Mad Hedge Technology Letter
September 2, 2022
Fiat Lux
Featured Trade:
(DON’T COMPROMISE)
(AAPL), (GOOGL)
Tag Archive for: (AAPL)
A fresh analysis from the C-suite at the top 1,000 U.S. companies by revenue offers us critical insight into the direction of tech management.
It’s important to keep our finger on the pulse of what’s happening at the higher level of tech companies because these are the key people that drive the game-changing decisions.
It’s no surprise that the banking and financial services industry has the oldest average CEO age at 60, and the technology and energy sectors have the youngest CEOs at an average age of 57.
Technology companies harness new technologies that can lead to new businesses so that would usually trend younger.
Compared to other industries, tech companies also have a boom-bust element to them because technologies go extinct quicker, and refreshing a CEO is always on the table if the bust element creeps in.
Interestingly, the current tenure is down from an average of 8 years to 6 years, meaning that the leash for tech CEOs is getting shorter and shorter.
Much like highly paid professional athletes these days, there’s no learning on the job type of mentality. It’s overperform now or face the sack.
This mentality emphasizes short-term performance which revolves around the quarterly earnings report and stock-based compensation to employees.
Then add in the wild card of forced lockdowns and China’s increasingly aggressive attitude to politics and it’s simple to understand that boards need to quickly change management if they believe they cannot navigate these herculean tasks.
Just a few instances where critical decisions are being made can be seen in Apple when CEO Tim Cook yanked China production and moved factories to Vietnam.
Vietnam is becoming the new factory of the world for tech companies because costs and political risks associated with China are accelerating.
Now, throw in the Taiwan situation after top U.S. government officials chose to visit the island and tech companies are now worrying about their supply of Taiwan chips needed to harness artificial intelligence.
CFOs are usually the second most important person in a company behind the CEO because they guard the balance sheet and usually possess a strong accounting background.
Yet they can be disposed of quickly for bad performance which is why tech CFOs only tenure 4.1 years if we compare with other more stable industries.
The key findings here is that tech management has never been so prone to high turnover.
Due to the internet, competition has supercharged the fight for highly paid positions and data can be calculated in real time because of superior analytic platforms.
Management won’t be able to hide poor performance because of the close tracking.
As much as it’s difficult to make a famous name as a C-suite manager, tech CEOs with a proven track record can expect elevated attention which is why if guys who have built successful tech firms like Jack Dorsey reach out to investors, they will get whatever starting funds they need.
This builds on the winning take mentality in technology which has a few outsized winners among the crowd.
On the trading front, I would hesitate to buy tech stocks from management that is unproven.
I would urge traders to go into long-term bets on guys like Tim Cook, Sundar Pichai, and Elon Musk and don’t compromise on the quality of tech management because it makes a big difference in the future price of the stock.
Global Market Comments
September 2, 2022
Fiat Lux
Featured Trade:
(GET READY TO TAKE A LEAP BACK INTO LEAPS),
(AAPL)
(TESTIMONIAL)
Just as every cloud has a silver lining, every stock market crash offers generational opportunities.
September and October are now upon us, for the past 100 years, the two worst trading months of the year. That means they are also the best months for entering spectacular trades with LEAPS.
What are LEAPS you make ask?
This is the best strategy with which to cash in on the gigantic market swoons, which have become a regular feature of our markets, especially in 2022.
LEAPS, or Long Term Equity Anticipation Securities, are just a fancy name for a stock option spread with a maturity of more than one year.
You execute orders for these securities on your options online trading platform, pay options commissions, and endure options like volatility.
Another way of describing LEAPS is that they offer a way to rent stocks instead of buying them, with the prospect of enjoying years’ worth of stock gains for a fraction of the price.
While these are highly leveraged instruments, you can’t lose any more money than you put into them. Your risk is well defined. But you get 10X or more exposure to the stock. They are kind of like synthetic futures on individual stocks.
And there are many companies in the market where LEAPS is a very good idea, especially on those gut-wrenching 1,000-point down days.
Interested?
Currently, LEAPS are listed all the way out until January 2025.
However, the further expiration dates will have far less liquidity than near-month options, so they are not a great short-term trading vehicle. That is why limit orders in LEAPS, as opposed to market orders, are crucial.
These are really for your buy-and-forget investment portfolio, defined benefit plan, 401k, or IRA.
Because of the long maturities, premiums can be enormous. However, there is more than one way to skin a cat, and the profit opportunities here can be astronomical.
Like all options contracts, a LEAPS gives its owner the right to "exercise" the option to buy or sell 100 shares of stock at a set price for a given time.
LEAPS have been around since 1990, and trade on the Chicago Board Options Exchange (CBOE).
To participate, you need an options account with a brokerage house, an easy process that mainly involves acknowledging the risk disclosures that no one ever reads.
If a LEAPS expires "out-of-the-money" – when exercising, you can lose all the money that was spent on the premium to buy it. There's no toughing it out waiting for a recovery, as with actual shares of stock. Poof, and your money is gone.
LEAPS are also offered on exchange-traded funds (ETFs) that track indices like the Standard & Poor's 500 index (SPY) and the Dow Jones Industrial Average (INDU), so you could bet on up or down moves of the broad market.
One of my most profitable trades in 2021 was the (TLT) December 2022 $$150-$155 vertical bear put LEAPS, which generated a 100% profit for everyone who got into it. Those who bought the more aggressive (TLT) December 2022 $$140-$145 vertical bear put LEAPS made 200%.
I see you’re still interested. For example, the highly popular ProShares 2X Ultra Technology ETF (ROM) only offers maturities out only six months so it is not possible to do a proper LEAPS. No one is willing to take the risk on the other side of this highly volatile security.
Not all stocks have options, and not all stocks with ordinary options also offer LEAPS.
Note that a LEAPS owner does not vote proxies or receive dividends because the underlying stock is owned by the seller, or "writer," of the LEAPS contract until the LEAPS owner exercises.
Despite the Wild West image of options, LEAPS are actually ideal for the right type of conservative investor.
They offer more margin and more efficient use of capital than traditional broker margin accounts. And you don’t have to pay the usurious interest rates that margin accounts usually charge.
And for a moderate increase in risk, they present outsized profit opportunities.
For the right investor, they are the ideal instrument.
Let me go through some examples to show you their inner beauty.
By now, you should all know what vertical bull call spreads are. If you don’t, then please click here for a quickie video tutorial (you must be logged in to your account).
Let’s go back to February 9, 2018 when the Dow Average plunged to its 23,800 low for the year. I then begged you to buy the Apple (AAPL) June 2018 $130-$140 call spread at $8.10, which most of you did. A month later, that position is worth $9.40, up some 16.04%. Not bad.
Now let’s say that instead of buying a spread four months out, you went for the full year and three months, to June 2019.
That identical (AAPL) $130-$140 would have cost $5.50 on February 9. The spread would be worth $9.40 today, up 70.90%, and worth $10 on June 21, 2019, up 81.81%.
So, by holding a 15-month to expiration position for only a month, you get to collect 86.67% of the maximum potential profit of the position.
So, now you know why we leap into LEAPS.
When the meltdown comes, and that could be as soon as next week, use this strategy to jump into longer term positions in the names we have been recommending and you should be able to retire early.
Now you know why I like LEAPS so much. Please play around with the names and the numbers and I’m sure you will find something you like. But remember one thing. LEAPS are only a trade to consider at long time market bottoms, not tops!
They are also the perfect positions to own if you believe we have just entered a second Roaring Twenties and a second American Golden Age, as I do.
Time to Leap Into LEAPS
Global Market Comments
August 26, 2022
Fiat Lux
Featured Trade:
(AUGUST 24 BIWEEKLY STRATEGY WEBINAR Q&A),
(UNG), (AAPL), (MU), (AMD), (NVDA),
(META), (VIX), (MCD), (UBER)
Below please find subscribers’ Q&A for the August 24 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Silicon Valley in California.
Q: I’ve heard another speaker say that we are not heading for a Roaring Twenties; instead, we are heading for a Great Depression. Who is right?
A: There are many different possible comments to this. Number one, in the newsletter business, the easiest way to make money is to predict the Great Depression and panic people. Stock market Gurus have been predicting the next Great Depression for all of the 54 years that I have been in the financial markets. We’ve gone through a whole series of Dr. Doom's over this time. We had Nouriel Roubini, we had Henry Kaufman, and before that, there was Joe Granville who predicted Dow 300 when the Dow was at 600 and never gave up. The reason is very simple: the people making these dire forecasts are based in depressionary places. If you live in Puerto Rico, or Ukraine, or Europe, it’s easier to be depressed right now, because the economy is falling to pieces. If you live in Silicon Valley, like I do, and you see these incredible technologies delivering every day, it’s easy to be bullish about the future. So, that is another part of it. On top of that, we’ve just had a recession. And even during this last recession, earnings continued to grow at 5% for the main market, and 20-30% for individual technology companies. The market goes up 80% of the time so if you’re bullish, you’re right 80% of the time. In fact, that may increase going into the future because we just had six months of down days behind us.
Q: How do you know when to buy?
A: Well, I have about 100 different market indicators that I look at, but my favorite one is the Volatility Index (VIX). The (VIX) is the perfect contrary indicator because when fear is high the payoff for taking on risk is huge. The risk/reward swings overwhelmingly in your favor. The simplest indicators are usually the best ones. When (VIX) gets to $30—I don’t think I’ve ever lost money in my life adding on a new trade with (VIX) at $30. If I add positions with the (VIX) at under $30, the loss rate goes up; so, I’m inclined to only do trades when the (VIX) gets close to $30. If that means doing nothing for a month, that’s fine with me. If telling you to stay out of the market makes more money than getting you into the market, I’ll keep you out of the market. I’m not a broker so, I don’t get paid commission; I get paid to give you the highest annual returns so you’ll renew because I only get paid if you renew. Our renewal rate is about 80% these days, and the other 20% either die or retire.
Q: What about the Tesla (TSLA) 3:1 split?
A: In the short term I would stand back and do nothing because you often get a “buy the rumor sell the news” selloff in stocks after splits. Long term, Tesla is a strong buy; short term, we are up close to 60% in a couple of months. Betting that Tesla would rise going into this split was one of the most successful trades that I’ve ever done.
Q: Did you know Julian Robertson?
A: Yes, I did. Julian was one of the first investors in my hedge fund, and then he was one of the first buyers of my Mad Hedge newsletter. He was also my first concierge client. He had one heck of a temper; if you didn’t know your stuff cold, he would just absolutely blow up at you. But he did tend to surround himself with geniuses. He drew on Morgan Stanley people a lot, so I knew a lot of the tiger cubs. But he certainly knew stocks, and he knew markets.
Q: What do we do on the SPDR S&P 500 ETF (SPY) position?
A: Just run it into expiration. As it is my only position, I don’t really have anything else to do and I don’t really see any explosive upside moves in markets this month. And then after that, we will be 10 days to expiration; so there may be enough profit there at that time.
Q: As a long-term investor, should I take Tesla profits now?
A: If you're really a long-term investor and sell now, you’ll miss the move to $10,000. However, if you’re a trader, you should take some profits now and look to buy and scale in down $50 and more down $100, and so on, depending on what the market does.
Q: What are your thoughts on Nvidia Corporation (NVDA) and semis?
A: When recession fears exist, you will have sharp downturns in the semis, because this is the most volatile sector in the market. However, in the long term in Nvidia you might be looking at a 20% of downside, and 200% of upside on a three-year view. It just depends on how much pain you want to take while keeping your long-term position.
Q: Why is September typically the worst month of the year for stocks?
A: You need to go back 120 years when farmers accounted for 50% of the US population. In the farming business, September/October is your maximum stress point, because you’ve put out all your money for seed, for water, for fertilizer, but you don’t get paid until you sell your crop in September/October. That creates a point of maximum stress—when farmers have to max out the loans from the banks, and that creates cascading stresses in the financial system. That’s why almost every stock market crash happened in October. And of course, since that cycle started, it has become a self-fulfilling prophecy to this day. Even though only 2% of the population is in farming now, that selloff in September/October is still there. There’s no real current reason behind it.
Q: How do you find good spreads?
A: You find a good stock first, then a good chart, and then wait for the market to come to you with a high Volatility Index (VIX) with a good micro and macro tailwind. It’s that simple.
Q: Do you think healthcare will sell off once the recession fear is gone?
A: It may not because it had a massive selloff across the entire industry when COVID went away. They've taken that COVID hit. That's a recession if you’re a healthcare company. Now COVID is essentially gone, so they haven’t got it left to lose. In the meantime, technology continues to hyper-accelerate in the healthcare area, just in time for old people like me.
Q: How would you invest $1 million in a retirement portfolio today?
A: Call me—that’s a longer conversation. Or better yet, sign up for the concierge service, and we can talk as long as you want.
Q: Any hope for Facebook (META)?
A: No, when you’re advertising that you’re going to lose money and that you’re not going to make money for five years, that’s bad for the stock. I’m sorry Mr. Zuckerberg, but you should have taken those financial markets classes instead of just doing the programming ones.
Q: Will Powell be dovish or hawkish in his speech?
A: I think he has to go hawkish because he needs to justify the next interest rate hike in September. That’s why I’m 90% cash. The market is set up here not to take disappointments on top of a 4,000-point rally in two months. It’s very sensitive to disappointment, so it’s a good time to be in cash.
Q: What stocks go down the most if we get a 5-10% correction?
A: Semiconductors. Nvidia (NVDA), Advanced Micro Devices (AMD), Micron Technology (MU) are your high beta stocks. Having said that, those are the ones you want to buy at market bottoms. I’ve caught many doubles on Nvidia over the years just using that strategy. When you’ve had a horrible market, you want to go for the highest beta stocks out there, and those are the semis. Plus, semis have a long-term undercurrent of always making more money, always improving their products, always increasing market shares. So, you want to invest with tailwinds behind you all the time. 30 years ago, a new car needed ten chips. Now they need 100. That accelerates exponentially as the entire auto industry goes EV.
Q: What’s your opinion on Lithium companies?
A: You know, I haven’t really done much in this area because it is a basic commodity. The profit margins are minimal, there is no Lithium shortage in the world like there is an oil shortage. Plus, no one has a secret method of mining Lithium that is more profitable than another. No one has an advantage.
Q: Is there a logical maximum number of stocks to have in a share portfolio?
A: I keep mine at ten. You should be able to cover every good sector in the market with ten. When I talk to new concierge customers and review their portfolios, one of the most common mistakes is they own too many stocks – there can be 50, 100, 200 stocks, even several gold stocks. And you never want to own more than you can follow on a daily basis. It’s better to follow ten stocks very closely than 100 stocks just occasionally.
Q: How low do you think Apple (APPL) will go on this dip?
A: Minimum 10%, maybe 20%. Just depends on how weak the market will go in this correction.
Q: What was your defensive plan when you sold short Tesla puts?
A: If they got exercised against me and the Tesla shares were sold to me at my strike price, I was going to take the stock, then let the stock rally. If my long-term view for Tesla is $10,000, it’s not such a problem having a $500 put exercise against you—you just take the stock and run the stock. That was always the strategy. Never sell short more puts than you can take delivery of in the stock. Your broker won’t let you do it anyway to protect themselves.
Q: Do you think we could get a strong rally on the next CPI report?
A: Yes. The report is due out on September 13. But some of a sharp drop in the CPI in the next report is already in the market, so don’t expect another 2,000-point stock market rally like we got last time. It’ll be a much lesser move and after that, we’ll need to see more data. We may get 1,000 points out of it, probably not much more. After that, the November midterm election becomes the dominant factor in the market.
Q: When is natural gas (UNG) going to roll over?
A: When the Ukraine War ends, and that day is getting closer and closer. I think it’ll be sometime in 2023. And if you get an end to the war (and the resumption of Russian supplies is not necessarily a sure thing) you’d get a move in natgas from $9 down to $2. So, that’s why I’m very cautiously avoiding energy plays right now. The big money has been made; next to happen is that the big money gets lost.
Q: What are your thoughts on Florida’s pension fund now banning ESG stocks? I live on Florida state pension fund payments.
A: You might start checking out other income opportunities, like becoming an Uber (UBER) driver or working at MacDonalds (MCD). What the Florida governor has done is ban the pension fund from the sector that is most likely to go up over the next ten years and restricted them to the sector (oil) which is most likely to go down. That is very bad for Florida’s pension fund and any other pension funds that follow them. And I’ve seen this happen before, where a pension fund gets politicized, and it’s 100% of the time a disaster. Governors aren't great market timers; politicians are terrible at making market calls. There are too many examples to name. ESG stocks were one of the top performing sectors of the market for 5 years until we got the pandemic crash. So, that is an awful idea (and one of the many reasons I don’t live in Florida besides hurricanes, humidity, alligators, and the Bermuda Triangle).
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, or BITCOIN LETTER, whichever applies to you, then select 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
Mad Hedge Technology Letter
August 19, 2022
Fiat Lux
Featured Trade:
(A WALK IN THE PARK)
(RIVN), (AAPL), (LCID)
Rivian (RIVN) produces nice EVs, but their business model still needs to work out the kinks.
Creating an EV company from scratch these days is something that doesn’t get a lot of attention.
Bellwether EV company Tesla (TSLA) built its reputation when doing something like this was easier. We assume it’s like a walk in the park.
Now the post-health situation world has really put the clamps on business with energy not cheap anymore, made in China not working smoothly, and the strong dollar making sales from abroad lower in greenback terms.
Naturally, RIVN has felt all these bottlenecks and the usual result is losing money.
This has forced RIVN to raise prices as it is discontinuing the cheapest versions of its pickup truck and SUV models, citing low customer demand.
Eliminating the base version, coined the Explore package, now means the most affordable pickup truck in the R1T model line will have a price of $73,000—an increase of $5,500, Rivian said. The least expensive version of its all-electric SUV, the R1S, is now $78,000.
These mid-$70,000 EV pickup trucks will most likely be closer to $100,000 in 2-3 years as inflation isn’t going anywhere.
RIVN isn’t profitable when selling at the lower price point and raising prices will effectively lower demand but not by too much.
This isn’t the first time RIVN has jacked up prices, but truthfully, it is just a sign of the times.
Actually, this is the second time that Rivian has gone rogue citing rising raw-material costs, particularly for batteries, and manufacturing difficulties that have led the company to report a $1.7 billion loss for the second quarter.
Today, the world's biggest nickel producer, Indonesia, may impose a tax on exports of the metal this year, President Joko Widodo says.
It pours fuel on the fire.
Back in March, RIVN raised prices by $20,000, even the ones who had already put down a $1,000 deposit to reserve their vehicles.
RIVN is now in an unenviable position of slashing costs to conserve cash and giving priority to certain trims of its vehicles in an effort to boost factory output.
Rivian said it aims to produce 25,000 vehicles this year from its plant in Normal, Ill.
Luckily, the Federal government has given EVs a new subsidy where any electric truck or SUV selling for over $80,000 would become ineligible for the $7,500 tax credit under the planned revisions.
Naturally, after the $80,000 price point breaches, it’s a mere formality that prices will need to compensate the lost tax credit and go straight to $90,000 and above like a runaway train.
As expected, the company is losing lots of money and at the end of June, it had about $15.46 billion in cash and cash equivalents, about $1.5 billion less than at the close of the first quarter.
The company has a great product that consumers want, but producing these cars at scale at an affordable price is the issue.
I would wait for the stock to drop from $35 to $25 then hold long term and incrementally add as the stock goes down.
If the operations teams can pull out a few victories here and there, then sourcing the next factory is in the cards to increase output.
It’s not just a RIVN problem, Tesla (TSLA) and Lucid (LCID) have also increased prices as well, but Tesla has a larger balance sheet and a profitable busine model.
Scale into this stock at lower levels and put it away for the long term. If the company survives, the stock price will be higher in the long term especially if someone can get the Chinese back in the factories.
Mad Hedge Technology Letter
August 17, 2022
Fiat Lux
Featured Trade:
(HERE WE COME VIETNAM)
(AAPL), (WMT)
There is definitely jet fuel left in Apple’s (AAPL) tank.
I guarantee it.
I like some of their recent moves, like today when they announced that they are in talks with Vietnam for the Apple Watch and MacBook to be produced in the country.
Cutting the China risk is a big deal.
The lockdown-obsessed country is a terrible place to headquarter manufacturing operations.
Apple has deadlines to meet and shareholder value to accrue, and that’s not going to cut it when the government doesn’t allow workers to work.
Vietnam’s government and Apple most likely have a wink, wink – nod, nod agreement to chill on the overbearing lockdowns, otherwise, I cannot fathom why they would move from one lockdown-prone country to another one.
Maybe Apple management just like the Vietnamese spring rolls over the Chinese, but I bet most unlikely.
Oh yeh, almost forgot about the tax breaks, Vietnam most likely will load those up to the eyeballs to convince Apple to put factories there.
Brand name companies don’t put their resources in Podunk places for free.
Another bright spot in Apple is the massive stock buyback and large dividend.
Must love a tech company that rewards shareholders and that’s why Warren Buffet loves this gravy train.
Next, the biggest fish in the largest body of water is still churning out its prized iPhone.
Now we are onto number 14 coming to you later this winter!
Demand for the iPhone remains strong. During Apple's third quarter, revenue from this segment rose 2.8% to $40.7 billion.
Selling more iPhones isn't just a matter of generating revenue for Apple. It also helps the company grow its installed base, provided a customer not previously part of Apple's network purchases a new device. That seems to be at least part of the story, as Apple reported that its installed base reached all-time highs across all its products during its latest quarter.
The long-run implications of these developments are significant. The more people are plugged into Apple's services network, the more it can monetize these users, and the more it can grow its services revenue. During Apple's third quarter, the tech giant's services segment grew faster than the rest of its business, recording total sales of $19.6 billion, 12.1% higher than the year-ago period.
This segues nicely to more eyeballs viewing Apple ads. The annual $4 billion ad business will get upgraded as Apple plans to post more ads around its ecosystem. Ad buyers will be chomping at the bit to flood Apple’s network with ads galore. I see this as a great move to add strength to the balance sheet.
The consumer is still consuming. The top 39% of US income earners who are exposed to the stock market are responsible for 65% of consumption so it is a chicken and egg thing…they will feel like they have the license to spend because they feel wealthier.
That’s what I like because the people who cannot even afford iPhones, won’t buy the iPhone 14 and never had a chance to buy an iPhone when they are shopping at the Dollar store.
There will be zero churn here in iPhone usage and I would argue that the attrition rate becomes healthier.
True, I saw that report from Walmart about higher-income families more concerned about rising prices, but this doesn’t mean their budget will exclude the iPhone 14.
Many of these higher-income families need the iPhone 14 for work purposes and many of them have work-from-home jobs where they need an Apple device always glued to their face.
The Apple monster should keep chugging along, and out of all tech companies, this is the one to ride to profits.
