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
Mad Hedge Technology Letter
February 28, 2020
Fiat Lux
Featured Trade:
(THE TRUE COST OF THE CORONAVIRUS)
(COMPQ), (PYPL), (MSFT), (AMZN), (GOOGL)
Global Market Comments
February 28, 2020
Fiat Lux
Featured Trade:
(FEBRUARY 26 BIWEEKLY STRATEGY WEBINAR Q&A),
(VIX), (VXX), (SPY), (TLT), (UAL), (DIS), (AAPL), (AMZN), (USO), (XLE), (KOL), (NVDA), (MU), (AMD), (QQQ), (MSFT), (INDU)
Tech shares are hoping to stage a rebound after the coronavirus-fueled rout that saw the Nasdaq’s 2-day drop by 6.38%, which is its worst since June 2016.
Readers can now pencil in a fresh readjustment to growth expectations of zero to low single digits in tech shares for fiscal year of 2020.
That is why Thursday morning was greeted by another 3% drop at the open - proceed with caution to not get trapped in the proverbial dead cat bounce vortex in the short-term.
A major tech consolidation could take place because let’s get real, the unpredictability is having a major impact on technology companies and uncertainty is a substantial input in heightened risk.
What are the realistic scenarios that are still left on the table?
Firms trading on the Nasdaq will slash price targets and profit estimates that could uncoil another leg down in the Nasdaq index.
In fact, it has already happened as PayPal (PYPL), Microsoft (MSFT), and Apple (AAPL) issued revenue warnings saying they do not expect to meet their revenue goals because of the coronavirus.
On an operational level, softness is what I see when delving into the semantics of Amazon (AMZN) whose ranking algorithm demotes product sellers who go out of stock.
The coronavirus has crippled supply chains, and to avoid a lack of stock, sellers are raising prices to slow sales, while planning to move production to other countries.
This is on top of the backbreaking supply problems that companies face because of the ill-effects of the trade war.
If the Amazon algorithm punishes the seller, once stock is replenished, they must overspend on advertising to climb back to the top of product searches.
The surveys I have taken out with Amazon sellers in the last few days show a precarious situation where sellers are stretched to the limit relying on numerous uncertain variables that are completely out of their control,
Even if the local government allows Chinese factories to restart, it will be understaffed while workers from other provinces self-quarantine.
The third-party marketplace accounts for more than half of Amazon’s retail sales with a robust base of manufacturers and sellers in China.
Google (GOOGL) and Microsoft are accelerating efforts to shift hardware production to Southeast Asia amid the worsening coronavirus outbreak, opening factories in Vietnam and Thailand as well.
Google is set to begin production of the Pixel 4A smartphone and also plans to manufacture its next-generation flagship smartphone called the Pixel 5 in Vietnam.
Google is also on the verge of building factories in Thailand for "smart home" related products, including voice-activated smart speakers like the Nest Mini.
Google and Microsoft’s plans are a giant shift away from their prior generation-long China manufacturing strategy and the coronavirus has only supported a strategy to remove China as a core manufacturing hub.
It is getting so bad in China that they are evaluating the feasibility and cost implications to uninstall some production equipment and ship it from China to Vietnam, literally packing up and taking their show on the road.
The have already initiated the process by asking a key sourcing contact to convert an old Nokia factory in the northern Vietnamese province of Bac Ninh to handle the production of Pixel phones.
Data center server production was also rerouted to Taiwan last year.
The coronavirus threat is only speeding up the move into South East Asia and Google and Microsoft hope to avoid the geopolitical risk in the region.
Remember that all of this rejigging of production will add costs and only the biggest can absorb mega hits to the balance sheets.
As for the coronavirus, business is becoming more complicated as the ban on Chinese nationals and flights from China could build barriers to business, and now South Korea has joined the list.
Korea’s Samsung Electronics, the world's largest smartphone maker, has operated a smartphone supply chain in northern Vietnam for years but still relies on some components made in China.
While there are many moving parts, the average investor needs to wait on optimal entry points.
Japan announced school shutdowns for a month and tech shares have only priced in the coronavirus eventually entering the U.S., but if there are mass shutdowns of American cities and schools, then tech shares will see another stinging sell-off.
The contagion could eventually lead to the Olympics in Tokyo being canceled, high-profile corporate management getting infected, and the Chinese economy being sidelined for most of 2020.
All of these events are highly negative to the global economy which is why potential risks have exploded through the roof in such a short time.
Slinging mud at the wall will not work in times like this, but this does have the makings of a once-in-a-year entry point into tech shares.
Below please find subscribers’ Q&A for the Mad Hedge Fund Trader February 26 Global Strategy Webinar broadcast from Silicon Valley, CA with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: There’s been a moderation of new coronavirus cases in China. Is this what the market needs to find a bottom?
A: Absolutely it is; of course, the next risk is that cases keep increasing overseas. The final bottom will come when overseas cases start to disappear, and that could be a month or two off.
Q: How low will interest rates go after the coronavirus?
A: Well, interest rates already hit new all-time lows before the virus became a stock market problem. The virus is just giving it a turbocharger. Our initial target of 1.32% for the ten-year US Treasury bond was surpassed yesterday, and we think it could eventually hit 1.00% this year.
Q: What is the best way to know when to buy the dip?
A: When the Volatility Index (VIX) starts to drop. If you can get the volatility index down to the mid-teens and stay there, then the market will stabilize and start to rise fairly sharply. A lot of the really high-quality stocks in the market, like United Airlines (UAL), Walt Disney (DIS), Apple (AAPL) and Amazon (AMZN), have really been crushed by this selloff. So those are the names people are going to look at for quality at a discount. That’s going to be your new investment theme, buying quality at a discount.
Q: Do recent events mean that Boeing (BA) is headed down to 200?
A: I wouldn't say $200, but $280 is certainly doable. And if you get to $280, then the $240/$250 call spread all of a sudden looks incredibly attractive.
Q: What does a Bernie Sanders presidency mean for the market?
A: Well, if he became president, we could be looking at like a 50-80% selloff—at least a repeat of the ‘09 crash. However, I doubt he will get elected, or if elected, he won’t have control of congress, so nothing substantial will get done.
Q: Is this the beginning of Chinese (FXI) bank failures that will cause an economic crisis in mainland China?
A: It could be, but the actual fact is that the Chinese government is doing everything they can to rescue troubled banks and companies of all types with short term emergency loans. It’s part of their QE emergency rescue package.
Q: Can you explain what lower energy prices mean for the global economy?
A: Well, if you’re an oil consumer (USO), it’s fantastic news because the price of gas is going down. If you’re an oil producer (XLE), like for people in the Middle East, Texas, Louisiana, Oklahoma, and North Dakota, it’s terrible news. And if you’re involved anywhere in the oil industry, or own energy stocks or MLPs, you’re looking at something like another great recession. I have been hugely negative on energy for years. I’ve seen telling people to sell short coal (KOL). It’s having a “going out of business” sale.
Q: Should I aggressively short Tesla (TSLA) here? Surely, they couldn’t go up anymore.
A: Actually, they could go up a lot more. I would just stay away from Tesla and watch in amazement—there’s no play here, long or short. It suffices to say that Tesla stock has generated the biggest short-selling losses in market history. I think we’re up to about $15 billion now in short losses. Much smarter people than us have lost fortunes trying in that game.
Q: Was that an Amazon trade or a Google trade?
A: I sent out both Amazon and an Apple trade alert this morning. You should have separate trade alerts for each one.
Q: Are chips a long term buy at today’s level?
A: Yes, but companies like NVIDIA (NVDA), Micron Technology (MU), and Advanced Micro Devices (AMD) may be better long-term buys if you wait a couple of weeks and we test the new lows that we’ve been talking about. Chips are the canary in the coal mine for the global economy, and we have not gotten an all-clear on the sector yet. If you’re really anxious to get into the sector, buy a half of a position here and another half 10% down, which might be later this week.
Q: When will Foxconn reopen, the big iPhone factory in China?
A: Probably in the next week or so. Workers are steadily moving back; some factories are saying they have anywhere from 60-80% of workers returning, so that’s positive news.
Q: Are bank stocks a sell because of lower interest rates?
A: Yes, absolutely. If you think the 10-year treasury is running to a 1.00% yield as I do, the banks will get absolutely slaughtered, and we hate the sector anyway on a long-term basis.
Q: What about future Fed rate cuts?
A: Futures markets are now pricing in possibly three more rate cuts this year after discounting no more rate cuts only a few weeks ago. So yes, we could get more interest rates. I think the government is going to pull all the stops out here to head off a corona-induced recession.
Q: Once your options expire, is it still affected by after-hours trading?
A: If you read the fine print on an options contract, they don’t actually expire until midnight on a Saturday night after options expiration day, even though the stock market stops trading on a Friday. I’ve never heard of a Saturday exercise, but you may have to get a batch of lawyers involved if you ever try that.
Q: What’s the worst-case scenario for this correction?
A: Everything goes down to their 200-day moving averages, including Indexes and individual stocks. You’re talking about Apple dropping to $243 and Microsoft (MSFT) to $144, and NASDAQ (QQQ) to 8,387. That could tale the Dow Average (INDU) to maybe 24,000, giving up all the 2019 gains.
Good Luck and Good Trading
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
“Don't chase a girl, let the girl chase you.” – Said Founder of Softbank Masayoshi Son
“The VIX right here is unsustainably low. I think China has more of a downside surprise. Analyst expectations for earnings are overly aggressive. There are just a few too many things that can go wrong out there,” said Vadim Zlotnikov, chief market strategist at Alliance Bernstein.
Mad Hedge Biotech & Healthcare Letter
February 27, 2020
Fiat Lux
Featured Trade:
(MINING GOLD IN NICHE DRUGS)
(BLUE)
In 2019, approximately 1.8 million Americans were diagnosed with cancer. On a global scale, the total reaches almost 17 million. Hence, it comes as no surprise that over 700 biotechnology and pharmaceutical companies have been investing hugely in experimental cancer drugs.
Meanwhile, rare disease beta-thalassemia affects the lives of at least 1,000 or so patients in the United States alone. In a nutshell, people with this blood disorder do not have enough oxygen in various parts of their bodies.
Although beta-thalassemia is more prevalent in other countries, this disease impacts one in every 100,000 people. Given these numbers, you’d expect that only one or two biotechnology companies would be interested in looking for treatments.
By my last count though, I found at least a dozen biotechnology companies scrambling to come up with a drug for this rare disease.
While there may be a lot of underlying reasons for this focus on beta-thalassemia, one reason is the most obvious to me: beta-thalassemia is a lifelong disease that requires regular treatment throughout the life of the patient.
Among the biotechnology companies working on this sector, one name has emerged as the leader of the pact: bluebird bio (BLUE).
After unexpectedly doubling the price tag for gene therapy Zynteglo from the anticipated $900,000 to $1.8 million in Europe, bluebird bio (BLUE) announced that its expensive beta-thalassemia treatment will be available in the US sometime in the second half of 2020.
This gene therapy is the second most expensive treatment worldwide, with Novartis’ (NOVN) Zolgensma ranking first with a jaw-dropping $2.1 million price tag.
Following Novartis’ lead, installment plans will be offered to Zynteglo users.
While the details have yet to be ironed out, this bluebird bio gene therapy is expected to be paid over a period of five years. Notably, the patients will only pay for the treatment if it actually works for them.
That is, bluebird will not bind patients to pay the full $1.8 million if Zynteglo fails to alleviate their condition. They can even get reimbursements depending on the situation.
If successful, bluebird bio points out that Zynteglo can dramatically cut down not only on the financial burden of the patients but also reduce their suffering from the transfusions and treatments.
Here’s how this gene therapy works.
The first step is to harvest stem cells from the patient’s body. Then, chemotherapy is required to prepare the recipient’s bone marrow for gene therapy.
A healthy copy of the beta-globin gene, which is a component of hemoglobin, is subsequently implanted into the bone marrow and the body will be able to normally produce red blood cells.
If the patient’s body responds well to Zynteglo, then this means living over four years without the need for any transfusion.
In contrast, traditional treatments for this rare blood disorder include regular blood transfusions. There are also drugs needed to get rid of the extra iron from the patient’s system. At times, the spleen is even surgically removed.
Taking all these into consideration, bluebird bio defended its shocking price tag by pointing out that Zynteglo’s “intrinsic” value is actually worth $2.1 million.
This was calculated based on the claim that this treatment can deliver 22 quality-adjusted life-years to its users.
In effect, patients get a 15% discount on the total cost.
While it remains to be seen how the FDA will handle bluebird bio’s application for Zynteglo, the fact that this gene therapy has received approval in the European market gives the company its much needed push to pursue more innovative products geared towards rare diseases.
Apart from beta-thalassemia, Zynteglo is also being tested for another rare blood disorder called sickle cell disease.
Throughout 2019, bluebird bio’s income solely came from the license and royalty revenues derived from its collaboration with Celgene, which has since been acquired by Bristol-Myers Squibb (BMY).
The two companies worked together on cancer cell therapies called ide-cel and bb21217. Analysts estimate that both drugs could achieve blockbuster sales potential in the multiple myeloma sector.
Adding to Zynteglo and the cancer therapies in its pipeline is another rare genetic disorder gene therapy called Lenti-D.
This specifically targets cerebral adrenoleukodystrophy, which is a deadly genetic brain disease that affects 1 in 17,000 males. Bluebird bio is expected to seek FDA approval for Lenti-D by the second half of 2020.
Bluebird bio currently has a market cap of roughly $5 billion, which I think provides it plenty of room to maneuver and grow.
Since the lifeblood of any biotechnology company is its pipeline, I can see how well-positioned bluebird bio is in this aspect.
At this point, it already has a couple of winners in its portfolio with Zynteglo, Lenti-D, and the multiple myeloma drugs with Celgene.
With these in mind, it’s easy to see that bluebird bio will transform into a huge winner over the next 10 years or even earlier.
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
