sheet" guarantees they issued either directly or through the Vision Fund.

Lastly, things might turn quite bad for Masayoshi Son personally, because 35% of his personal shares in Softbank are already pledged to financial institutions.

It doesn't take much to figure out what financial institutions will do if Softbank stock starts crashing, right?

The Japanese government will need to bail out not only Softbank but also the Japanese banks.

This tinderbox could explode anytime and the Yen would then become the focus.

If the Japanese government finally does embark on an interest hiking cycle then under this scenario, the Bank of Japan would be forced to raise the cost of capital on investors and households.

The global and Japanese financial system isn’t ready to take away the low-interest carry trade and it’s hard to quantify the unintended consequences.

Large parts of the Japanese system could go under water and the Japanese yen would greatly strengthen.

I specifically am worried about all the adjustable loans taken out by the Japanese consumer.

Loan defaults would surge.

If the Japanese government is forced to save Softbank and the Japanese financial system then expect another tidal wave of inflation as the purchasing power of the Japanese yen is even more devalued.

The string of abysmal tech investments by Softbank is threatening to accelerate the financial death spiral in Japan.

In my view, this would ice the tech rally momentarily, but not derail it long-term.

In all honesty, Softbank did deliver ample liquidity to many poorly run Silicon Valley tech companies and this fortified tech stocks during the bull run.

Now Softbank cannot throw around the cash they used to and tech stocks have concentrated into a group of 7 outperformers.

In the short term, the tech bull run continues in just a few narrow names but 2024 could trigger a broader run in secondary tech names as well.

November 22, 2023

Jacque's Post

(A TRAILER TO MATCH YOUR ELECTRIC VEHICLE)

November 22, 2023

Hello everyone.

The $50 billion travel trailer industry is playing catch-up.

As more Americans move to electric cars, the trailer industry must evolve because the towing runs down the battery quickly. The drag on battery power can make towing an RV long distances with an RV prohibitive.

Pebble Mobility, a California-based start-up, has invented a self-propelled, self-powered, remote-controlled trailer. The 25-foot vehicle sleeps four and has its own electric motor. It propels itself, saving on the power needed by the car dragging it.

The trailer has an EV battery on board and an integrated solar array over the rooftop of the travel trailer – making the most of renewable energy from the sun and powering the entire vehicle.

Yang, who helped build the iPhone, uses that knowledge to enhance the RV experience.

The user can use Pebble’s app to maneuver the trailer on its own, which helps in tight spaces. There is a generational shift in RV use from the baby boomers to millennials, and this group of consumers is more tech-forward. They are tech-savvy, and they want a better experience.

The trailer price starts at $109,000 without the self-propelling motor. Potential tax credits could bring that price down. The version with the motor starts at $125,000, which is comparable to other RVs. Different products are on the horizon to cater to the different needs of consumers.

With the solar and battery power, the Pebble makers say it can live off the grid for seven days, without propane or a generator required. The kitchen appliances, lights, AC, and everything else are fully electric.

Pebble aims to deliver the first models in 2024.

Why being bored can be a good thing.

I talked about this just recently in a Post, how just daydreaming and looking into thin air and giving your brain a rest can be very useful. It seems counterintuitive, I know, but when we are constantly expected to be on task, we are decreasing our level of productive output.

When we let the brain go into “default mode” – i.e. when we are folding the laundry or walking to or catching the train, this is when the brain gets busy; we are allowing the brain to connect disparate ideas – we can solve some of our most pressing problems.

We unconsciously dive into a path of autobiographic planning – we look back at our lives, take note of big moments and not so big, create a personal narrative, and then set goals and work out what steps we need to take to reach them.

Today we are often doing four or five tasks at once and switching our attention every few minutes, which is not productive. In fact, it creates higher levels of cortisol and reduces productivity. It essentially depletes our brain, exhausts it, and makes it less efficient. So, multitasking – talking to friends, checking social media, and working on a project all at the same time can lead to a lack of focus, loss of energy, confusion about priorities, and even a decline in cognitive function.

Try daydreaming to give your brain a rest.

You are actually being your most productive and creative self by doing nothing for short periods.

Thank you for supporting my Posts.

Wishing you all a wonderful Thanksgiving.

Cheers

Jacquie

November 22, 2023

Diary, Newsletter, Summary

Global Market Comments
November 22, 2023
Fiat Lux

Featured Trade:

(TRADING THE KENNEDY ASSASSINATION)

November 21, 2023

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
November 21, 2023
Fiat Lux

Featured Trade:

(A PRESCRIPTION FOR CAUTION)

(VTRS), (PFE), (JNJ), (LLY), (BMY), (TEVA), (ABBV), (CVS)

A Prescription For Caution

Biotech Letter

In the rollercoaster world of pharmaceutical stocks, 2023 has been like riding the Cyclone at Coney Island – thrilling for some, nauseating for others.

Take Pfizer (PFE), for instance. It’s seen its stock take a nosedive by 43.4%. That’s the kind of drop that makes you check if your wallet’s still there. Then there’s Johnson & Johnson (JNJ), trailing behind with a 16.4% decline. Not as dramatic, but still enough to make your stomach lurch.

Meanwhile, there’s Eli Lilly (LLY), playing the hero as it rockets up by an extraordinary 66.8%, thanks to its new weight-loss drugs. At this point, investors are practically throwing ticker-tape parades.

However, even with Eli Lilly’s star performance, the S&P 500 Pharmaceuticals index still shows a downturn of 2.3%.

Now, as we've seen earnings reports trickle in, a trend has started to stick out: positive results aren’t shielding drugmakers from a sell-off. Look at Pfizer and Bristol Myers Squibb (BMY), both hovering near their 52-week lows.

Still, investors are giving the biotechnology and healthcare stocks the side-eye for several reasons.

The new Medicare drug-price negotiation program is like a strict parent setting a curfew – it’s potentially restricting pricing power for certain medications. Plus, as interest rates climb, the allure of high dividend yields is diminishing faster than my motivation to hit the gym.

In this skeptical market, however, there are some optimistic investors who are digging through the bargain bin, hoping to strike gold.

Enter Viatris (VTRS), trading at just 3.3 times earnings and boasting a 5.1% dividend yield. It sounds promising, but only a few brave souls are recommending a buy.

Basically, this situation with Viatris is pretty much like finding a designer shirt at a discount store – sure, it’s cheap, but will it fall apart after two washes? Let’s take a closer look.

Viatris’s backstory is a bit of a soap opera. Born from the merger of Mylan and Pfizer's Upjohn unit, it carries the baggage of Mylan's EpiPen pricing scandal.

Since rebranding, Viatris has been trying to find its footing. Despite a shiny new business plan, which involves selling off assets for a potential $9 billion, investor confidence remains shaky at best.

Notably, its decision to exit the biosimilars market, where heavy hitters like Teva Pharmaceutical Industries (TEVA) and AbbVie (ABBV) play ball, has been seen as a bold move. Considering the potential of that market, it felt like leaving a high-stakes poker game just when the chips were starting to stack up. And with CVS Health (CVS) eyeing this lucrative space, Viatris might find itself wishing it had stayed at the table.

These past months, investors have been capturing this drama through a meme – comparing 'adjusted Ebitda' to 'free cash flow' with images of Jennifer Aniston and Iggy Pop. It’s a cheeky way of saying that Viatris’s financial projections might be wearing rose-colored glasses.

Looking ahead, Viatris is aiming for $2.3 billion in free cash flow next year, buoyed by recent sales. But the big question is: can it turn these assets into growth, or will it continue its high-wire act?

Reviewing its recent moves and their effects on the market, the Viatris saga has turned into a cautionary tale for investors in the pharma world – it’s a reminder that sometimes the threat of a nosedive is as real as the thrill of a skyrocket.

So, what’s the takeaway for those of us with skin in the game?

It seems wise to keep our eyes peeled and not jump on any bandwagons too hastily. Viatris, amidst its strategic transformations and market challenges, is worth watching with a careful eye. While its cash flow looks steady through 2027, thanks to planned asset sales, the long-term picture is as clear as mud.

As we navigate the unpredictable waves of the pharmaceutical market this year, let’s remember – it’s not just about holding on for the ride. It’s about knowing when to get on, when to get off, and maybe, just maybe, when to enjoy the view from the sidelines with some popcorn in hand. I say hold off from buying Viatris shares at the moment.

November 21, 2023

Diary, Newsletter, Summary

Global Market Comments
November 21, 2023
Fiat Lux

Featured Trade:

(THE NEW OFFSHORE CENTER: AMERICA), (SPY),
(THE CHINA VIEW FROM 30,000 FEET)
(DBC), (DYY), (DBA), (PHO), (FCX)

The China View from 30,000 Feet

Diary, Newsletter

I have long sat beside the table of McKinsey & Co., the best management consulting company in Asia, hoping to catch some crumbs of wisdom (click here for their home page).

So, I jumped at the chance to have breakfast with Shanghai-based Worldwide Managing Director Dominic Barton when he passed through San Francisco visiting clients.

These are usually sedentary affairs, but Dominic spits out fascinating statistics so fast I had to write furiously to keep up. Sadly, my bacon and eggs grew cold and congealed.

Asia has accounted for 50% of the world's GDP for most of human history. It dipped down to only 10% over the last two centuries but is now on the way back up. That implies that China’s GDP will triple relative to our own from current levels.

A $500 billion infrastructure-oriented stimulus package enabled the Middle Kingdom to recover faster from the Great Recession than the West, and if this didn’t work, they had another $500 billion package sitting on the shelf. But with a GDP of only $19 trillion today, don’t count on China bailing out our $24 trillion economy.

China is trying to free itself from an overdependence on exports by creating a domestic demand-driven economy. The result will be 900 million Asians joining the global middle class who are all going to want cell phones, and PCs, and to live in big cities. They’ll want bandwidth too.

Asia has a huge edge over the West with a very pro-growth demographic pyramid. China needs to spend a further $2 trillion in infrastructure spending.

Some 1,000 years ago, the Silk Road was the world’s major trade route, and today intra-Asian trade exceeds trade with the West.

Climate change is going to become a contentious political issue, with per capita carbon emission at 19 tons in the US, compared to only 4.6 tons in China, but with all of the new growth coming from the latter. Protectionism, pandemics, huge food and water shortages, and rising income inequality are other threats to growth.

To me, this all adds up to buying on the next substantial dip in big core longs in commodities (DBC) and the 2X (DYY), food (DBA), Freeport McMoRan (FCX), and water (PHO).

A quick Egg McMuffin next door filled my other needs.

CLASH OF TECH TITANS

Mad Hedge AI

(AMD), (MSFT), (AMZN), (GOOGL), (NVDA)

Artificial Intelligence (AI) has surged to the forefront of the technology sector this year, with Microsoft (MSFT) setting the stage through a multi-billion-dollar investment in OpenAI, the innovator behind ChatGPT.

This strategic move has not only captured the attention of the tech world but also set off a chain reaction, prompting other tech giants like Amazon (AMZN) and Alphabet (GOOGL) to invest in similar AI ventures, such as Anthropic. These investments have created a palpable excitement among Wall Street and retail investors, heralding a new era in technology.

However, it was Nvidia (NVDA), a titan in the semiconductor arena, that truly set the AI investment world ablaze.

The company's extraordinary performance in data center services and advancements in graphics processor units (GPUs), as showcased in its May earnings report for Q1 of fiscal 2024, resulted in a dramatic 60% surge in its stock value.

In stark contrast, Advanced Micro Devices (AMD), Nvidia's primary competitor, saw a mere 8% increase in stock value over the same timeframe.

This notable disparity, especially amidst the current enthusiasm for chip stocks and AI technologies, suggests a significant shift in investor focus towards Nvidia, seemingly overshadowing AMD.

However, a closer look at AMD's recent third-quarter earnings report tells a different, more nuanced story.

Contrary to being overshadowed, AMD continues to demonstrate robust operations and presents a compelling case for long-term investment.

Delving into the specifics of the report reveals AMD's strategic positioning to challenge Nvidia's dominance. Additionally, analyzing the company's long-term outlook in relation to its current valuation underscores why it might be an opportune time to invest in AMD.

AMD's performance in the third quarter was solid, with total revenue reaching $5.8 billion, marking a 4% increase year-over-year.

The data center business emerged as a significant revenue driver, generating $1.6 billion in sales. Although this figure hasn’t dramatically changed since last year, recent strategic moves by AMD suggest imminent growth in this sector.

About a month ago, AMD acquired Nod.ai, a machine learning startup, continuing its successful streak in mergers and acquisitions.

This acquisition, alongside the purchase of Mipsology, a startup specializing in "image inference computation," strategically enhances AMD's data center operations.

These acquisitions, integrating seamlessly with AMD's core services, underscore the company's innovative approach and potential for revitalization in its data-center business.

In addition to the data center business, AMD’s client segment also reported remarkable growth.

For the quarter ending in September, AMD recorded a 42% increase in client revenue year over year, amounting to $1.5 billion.

This surge, primarily driven by a stabilizing PC market, signals a significant comeback. The PC industry, despite facing challenges like a 16% drop in shipments in 2022 and continued decline in 2023, saw AMD’s client segment flourish, mirroring the recovering PC market and increasing chip sales.

Looking to the future, AMD’s management has laid out an optimistic forecast for both the data center and client segments.

The company projects “strong double-digit percentage” growth in these areas. Specifically, the data center business is expected to surpass $2 billion in revenue by 2024, bolstered by rapid advancements in AMD's AI roadmap.

The data center AI market, valued at $30 billion, is expected to grow to $150 billion by 2027. AMD's entry into this market, though later than Nvidia, introduces a formidable contender.

Moreover, it has been preparing to launch a new AI GPU in 2024, poised to directly challenge Nvidia’s market dominance.

Despite Nvidia holding an estimated 90% of the AI chip market, AMD's forthcoming MI300 chips – MI300A and MI300X – are set to disrupt the industry. These chips, designed for data centers and AI machine learning, offer competitive advantages in terms of memory bandwidth and computational power.

The MI300X, in particular, is strategically positioned to challenge Nvidia's H100 GPUs, offering substantial memory bandwidth and being well-suited for large language models in AI machine learning.

Microsoft's collaboration with AMD as an AI chip partner further underscores AMD's potential in this rapidly evolving sector.

Moreover, with the GPU market projected to escalate to a staggering US$190 billion by 2028, AMD's new AI accelerators are anticipated to be key drivers of revenue growth.

While Nvidia has undoubtedly experienced a meteoric rise in the AI market, AMD has emerged as a compelling investment alternative. Given its current undervaluation, I suggest you buy the dip.

November 20, 2023

Tech Letter

Mad Hedge Technology Letter
November 20, 2023
Fiat Lux

Featured Trade:

(MICROSOFT HITS A HOME RUN)
(MSFT), (OPENAI)

Microsoft Hits A Home Run

Tech Letter

After the smoke clears, it is obvious to the naked eye that the winner of the Sam Altman firing is Sam Altman and Microsoft.

Sam Altman is the former OpenAI CEO and the face of AI.

The board at OpenAI just gave away the company to Microsoft.

The event is still reverberating around the world and is a shocker for anyone and everyone involved in technology.

It is similar to if Elon Musk is fired by the board of Tesla.

Something of this magnitude has a lot of unintended consequences and from first glance, it appears that the board of directors overplayed their hand.

The only reason why the board got its way is because of the government structure in place that allows the power of management.

The best NFL teams don’t fire their franchise quarterback or lose them for nothing.

In an ironic twist, OpenAI's biggest investor Microsoft said it is hiring Sam Altman to lead a new advanced artificial-intelligence research team, after his bid to return to OpenAI with the board that fired him declining to agree to the proposed terms of his reinstatement.

OpenAI has been relegated to second-tier status and Altman has been promoted to the big show.

Microsoft Chief Executive Satya Nadella posted on X late Sunday that Altman and Greg Brockman, OpenAI’s president and cofounder who resigned Friday in protest over Altman’s ouster, will lead its team alongside unspecified colleagues.

Altman was blindsided by the firing which shows there was something horribly wrong with the relationship between the board and Altman. It sure smells like a power struggle.

Altman was the key to the company’s close relationship with Microsoft, which became highly dependent on its technology and remains OpenAI’s largest investor with a 49% stake.

Ultimately, Altman’s insistence that the current board resigns was rebuffed.

It would have made no sense for him to go back for anything less than that plus a big salary hike.

Among all the investors, Microsoft might be the most deeply intertwined in the fate of OpenAI, and the startup’s turmoil has been a liability.

Beyond being OpenAI’s largest backer, Microsoft has reoriented its business around the startup’s AI software.

The first takeaway is that this is great for Microsoft’s stock because of the boost it will deliver to its AI business.

MSFT shares would have sold off by 10% if Altman left completely.

MSFT now has the best of breed working directly for them after becoming frustrated by the lack of insight into OpenAI.

A lack of a board seat made the transparency even blurrier.

Opportunistically, expect a mass exodus of OpenAI’s best to join Microsoft’s new AI division.

Most of the employees are already demanding for the board to resign and this situation is on the verge of erupting into a toxic mess.

Poaching is the oldest game in town and MSFT will aggressively look to add to its staff. OpenAI will be a shell of its former self soon because MSFT has the resources to pull it off. Everyone jumping ship will be granted a massive pay rise and restricted stock.

Even if MSFT needs to write down its initial AI investment into OpenAI, it pales in comparison to the potential and bottom-line boost that Altman could muster for the Washington company.

Free agents of this caliber don’t usually jump ship for free and this is a major coup for Microsoft, Altman, and anyone else that follows him to MSFT.

Half the value of OpenAI is wrapped up in Altman himself.

He is now tasked to bring what he did from OpenAI and then develop it, and this time around he has unlimited resources to deploy.

This is another win for the Magnificent 7.

I am highly bullish on MSFT.

MSFT HITS A HOME RUN WITH ALTMAN