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December 15 Biweekly Strategy Webinar Q&A

Below please find subscribers’ Q&A for the December 15 Mad Hedge Fund Trader Global Strategy Webinar broadcast from the safety of Silicon Valley.

Q: With interest rates going up, would it make sense to short heavily indebted companies as a class?

A: Yes it does; those would be old-line industrials and auto companies with very heavy debts. Technology companies essentially have no debt unless they’re startups. So yeah, that’s a good idea; unless of course inflation is peaking right now, which it may be if you solve these supply chain problems, and it becomes evident that retailers overordered to beat the supply chain problems and now have a ton of excess inventory they can’t meet—then the inflation plays will crash. So, not a low-risk environment right now. No matter where you look, you’re screwed if you do, you’re screwed if you don't. So that is an issue to keep in mind.

Q: What do you think of Freeport McMoRan (FCX) short-term?

A: Short term, (FCX) only sees the Chinese (FXI) real estate crisis, which is getting worse before it gets better and could bring a complete halt to all known construction in China. The government is forcing the real estate companies there to run at losses in order to bring the bottom part of their society into the middle class with houses in third and fourth-tier cities. Long term, as annual electric car production goes from a million cars a year to 25 million cars a year and each car needs 200 lbs. of copper, we have to triple world production practically overnight to accommodate that. That can’t happen, therefore that means much higher prices. If you’re willing to take some pain, picking up freeport McMoRan in the low $30s has to be the trade of the century.

Q: Do you see a Christmas rally or a bigger correction?

A: Rally first. Once we get the Fed out of the way today, we could get our Christmas rally resumed and go to new highs by the end of the year. But, January is starting to look a little bit scary with all the unknowns going forward and massive long positions. January could be okay as hedge funds put positions back on in tech that they’re dumping right now. If they don’t show up…Houston, we might have a problem.

Q: Thoughts on the iShares 20 Plus Year Treasury Bond ETF (TLT) Dec 2022 $150-$155 vertical bear put spread?

A: Since I'm in low-risk mode, I would go up $5 or $10 points and not be greedy. Not being greedy is going to be one of the principal themes of 2022 therefore I’m recommending that people do the $160-$165 or even the $165-$170, which still gives you a 30% return in a year, and I think next year this will be seen as a fabulous return.

Q: What about the $100,000 target for Bitcoin (BITO) by the end of the year?

A: That’s off the table thanks to the Fed tightening and Omicron triggering a massive “RISK OFF” and flight to safety move. Non-yielding instruments tend not to do well during periods of rising interest rates, so gold along with crypto is getting crushed.

Q: What will happen in the case of a black swan event in early 2022, like Russia invading Ukraine?

A: Market impact for that would be a bad couple of days, a buying opportunity, and then you’d want to pile into stocks. Every geopolitical event that’s happened in the last 20 years has been a buying opportunity for stocks. Of course, I would feel bad for the Ukrainians, but it’s kind of like Florida seceding from the US, then the US invading Florida to take it back, and the rest of the world not really caring. Plus, it doesn’t help that their heavily nationalist post-coup government has some fascist tendencies. However, we could get global economic sanctions against Russia like an import/export embargo, which would hurt them and destroy their economy.

Q: Will the European natural gas shortage continue?

A: Yes because the Europeans are at the mercy of the Russians, who have all the gas and none of the economy. Therefore, they can export as much or as little as they want, depending on how much political control they’re trying to exert in Europe.

Q: Apple Inc. (AAPL) price target?

A: Well, my price target for next year was $200; we could hit that by the end of the year if we get a rally after the Fed meeting.

Q: 33% of the population is in collection status with personal debt, credit cards, etc—is that a harbinger of a 2008 crash?

A: No, it is a harbinger of excess liquidity, interest rates being too low, and lenders being too lax. However, we aren’t at the level where it could wipe out the entire economy like with defaulting on a third of all housing market debt in 2008.

Q: What should I do with my call spreads for Amazon.com, Inc. (AMZN)?

A: Well, November would have been a great sell. Down here, I’d be inclined to hold onto the spreads you have, looking for a yearend rally and a new year rally. But remember, with all these short-dated plays risk is rising, so keep that in mind.

Q: What do you think of AT&T Inc (T)?

A: The whole sector has just been treated horrifically; I don’t want to try to catch a falling knife here even though AT&T pays a 10% dividend.

Q: What about quad witching day?

A: Expect a battle by big hedge funds trying to push single stocks options just above or below strike prices. It’s totally unpredictable because of the rise of front-month trading, which is now 80% of all options trading with the participation of algorithms.

Q: Is the Alibaba Group Holding Limited (BABA) $230-$250 LEAP in June 2023 worth keeping?

A: I would say yes, I think the Chinese will come to their senses by then, and all the Chinese tech plays will double, but there’s no guarantee. That is still a high-risk trade.

Q: Does the US have an opportunity to export petroleum products?

A: The answer is yes, we are already a net energy exporter thanks to fracking. But, it is a multi-year infrastructure build-out to add foreign export destinations like Europe, which hasn’t bought our petroleum since WWII. Right now, almost all of our exports are going to Asia. No easy fixes here.

Q: Is Tesla Inc (TSLA) a buy at 935 down 300 in change?

A: Not yet; 45% seems to be the magic number for Tesla correction. We had one this year. And Elon Musk hasn’t quit selling yet, although I suspect he’ll end his selling by the end of the year because he’ll have met all his tax obligations for the year. He has to sell these options before they expire and are rendered useless. So that is what’s happening with Tesla, Elon Musk selling. And can you blame him? He almost worked himself to death making that company, time to spend some money and have a good time, like me.

Q: What if your Chinese company gets delisted?

A: Try to get out before it is delisted. Otherwise, the domicile moves to Hong Kong and you’ll have to sell equivalent shares there. I don’t know what the details of that are going to be, but the Chinese companies are trying to force companies to delist from the US and list in Hong Kong so they have complete control over what's going on. Also, I never liked these New York listings anyway because the disclosures were terrible, with Cayman Island PO Boxes and so on…

Q: Is the ProShares UltraShort 20+ Year Treasury (TBT) a good long-term position to hold?

A: It is to an extent—only if you expect any big moves up in interest rates, which I kind of am. This is because the cost of carry for (TBT) is quite high; you have to pay double the 10-year US Treasury rates, which is double 1.45% or about 2.90%, and then another management fee of 1%, so you have kind of a 4% a year headwind on that because of cost. Remember, if you’re short a bond, you’re short a coupon; if you’re double short a bond you’re short twice the coupon and you have to pay that and they take it out of the share price. But, if you’re expecting bonds to go down more than 4%, you’ll cover that and then some and I think bonds could drop 10-20% this year.

Q: What’s the difference between GBTC and BITO?

A: Nothing, both are Bitcoin plays that are tracking reasonably well. I prefer to go with the miners—the Bitcoin providers, that’s a selling-shovels-to-the-gold-miners play. They tend to have more volatility than the underlying Bitcoin, so that’s why I’m in (BLOK) and (MSTR) when I’m in it.

Q: What’s the best way to buy Crypto?

A: If you really want to buy Crypto directly, the really easy way is to go through one of the top crypto brokerage houses, and we’ve recommended several of those. Coinbase (COIN) is the one I’m in. It literally takes you five minutes to set up an account and you can instantly buy Bitcoin linked to your bank account.

Q: What are the fees like for Coinbase?

A: The fees at (COIN) are exorbitant only if you’re buying $10 worth of Bitcoin. If you’re buying like $1 million worth, they’re much, much smaller. But I recommend you start at $10 and work your way up as I did, and sooner or later you’ll be buying million-dollar chunks of Bitcoin which then double in three months, which happened to me this year.

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, then WEBINARS, and all the webinars from the last ten years are there in all their glory.

Good Luck and Stay Healthy.

John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader

December 16, 2021

Diary, Newsletter, Summary

Global Market Comments
December 15, 2021
Fiat Lux

Featured Trade:

(TESTIMONIAL)
(LONG TERM ECONOMIC EFFECTS OF THE CORONAVIRUS),
(ZM), (LOGM), (AMZN), (PYPL), (SQ), CNK), (AMC),
(IMAX), (CCL), (RCL), (NCLH), (CVS), (RAD), (WMT)

December 8, 2021

Tech Letter

Mad Hedge Technology Letter
December 8, 2021
Fiat Lux

Featured Trade:

(A HEAD-SCRATCHER IN SILICON VALLEY)
(SFIX), (AMZN)

A Head-Scratcher in Silicon Valley

Tech Letter

I don’t get Stich Fix (SFIX).

It’s not that they shouldn’t be a company--I’ve seen worse ideas that didn’t get left on the drawing board--but I don’t see how they ever become successful.

They probably should have invested in Bitcoin at the beginning of the year.

That might be an exaggeration, but it brings home the point that their competitive advantage is marginal, and they haven’t done enough to differentiate themselves amongst competition.

For a company that is fighting for relevancy, they have made some boneheaded mistakes.

For one, customers don’t receive a great sales price on the clothes. Unless you keep the entire box (5 items), you won't get a discount. You also won't find any coupons online for Stitch Fix. You pay retail prices, which can sometimes be high, depending on the brand they send.

For many tech companies that preach the freemium model, Stich Fix is asking customers to pay a premium for the clothing off the bat, and I believe that is turning off a lot of potential customers.

SFIX hasn’t done enough to fetch a premium for its services.

I understand SFIX isn’t willing to discount any clothing, unless it’s the entire box, and this is because the unit economics of this business model is quite poor.

Revenue grew 19% year over year to $581 million, yet they forecasted just 9% revenue growth for the next quarter — that’s not what I call a tech growth company.

A tech company with only $2 billion in annual revenue shouldn’t be growing only 9% year over year. In fact, I would say a company this small needs to be accelerating revenue to somewhere around 40% to command respect among the incremental investors.

It’s no shocker that the stock is down around 300% in the past 365 days.

That’s horrible considering the “reopening trade” was supposed to cause a massive demand in people wearing proper clothes again and not just pajama pants.

To miss that opportunity epitomizes the company’s lack of marginal advantage which I was just banging on about.

Another issue I have with the company is that the clothes are not affordable, and I am not talking about a discounted price relative to the retail price.

If you are a bargain bin fanatic, the sight of SFIX’s service will turn you off.

Stitch Fix claims the average price of items is around $55, but that the items can cost anywhere between $20 and $400.

You can set price ranges for each category, but that doesn't mean your stylist will always follow those instructions.

Pigeonholing oneself as a luxury service but hoping to scale broadly and fast like a tech company is counterproductive.

Many Americans simply won’t pay up to $500 for a 5-piece set of clothing no matter who is styling it.

This sounds like a service for a computer programmer in San Francisco with a $200,000 annual salary--which isn’t a bad thing, but it won’t get the masses interested.

This leads me to my next point of the company overselling the personalized stylist aspect of it.

Is the stylist really that much better than me just picking out a few pieces at the store or online, and being able to keep it?

They even have Stitch Fix “Freestyle” category now that is SFIX without the styling fee, where the customer can personally choose their clothes. But then, isn’t that the same as any other online retailer but with higher price?

Again, I don’t get the roadmap here and it’s basically admitting that their styling is not good.

In fact, there is quite robust competition that undercuts SFIX such as Amazon (AMZN) Prime Wardrobe.

Amazon Prime Wardrobe is an exclusive program just for Prime members. This service gives users the chance to have chosen clothing items shipped to their home for them to try on before buying. The difference here is that the user selects the item which, for me at least, makes sense instead of SFIX blindly shipping clothes that aren’t ok’d. I just don’t think a “stylist” can get it right more than half the time. You only pay for what you keep and you have 7 days to make up your mind.

The biggest headscratcher is the $20 SFIX styling fee if you don't keep anything.

Seriously, what is that about?

If you hate their expert stylish decisions, you get blamed for it and pay $20 for nothing! Shouldn’t it be SFIX paying the user $20 for failed style sense?

Any person with a brain understands that paying $20 just to try something on then sending it back sounds like the worst way to convince someone to become a long-term customer.

And this is without even mentioning the pain of resending the clothes!

So, in an era where software companies have made software as a subscription (SaaS) almost a religion, there is no subscription service for SFIX.

This means there is a high number of churn where customers use their service once then never again, most likely after they are charged $20 to try on clothes they don’t like and have to send back the failed styled clothing.

Marginally, this company doesn’t cut it, we will check in with the next iteration of SFIX sometime in the future, but in it its current form, the 300% drawdown in the stock is absolutely logical.

December 1, 2021

Tech Letter

Mad Hedge Technology Letter
December 1, 2021
Fiat Lux

Featured Trade:

(TAKE A REST FROM FINTECH)
(PYPL), (SQ), (BNPL), (AMZN), (TWTR), (AAPL)

Take a Rest From Fintech

Tech Letter

The fintech trade is tiring — that is what the underperformance of stocks like PayPal (PYPL) and Square (SQ) is telling us.

Jack Dorsey’s Square has retraced around 25% from its peak and is bang on even from where it was 365 days ago.

Not what you want to hear if you’re a fintech trader.

The pullback from PYPL is even more precipitous declining around 40% from its peak.

Certainly, it would be cliché for me to say that the low-hanging fruit is gone from the fintech trade, but that’s exactly what is happening here.

Not only that, but I would also like to point out that most companies without a home-field advantage ecosystem are getting penalized for exactly that — not having an ecosystem.

Wasn’t it weird how the whole tech sector literally gave us a rip-your-face-off selloff the other day yet, Apple was one of the only tech stocks that reacted positively?

As we move into the late stages of the economic cycle, the goalposts are certainly narrowing for the tech companies, and that’s bad news for SQ and PYPL.

Another way to get penalized is to let that moat narrow which is effectively what has happened to PYPL and SQ.

And that’s the thing with PYPL, it’s just a way to pay, and not an ecosystem.

It plays second fiddle to that of wall gardens and the user trapped in it who is spending and can’t find a way out.

Another point I would like to make is that Twitter (TWTR) at these levels is an ideal buy-the-dip candidate precisely because it’s a great walled garden whose potential has yet to be untapped.

And readers shouldn’t let the mismanagement of the company by former CEO Jack Dorsey turn you off from a great long-term investment.

PYPL would kill for a platform like Twitter and instead needs to grovel to other strategic platforms to allow them to use PYPL’s technology.

PYPL is finally exposed, and I guess more accurate would be to say they are getting undercut by stickier technology that is more convenient to the consumer.

And what does that get you in late 2021?

Downgrades and slews of them which cut blocks the stock at its knees.

We just got one from Bernstein the other day and then it almost becomes a self-fulfilling prophecy with other analyst outlets doing the same thing in a copycat league.

Instead of catching a falling knife in SQ and PYPL, traders need to let these stocks breathe and find support where we know buyers will come in to breed confidence in an upward trajectory.

Easier said than done.

What has been all the rage so far denting PYPL and SQ’s model?

Enter Buy Now Pay Later (BNPL).

Naturally, the differentiated mechanism around which this technology revolves around is the delay in paying, which is never a good concept for a fintech player who rather gets paid ASAP.

Delayed payment is one headache, but then the downward force on fees is another monumental concern, if not downright scary.

This will no doubt trounce margin expansion moving forward and evidence of slowed growth in the latest quarter does not portend well for the company, especially as pandemic tailwinds continue to fade.

Another talking point is BNPL’s lack of credit checks meaning the quality of purchasers will naturally decline, may I even say attract fraudsters as well, and the companies will need to build up loss reserves to compensate for a riskier purchaser profile.

Klarna is another major BNPL company, and they were part of this new industry that took in around 20% of all sales on Cyber Monday.

That rather high number bodes poorly for PYPL in the short term.

Reinforcing the strategic hole of a lack of walled garden is that PYPL is desperate to cultivate partnerships like PYPL’s Venmo joining forces with Amazon (AMZN) — Starting next year, you'll be able to use the money anybody Venmo’s you to buy products directly from Amazon — so long as you live in the US.

But again, Amazon is infamous for replacing outside technology with its own in-house solution over time.

PYPL’s counter solution for BNPL is to enter the BNPL lovefest as well which will effectively trigger a race to zero.

Stopgap solutions will inevitably cannibalize its own business model.

Then let’s point to another walled garden — Tim Cook’s Apple with its Apple wallet.

It’s getting better and with the Apple Card, do they ever really need to spend one second considering a partnership with PYPL or SQ.

There is an inquisition going on in the fintech industry and big body blows will need to be landed for some clear-cut solutions that will ultimately lead to consolidation.

In this precarious environment, don’t get too fancy while fintech is getting elbowed out the way, head to higher ground where balance sheets can absorb just about anything.

pypl

November 22, 2021

Tech Letter

Mad Hedge Technology Letter
November 22, 2021
Fiat Lux

Featured Trade:

(RENOMINATION BOOSTS BIG TECH)
(FB), (GOOGL), (AMZN), (MSFT), (AAPL)

Renomination Boosts Big Tech

Tech Letter

U.S. President Joe Biden is doing all he can do to make sure that the US Central Bank stays accommodative to big tech investors.

He let the doves back in the driving seat which is highly positive for corporate America and terrible for penny-pinching savers.

Biden’s decision to re-elect incumbent Fed Chair Jerome Powell was cheered by the market locking in his ultra-low interest rate policies for yet another term.

Even more brazen was the appointment of Vice Chair, an even more pronounced dove Dr. Lael Brainard.

The second in command often helps signal Fed policy and gives it a dovish twist and clears the way for all systems go in 2022.

Any inclination that interest rates would rise faster than expected is now a non-starter, and the Fed will push its "lower for longer" mantra in the face of surging inflation for as long as they can make excuses for it.

Ostensibly, the path of easiest conjecture leads me to say that the five biggest stocks in the S&P 500 – Facebook, Apple, Amazon, Microsoft, and Google, which are around 30% of the market and growing, will do well in 2022.

Long-term, they have comprised an average of about 14% of the entire stock market, and 2022 should be the year they knock on the 35% threshold.

This essentially means that the stock market is techs to win or lose and everyone else is just a footnote.

And yeah I know…it’s been like that for quite a while now; but it’s more prevalent than ever.

We are rolling into a year where big tech will weaponize their cash horde to issue low-interest corporate bonds of their own company debt and then spin those cash harvests into higher rate corporate bonds that cheapen their cost of doing business because they pocket the higher interest payments as profits.

Industry leaders are able to borrow more cheaply and in greater quantities, and the size of their balance sheets also offers incredible optionality.

This also means they can buy back more shares and also leverage up their balance sheets.

Preferential access to cheap money also cheapens the process of expansion, or in buying rivals, more easily. In effect, lower rates give leading companies an unfair set of tools to accelerate their dominance and which no regulator dares to prevent.

What does this mean in practice for investors? If falling rates have spiced up valuations of the biggest tech stocks on the way up, it implies they may struggle if rates rise, particularly as this would mean investors place less of a premium on future earnings.

But since the expectations are lower for longer, the market will be comfortable with the nominal rate even in the face of surging inflation, meaning it’s a net positive for tech stocks in 2022.

Powell and Baird will move as slow as needed and anything faster than that will shock the tech market and we will get a 5% drop which will be a golden buying opportunity.

I have read many experts’ take on tech preaching that regulation is here and coming fast to take down big tech.

However, I am in the camp that Congress will do hardly anything, and any investigation will end with a slap on the wrist which is fine.

I don’t subscribe to this ridiculous idea that superstars eventually tend to fall to earth.

I believe the current climate has set up big tech to gain an even bigger market share, crush the little guy faster, and trigger EPS to grow uncontrollably.

That’s what I am seeing on the ground with my own eyes, as opposed to baseless claims that big tech will revert back to the mean.

This sets the stage for big tech to benefit from such elevated rates of profitability next year, they will be happy to overpay for smaller companies to whom they will give an ultimatum to either sell up or get killed by them.

Numerous signs point to a devastatingly profitable and comically successful 2022 for the most recognizable and biggest tech firms who will refine their tech and harness their balance sheets in a systematically lethal way.

Unprofitable startups have a mountain climb as it relates to competing in their industries and they can thank President Joe Biden for that; they will be unduly penalized as a group that will result in lower share prices that force them to crawl on their knees to venture capitalists for capital injections.

November 17, 2021

Tech Letter

Mad Hedge Technology Letter
November 17, 2021
Fiat Lux

Featured Trade:

(THE TESLA OF PICK-UP TRUCKS)
(RIVN), (AMZN), (TSLA)

The Tesla of Pick-Up Trucks

Tech Letter

Rivian Automotive Inc. (RIVN), the California-based EV company, touched $153 billion in market valuation making Rivian the largest U.S. company with zero revenue.

Exuberance can take you this far, but the company will need to show investors sales after the pixie dust wears off.

I understand that part of the narrative is that this could be the next Tesla (TSLA), and back of the napkin math shows us if it is a certain percentage of Tesla going forward then it would be certain billions of dollars.

The $150 billion valuation is too fast too soon, but when traders grab a hold of this rocket, all they need to do is add a little fuel.

It does speak loudly to investors that there is excess liquidity ebbing and flowing in the financial system where a stock can go this high just based on potential.

Let’s see the damn car first!

Granted, the car looks fantastic based on internet reviews, and if they do become the Tesla of pickup trucks, then anything that means reversion in the stock will be muted.

Word on the street is that only employees are driving the truck around now and the greater public should start receiving their Rivian orders at the end of 2021 or 2022.

EV peer Lucid Group Inc. also rallied intensely closing up 24% and eclipsing the valuation of Ford in the process. Lucid is now a $91 billion company, compared to Ford’s $79 billion.

Rivian will also need to compete with the upcoming European EV behemoths with Volkswagen that is Europe’s largest automaker with about 10 million vehicle deliveries per year, making it the global number two behind Toyota Motor Corp.

Rivian’s trucks are called the R1T and an electric SUV — R1S.

They forecast annual production will hit 150,000 vehicles at its main facility by late 2023.

At one point, Rivian was worth more than almost 90% of S&P 500 companies, including stocks like Goldman Sachs Group Inc., Boeing Co., Citigroup Inc., Starbucks Corp.

Rivian also benefited from Tesla’s Founder Elon Musk selling big tranches of stock which gave EV investors the green light to pile into Rivian even if it’s not for the long term.

Pricing for Rivian’s models starts around $70,000, and each features a base driving range of more than 300 miles on a full charge.

The hope is that mass affluent truck shoppers won’t be able to get enough of Rivian. Remember, the Ford F-150 is the best-selling vehicle in the country. In fact, the top six automobiles in the U.S. by sales are either pickup trucks or SUVs.

Amazon’s 20% stake in the company is the stamp of approval for many investors on the fence and they have already ordered 100,000 units for delivery by the end of 2030.

I could easily see Amazon ramping up orders quickly if they like the quality of the first two models.

Whether the stock should be $150 billion with 0 sales or not, is not really the full story of Rivian.

With only a narrow snapshot of what’s really going on, the high valuation is more a story of the momentum of the market in November that has seen big tech rejuvenate.

Rivian merely just got caught up in the updraft.

I am not diminishing the company, but they will need to demonstrate consistent earnings to build those long-term holders of the stock and I do believe they can do it.

The specs of the car look and feel like a Tesla and if they can replicate 80% of the quality with their first iterations, socially, they could catch on fire and become the new hip car to the masses.

This does set the stage for a critical first earnings report where the first sales will be thoroughly dissected with a fine-tooth comb and possible offer an entry point to investors after people realize this isn’t a $150 billion company yet.

Remember that it took Tesla years to stabilize their volatile stock, and Rivian might have to go through the same right of passage to be legit.

Rivian has the potential to become the #2 behind Tesla and that’s worth $90 billion right there, it’ll be interesting to see what pans out after that.

As for buying the stock, wait for a big sell-off then slowly scale in.

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