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June 21 Biweekly Strategy Webinar Q&A

Below please find subscribers’ Q&A for the June 21 Mad Hedge Fund Trader Global Strategy Webinar, broadcast from Lake Tahoe, NV.

Q: When do we buy Nvidia (NVDA) and Tesla (TSLA)?

A: On at least a 20% dip. We have had ballistic moves—some of the sharpest up moves in the history of the stock market for large stocks—and certainly the greatest creation of market caps since the market was invented under the Buttonwood Tree in 1792 at 68 Wall Street. Tesla’s almost at a triple now. Tripling one of the world's largest companies in 6 months? You have to live as long as me to see that.

Q: Is it a good time to invest in Bitcoin?

A: No, absolutely not. You only want to invest in Bitcoin when we have an excess of cash and a shortage of assets. Right now, we have the opposite, a shortage of cash and an excess of assets, and that will probably continue for several years.

Q: Should I short Apple (APPL)?

A: Only if you’re a day trader. It’s hugely overbought for the short term, but still in a multiyear long-term uptrend. I think we could see Apple at $300 in the next one or two years.

Q: Is it better to focus on single stocks or ETFs?

A: Single stocks always, because a single stock will outperform a basket that's in an ETF by 2 to 1 or even 3 to 1. That's always the case; whenever you add stocks to a basket, it diversifies risk and dilutes the performance. Better to just own Tesla, and if you want to diversify, diversify to Nvidia, but then I live next door to these two companies. That's what I tell my friends. You only diversify if you don’t know what is going to happen, which is most investors and financial advisors.

Q: Is the bottom of the housing market in, and are we due for a spike in home prices when interest rates can only go lower?

A: Yes, absolutely. In fact, we will enter a new 10-year bull leg for housing because we have a structural shortage of 10 million homes and 82 million millennials desperately trying to buy them at any price. I just got a call from my broker and she is panicking because she is running out of inventory. Even the lemons are starting to move.

Q: When do you think energy will rise?

A: Falling interest rates could be a good key because it sets the whole global economy on fire and increases energy demand.

Q: Outlook for the S&P 500 (SPY) second half of the year?

A: We hit 4,800 at least, maybe even higher. That's about a little more than 10% from here, so it’s not that much of a stretch, not like it was at the beginning of the year when it needed to rise 25% to reach my yearend target.

Q: Best time to invest from here on?

A: Either a 10% pullback in the market, or a sideways move of 3 months—that's called a time correction. It usually counts as a price correction because of course, over 3 months, earnings go up a lot, especially in tech.

Q: I’m seeing grains (WEAT) in rally mode.

A: Yes, that's true. They are commodities, and just like copper’s been rallying, and it’s yet another signal that we may get a much broader global commodity rally in everything: iron ore, coal, energy, gold, silver, you name it.

Q: Will inflation drop to 2%, causing stocks to go on another epic run?

A: The answer is yes, I do see inflation dropping to 2% —maybe not this year, but next year; not because of any action the Fed is doing, but because technology is hyper-accelerating, and technology is highly deflationary. The tech product you bought two years ago is now half the price, and they offer you twice as much functionality with an auto-renew for life. So, that is happening across the entire technology front and feeds into the inflation numbers big time, including labor. There's going to be a lot of labor replacement by machines and AI in the coming years.

Q: Is Airbnb (ABNB) a good stock to buy?

A: Well, if we’re going into the most perfect travel storm of all time, which is this summer, and which is why I’m going to remote places only like Cortina, Italy. Airbnb is the perfect stock to own. It’s a well-run company even in normal times.

Q: Should I buy gold here on the pullback?

A: Yes, you should. Gold is also highly sensitive to any decline in interest rates, and by the way: buy silver, it always moves 2.5x as much as the barbarous relic.

Q: How can inflation not go up if commodities and wage demands are going up due to state and federal unions? What about farm equipment and truck supplies? Costs keep rising, should we buy John Deere (DE)?

A: There are three questions here. Inflation will not go up because, though commodities will rise, they are only 0.6% of the $100 trillion global economy, or $660 billion in 2022. That will be more than offset by technology cutting prices, which is 30% of the stock market. You have to realize how important each individual element is in the global picture. And regarding wage demands going up caused by state and federal unions, less than 11.3% of the workforce is now unionized and that figure has been declining for 40 years. Most growth in the economy has been in non-unionized technology firms which largely depend on temporary workers, by design. What IS unionized is mostly teachers, the lowest paid workers in the economy, so incremental pay rises will be small. Unions were absolutely slaughtered when 25 million jobs were offshored to China during the Bush administration. Buy farm equipment and trucks? Absolutely, buy John Deere (DE) and buy Caterpillar (CAT) on the next dip. I was actually looking at Caterpillar for the next LEAPS the other day, but it’s already had a big run; I'm going to wait for a pullback before I get CAT and John Deere. So, again, people see headlines, see union wage headlines—I say focus on the 89% and not on the 11% if you want to make good decisions.

Q: Is Boeing (BA) a buy on the dip?

A: Yes, they got 1,000 new aircraft orders and the stock hasn't moved. So yes, if you get any kind of selloff down to $200, I'd be hoovering this thing up.

Q: Can you please explain how the profit predictor works?

A: It’s a long story; just go to our website, log in and do a search for “profit predictor,” and you’ll get a full explanation of how it works. It’s actually where Mad Hedge has been using artificial intelligence for 11 years, which is why our performance has doubled. Just for fun, I'll run the piece next week.

Q: Gold (GLD) is having a hard time going up because Russia is being squeezed by other governments. Since they need cash, they may be either selling their gold or stop buying new gold.

A: That is a good point, but at the end of the day, interest rates are the number one driver of all precious metals—period, end of story. We’re long gold too, I’ve got lots of gold coins stashed around the world in various safe deposit boxes, and I'm keeping them. I’ve got even more silver coins, which take up a lot of space.

Q: Do you like India (INDA) long term?

A: Yes, it’s the next China. But as Apple is finding out it is very difficult to get anything done there. A radical reforming Prime Minster Modi may be changing things there with his recent Biden visit and (GE) contract to build jet engines.

Q: What do you think of General Dynamics Corp (GD)?

A: I like General Dynamics because I think defense spending is in a permanent long term upcycle as a result of the Ukraine war. And it won’t end with the Ukraine war—the threat will always be out there, and the buying is done by not only us but all the other countries that think Russia is a threat.

Q: Do you like MP Materials Corp (MP)?

A: Yes, I do. The whole commodities space is ready to take off and go on fire.

Q: What about Square (SQ)?

A: The only reason I’m not recommending Square right now is huge competition in the entire sector, where all the stocks including PayPal (PYPL) are getting crushed. I will pass on Square for now, especially when I can buy US Steel (X) at close to its low for the year.

Q: If you had to pick one: Nvidia (NVDA), Tesla (TSLA), Microsoft (MSFT), Meta (META), and Google (GOOGL), which is the best to buy for next year?

A: All of them. Diversify. If I have to pick the top performer, it’s going to be either Tesla or Nvidia, probably Nvidia. But you need at least a 10% correction before you do anything. Actually, the split-adjusted price for our first (NVDA) recommendation eight years ago was $2 a share.

Q: Do you like Crown Castle International (CCI)?

A: Yes, I like it very much—it has very high dividend yield at 5.5%. The reason it hasn’t moved yet is that as long as interest rates are high, any REIT structure will suffer, and (CCI) has a REIT structure. Sure, it’s in a great sector—5G cell towers—but it is still a REIT nonetheless, and those will start to recover when interest rates go down; that’s why we did a 2.5-year LEAPS on CCI. For sure interest rates are going to go down in the next 2.5 years, and you will double your money on (CCI). That’s why we put it out.

Q: Which mid cap will do best over the long term: Airbnb (ABNB), Snowflake (SNOW), or Palantir (PLTR)?

A: That’s easy: Snowflake. They have such an overwhelming technology on the database and security front; I would be buying Snowflake all day long. Even Warren Buffet owns Snowflake, so that’s good enough for me.

Q: Could you comment on the pace of EV adoption/potential for (TSLA) robot fleet acceleration and implications for oil investments in holding pattern till the eventual collapse to near 0?

A: Yes, oil may collapse to near zero, but it may take twenty years to do it—that’s how long it takes to transition an energy source. That’s how long it took the move from horses and hay to gasoline-powered cars at the beginning of the 20th century. A national robot fleet of taxis with no drivers at all is a couple of years off. There are about 1,000 of them working in San Francisco right now, but they still have more work to do on the software. When it gets foggy, they often congregate at intersections causing traffic jams. Suffice it to say that eventually Tesla shares go to $1,000 and after that, $10,000—that’s my bet. By the way, my Tesla January 2025 $595-$600 LEAPS are starting to look pretty good.

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 or TECHNOLOGY LETTER, 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 in Australia

June 20, 2023

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
June 20, 2023
Fiat Lux

Featured Trade:

(THE RISE OF THE TRILLION-DOLLAR PHARMA)
(LLY), (NVO), (AAPL), (MSFT)

The Rise of the Trillion Dollar Pharma

Biotech Letter

It's hardly a surprise when we think of titans like Apple (AAPL) and Microsoft (MSFT) topping the trillion-dollar club. After all, these tech leviathans have their tendrils in the lives of billions worldwide.

But guess what? This playground isn't just for tech heavyweights.

There's another contender in the ring, flexing its muscles from the biotechnology and healthcare sector: Eli Lilly (LLY).

Even as I write, I can almost hear the gears of potential turning. Eli Lilly could soon be donning the badge of the biopharma representative in the trillion-dollar league. What's more, this could happen sooner than you might think—say, before we're toasting to 2030.

Today, Eli Lilly stands proud with a market cap hovering over $410 billion, rubbing shoulders with the crème de la crème of the pharmaceutical world.

To reach the coveted trillion by 2030, it needs to rev up its growth engine by almost 166% in the next six or so years.

Given that its market cap ballooned by 178% since May 2020, we're not betting against the odds here.

Let's dissect this potential behemoth and scrutinize its growth prospects, valuation, and their likely dance over time.

With a trailing 12-month net income of $6.2 billion and a price-to-earnings ratio lingering around 69, Eli Lilly isn't exactly shy.

This valuation is higher than the industry standard but not bloated like some tech stocks.

Credit its remarkable net income growth of around 14% per annum over the last decade to persistent R&D investment, the frequent launch of new sought-after medicines, and strategic label expansions for its already-approved drugs.

Now, the market is giddy with anticipation, pricing in growth that surpasses its own impressive average. This is likely due to Eli Lilly's ambitious ventures into thriving markets with treatments for conditions like diabetes, obesity, and chronic kidney disease.

If Eli Lilly maintains its current PE ratio and boosts its earnings by a mere 13.5% each year between now and 2030, it will rake in a net income of about $15.1 billion, nudging its market cap just above $1 trillion.

A lofty goal? Perhaps, but Eli Lilly isn't one to back away from a challenge.

The question hanging in the air like an eager balloon is whether the company can maintain this steady pace.

Analysts are optimistic, predicting an EPS of $8.76 in 2023 and around $16 in 2025. This promising growth is tied to the launch of new medicines from its four programs awaiting approval decisions and a Phase 3 roster filled with 21 promising programs.

Meanwhile, Eli Lilly is acing its game in another affluent market: obesity treatments.

The company has long been a trailblazer in diabetes and obesity drugs, and its recent approval of Mounjaro, a revolutionary treatment for Type 2 diabetes, adds another feather to its cap.

Mounjaro has made waves, garnering $568.5 million in sales in the first quarter, and is predicted to hit peak annual revenue of $25 billion.

Obesity, a global health concern responsible for at least 2.8 million deaths yearly, opens up another massive market for Eli Lilly.

Branded anti-obesity drugs could hit $44 billion in risk-adjusted sales by 2030, up from a modest $2.5 billion in 2022.

As it stands, Eli Lilly's primary contender in this arena is Novo Nordisk (NVO).

So, can Eli Lilly flex its muscles and reach a market cap of $1 trillion by 2030? Signs point to a resounding yes.

With a steady stream of treatments on the horizon and a projected growth trajectory through the end of the decade, it seems to be business as usual for Eli Lilly.

However, like a precarious game of Jenga, the entire venture hinges on its valuation. As long as investors see sunny days ahead, all's well. But maintaining a P/E ratio of around 70 isn't a walk in the park. A dip in performance or a market crash could bring the whole structure down.

That being said, don't let these concerns hold you back from joining Eli Lilly's growth ride. Come 2030, you'll probably be smiling at your investment, whether or not Eli Lilly cracks that 13-digit milestone.

June 9, 2023

Diary, Newsletter, Summary

Global Market Comments
June 9, 2023
Fiat Lux

Featured Trades:

(JUNE 7 BIWEEKLY STRATEGY WEBINAR Q&A),
($VIX), (TSLA), (TLT), (FCX), (RUT), (COIN), (AAPL),
(ROM), (AMZN), (PYPL), (NVDA), (COPX), (FXI)

CLICK HERE to download today's position sheet.

June 7 Biweekly Strategy Webinar Q&A

Diary, Newsletter, Summary

Below please find subscribers’ Q&A for the June 7 Mad Hedge Fund Trader Global Strategy Webinar, broadcast from Lake Tahoe, NV.

Q: Do you ever trade the CBOE Volatility Index ($VIX)?

A: No, I used to, but I got hit a few times. That’s because 95% of the year is spent seeing the ($VIX) go down, and then the other 5% basically doubles overnight. It’s a short play only. With a long ($VIX), the time decay is enormous, and it’s just not worth owning. The only way to make money in ($VIX) is to buy it right before a giant VIX spike. And the floor traders in Chicago have a huge inside advantage in that market. So, I finally gave up and decided there's better things to do.

Q: Buy the price dip for Tesla (TSLA)?

A: I’d have to look at the charts, but if it gets back down to $200, I would start hoovering it up again. The fundamentals are really arriving for Tesla big time, as is the long-term bull case.

Q: With the debt crisis over, how low will the iShares 20 Plus Year Treasury Bond ETF (TLT) go in the short term?

A: Well, we know they have to issue a trillion dollars of 90-day T-bills in the next few weeks. The debt ceiling crisis stopped Treasury bill issuance for several months and now they have a lot of catch-up to do. So, best case scenario, the (TLT) drops to $95, then you load the boat for the rest of your life in (TLT) LEAPS, like a $95-$100 2024 LEAPS. And that should double about every year.

Q: Are you concerned about commodities given the weakness in the Chinese economy?

A: Yes, it’s definitely slowing the commodities recovery, but is also giving you a fantastic opportunity to get into things like Freeport McMoRan (FCX) at a cheaper price, where it was just a couple of weeks ago. All of the commodities look like they’re bottoming now, it’s time to buy them.

Q: It seems like you really love the Russell 2000 (RUT).

A: I hate the Russell. You only want to own big money stocks because that's where the big money goes first. Big money doesn’t go into the Russell, and as long as there's any doubt of a recession coming, they’ll perform poorly.

Q: Coinbase (COIN) is getting sued by the SEC, should I buy on the dip?

A: No, the whole crypto infrastructure is getting sued out of existence and disappearing. They went after Binance also. It seems like the SEC just doesn’t like crypto very much. That kind of shrinks the whole industry back down to hot wallets, where you slowly have direct control of your bitcoin on the network and you don't use any outside brokers to buy and sell it because there may not be any left shortly.

Q: Should we still hold the Apple (AAPL) bull call spread?

A: Yes, I think we have enough room on our call spread in the next 7 trading days to take max profit. However, if you have any doubts, no one ever gets fired for taking a profit.

Q: Is the ProShares Ultra Technology ETF (ROM) a buy at this time?

A: No, if anything, ROM is a sell. It almost had a near-double move. So no, wait for a 20% or 30% correction this summer in ROM and then go in. It has actually led most tech because it's a 2X long ETF. Sometimes I just want to shoot myself. You buy before stocks double, not afterwards.

Q: What will trigger a correction this summer?

A: The risk of a further rise in interest rates, which we may get. Other than that, the market is running out of negatives.

Q: What is the risk of US currency not being the world reserve?

A: Zero. I have been asked this question every day for the last 50 years and so far, I have been right. What would you rather keep your savings in Chinese Yuan, Russian rubles, or Euros? I would say none of those. And US currency will remain the reserve currency for this century, easily, until a digital US dollar comes out.

Q: Do you want to buy the cellphone companies?

A: No, not really. They weren’t very interesting before—it's a low margin, highly competitive cutthroat business—and now you have one of the world's largest companies, Amazon (AMZN), potentially offering phones for free? I think I'll pass on that one.

Q: Do you have any interest in pairs trading?

A: No, they blow up too often.

Q: Did you say you sent out a one-year LEAPS on Freeport McMoRan (FCX), the $35-$38?

A: Yes, if you didn’t get it, email customer support.

Q: Are investing in 90-day Treasury bills until the next one or two Fed meetings are over a good idea?

A: Yes, that is a good idea. Cash has a high-value night now. Remember, a dollar at a market top is worth $10 at a market bottom, and we now have a rare opportunity to get paid 5.2% or 5.3% while we wait. That hasn’t happened in almost 20 years.

Q: Will the new Apple VR headset be a boon to the stock price?

A: Yes, adding 10% to your earnings is always good, but it won’t happen immediately. You need a few thousand third-party app developers to come through with services before the earnings really get going. That's what happened with iTunes when the iPhone came out. Growth was slow when Apple only allowed its in-house apps to be sold—when they opened to the public, the business went up 100 times. That's maybe what will happen with the virtual headset.

Q: PayPal (PYPL) has dropped a lot, should I buy it here?

A: No, cutthroat competition in the sector is destroying the share price. There are too many other better things to buy.

Q: Why do so many professional analysts say the market will go down this year, but it goes up every day?

A: Professional analysts are just that—they're analysts, not traders. And often these days, to save money, your professional analyst is 26 years old, so they don’t have much market experience. I like to think that 50 years of trading experience backed with algorithms helps.

Q: Do you think oil could hit $100 a barrel next year?

A: Yes, definitely. Especially if we get a decent economic recovery and Saudi Arabia doesn’t immediately bring back 3 million barrels a day that they’ve cut.

Q: Should I chase NVIDIA (NVDA) here?

A: No, better to own cash here than Nvidia. Buy Nvidia on the next dip, or another Nvidia wannabe company, which will almost certainly arrive shortly.

Q: When will we get peace in Ukraine?

A: Within a year, I would say. Russia has literally run out of ammunition, and Ukraine is getting more. Ukraine is also getting F16s, our older fighter planes, and many other advanced weapons and parts—those are a big help. They can beat anything the Russians throw up.

Q: Is Global X Copper Miners ETF (COPX) a good copper play?

A: Yes it is, but you don’t get the leverage that you do with an FCX LEAP. I don’t know how far the top will go, but that would be a great trade one to two years out.

Q: Can you explain why there is a short squeeze in copper?

A: There are 200 pounds of copper needed for each EV, and EV production is exploding both here and in China. Tesla is expected to make 2 million EVs this year, especially with the $33,000 price point. China manufactures this many EVs as well. Four million EVS and 200 pounds of copper per EV equals the entire annual production of copper right now. At some point, people will notice that and they’ll take copper as much as they took lithium up last year.

Q: What do you mean when you say LEAPS one or two years?

A: It really depends on your risk. When you buy a two-year LEAPS, you usually get the extra year for free or almost nothing, and if you get a rapid increase in the underlying share price, the two-year LEAP will go up almost as much as the one year. So for most people who don’t want to watch the market every day, the two-year LEAPS is probably a better choice.

Q: Why did you buy only one LEAPS contracts?

A: All of my LEAPS recommendations are only for one contract. It is up to you to decide what your risk tolerance and experience level is, whether you buy 1, 100, or 1,000 contracts, so I leave the size up to you because it can vary tremendously depending on the person. Also, one contract makes the math really easy for people to understand.

Q: At what point do you sell your LEAPS?

A: Well, if you get a rapid 500% profit, which happened with many of the LEAPS that we did in October as well as the ones we did in March, I would take it. However, the goal on these is to go for the 10 baggers, or the 100% return in a year, and you usually need to hold it for the full year to get that. But, if the stock takes off like a rocket, I would take the profit. How many times in your life do you get a 500% profit in a month or two? I would say none. So, when you get that with these LEAPS recommendations, take it and run like a madman, move to a different country, and change your name.

Q: With the ($VIX) this low and many great companies for the second half down, would you buy single LEAPS instead of spreads?

A: I would; the problem with the call spread strategy is that it’s not the best thing to do at big market bottoms, down 20%, 30%, and 40%. The better thing to do is the LEAPS, but the LEAPS is a one- or two-year position, and I have to be sending out trade alerts every day. At market bottoms, you definitely want to get the most market leverage possible on the upside, and LEAPS does that for you in spades. They essentially turn your stock into a synthetic futures contract with a 10x leverage.

Q: When do we expect China (FXI) to take over Taiwan?

A: Never, because if they invade Taiwan, China loses its food supply from the US, which cannot be replaced anywhere. They also lose their international trade, so they won’t have the profits with which to buy food elsewhere. I’ve been in China when millions died during a famine and let me tell you, there is NO substitute for food. Not all the money in the world can buy it when it just plain isn’t available. But China will keep threatening and bluffing as they have done for 74 years.

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 or TECHNOLOGY LETTER 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

Sometimes the Market Can be Tough to Figure Out

May 31, 2023

Diary, Newsletter, Summary

Global Market Comments
May 31, 2023
Fiat Lux

Featured Trades:

(WHAT AI CAN AND CAN’T DO)
(AAPL), (GOOGL), (AMZN), (AMZN), (TSLA), (NVDA), (MU)

CLICK HERE to download today's position sheet.

What AI Can and Can’t Do

Diary, Newsletter, Research

The future has arrived!

Over the last few weeks, I picked up some astonishing developments in artificial intelligence.

*Mainframes at Stanford University and the University of California at Berkeley were given a direct connection to speak freely with each other. Within 30 minutes they dumped English as a means of communication because it was too inefficient and developed their own language which no human could understand. They then began exchanging immense amounts of data. Fearful of what was going on, the schools unplugged the machines after only eight hours.

*All of the soccer videos ever recorded were downloaded into two robots, but they were not taught how to play the game or given any rules. Not only did figure out how to play the game, it developed plays and maneuvers no one in the sport has ever thought of in its 150-year history.

*It normally takes a PhD candidate five years to 3D map a protein. An AI app 3D mapped all 200 million known proteins in seven weeks, shortcutting one billion years of PhD level research with existing technology. These new maps have already been used to design a malaria vaccine and enzymes that eat plastic. They will soon cure all human diseases.

*A developer asked an AI program a half dozen questions in Bengali, not an easy language. Within an hour, it spoke the language fluently, without any instructions to do so.

By now, word has gotten out about the incredible opportunities AI presents. Our only limitation is our own imagination on how to use it. AI will instantly triple the value of any company that uses it.

What has changed is that we now have millions of computers powerful enough and an Internet fast enough to realize its full potential.

It all vindicates my own long-term vision, unique in the investing community, that in the coming decade, immense technology profits will more than replace the trillions of dollars worth of Fed liquidity we feasted on during the 2010s. Extended QE is proving just a bridge to a much more prosperous future.

The Internet has created about $10 trillion in value since its inception. AI will create double that in half the time. That’s what will take the Dow from 33,000 to 240,000.

No surprise then that the top ten AI companies have delivered 120% of the stock market gains so far in 2023. The other 490 companies in the S&P 500 have either gone nowhere to down.

However, there are many things that AI can’t do. Here is the list.

1) AI Can’t Predict large anomalous events, otherwise known as Black Swans. AI takes past trends and extrapolates them into the future. It in no way could have seen 9/11, the 2008 crash or the pandemic coming, although I warned my hedge fund clients for years that we were overdue. All of the AI stock trading apps I have seen so far, including my own, max out at 90% accuracy. The other 10% is accounted for by black swans: earnings shocks, foreign crises, sudden FDA stage three denials, surprise legal judgments, foreign invasions, or the murder of a key man in a tech company, as recently happened in San Francisco.

2) AI Lies and Lies Often. AI was asked to write a scientific paper on a specific subject. It came back with an elegant and well-researched piece. The problem was that all of the books it made reference to didn’t exist. AI learned early to tell humans what they want to hear.

3) AI Requires Exponential Computing Capacity. Only five companies have the muscle to pursue true AI. No surprise that these, including (AAPL), (GOOGL), (AMZN), and (TSLA), account for the bulk of stock market performance this year. This won’t always be the case. Some 30 years ago, it required thousands of mainframes to contain all human knowledge. Today, that task can be accomplished with a cheap $1,000 laptop.

4) Internet Capacity Will Be a Limiting Factor for AI for Years. To accommodate the traffic that is taking place right now, the Internet will have to grow 500% practically overnight, and that is with five main players. What happens when we have 5 million? That’s why NVIDIA (NVDA) has gone nuts.

5) AI Hallucinates, as anyone who drives a Tesla will tell you. If a car makes a left turn in Florida, the 4 million vehicles in the world’s largest neural network learn from it. The problem is that sometimes the data from that Florida car is placed directly in front of a California one, prompting it to brake abruptly, causing accidents. This is known as “ghost braking.” I have explained to Elon Musk that his database has grown so large, eight video feeds per 4 million cars going back many years and billions of miles, that he may be going behind the limits of known physics.

6) While the Growth Opportunities for AI are Unlimited, the ability of humans and society to absorb it isn’t. All jobs will be affected by AI and millions destroyed, starting with low-level programmers and call centers, and millions more will be created. People are talking about regulating AI but have no idea where to start. Maybe with (AAPL), (GOOGL), (AMZN), and (TSLA)?

7) The Terminator Issue. Can AI be controlled? Or have we started a chain reaction that is unstoppable, as with an atomic bomb? AI researchers have noticed a disturbing issue where AI programs are learning skills on their own, without our instructions. This is referred to as “emergent properties.” If AI is using humans as its example, we can’t exactly count on it to be benign.

Needless to say, AI will be at the core of your investment approach, probably for the rest of your life.

2014 at Micron Technology

May 23, 2023

Diary, Newsletter, Summary

Global Market Comments
May 23, 2023
Fiat Lux

Featured Trades:

(THURSDAY, JULY 6 NEW YORK STRATEGY LUNCHEON)
(SHORT SELLING SCHOOL 101),
(SH), (SDS), (PSQ), (DOG), (RWM), (SPXU), (AAPL),
(VIX), (VXX), (IPO), (MTUM), (SPHB), (HDGE)

CLICK HERE to download today's position sheet.

Short Selling School 101

Diary, Newsletter

With the market now scraping the absolute top of the 2023 trading range, it’s time to revisit Short Selling School.

We are also solidly into the high-risk, low-return time of the year from May to November. Historically, the total return for the time of year or the past 70 years is precisely zero.

I, therefore, think it is timely to review how to make money when prices are falling. I call it Short Selling School 101

There is nothing worse than closing the barn door after the horses have bolted or hedging after markets have crashed.

No doubt, you will receive a wealth of short selling and hedging ideas from your other research sources and the media right at the next market bottom.

That is always how it seems to play out.

So I am going to get you out ahead of the curve, putting you through a refresher course on how to best trade falling markets now, while stock prices are still rich.

Markets could be down 10% or more by the time this is all over.

There is nothing worse than fumbling around in the dark looking for the matches and candles after a storm has knocked the power out.

I’m not saying that you should sell short the market right here. But there will come a time when you will need to do so.

Watch my Trade Alerts for the best market timing. So here are the best ways to profit from declining stock prices, broken down by security type:

Bear ETFs

Of course the granddaddy of them all is the ProShares Short S&P 500 Fund (SH), a non-leveraged bear ETF that is supposed to match the fall in the S&P 500 point for point on the downside. Hence, a 10% decline in the (SPY) is supposed to generate a 10% gain in the (SH).

In actual practice, it doesn’t work out like that. The ITF has to pay management operating fees and expenses, which can be substantial. After all, nobody works for free.

There is also the “cost of carry,” whereby owners have to pay the price for borrowing and selling short shares. They are also liable for paying the quarterly dividends for the shares they have borrowed, around 2% a year. And then you have to pay the commissions and spread for buying the ETF.

Still, individuals can protect themselves from downside exposure in their core portfolios through buying the (SH) against it (click here for the prospectus). Short selling is not cheap. But it’s better than watching your gains of the past seven years go up in smoke.

Virtually all equity indexes now have bear ETFs. Some of the favorites include the (PSQ), a short play on the NASDAQ (click here for the prospectus), and the (DOG), which profits from a plunging Dow Average (click here for the prospectus).

My favorite is the (RWM), a short play on the Russell 2000, which falls 1.5X faster than the big cap indexes in bear markets (click here for the prospectus).

Leveraged Bear ETFs

My favorite is the ProShares UltraShort S&P 500 (SDS), a 2X leveraged ETF (click here for the prospectus). A 10% decline in the (SPY) generates a 20% profit, maybe.

Keep in mind that by shorting double the market, you are liable for double the cost of shorting, which can total 5% a year or more. This shows up over time in the tracking error against the underlying index. Therefore, you should date, not marry this ETF, or you might be disappointed.

3X Leveraged Bear ETF

The 3X bear ETFs, like the UltraPro Short S&P 500 (SPXU), are to be avoided like the plague (click here for the prospectus).

First, you have to be pretty good to cover the 8% cost of carry embedded in this fund. They also reset the amount of index they are short at the end of each day, creating an enormous tracking error.

Eventually, they all go to zero and have to be periodically redenominated to keep from doing so. Dealing spreads can be very wide, further adding to costs.

Yes, I know the charts can be tempting. Leave these for the professional hedge fund intraday traders for which they are meant.

Buying Put Options

For a small amount of capital you can buy a ton of downside protection. For example, the April (SPY) $182 puts I bought for $4,872 on Thursday allows me to sell short $145,600 worth of large cap stocks at $182 (8 X 100 X $6.09).

Go for distant maturities out several months to minimize time decay and damp down daily price volatility. Your market timing better be good with these because when the market goes against you, put options can go poof and disappear pretty quickly.

That’s why you read this newsletter.

Selling Call Options

One of the lowest risk ways to coin it in a market heading south is to engage in “buy writes.” This involves selling short call options against stock you already own but may not want to sell for tax or other reasons.

If the market goes sideways or falls, and the options expire worthless, then the average cost of your shares is effectively lowered. If the shares rise substantially they get called away, but at a higher price so you make more money. Then you just buy them back on the next dip. It is a win-win-win.

Selling Futures

This is what the pros do, as futures contracts trade on countless exchanges around the world for every conceivable stock index or commodity. It is easy to hedge out all of the risk for an entire portfolio of shares by simply selling short futures contracts for a stock index.

For example, let’s say you have a portfolio of predominantly large cap stocks worth $100,000. If you sell short 1 June, 2016 contract for the S&P 500 against it, you will eliminate most of the potential losses for your portfolio in a falling market.

The margin requirement for one contract is only $5,000. However, if you are short the futures and the market rises, then you have a big problem, and the losses can prove ruinous.

But most individuals are not set up to trade futures. The educational, financial, and disclosure requirements are beyond mom-and-pop investing for their retirement fund.

Most 401Ks and IRAs don’t permit the inclusion of futures contracts. Only 25% of the readers of this letter trade the futures market. Regulators do whatever they can to keep the uninitiated and untrained away from this instrument.

That said, get the futures markets right, and it is the quickest way to make a fortune if your market direction is correct.

Buying Volatility

Volatility (VIX) is a mathematical construct derived from how much the S&P 500 moves over the next 30 days. You can gain exposure to it through buying the iPath S&P 500 VIX Short-Term Futures ETN (VXX) or buying call and put options on the (VIX) itself.

If markets fall, volatility rises, and if markets rise, then volatility falls. You can therefore protect a stock portfolio from losses through buying the (VIX).

I have written endlessly about the (VIX) and its implications over the years. For my latest in-depth piece with all the bells and whistles, please read “Buy Flood Insurance With the (VIX)” by clicking here.

Selling Short IPOs

Another way to make money in a down market is to sell short recent initial public offerings. These tend to go down much faster than the main market. That’s because many are held by hot hands, known as “flippers,” don’t have a broad institutional shareholder base.

Many of the recent ones don’t make money and are based on an, as yet, unproven business model. These are the ones that take the biggest hits.

Individual IPO stocks can be tough to follow to sell short. But one ETF has done the heavy lifting for you. This is the Renaissance IPO ETF (click here for the prospectus). So far, a 6% drop in the main indexes has generated a 20% fall in (IPO).

Buying Momentum

This is another mathematical creation based on the number of rising days over falling days. Rising markets bring increasing momentum while falling markets produce falling momentum.

So, selling short momentum produces additional protection during the early stages of a bear market. Blackrock issued a tailor-made ETF to capture just this kind of move through its iShares MSCI Momentum Factor ETF (MTUM). To learn more, please read the prospectus by clicking here.

Buying Beta

Beta, or the magnitude of share price movements, also declines in down markets. So, selling short beta provides yet another form of indirect insurance. The PowerShares S&P 500 High Beta Portfolio ETF (SPHB) is another niche product that captures this relationship.

The Index is compiled, maintained, and calculated by Standard & Poor's and consists of the 100 stocks from the (SPX) with the highest sensitivity to market movements, or beta, over the past 12 months.

The Fund and the Index are rebalanced and reconstituted quarterly in February, May, August, and November. To learn more, read the prospectus by clicking here.

Buying Bearish Hedge Funds

Another subsector that does well in plunging markets is publicly listed bearish hedge funds. There are a couple of these that are publicly listed and have already started to move.

One is the Advisor Shares Active Bear ETF (HDGE) (click here for the prospectus). Keep in mind that this is an actively managed fund, not an index or mathematical relationship, so the volatility could be large.

Oops, Forgot to Hedge

May 22, 2023

Diary, Newsletter, Summary

Global Market Comments
May 22, 2023
Fiat Lux

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