Mad Hedge Technology Letter
September 22, 2023
Fiat Lux
Featured Trade:
(THE NEW CORRECTION IS THE SIDEWAYS ONE)
($COMPQ), (NVDA), (AAPL), (META), ($TNX)
Thursday wasn’t a great day for technology stocks ($COMPQ).
It’s not always smooth sailing from the bottom left to the top right.
It never is.
Stocks like Amazon (AMZN) were down more than 4% and other lower-tier growth stocks were down a lot more.
The price action in tech was a knee-jerk reaction after Fed Chair Jerome Powell signaled “higher for longer” for US interest rates ($TNX).
Powell was slightly a little bit more hawkish than consensus had it, and I don’t believe that will have any weight in the short or long term.
Funnily enough, Fed Futures are still pricing in no interest rate hike at the next meeting, even though Powell said there is one more hike.
There is still a deep-seated psychology that the Fed will pivot and this concept that the Fed has our back is not going away with itty bitty hikes.
Is there much of a difference between 5.25% and 5.5%?
The answer is no.
I would say that Powell's slow-walking this whole rate situation has done a lot more damage than good.
In more than 3 years since inflation was supposed to be transitory, inflation is still stuck at 3.7%.
Imagine living in a house with severe water damage to the wall and allowing it to fester over 3 years.
Tech continues to do well relative to expectations because Powell’s minuscule rate hikes have been sanitized to the investor audience.
Investors are scared of uncertainty and Powell is full of certainty.
Investors also don’t believe Powell will do anything to scare the tech market as we approach a federal government shutdown yet again.
Powell keeps pedaling this version of economic success, possibly because it is an election year.
Talking up tech stocks isn’t bad and Powell said that a soft landing is not the Fed's baseline expectation; it's merely a "plausible outcome."
Ultimately, tech investors believe Powell will pivot.
The proof is in the pudding.
Let’s look at the short and long end of the treasury curve.
The 10-year US treasury is yielding 4.43% and the 30-year US treasury bond is yielding 4.53%.
This means for an extra 20 years of duration, investors are rewarded an extra measly .10% worth of juice, precisely because investors think Powell will drop the front end of the curve like a hot potato.
Investors are just waiting it out.
Thus, Powell has telegraphed that we are basically at the peak of rates which is highly bullish for tech stocks.
Tech stocks are down just slightly in the past 30 days which I would characterize as a massive victory in relative terms.
In normal financial times, tech stocks would be thrown out with the bath water and we haven’t seen that happen.
Any selloff has been pristinely orderly and that’s a bullish sign in the short-term.
I am not saying that tech stocks have unlimited upside, but I do believe there is a solid bottom under them and they will most likely bounce around in a range-bound fashion.
Remember that for most of this year stocks like Apple (AAPL), Nvidia (NVDA), Meta (META), and so on rose while treasury yields spiked.
I don’t see why this correlation will screech to an immediate stop.
The likely bet is it continues but at a slower pace.
“All money is a matter of belief.” – Said Scottish Economist Adam Smith
Global Market Comments
September 22, 2023
Fiat Lux
Featured Trade:
(SEPTEMBER 20 BIWEEKLY STRATEGY WEBINAR Q&A),
(AMZN), (SPX), (TLT), (TSLA), (DIS), (LEN), (KBH), (PHM), (USO), (FXA), (UNG), (JPM), (C), (BAC)
Below please find subscribers’ Q&A for the September 20 Mad Hedge Fund Trader Global Strategy Webinar, broadcast from Silicon Valley, CA.
Q: How do we know when interest rates have peaked?
A: Well, that's easy—the Fed announces it and they start cutting interest rates. The first hint of that is they don’t raise interest rates when they have the opportunity to do so. That will be today as it was in July. So we’re at the top now, and they’ll probably go sideways for 6 months or even longer before they start cutting. Markets will start to discount this 6-9 months in advance, or about now.
Q: Year-end target for the S&P 500? What about Amazon (AMZN)?
A: 5,000. For the (SPX). For Amazon, I think we could easily tack on another 20-25%.
Q: Does the Mad Hedge Global Trading Dispatch include tech trade alerts?
A: It does, but only the higher quality, lower risk trades. Pure Tech traders are a much higher-risk bunch of people, and they want more aggressive trade alerts in smaller companies. As for me, with Global Trading Dispatch I try to stick to a 90% success rate, and the only way to do that is to avoid tech when it flatlines and not try to catch any falling knives.
Q: Any hope of recovery for the iShares 20 Plus Year Treasury Bond ETF (TLT)?
A: Yes; as I said, the Fed will start cutting interest rates next year, and markets discount 6-9 months in advance, so that gives us 3 months for our January 2024 $100/$105 call spreads to expire at max profit. So yes, it is entirely possible, if not likely, that we will see those numbers by January.
Q: Can you help me jump the line for a Cybertruck from Tesla (TSLA)?
A: Well, if I was going to help anyone get a Cybertruck, it would be me! And I can't get one. Back in the old days, Tesla people would fall down on their knees crying “thank you!” when you bought one of their cars. Now, I think I’m number 2 million on the waiting list. You’re on your own on that one.
Q: Is Disney (DIS) a good LEAP stock?
A: No, Disney has some major problems with their streaming business, and the parks have maxed out. That is why the stock seems immune to good news—unless you know something I don’t. So go for it if you’re ready for that risk.
Q: What is your fact-finding trip to Ukraine all about?
A: Nothing beats research on the ground for finding out what really happened. Second, Ukraine got a lot of aid from other countries when the war started, but it’s since run out and we know that hospitals and orphanages in Ukraine are in trouble and running out of money. So, nothing beats showing up with US dollar cash in that situation. So that is why I’m going. This’ll be my eighth war. I guess the war correspondent in me never left. I’ll also be escorting American doctors to Ukrainian hospitals who don’t know how to do this. There’s more to life than just making money.
Q: Should I buy the dip in homebuilders like Lennar Homes (LEN), D.R. Horton (DHI), and KB Homes (KBH)?
A: Absolutely, yes—with both hands. Who does better with a falling interest rate cycle than home builders who have to depend on falling mortgage rates for business to boom once again. So yes, any dip in this sector and I would be loading the boat. The next declining interest rate cycle could last 5 or 10 years.
Q: Will the United Auto Workers strikes cause inflation to rocket and feed into higher inflation figures?
A: No, not really. Union membership has declined by 75% over the last 40 years. The UAW itself has declined from 1.6 million members to 400,000, and they really have become too small to affect the general economy. What they will do is accelerate existing trends, like people dumping their ice cars and moving to Tesla and other EV manufacturers. This is sort of like a gift for Tesla, and that's why the stock was up 10% last week. Also, in the long, long run, if they force the car companies to move to Mexico and cut the same deals that Elon Musk got, then it reduces inflation.
Q: Does the recent increase in Chinese ships and warplanes near Taiwan change anything?
A: No, it just shows us how weak the economy in China is. It’s effectively in recession even though they refuse to admit it, and therefore they have to create more distractions. The Chinese have been bluffing on Taiwan for 70 years—why stop now?
Q: What is a good time to buy banks?
A: I would start scaling into (JPM), (BAC), and (C) now. They will be a major beneficiary of an economic recovery next year and falling interest rates; and the prices down here are good. They’re one of the worst performers so far this year—one of the few cheap sectors left in the market.
Q: Should I buy Tesla (TSLA) here?
A: The thing here that I’m telling my professional money managers is: scale in on a one-month basis. Figure out how much you want to buy, and then buy 1/30th of that amount every day for a month. Then, you’ll scale in, you won’t get the absolute bottom but you’ll get some kind of bottom, and when a turnaround happens, then it goes up 50% or 100%. That’s the way to play Tesla. A lot of the professional money managers and investment advisors who follow me have a problem; they’re getting tons of new customers based on their performance this year. So yes, what do you do when you get money after a great run? You can only scale in.
Q: Is oil (USO) topping and going back to 70 a barrel?
A: I think yes. We saw the run from $70 to $95; it looks like it’ll probably hit $100. After that, Saudi Arabia will start bringing supply back on. What they did is create an artificial short squeeze in oil by taking 5 million barrels off the market with Russia—that got prices up. Any higher than that, and high oil starts to adversely affect Saudi Arabia’s foreign investments. So yes, they do back off when we get over 100; they’re very happy with $100/barrel, as is the American oil industry. So, I’m inclined to take profits if you did the oil trade in June.
Q: Would you buy iShares 20 Plus Year Treasury Bond ETF (TLT) now?
A: No, I’ve been holding back because it seems to want to have a capitulation; that’s why it’s not rallying off the 93 level—it’s been bouncing on the bottom. Some piece of bad news, some kind of high inflation, could trigger a capitulation, which would take us down another 5 points—that's where you buy it. Then, all of a sudden something like a 2024 $85/$90 bull call spread is offering you 100% return one year out.
Q: Do you recommend 4-week T-bills?
A: No, I recommend 4-month T-bills. Those expire in January and take advantage of the cash squeeze in the financial system you always get in New Years. Returns on 4-month T-bills are much higher than 3 month, 2 month, or 1 month. I just bought some before this meeting because I’m not going to do a lot of trading this month, and I got a 5.48% yield. For me to do a trade now, it has to have a very low-risk 20% return. That’s what I need to beat T-bills at 5.48%, which have zero risk and a guaranteed return of money. You need the extra 15% return on a 1-month trade to justify the risk that individual stocks have.
Q: Will the Australian dollar (FXA) stay weak as long as China is weak?
A: Yes, and the flip side is also true: Will the Australian dollar be strong when China recovers? Absolutely. I still see 1 to 1 against the US dollar for the long term.
Q: Why is everyone pouring into short-term options?
A: They’re buying lottery tickets. A lot of people are in the markets not to invest, but to gamble. They have gambling addictions quite often, and nothing beats the instant gratification of a same-day win, even though 80% of the same-day options expire worthless. So, enter that market with caution.
Q: After artificial intelligence destroys 90% of jobs, won’t there be nobody left to buy stocks since stocks won’t go up solely on institutional buying?
A: While AI will destroy a lot of jobs, it’s creating even more jobs—that has always been the case with technology from day one. However, you do get mismatches from the time a job is destroyed to when a new one is created. There are also mismatches in skill levels and that can create turmoil in the economy. Look at the United Auto strike, which is hell-bent on stopping technology and automation—stopping any kind of technology they can. Technology in the long term always destroys jobs, but it also creates more jobs, just moving them from old economies into new industries. I’m sure the same thing went on with the hay and leather industries 120 years ago when we moved from horses to internal combustion cars.
Q: If companies go to a four-day workweek, how will that affect stocks?
A: It’ll probably make them go up. When people go to four-day work weeks, productivity goes up and companies get more output for their dollar of labor costs. That’s why it’s happening and why it’s so popular. People who work at home and get to play with their kids on weekends will work for less money—that is a proven fact.
Q: Any thoughts on when we will see the United States Natural Gas Fund (UNG) turn upward?
A: This winter. (UNG) is priced for perfection, sitting around here at the $7 level. The slightest surprise like a cold winter, for example, which we may get (at least in California we will), and then the thing will spike up.
To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in to www.madhedgefundtrader.com, go to MY ACCOUNT, click on GLOBAL TRADING DISPATCH, then WEBINARS, and all the webinars from the last 12 years are there in all their glory.
Good Luck and Stay Healthy,
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
2018 On the HMS Victory in Plymouth, England
"Right now, by historical standards, stocks are significantly undervalued. ?Irrational exuberance? is the last term I would use to characterize the market right now," said former Federal Reserve chairman, Alan Greenspan.
Mad Hedge Biotech and Healthcare Letter
September 21, 2023
Fiat Lux
Featured Trade:
(HEALTH MEETS WEALTH)
(BSX), (ABT), (JNJ), (MDT), (SYK)
In a state-of-the-art medical facility, a surgeon's hands move with precision, guiding a catheter towards the basivertebral nerve. Their mission is clear: to halt the persistent pain signals traveling to the brain, offering relief to those burdened by vertebrogenic pain. This is the real-world application of the Intracept system, a breakthrough in healthcare.
Boston Scientific Corporation (BSX) has recently made headlines by announcing its definitive agreement to acquire Relievant Medsystems, Inc., the very creators of the Intracept Intraosseous Nerve Ablation System. This power move, sealed with a cool $850 million upfront cash payment, also includes some exciting performance-based bonuses over the next three years.
Let's zoom in on the Intracept system for a moment. It's the only kid on the block with a nod from the U.S. Food and Drug Administration, specifically tailored for vertebrogenic pain. This sleek, implant-free outpatient procedure employs radiofrequency energy, acting like a mute button for the pain-causing basivertebral nerve.
And with over 5.3 million Americans wrestling with vertebrogenic pain, the ripple effect of this innovation is monumental. So, mark your calendars: the acquisition is set to be finalized in the first half of 2024 once all the formalities are squared away.
On the financial front, the future's looking bright for Relievant. They're gearing up to clock sales north of $70 million in 2023, with a growth spurt expected to zoom past 50% in 2024. And while the 2024 earnings per share (EPS) might not cause a big splash, 2025 and beyond are looking sunny.
While the acquisition is a major step, Boston Scientific's journey doesn't stop there.
Their Watchman device, which dominates its market segment, is poised to bring transformative changes to atrial fibrillation treatments. Just think of this gadget as a guardian angel for patients with non-valvular atrial fibrillation, shielding them from stroke risks without the ball-and-chain of long-term blood thinners.
Apart from this, Boston Scientific dropped some exciting news earlier this year about their ADVENT Study of the FARAPULSE Pulsed Field Ablation System (PFA). This nifty gadget uses electric fields to treat atrial fibrillation (AF), sidestepping the need to heat up the tissue. The study was a trailblazer, being the first to pit the FARAPULSE system against traditional AF treatments.
However, Boston Scientific's game plan goes beyond just gadgets and gizmos.
Their keen interest in Shockwave (SWAV) and a track record of smart acquisitions hint at a company that's always two steps ahead. This forward-thinking mindset has earned them nods of approval from both the medical community and sharp-eyed investors. The success of its ADVENT study, for instance, has further underscored its growing prominence in the sector.
In today's roller-coaster financial world, with storm clouds of economic downturns gathering, investors are on the hunt for solid ground. This is where Boston Scientific comes through. They're not just a safe harbor; they're also a vessel of growth.
With two solid quarters in the bag and a projected 11% revenue growth on the horizon, they're on a skyward journey. And while there might be some chatter about its share valuation, their blend of innovation and strategy makes every penny worth it.
In a nutshell, Boston Scientific is more than a company name; it's a promise of a brighter, healthier tomorrow. Moreover, the stock has consistently outpaced the broader medical device sector, gaining an edge of about 10% over notable competitors like Abbott (ABT), Johnson & Johnson (JNJ), Medtronic (MDT), and Stryker (SYK). This performance was evident even before the company unveiled the impressive results of its ADVENT study on the Farapulse ablation.
Currently, I remain optimistic about the potential of BSX shares. Granted, a forward revenue multiple of 6.5x isn't exactly modest, and the valuation might appear ambitious when assessed through traditional metrics like discounted free cash flow. However, top-tier growth med-tech stocks rarely come with a discount tag.
Given the prospects of Farapulse, Watchman label extension studies, innovative CRM products, the Agent drug-coated balloon, and growth avenues in peripheral intervention, endoscopy, and urology, Boston Scientific stands out as a unique growth narrative. Historically, investors have shown a willingness to pay premium multiples for such consistent growth in this market segment.
Global Market Comments
September 21, 2023
Fiat Lux
Featured Trade:
(THE MAD HEDGE TRADERS & INVESTORS SUMMIT VIDEOS ARE UP!)
(THE NEW OFFSHORE CENTER: AMERICA),
(SIGN UP NOW FOR TEXT MESSAGING OF TRADE ALERTS),
Video replays from the September 12-13 confab are up. Listen to 15 speakers opine on the best strategies, tactics, and instruments to use in these volatile markets. It is a true smorgasbord of investment strategies. Find the best one that suits your own goals.
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