While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to a six-month time frame, Mad Day Trader, provided by Bill Davis, will exploit money-making opportunities over a brief ten minute to three-day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points. Read more
Global Market Comments
April 15, 2020
Fiat Lux
Featured Trade:
(GOODBYE TO THE OLD WORLD, HELLO TO THE NEW)
(TGT), (WMT), (ZM), (NFLX), (PYPL), (SQ), (AMZN), (MSFT)
With the ongoing impacts of coronavirus, our world is suddenly changing beyond all recognition.
The WWII comparisons here are valid. Just as technological innovation accelerated tenfold from 1941-1945, bringing us computers, penicillin, jet engines, and the atomic bomb, the same kind of great leaps forward are happening now.
The end result will be a faster rate of innovation and economic growth, greater corporate profits in the right industries, and a hugely performing stock market. It perfectly sets up my coming Golden Age and the next Roaring Twenties.
Living in Silicon Valley for the last 25 years, I have gotten pretty used to change. But what is happening now is mind-boggling.
The bottom line for the impacts of the coronavirus pandemic has been to greatly accelerate all existing trends. The biggest one of these has been the movement of the economy online, which has been taking place since the eighties. Except that it is now happening lightning fast. Business models are hyper-evolving.
Legacy brick and mortar companies must move online or perish, as much of the restaurant business is now doing. Target (TGT) and Walmart (WMT) have accomplished this. Those with feet in both worlds are closing down their physical presence and going entirely digital. Pure digital companies, like Zoom (ZM), Netflix (NFLX), PayPal (PYPL), and Square (SQ) are booming.
The side effect of the virus may be to move an even greater share of America’s business activity to the San Francisco Bay area and Seattle. Almost all tech companies here are hiring like crazy. Amazon has announced plans for hiring a staggering 175,000 since the epidemic started, as millions shift to home delivery of everything.
The productivity of tech is also growing by leaps and bounds. Since everyone is working at home, no one wastes two hours a day commuting. Meetings in person are a thing of the past. Everything now happens on Zoom.
The whole mental health industry is now conducted on Zoom. So is much of non-Corona related medicine. And I haven’t seen my accountant in years. I think he died, replaced by a younger, cheaper clone.
Even my own Boy Scout troop has gone virtual. The National Council is offering 58 online merit badges, including Railroading, Stamp Collecting, and Genealogy (click here for the full list).
The stock market has noticed and several tech companies like Microsoft (MSFT) and Amazon are showing positive gains for 2020. Many legacy companies see share prices still down 80% or more. Sector selection for portfolio mangers has essentially shrunk from 100 to only 2: tech/biotech and healthcare.
Business models are evolving at an astonishing rate. Who knew the yoga instructor in Chicago was much better than the one down the street, thanks to Skype.
Education is now entirely online and much of it may never go back to school. My kids are totally comfortable in this new world. They have been social distancing since I bought them their own iPhones five years ago.
Now, if I can only figure out how to do my own haircut, the third most searched term on Google. It’s longer than at any time since the summer of love in 1967.
These are just a few of the practical impacts of coronavirus. The social changes are equally eye-popping.
While death rates are soaring, crime has fallen by up to 75%. So have deaths from car accidents. Alcohol and domestic abuse have gone through the roof. Drug addiction is plummeting because dealers are afraid to go out on the street.
There are many lessons to be learned from this crash. Too many companies drank the Kool-Aid and assumed business conditions would remain perfect forever.
Let's call a spade a spade. The year 2019 and the first two months of 2020 were the bubble top. All the growth in stock prices then were pure fluff.
That means you didn’t need costly reserves ran on thin margins, borrowed like crazy at artificially low-interest rates, and kept endlessly buying back your own stock and paying generous dividends.
Manufacturers didn’t need inventories, counting on a seamless, global supply chain to keep assembly lines running. “Just in time” has switched to “just-in-case.” Companies are going to have to keep enough inventories in the warehouse to guard against future disease-driven disruptions. This will raise costs and shrink profits.
It’s really hard to see how entire industries are going to come back. Cruise ships were packing guests onboard like sardines in a can to make money. I bet it will be a while before you sit at a crowded casino blackjack table. Want to stand in line at a popular chain restaurant?
Airlines have become the poster boy for the evils of bubblicious management. They flew full most of the time, seating their customers shoulder to shoulder, yet their net profit per fight depended on selling that last economy class seat.
The industry spent $50 billion in dividends and the buyback of shares that are now largely worthless, while senior management laughed all the way to the bank. They were the only industry to actually list a global pandemic as a major risk to their business in their SEC filings.
Now they want a government bailout at your expense.
As for me, I am looking forward to this brave new world. Until then, I’ll be spending my afternoons getting in shape hiking in the High Sierras, long hair and all. I’m the only one up here. Maybe it will scare the mountain lions away.
Mad Hedge Technology Letter
April 15, 2020
Fiat Lux
Featured Trade:
(SOFTBANK’S CRASH AND BURN)
(SOFTBANK VISION FUND)
The bizarre case of Softbank’s emperor has no clothes – its enigmatic CEO Masayoshi Son was heralded as a tech genius who planned to validate his intelligence by throwing money at budding tech companies that were supposed to deliver his investors billions in shareholder value.
It’s now Mr. Market who has the last laugh, as the infamous tech venture fund, smartly named the Vision Fund, bankrolled by Son and Middle Eastern wealth funds, took a turn for the worst with a $16.6 billion loss in the fiscal year that just ended.
Apparently, the vision fund is blind.
How bad is the situation at the “vision” fund?
A fraudulent tech company that sells shared office space owned by Softbank is now suing itself, creating a scenario where WeWork is reliant on Softbank to fund it, yet attacking the hand that is feeding it.
Presiding over a cesspool of conflict of interests, unremarkable business models, inflated egos, and botched management, the vision fund’s greatest success is overpaying for massive loss-making tech companies that sometimes weren’t even tech companies.
WeWork is the most high-profile casualty of Son’s excesses, but Oyo, the hotel sharing company, also epitomizes the state of Son’s crumbling empire.
Less than a year ago, Son publicly anointed Founder and CEO of Oyo Ritesh Agarwal one of the new up-and-coming tech innovators.
Oyo is the Uber of hotels that, through a reservation website, matches hotel units with paying customers.
Agarwal began working with small hoteliers on service, design and standardized accouterments like bedding and toiletries to draw more travelers. He took a 25% cut of sales.
The online hotel platform expanded ambitiously by recruiting hotel owners and guaranteeing a minimum amount of revenue, essentially doubling down that its online booking system and brand name would attract enough extra cash flow to sustain sales.
In the event that revenue goes to zero because of a pandemic, Oyo would incur abnormally high risk by still being on the hook for the revenue to the hotel operators.
Oyo has since gone back on its guarantee to pay guaranteed revenue streams to hotel operators alienating any potential relationships with hotels in the future.
Agarwal’s brainchild was supposedly poised to become the biggest hotel operator in the world.
Fast forward to today and the situation is nothing short of a disaster.
Oyo has called for a major restructuring, furloughing thousands of employees as it clings on for dear life.
Oyo is just another disastrous instance of the Vision Fund’s toxic array of underperforming assets.
The hotel startup was valued at $10 billion just recently and even though not a zero yet, the company has lost around 70% of its value in one month.
Complicating the pitiful situation, Agarwal borrowed $2 billion to buy back shares in his own creation speculating that Oyo would be able to offload the asset to avid investors.
Agarwal could face an imminent margin call from the banks he borrowed from, setting the stage for Son to bail out another ridiculous sideshow or let it rot like WeWork who is effectively suing Son for not following through with a $3 billion bailout that he is walking away from.
Son promised after WeWork that he wouldn’t bail out any more startups, but the issue now is that the list of eroding companies grows longer and Son’s ability to fund these decrepit companies weakens by the day as business is shut around the world and his balance sheet sours.
Just look around at the lifeless companies that have been put out of their misery such as Brandless Inc., Zume Pizza Inc., and OneWeb just filed for bankruptcy.
I double down that no tech firm will be able to go public in 2020, and the rotten apples under Son’s leadership are now being inspected for exactly how rotten each apple is.
Tech investors should take this cue to find higher ground in the form of iron-clad balance sheets, positive cash flow, and unmistakable intellectual property.
If you can slip in a recurring subscription model in the equation, then that is the cherry on top of the chocolate sundae.
Park money in the corona tech stocks of DocuSign (DOCU), Zoom Video Communications, Inc. (ZM), Amazon (AMZN), Netflix (NFLX) and Microsoft (MSFT), then grab some popcorn to watch how Son’s portfolio blows up in dramatic fashion.
“It's better to be a pirate than to join the Navy.” – Said Co-Founder and Former CEO of Apple Steve Jobs
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
I would like to suggest that you collect some more call premium on the AGNC position.
The last price for the April 24th - $13.00 calls were $0.35
My suggestion is to sell them at $0.35.
These are the calls that expire next Friday.
Assuming you collect the 35 cents, it will mean you would have collected $1.55 in call premium on this position.
If these calls are assigned next Friday, the total return would be 10.3%.
Mad Hedge Biotech & Healthcare Letter
April 14, 2020
Fiat Lux
Featured Trade:
(ELI LILLY’S CORONA LEAP FORWARD)
(LLY), (GSK)
Eli Lilly (LLY) is one of the major biotechnology companies that have been working double-time to develop a coronavirus disease (COVID-19) cure, and the company shared its progress in this field.
According to this top biotech company, its partnership with the National Institute of Allergy and Infectious Diseases will explore the potential of Olumiant as a COVID-19 treatment.
This drug was first approved in June 2018 as a rheumatoid arthritis medication. Health experts believe that its anti-inflammatory effects on the immune system could be effective as a COVID-19 cure.
The clinical trial for Olumiant will involve COVID-19 patients in the US, with results available within two months.
Other than this Olumiant trial, Eli Lilly has another potential COVID-19 clinical trial already in Phase 2 for an experimental antibody treatment currently dubbed LY3127804.
This trial will involve pneumonia patients diagnosed with COVID-19. These patients are at a higher risk of acquiring acute respiratory distress syndrome (ARDS). The antibody treatment trial is slated to begin by late April at several US centers.
Apart from these experimental treatments, Eli Lilly is also taking an active part in providing testing centers to frontliners in its home state Indiana.
In March, Eli Lilly launched drive-through testing centers for active healthcare workers. This initiative was in partnership with the Indiana State Department of Health and backed by the U.S. Food and Drug Administration.
Eli Lilly’s centers test for the SARS-CoV-2 virus, which is the type that caused COVID-19. This service is offered free of charge to frontliners.
Outside its COVID-19 efforts, Eli Lilly has been active in developing its pipeline.
The latest deal towards this end is with privately held company Sitryx, which focuses on creating drugs for cancer and inflammatory diseases.
The partnership involves a five-year collaboration culminating in the development of four drugs. Eli Lilly has already selected two lead projects from Sitryx’s pipeline to be the first drugs they’ll submit for licensing.
Founded in 2018, all projects in Sitryx’s pipeline are still in the preclinical phase. The company is also comprised of widely known immunology experts, with another biotech heavyweight GlaxoSmithKline (GSK) contributing to its technology.
According to the terms of the collaboration, Sitryx will handle drug discovery while Eli Lilly will fund the clinical development as well as the marketing efforts.
Sitryx will get $50 million from Eli Lilly upfront, with the Indianapolis biotech company making an additional $10 million equity investment.
Meanwhile, the smaller biotech is eligible to almost $820 million if the development milestones are reached. Sytrix is also entitled for royalties.
Amid the pandemic, Eli Lilly is riding the momentum of its previous quarters and is still aiming to deliver a promising growth this year.
Coming off a strong 2019 fourth quarter, the company saw an 8% year over year growth in its top line. The entire year’s sales also went up by a modest 4% from how much they earned in 2018.
As for earnings per share (EPS), the said quarter showed off an impressive 49% year over year jump to reach $1.64. Meanwhile, the entirety of 2019 recorded an EPS of $8.89 which is more than twice 2018’s $3.13 total.
For Eli Lilly’s 2020 performance, the company is anticipating more growth, especially after the completion of its $1.1 billion all-cash acquisition of Dermira.
This acquisition opens a plethora of opportunities for Eli Lilly, particularly in the dermatology medicines sector.
A prime example to illustrate potential growth is Dermira’s top-selling product Qbrexza, which is used to treat excessive underarm sweating. This bestselling item boosted Eli Lilly’s quarterly sales by 27%, increasing the revenue from $8.1 million to $10.2 million.
Even without the collaborations, Eli Lilly can stand on its own as a solid buy.
The company has shown a strong operating margin, staying over 20% in all the previous 10 quarters. Moreover, its free cash flow of $3.5 billion and consistent revenue generation platforms through the years, Eli Lilly is in a good position to take on more acquisitions down the road.
Basically, Eli Lilly is ideal for investors on the lookout for a biotech stock that you can buy and just forget.
Only a handful of sectors managed to escape the coronavirus pandemic unscathed as practically every stock suffered a 20% drop over the course of the past months. I believe there’s one group that merits our attention even in the midst of this pandemonium: the biotech sector.
I think biotech stocks will roar back soon enough, and buying shares of solid and well-managed biotech companies that pride themselves with promising product lineups and solid pipelines should be rewarded in the long run.
Among these biotech stocks, Eli Lilly is one of the best-positioned growth stories. Investors searching for a port in this coronavirus storm might want to take a good look at this biotech stock.
