Global Market Comments
August 10, 2023
Fiat Lux
Featured Trades:
(WEDNESDAY, SEPTEMBER 6, 2023 SAN DIEGO, CALIFORNIA GLOBAL STRATEGY LUNCHEON)
(HOW TO GAIN AN ADVANTAGE WITH PARALLEL TRADING),
(GM), (F), (TM), (NSANY), (DDAIF), BMW (BMWYY), (VWAPY),
(PALL), (GS), (EZA), (CAT), (CMI), (KMTUY),
(KODK), (SLV), (AAPL)
CLICK HERE to download today's position sheet.
One of the most fascinating things I learned when I first joined the equity trading desk at Morgan Stanley during the early 1980s was how to parallel trade.
A customer order would come in to buy a million shares of General Motors (GM) and what did the in-house proprietary trading book do immediately?
It loaded the boat with the shares of Ford Motors (F).
When I asked about this tactic, I was taken away to a quiet corner of the office and read the riot act.
“This is how you legally front-run a customer,” I was told.
Buy (GM) in front of a customer order, and you will find yourself in Sing Sing shortly.
Ford (F), Toyota (TM), Nissan (NSANY), Daimler Benz (DDAIF), BMW (BMWYY), or Volkswagen (VWAPY), are no problem.
The logic here was very simple.
Perhaps the client completed an exhaustive piece of research concluding that (GM) earnings were about to rise.
Or maybe a client's old boy network picked up some valuable insider information.
(GM) doesn’t do business in isolation. It has tens of thousands of parts suppliers for a start. While whatever is good for (GM) is good for America, it is GREAT for the auto industry.
So through buying (F) on the back of a (GM) might not only match the (GM) share performance, it might even exceed it.
This is known as a Primary Parallel Trade.
This understanding led me on a lifelong quest to understand Cross Asset Class Correlations, which continue to this day.
Whenever you buy one thing, you buy another related thing as well, which might do considerably better.
I eventually made friends with a senior trader at Salomon Brothers while they were attempting to recruit me to run their Japanese desk.
I asked if this kind of legal front running happened on their desk.
“Absolutely,” he responded. But he then took Cross Asset Class Correlations to a whole new level for me.
Not only did Salomon’s buy (F) in that situation, they also bought palladium (PALL).
I was puzzled. Why palladium?
Because palladium is the principal metal used in catalytic converters, which remove toxic emissions from car exhaust, and has been required for every U.S. manufactured car since 1975.
Lots of car sales, which the (GM) buying implied, ALSO meant lots of palladium buying.
And here’s the sweetener.
Palladium trading is relatively illiquid.
So, if you catch a surge in the price of this white metal, you would earn a multiple of what you would make on your boring old parallel (F) trade.
This is known in the trade as a Secondary Parallel Trade.
A few months later, Morgan Stanley sent me to an investment conference to represent the firm.
I was having lunch with a trader at Goldman Sachs (GS) who would later become a famous hedge fund manager and asked him about the (GM)-(F)-(PALL) trade.
He said I would be an IDIOT not to take advantage of such correlations. Then he one-upped me.
You can do a Tertiary Parallel Trade here through buying mining equipment companies such as Caterpillar (CAT), Cummins (CMI), and Komatsu (KMTUY).
Since this guy was one of the smartest traders I ever ran into, I asked him if there was such a thing as a Quaternary Parallel Trade.
He answered “Abso******lutely,” as was his way.
But the first thing he always did when searching for Quaternary Parallel Trades would be to buy the country ETF for the world’s largest supplier of the commodity in question.
In the case of palladium, that would be South Africa (EZA), the world's largest non-sanctioned producer, which together accounts for 74% with Russia of the world’s total production.
Since then, I have discovered hundreds of what I can Parallel Trading Chains, and have been actively making money off of them. So have you, you just haven’t realized it yet.
I could go on and on.
If you ever become puzzled or confused about a trade alert I am sending out (Why on earth is he doing THAT?), there is often a parallel trade in play.
Do this for decades as I have and you learn that some parallel trades break down and die. The cross relationships no longer function.
The best example I can think of is the photography/silver connection. When the photography business was booming, silver prices rose smartly.
Digital photography wiped out this trade, and silver-based film development is still only used by a handful of professionals and hobbyists.
Oh, and Eastman Kodak (KODK) went bankrupt in 2012.
However, it seems that whenever one Parallel Trading Chain disappears, many more replace it.
You could build chains a mile long simply based on how well Apple (AAPL) is doing.
And guess what? There is a new parallel trade in silver developing. For whenever someone builds a solar panel anywhere in the world, they are using a small amount of silver for the wiring. Build several tens of millions of solar panels and that can add up to quite a lot of silver.
What goes around comes around.
Suffice it to say that parallel trading is an incredibly useful trading strategy.
Ignore it at your peril.
Sometimes Markets are Hard to Figure Out
Global Market Comments
July 21, 2023
Fiat Lux
Featured Trades:
(WHAT THE NEXT RECESSION WILL LOOK LIKE),
(FB), (AAPL), (NFLX), (GOOGL), (KSS), (VIX), (MS), (GS),
(TESTIMONIAL)
CLICK HERE to download today's position sheet.
The probability of a recession taking place over the next 12 months is now low ranging as high as 20%. If it reaccelerates, not an impossibility, you can take that up to 100%.
And here’s the scary part. Bear markets front-run recessions by 6-12 months, i.e. now.
We’ll get a better read on the inflation numbers over the coming months. If inflation turns hot again, the Fed will be forced to raise rates to once unimagined levels.
So, it’s time to start asking the question of what the next recession will look like. Are we in for another 2008-2009 meltdown, when friends and relatives lost homes, jobs, and their entire net worth? Or can we look forward to a mild pullback that only economists and data junkies like myself will notice?
I’ll paraphrase one of my favorite Russian authors, Fyodor Dostoevsky, who in Anna Karenina might have said, “All economic expansions are all alike, while recessions are all miserable in their own way.”
Let’s look at some major pillars of the economy. A hallmark of the 2008 recession was the near collapse of the financial system, where the ATMs were probably within a week of shutting down nationally. The government had to step in with the TARP, and mandatory 5% equity ownership in the country’s 20 largest banks.
Back then, banks were leveraged 40:1 in the case of Morgan Stanley (MS) and Goldman Sachs (GS), while Lehman Brothers and Bear Stearns were leveraged 100:1. In that case the most heavily borrowed companies only needed markets to move 1% against them to wipe out their entire capital. That is exactly what happened. (MS) and (GS) came within a hair’s breadth of going the same way.
Thanks to the Dodd Frank financial regulation bill, banks cannot leverage themselves more than 10:1. They have spent a decade rebuilding balance sheets and reserves. They are now among the healthiest in the world, having become low-margin, very low-risk utilities. It is now European and Chinese banks that are going down the tubes.
How about real estate, another major cause of angst in the last recession? The market couldn’t be any more different today. There is a structural shortage of housing, especially at entry level affordable prices. While liar loans and house flipping are starting to make a comeback, they are nowhere near as prevalent as a decade ago. And the mis-rating of mortgage-backed securities from single “C” to triple “A” is now a distant memory. (I still can’t believe no one ever went to jail for that!).
And interest rates? We went into the last recession with a 6% overnight rate and a 7% 30-year fixed rate mortgage. Here we are once again.
The auto industry has been in a mild recession for the past two years, with annual production stalling at 15 million units, versus a 2009 low of 9 million units. In any, case the challenges to the industry are now more structural than cyclical, with new buyers decamping en masse to electric vehicles made on the west coast.
Of far greater concern are industries that are already in recession now. Energy has been flagging since oil prices peaked 18 months ago, despite massive tax subsidies. It is suffering from a structural oversupply and falling demand.
Retailers have been in a Great Depression for five years, squeezed on one side by Amazon and the other by China. A decade into store closings and the US is STILL over-stored. However, many of these shares are already so close to zero that the marginal impact on the major indexes will be small.
Financials and legacy banks are also facing a double squeeze from Fintech innovation and collapsing interest rates. All of those expensive national networks with branches on every street corner will be gone later in the 2020s.
And no matter how bad the coming recession gets technology, now 30% of the S&P 500, will keep powering on. Combined revenues of the “Magnificent Seven” in Q1 are at records. That leaves a mighty big cushion for any slowdown. That’s a lot more than the “eyeballs” and market shares they possessed a decade ago.
So, netting all this out, how bad will the next recession be? Not bad at all. I’m looking at a couple of quarters' small negative numbers, like two back-to-back -0.1%’s. Then we’ll see a recovery and probably another decade of decent US growth.
The stock market, however, is another kettle of fish. While the economy may slow from a 2.2% annual rate to -0.1% or -0.2%, the major indexes could fall much more than that, say 30% to 40%.
Earnings multiples are still at a 19X high compared to a 9X low in 2009. Shares would have to drop 53% just to match the last low. Equity weightings in portfolios are low. Money is pouring out of stock funds into bond ones.
Corporations buying back their own shares have been the principal prop from the market for the past three years. Some large companies, like Kohls (KSS), have retired as much as 50% of their outstanding equity in ten years.
Is it worth it to invest in the “next Tesla” or is it way too optimistic there could even be a next Tesla?
This upstart challenger to Tesla, Lucid (LCID) is more or less what I thought about Tesla a few years ago – buy the car and not the stock.
Like many businesses in the world – it comes down to time and place.
Tesla benefited from generous federal subsidies, first mover advantage and LCID is just a little late to the action.
Why does that matter?
Tesla had its knife and fork at the table by itself when nobody else wanted to join them.
The problem with legacy automakers is that it took them too long to realize that EVs were a tsunami instead of a splash in a pond.
I know with conviction that EV makers like LCID are slogging through because of the numbers that materialize in their earnings reports.
The numbers are a manifestation of the time and place phenomenon that I just mentioned.
LCID continues to face major cash flow issues and will be lucky to exist in a few years.
A high burn rate is a hallmark of smaller EV companies and even Tesla had to be saved at the last second it its early days.
LCID simply doesn’t have the expertise and economies of scale to bring down the unit economics where it delivers a profit.
This achievement is also pushed out far into the future.
We are also seeing a widening gap in its production and deliveries, with approximately 4.76K units undelivered, with a growing inventory value of $1.01B.
LCID's resale value appears to be drastically impacted, with one recently auctioned for $85K, compared to the base model of $110,000.
The intense capital burn has forced LCID management to issue more common stock which dilutes current shareholders and suppresses the stock price.
While LCID may have won the battery competition through its longest driving range and market-leading design, the management's choice to go premium has clearly undermined the mass market.
This is a segment that fellow automakers such as Tesla (TSLA) and BYD (OTCPK:BYDDF) have invested great efforts while improving their supply chain and pricing strategies.
This alone suggests LCID's highly niche market segment based on the hefty price tag of $150K per unit, compared to TSLA at $40K and BYD between $20K to $30K (in China), effectively will stoke higher cash burn levels.
For now, LCID has not achieved break-even, selling every EV at a loss.
This signals weak consumer demand for LCID.
This automaker's expanded annualized production capacity of up to 90K vehicles in the AMP-1 facility and up to 155K in the Saudi Arabia facility.
Production is still miles behind Tesla at a time when supply chains and material costs are squeezing EV makers even more.
When we consider that the stock was trading at $20 per share just 1 year ago, the stock languishing at $7.50 today represents quite a pitiful performance.
I do acknowledge they make quite a nice EV.
However, it’s still highly debatable whether its business model is sustainable.
I do believe that around $4 per share is a good entry point for this EV maker.
Any pop from $4 should be sold.
There is no reason to overpay for LCID right now in a market that values accelerating and positive free cash flow.
Better the stock come to you than to go fishing for it.
Mad Hedge Technology Letter
July 14, 2023
Fiat Lux
Featured Trade:
(BAD TECH EARNINGS ARE PRICED IN)
(AAPL), (TSLA), (AMZN), (FB)
There are many so-called “experts” and “economists” dumping on the upcoming tech earnings season.
I got it – they won’t be the best ever.
No need to beat a dead horse when it’s down.
They say that the optimism of a soft landing for the economy is dissipating as stubbornly high inflation keeps central banks hawkish.
It’s hard to believe that tech stocks have been on a tear in 2023 during a period of hawkishness.
Higher for longer luckily has not affected tech stocks yet, yet many are saying this earnings season could be the straw that breaks the camel’s back.
I must admit, at the intro level such as venture capitalism and start-ups, the rate environment has been nothing short of catastrophic.
Investors aren't giving money for just ideas anymore.
The good news is that at the incubator level, nobody cares because these paltry numbers don’t move the stock market and are decades away from going public.
It doesn’t matter to the tech market that the next Amazon or Facebook has a tough time borrowing with these sky-high rates.
Nobody cares because most people hold Apple and Tesla stock.
I am also willing to call B.S. on the negativity for the upcoming tech earnings season and will say it should be just fine.
I am not diminishing the belt-tightening going on inside the offices, it certainly is happening.
Tech companies are hunkering down, which is true because the low-lying fruit has been plucked off the branch.
42% of respondents from a recent survey said the biggest negative for the earnings season will be the impact of further tightening of financial conditions.
I would say that if that is the biggest risk out there to respondents, then tech shares will certainly end the year higher from today.
There’s also a widespread belief that earnings per share (EPS) will fall off a cliff and then rebound to growth in the final three months of the year, according to data by Bloomberg Intelligence.
This seems like the perfect setup for tech executives to lower the bar.
While the tech rally was boosted by the hype around artificial intelligence, over 70% of survey participants say the impact of AI on tech earnings is overblown.
Amid the gloom, the biggest positive drivers for equities will be any signs of easing inflation and cost cutting, according to the majority of those surveyed.
Ultimately, it has already been baked into the pie that margins will come under pressure as companies lose the ability to keep raising prices when inflation cools and as growth slows.
That doesn’t mean there will be anything more than a technical and orderly pullback which I have been championing for.
A result like that would be healthy for tech stocks.
Tech shares simply cannot go up in a straight line forever, but they keep defying gravity in the first 7 months of the year.
Even if the big 7 tech stocks signal some downshifting revenue trajectories, it won’t be more than a few days' drop in shares signifying a marvelous opportunity to finally get into some of these premium names that rarely offer optimal entry points.
Expect nothing special from this earnings season and buy any garden variety dip from premium tech stocks.
Global Market Comments
July 12, 2023
Fiat Lux
Featured Trades:
(WHAT THE NEXT RECESSION WILL LOOK LIKE),
(FB), (AAPL), (NFLX), (GOOGL), (KSS), (VIX), (MS), (GS),
(TESTIMONIAL)
CLICK HERE to download today's position sheet.
Mad Hedge Biotech and Healthcare Letter
July 11, 2023
Fiat Lux
Featured Trade:
(A CALCULATED GAMBLE)
(PFE), (CRBU), (AAPL), (NTLA), (CRSP)
There has been a lot of chin-wagging about whether we're on a collision course with a recession or on the upswing. I get it. It's as confusing as figuring out why Warren Buffet didn't invest in Apple (AAPL) sooner.
Still, there are stocks that, recession or not, will let you sleep like a baby. In the biotechnology and healthcare sector, Pfizer (PFE) stands out as one of those stocks. In bear markets, it fares well because, well, let's face it, health trumps wealth every time.
Now, you might look at Pfizer's recent earnings and think it's taken a bit of a tumble. No growth in revenue or EPS in the first quarter of 2023? That’s definitely worrisome. But hold your horses. Let's peel back the layers a bit to see the full picture.
Pfizer has been raking in the dough from its COVID-19 potions, especially its vaccine Comirnaty and therapy Paxlovid. With the COVID gold rush subsiding, the company reported a 29% dip in revenue in Q1, clocking in at $18.3 billion.
Remember, context is key. Strip out the COVID-19 products, and revenue has actually nudged up 5% YoY.
It’s the same story with the company's forecast.
Revenues are predicted to be between $67 billion and $71 billion, a drop of 29% to 33%. But subtract the COVID dollars and cents, and Pfizer's set to grow between 7% to 9%.
What's Pfizer doing with its COVID-19 windfall? It's not buying beachfront properties, that's for sure.
Instead, it has a staggering 101 programs in the pipeline, including 38 in phase 3 trials. This year, the company also had four new approvals, from new uses for Paxlovid and Prevnar 20 to a vaccine for older folks and a nasal spray for migraines.
But the market's jittery about the predicted revenue drop, causing the stock to tumble 21% this year. That just makes it a bargain.
Pfizer's trading at less than 8 times earnings makes it the frugal shopper's dream.
To sweeten the pot, Pfizer's upped its quarterly dividend by 2.5% to $0.41 a pop. That gives a yield of about 4%, twice the average of the S&P 500. More impressively, it's been doing this for 14 consecutive years.
However, Pfizer's not resting on its laurels.
Its latest move? A 7% stake in Caribou Biosciences (CRBU), a firm that's pushing the boundaries of gene-editing tech and cell therapies for cancer. It's like investing in a tech startup but with a biological twist.
Caribou's stock has taken a wild ride since it went public in 2021, peaking at over $30 and dipping to a recent low of $4. After Pfizer's buy-in, it jumped 46% to $5.94. A small stake of $25 million, but it's a clear sign that gene editing is back in the spotlight.
Moreover, Caribou's no one-trick pony.
It's testing treatments based on the Nobel Prize-winning CRISPR technology. This precision tool allows doctors to zero in on problematic DNA and tweak it. The potential for treatments for cancer and genetic disorders is mind-boggling.
Caribou currently has a pair of potential game-changers simmering in the preliminary stages.
First up is their experimental treatment, CB-010, aiming a direct hit at blood cancer lymphoma. This therapy manipulates immune cells to lock onto the cancer.
Picture them as bounty hunters of the body, genetically tweaked to bring down the cancerous bad guys.
To date, we've got a trio of these CAR-T therapies courtesy of other pharmaceutical giants in the game, but they all work on modifying the patient's immune cells. Unfortunately, not every patient’s cells are ripe for the CAR-T transformation.
This is where Caribou switches things up.
The biotech’s CAR-T therapy is akin to a supermarket for immune cells – off-the-shelf and ready for action. Through some nifty gene editing, immune cells from healthy volunteers are modified and packed for delivery.
In theory, these should pack more punch. And it seems they do, judging by Caribou's initial guinea pigs – six lymphoma patients who saw their cancer vanish without a trace after a rendezvous with Caribou's CAR-T.
Obviously, they’re not promising an everlasting disappearance, but a couple of these folks kept their cancer at bay for at least a year.
While Caribou isn't alone in the off-the-shelf CAR-T quest, they've put up a stellar performance so far against the likes of Intellia Therapeutics (NTLA) and CRISPR Therapeutics (CRSP).
Caribou’s pipeline also features another off-the-shelf CAR-T contender battling the blood disorder known as multiple myeloma. This therapy, dubbed CB-011, is what specifically caught Pfizer's eye. Basically, Pfizer’s investment has earned it the right to haggle for a license if another suitor comes courting for Caribou's star player.
But Caribou's act doesn't end here.
It has a growing ensemble featuring CB-012, a CAR-T cell therapy focused on recurrent or stubborn acute myeloid leukemia, and CB-020, another CAR-T variant for various stubborn tumors.
Pre-Pfizer deal, Caribou boasted a cash reservoir of $291 million, promising smooth sailing until around 2025.
Caribou promises an action-packed second half of 2023, with an update on CB-010's phase 1 trial safety and efficacy, a dose-escalation report for CB-011's phase 1 trial, and a new drug application for CB-012 targeting relapsed/refractory acute myeloid myeloma.
As with all biotechs in the clinical stage, though, it's a bit of a gamble. With some key milestones expected later this year, investors are watching with bated breath to see if the company can deliver.
If the dice roll the right way, Caribou could be a jackpot for Pfizer – and for savvy investors.
So if you're looking for a stock that has the potential to thrive despite market uncertainties, with a dash of excitement and a sprinkle of future possibilities, Pfizer could be your ticket.
Not only is it a reliable dividend payer, but its recent ventures show it's also not afraid to swing for the fences.
