Page 467 - Mad Hedge Fund Trader

Spot On With Spotify

Many industries have experienced consolidation in the last few years and music streaming has been no exception.

The strong emergence of a few companies running the show has resulted in these same companies wielding extraordinary pricing power.

Spotify (SPOT) has been one of the leading music streaming platforms for years, and when companies harness pricing power, they can raise prices to compensate for higher expenses.

That is exactly what Spotify did recently as their stock sold off on a wider-than-expected loss for the second quarter, even though subscribers surged.

The streaming service posted a net loss of 302 million euros.

Monthly active users (MUAs) beat estimates of 530 million to hit 551 million — a 27% improvement compared to the year-ago period. Net additions of 36 million represented Spotify's largest quarterly net addition performance in its history.

Premium subscribers also surpassed expectations of 217 million, jumping another 17% year over year to hit 220 million.

In its first-quarter report, the company said it expected to add 15 million new monthly active users in Q2, bringing its total to 530 million. It also expected revenue of 3.2 billion euros and to report 217 million paid subscribers in the quarter.

Spotify is continuing to invest in advertising, and its ad-supported revenue grew 12% year over year. The company said podcast advertising revenue growth reaccelerated to more than 30% year over year.

Spotify will increase the price of its Premium subscription offerings by as much as $2, which translates to a 20% rise for some plans.

In the U.S., Spotify’s Premium Individual offering now costs $10.99, up from $9.99, and the price of its Premium Duo plan changed to $14.99, up from $12.99. The company’s Premium Family plan is now priced at $16.99, up from $15.99, and the Student offering costs $5.99, up from $4.99.

Spotify doesn’t expect a drawdown in product demand from the price increase, and let’s face it, most people can handle paying an extra 2 bucks for something they use every day.

Music streaming is definitely close to becoming an industry participated in by just a few for as long as it’s a viable business.

That means Spotify will also have the opportunity to raise subscription prices again in the future.

The licensing issues alone are too much of a hurdle for most companies to get to launch so to really compete takes a high amount of upfront funds and in the world of high interest rates, tech firms can’t fund this type of retread business again.

Spotify isn’t a pure monopoly.

The others involved are Apple Music, Amazon, Tidal, Deezer, and Pandora.

SPOT’s stock has increased by over 85% after the earnings pullback, and at one point they were up over 100%.

Growing subscriptions at 27% is still considered something that a growth company does at a time when growth companies are hard to find.

It doesn’t matter that they aren’t profitable yet, as long as they add more subscribers, which they have strongly indicated they will.

The stock has pulled back from $175 and once the negative shakeout fades away, traders should get into SPOT while they still can.

Quote of the Day - August 2, 2023

Tech Letter

“Never invest in a business you can't understand.” – Said American Investor Warren Buffett

August 2, 2023

Jacque's Post

(INVESTING IN SILVER IS A SMART MOVE FOR THE LONG TERM)

August 2, 2023

Hello everyone,

Let’s look at Silver today.

Silver is one of the many precious metals you can invest in, particularly when you are looking for long-term growth.

Silver isn't just a metal to collect and stow away for the future. It has endless real-life uses, and with those uses — and future, yet undiscovered ones — comes the potential for growth.

Silver is not only a precious metal but also an industrial metal. Silver is used in medical applications, solar panels, batteries, nuclear reactors, semiconductors, touch screens, and more.

It's also a large component in electric vehicles, which have jumped in production and popularity in recent years. By 2025, The Silver Institute estimates that 90 million ounces of silver will be needed for vehicle production.

It's smart to invest in silver if you have the patience to hold it for the long term. With a growing commitment to green infrastructure, clean alternative energy sources, and anticipated growth of EVs, we should only expect the demand for silver to grow from here.

How to invest in silver

There are many ways to invest in silver. You can purchase silver coins and bullion (just remember you need somewhere to store it). You can also buy stocks in silver mining companies or invest in silver ETFs. Examples of silver stocks and ETFs include WPM (Wheaton Precious Metals), SLV (iShares Silver Trust ETF), SIL (Global X Silver Miners), AGQ (ProShares Ultra Silver), NEM (Newmont Corporation), SVM (Silvercorp Metals), AG (First Majestic Silver Corp.)

You can also open a silver IRA, which allows you to use silver to build your wealth for retirement. These are specialized retirement accounts that must be managed by an IRS-approved custodian. You can only purchase certain coins and bouillon, and they must be stored in an official depository. (There are also gold IRAs if you're interested in investing in gold).

Invest in Silver if you are comfortable with some risk and volatility.

Silver is generally seen as a safe investment, but its value ebbs and flows more than gold does.

In the last year, silver prices have gone as low as $17 an ounce to nearly $26 an ounce. Over the last decade, silver has vacillated even more. Its lowest price was just under $14 per ounce, while it cost almost $28 per ounce at its peak. That's a peak-to-trough difference of 101%.

Still, the volatility can be worth it — at least for investors with patience and good timing.

Invest in Silver if you want to diversify your portfolio.

Silver is also a smart way to diversify your portfolio and offset your exposure to other, riskier assets, such as stocks.

"It can be smart to invest in silver when you're seeking diversification or when you expect inflation or economic turmoil," says Nick Ganesh, manager at Endeavor Metals. "Silver often holds value well under these conditions."

When silver investing isn't wise

Silver can often be a smart investment, but it's not right for everyone.

Don’t invest in Silver if you want a risk-free investment.

One of the biggest silver investment disadvantages is its volatility. While that can often mean big growth, it can mean significant loss if you need to sell at the wrong time.

If you're not prepared to ride out the waves of this volatility, you may want to explore other investment options. If you can ride out the volatility waves, you will do well with Silver in the long term.

Don’t invest in Silver if you're looking for quick returns or dividends.

If quick profits or a regular income stream are what you're looking for, silver won't be of much help.

Silver doesn't provide interest or dividends. So, if you're seeking a steady income stream, other investments might be more suitable. Assets like stocks or bonds may provide better returns.

Don’t invest in Silver if you need easy liquidity.

Silver isn't completely illiquid, but if being able to sell your assets fast and turn them into cash is a priority, it's not the best choice.

Warren Buffett has invested almost 1 billion in Silver. So, if you’re looking for confirmation of the value of Silver as a long-term hold, there it is.

In 10 years’ time, Silver could grow to a minimum value of $150/ounce. If the conditions are right, Silver could reach up to $750/ounce.

Have a great Wednesday.

Cheers,

Jacquie

August 2, 2023

Diary, Newsletter, Summary

Global Market Comments
August 2, 2023
Fiat Lux

Featured Trades:

(THE BEST FINANCIAL BOOK EVER),
(A DAY WITH TOM FRIEDMAN OF THE NEW YORK TIMES)

CLICK HERE to download today's position sheet.

The Best Financial Book Ever

Diary, Newsletter

I have just finished reading the best financial book ever, and I have read most of them. It is The Ascent of Money: A Financial History of the World by Harvard professor Niall Ferguson. It gives you a great explanation of how the broad sweep of history delivered us to the doorstep of today’s crisis.

Ferguson starts with an ancient accounting system written on clay tablets in Mesopotamia 5,000 years ago and then takes us through the economic dominance of Greece and Rome. We learn about a medieval Italian diplomat named Fibonacci, who imported advanced mathematical concepts from the Middle East, which we still trade around today. He plots the rise of the great banking dynasties, such as the Medici’s and the Rothschild’s (Jacob was my neighbor in London).

It is also a pot-boiling narrative of the great financial scandals, starting with the Mississippi bubble, which wrecked the government of France, the South Sea bubble, where Sir Isaac Newton lost his shirt, to the Ponzi schemes of the 20^th century. The story tells us how the financial center of the world has migrated from Babylon to Cairo, Rome, Venice, Amsterdam, London, and eventually ended up in a hedge fund-dominated New York.

Ferguson is particularly astute in explaining in layman’s terms the borrowing binge and the exotic, super-leveraged derivatives that lead to the current crash. The author finishes with an explanation of how American overconsumption is financed by Chinese savings, and why this can’t last. If you are looking for a single tome that ties it all together, this is it.

To obtain preferential pricing in the purchase of this book, please click here.

Trade Alert - (SPOT) August 1, 2023 - BUY

Tech 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

August 1, 2023

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
August 1, 2023
Fiat Lux

Featured Trade:

(CHASING THE TRILLION-DOLLAR DREAM)
(LLY), (NVO), (AMGN), (PFE)

Chasing the Trillion-Dollar Dream

Biotech Letter

Mark my words. The healthcare sector is on the cusp of a seismic shift. By 2033, I expect to see the dawn of a trillion-dollar enterprise. Now, you might think I've lost my marbles, but hear me out.

The prime contender for this prestigious title? Eli Lilly (LLY).

Now, Lilly is comfortably lounging at a market cap of $425 billion, a massive figure, yes, but still less than half of our $1 trillion target. Lilly's stock would need to scale up by a staggering 135% to breach the trillion-dollar threshold.

Daunting, right?

But if you break it down to an annual growth rate over a 10-year span, we're looking at a relatively modest compound rate of around 8.9%. With Lilly's recent track record and brimming product pipeline, this growth trajectory doesn't seem so far-fetched.

A closer look at Lilly's pharmaceutical lineup reveals a host of innovative treatments. Lilly's recent contributions to diabetes care - Mounjaro, Jardiance, and Trulicity - represent significant strides.

Adding to the fray are Taltz, a cutting-edge psoriasis solution, and Verzenio, a life-saving breast cancer drug. A peek into Lilly's late-stage pipeline reveals potential blockbusters in the making, like lebrikizumab for atopic dermatitis, mirikizumab for immunology, and donanemab for the relentless battle against Alzheimer's.

Then, there's the $1.9 billion acquisition of Versanis Bio, positioning Lilly at the precipice of the weight-loss market.

Lilly stands out with its robust line-up in the race for weight loss solutions. Mounjaro, initially a diabetes drug, has demonstrated potential as a weight-loss aid in clinical trials, with participants on the highest dosage shedding up to 22.5% of their body weight over 72 weeks.

Yet, the sector is intensely competitive, with giants such as Novo Nordisk (NVO), Amgen (AMGN), and Pfizer (PFE) on the battlefield. While Lilly's recent acquisitions present strong prospects, forecasting revenue growth over the next decade remains an intricate puzzle.

Notably, weight-loss solutions form a crucial part of Lilly's growth plan and could contribute more than 60% of the company's annual revenue by the mid-2030s.

Meanwhile, Lilly is developing potential breakthroughs in Alzheimer's treatment, with donanemab showing promise in clinical trials. This treatment has a mechanism that targets amyloid plaque, often found in the brains of Alzheimer's patients.

If approved, sales could reach a projected $3.9 billion by 2027.

Despite these promising avenues, caution is warranted. Lilly's stock is trading at 51.75 times its forward-looking earnings estimates. While the prospects for Alzheimer's and weight management treatments show promise, their success is far from guaranteed.

Historically successful drugs like Humalog and Alimta have seen their sales decline by 25% and 83%, respectively, as they lose exclusivity and face competition from lower-cost alternatives.

A company's value is often tied to its latest blockbuster in the pharmaceutical sector. Patent protection typically lasts 25 years from the date of discovery, with about half this time spent on testing. This leaves a limited window for profitability.

Investing in Lilly or any other pharma stock based on earnings expectations over 50 times isn’t always a guaranteed win. The firm’s upcoming offerings could indeed be significant earners, but they must offset foreseeable losses from other areas.

For instance, Trulicity, Lilly's top-selling treatment, generated nearly $2 billion in sales during the first quarter of 2023. However, Trulicity's revenue may be cannibalized by Lilly's own Mounjaro, with looming patent expirations set to intensify the pressure from 2027.

With robust profit margins exceeding 20%, the ascent of Eli Lilly to a trillion-dollar valuation is not only a bold prediction but also a captivating journey to monitor.

While this forecast appears to be grounded in solid reasoning and well-articulated facts, the reality of this industry is inherently marked by uncertainty and continuous change. Without the caveat of patent expiration, Lilly would be an unequivocal strong buy.

But given this reality, investors might be wiser to monitor Lilly first, rather than rush into a commitment. I suggest patiently waiting and buying the dip.

August 1, 2023

Diary, Newsletter, Summary

Global Market Comments
August 1, 2023
Fiat Lux

Featured Trades:

Trade Alert - (GOLD) – BUY LEAPS

CLICK HERE to download today's position sheet.

BUY the Barrick Gold (GOLD) January 2025 $20-$22 out-of-the-money vertical Bull Call spread LEAPS at $0.46 or best

Diary, Newsletter

Opening Trade

8-1-2023

expiration date: January 17, 2025

Number of Contracts = 1 contract

The entire interest rate-sensitive sector has been walloped over the last three months over fears that the Fed will keep interest rates higher for longer. That is now in the price of the gold miners.

This position is a bet that our nation’s central bank will embark on a path of interest rate CUTS sometime in the next 18 months. And the shares of Barrack Gold (GOLD) only have to return to where they were in March for the position to hit max profit.

While the chance of winning a real lottery is something like a million to one, this one is more like 10:1 in your favor. And the payoff is a double in little more than a year. That is the probability that (GOLD) shares will rise over the next 26 months.

The logic behind this LEAPS is fairly simple.

After keeping interest rates too low for too long and then raising them too far too fast, what does the Fed do next? It then lowers interest rates too far too fast. In other words, a mistake-prone Jay Powell will keep on making mistakes. That’s what you get with a Fed chair who only has a degree in political science.

The rate of interest rate rises has been the most rapid in history and is possibly going to trigger a modest recession by end of 2023. When the recession hits, demand for money will dry up and interest rates will collapse. Yields on ten-year US Treasury bonds that bottomed at 0.32% in 2020 and reached a peak of 4.46% in October will easily fall back down to 2.50% by the time this LEAPS matures.

And guess which asset class is one of the most sensitive to falling interest rates? That would be precious metals, especially gold. A drop in interest rates of this magnitude should allow the price of Barrick Gold to double. That’s where we were in March of 2021 when (GOLD) traded at $30.

Another factor driving down interest rates is the fact that the US government budget deficit is shrinking at the fast rate in history, down from $3 trillion to $1.5 trillion in the past year. A shrinking supply of bonds brings higher bond prices and lower interest rates.

I am therefore buying the Barrick Gold (GOLD) January 2025 $20-$22 out-of-the-money vertical Bull Call spread LEAPS at $0.46 or best.

Don’t pay more than $0.80 or you’ll be chasing on a risk/reward basis.

Barrick Gold is the world’s largest gold miner and is the end result of a long series of mergers and acquisitions. It is based in Toronto, Canada and has 16 mines in 13 countries producing 5 million ounces of gold and 400 million pounds of copper per year. Gold and copper are often found together. Its average production cost for gold is $834 compared to today’s spot price of $1,713. That gives Barrick Gold enormous upside earnings leverage when gold prices rise. To learn more about Barrick Gold, please click here.

Please note that these options are illiquid, and it may take some work to get in or out. Executing these trades is more an art than a science.

Let’s say the Barrick Gold (GOLD) January 2025 $20-$22 out-of-the-money vertical Bull Call spread LEAPS are showing a bid/offer spread of $0.10-$1.00, which is typical. Enter an order for one contract at $0.20, another for $0.30, another for $0.40, and so on. Eventually, you will enter a price that gets filled immediately. That is the real price. Then enter an order for your full position at that real price.

A lot of people ask me about the appropriate size. Remember, if the (Barrick Gold) does NOT rise by 31.57% in 18 months, the value of your investment goes to zero. The way to play this is to buy LEAPS in ten different names. If one out of ten increases ten times, you break even. If two of ten work, you double your money, and if only three of ten work you triple your money.

You never should have a position that is so big that you can’t sleep at night, or worse, need to call John Thomas asking if you should sell at a market bottom.

There is another way to cash in. Let’s say we get half of your 31.57% in the next six months, which from these low levels is entirely possible. Then you could earn half of the maximum potential profit in months. You can decide whether to keep the threefold return or go for the full ten bagger. It’s a nice problem to have.

Notice that the day-to-day volatility of LEAPS prices is miniscule since the time value is so great. This means that the day-to-day moves in your P&L will be small. It also means you can buy your position over the course of a month just entering new orders every day. I know this can be tedious but getting screwed by overpaying for a position is even more tedious.

Look at the math below and you will see that a 31.57% rise in (GOLD) shares will generate a 300% profit with this position, such is the wonder of LEAPS.

Only use a limit order. DO NOT USE MARKET ORDERS UNDER ANY CIRCUMSTANCES. Just enter a limit order and work it.

This is a bet that the (GOLD) will not fall below $22 by the January 17, 2025 option expiration in 18 months.

Here are the specific trades you need to execute this position:

Buy 1 January 2025 (GOLD) $20 call at………….………$1.70

Sell short 1 January 2025 (GOLD) $22 call at….………$1.24

Net Cost:………………………….………..........……….….....$0.46

Potential Profit: $2.00 - $0.46 = $1.54

(1 X 100 X $1.54) = $154 or 298% in 18 months

If you are uncertain on how to execute an options spread, please watch my training video by clicking here.

The best execution can be had by placing your bid for the entire spread in the middle market and waiting for the market to come to you. The difference between the bid and the offer on these deep in-the-money spread trades can be enormous.

Don’t execute the legs individually or you will end up losing much of your profit. Spread pricing can be very volatile on expiration months farther out.

Keep in mind that these are ballpark prices at best. After the alerts go out, prices can be all over the map.