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August 12 Biweekly Strategy Webinar Q&A

Below please find subscribers’ Q&A for the August 12 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Lake Tahoe, NV with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!

Q: I just joined your service. Can you explain the logic to your current model trading portfolio?

I always try to balance long positions with short position. That greatly mitigates the risk of an out-of-the-blue crash, like we saw in February. Also, every individual position has a long and short, further reducing volatility. And you never can lose more money than you put up, so your risk is defined. That’s another classic risk control measure.

There is a further four hedge in that the portfolio is spread across all asset classes. So, I am long banks (JPM), (BAC), short US Treasury bonds (TLT), short a basket of big tech stocks (AAPL), (AMZN), (FB) and long gold (GLD). Something is always working where you can take profits. Our proprietary Mad Hedge Market Timing Index is always a big help in judging the best time to enter and exit these asset classes.

That is the short course on hedge fund risk management 101.

Q: Is it a good time to add in gold (GLD) here?

A: Yes, my long-term target for gold is $3,000/oz, possibly higher—it’s very common once you get a breakout from a 7-year bottoming process to get a big move like that. You always go back and retest that breakout level, that’s what’s happening now. I would use this dip to buy gold. You can look at (GLD) itself, the (GDX) gold miners which will give you 4:1 leverage over gold, or any of the 2x or 3x gold leveraged ETFs like (NUGT). There are lots of ways to play gold this time left from over the last bull market in gold ten years ago. So yes, bullish on gold with a temporary pullback in store. This recovery trade, which is buying banks, casinos, hotels, restaurants, weak dollar, weak buy market, weak gold—this is all temporary, this is just a trade. Those will all reverse themselves, probably by September if not sooner. So, if you missed the first round in the gold bull market, there’s certainly another chance to get back in.

Q: Do you think Biden and Harris will crash the stock market if elected?

A: No, since Biden started to run away in the polls, the stock market basically went straight up every day, and I prefer the stock market’s judgment on these things to opinion polls or talking heads. As far as Harris is concerned, she was the most middle of the road conservative pick of the 12 or so people they were looking at for vice president. Certainly, she’s a favorite with Wall Street, and isn’t it interesting they’re looking for the talents of a prosecutor in the White House? Who do you think they have in mind? So yes, that’s a net positive for the market. If anything, a new administration will bring a whole new round of Quantitative Easing and deficit spending, except it will be focused on bailing out Main Street, not Wall Street.

Q: Is the vaccine drug maker Moderna (MRNA) overbought here at 70?

A: Yes, I think to get any more appreciation you need to get an actual result on the many vaccines that are out there.

Q: Will Tesla (TSLA) pass 2,000 by year end?

A: I tend not to think so; Tesla had a once-in-a-lifetime 10-fold increase over a year. That is a very big move to digest, and while I’m saying people should keep their Tesla longs for the long term, short term you want to be selling calls against your long positions to hedge any downside and to take in some extra income.

Q: What caused ten-year US Treasury yields (TLT) to jump 14% yesterday? What will yields do from here?

A: Yields will go up and retest the 95-basis point level we saw a couple of months ago. That means we’re going to have a clear shot at adding shorts, probably for the next several weeks or months.

Q: I got the first TLT trade, but when I added the second one, I had to automatically close out my 175 short position to add the long 175 put position.

A: That is the correct way to do this. And what you end up with is a wider spread with a much larger size. So, you take all three positions we currently have, and you now have a (TLT) August $170-177.5 bear put spread in triple the original size and triple the profit, which expires in 5 trading days. It’s a trade with a very high return over a very short time frame. It’s the kind of trade that’s only available with very high volatilities in the market—at $25 in the (VIX), and you get very high accelerated time decay going into the close. So, it really was a two-week expiration play on the (TLT).

Q: Apple (AAPL) has been able to avoid any major damage in its share price in this trade war. How long can it last?

A: It can last 3 more months, until the election. It’s really quite amazing that the Chinese have not retaliated against Apple in all of these trade wars, and the reason for this is that Apple employs a million people in China, and they make a ton of money out of it. Apple has also managed their relationship with the communist government perfectly. So, that’s why they haven’t been hit. General Motors, other US companies—they could get expropriated. If the US can expropriate TikTok, what’s to stop China from expropriating General Motors, Starbucks, or even Apple for that matter?

Q: How do we know who has a real vaccine and who has a fake one? There’s so much information out there, I have a hard time filtering through what is real.

A: Wait for 100,000 people to try it out first—that’s what my plan is. That will be the safe way to do it. And if that means quarantining another couple of months to make sure you get the real deal, it’s worth the investment. Most industry safety standards, like animal trials, have been ditched by the FDA in order to get Trump a vaccine before the election. Putin is doing the same in Russia.

Q: Why is Warren Buffet buying back shares of Berkshire Hathaway (BRK/B) in record amounts? Is it because he sees no good investments?

A: He’d rather buy his own shares at parity or at a small premium than pay record PE multiples for essentially anything else in the market. Because the government rushed in so quickly to support the stock market, there never were any real deals in stocks, they never really got cheap. Yes, it sounds like down 40% in 2 months is cheap, but stocks weren’t, not even close to cheap, on a PE multiple basis. We never got close to the 9 ½X we saw in 2009. Also, if you believe in a recovery play, the ultimate recovery play is Berkshire Hathaway because they own predominantly old-line industrial cash flow stocks, which will lead any real recovery in the economy. So, at this point, Berkshire Hathaway will probably get you a higher return on a 12-month view than say Apple, Facebook or Amazon.

Q: Gold (GLD) vs Silver (SLV)? Which is better? And what about Copper (FCX)?

A: Silver always outperforms gold by at least 2 to 1 in any real economic recovery. Copper prices have risen 30% in 4 months; that is discounting a real economic recovery someday, so I would be buying copper on dips also.

Q: How do we learn more about options?

A: I suggest you go to the “How to Trade” section on our website, and that has links. Every trade alert we send out also has a link to a video that tells you exactly how to do the options part of that trade. And if you don’t want to do options, we also propose ETF and single stocks.

Q: What year end effect on the market do you see from a Biden tax plan on long term capital gains and qualified dividends at the ordinary income rate?

A: Well, if he actually proposes that, there will be a rush to sell assets by the end of the current year so people can take advantage of the very favorable capital gains tax that exist now. However, it’s not known whether that is actually the tax increase he’s proposing; it’s more likely he’ll simply return to the pre-Trump tax rates. However, I do expect him to come up with highly punitive tax rates on any real estate-related investment as a way of getting back at Trump. And that’s like loss carry forwards, steps up in the cost basis, 1031 exchanges—things specific to the real estate industry.

Q: If you think markets are going to come off, why aren’t you more aggressive buying the iPath Series B S&P 500 VIX Short Term Futures ETN (VXX)?

A: (VXX) has become such a professional market it really has become a day trading vehicle. It’s hard to get customers in and out of this thing fast enough to make them money, as most of my followers are not set up to be day traders. It’s a market where 90% of the professionals are playing from the short side, so when you get moves up, they essentially happen over 1 or 2 days, and then they spend weeks or months bleeding off. It really is a tough trade for a retail trader to do; and it is an area where the insiders in Chicago trade this thing and really do have an in-house advantage that I would rather not try to bet against.

Q: I sold the top on all precious metals positions and started buying back today. Was that the right thing to do?

A: Yes, I have a feeling it is. Start scaling in—if you’re nervous about buying gold here, buy a third of a position now, a third if it’s higher or lower, and a third if it’s higher or lower again. That’s what any pro would do.

Q: Do you see another big economic crisis in 2021?

A: I don’t think so; I think any continued weakness will be hit with massive liquidity from the Fed and more government spending. Now that they found the model to keep the economy going, they’re going to just keep at it, no matter who is in power. Roosevelt kept at it for 5 years to end the Great Depression, until he was bailed out by WWII, so hopefully we don’t have to bail our economy out the same way with WWIII.

Q: What about Bitcoin here?

A: We don’t trade Bitcoin as we think the whole thing is a giant scam. There’s also no value added by anyone. Insiders have a huge advantage, the people who are creating the bitcoin to sell. So, it’s a security with no fundamentals—thus unanalyzable.

Good Luck and Stay Healthy

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

August 10, 2020

Tech Letter

Mad Hedge Technology Letter
August 10, 2020
Fiat Lux

Featured Trade:

(SCRAPING THE BOTTOM OF THE TECH BARREL WITH UBER)
(UBER), (LYFT), (FB), (AMZN), (GOOGL), (NFLX), (AAPL), (MSFT)

Scraping the Bottom of the Tech Barrel with Uber

Tech Letter

The coronavirus and the resulting effects from it have had the single most sway on tech companies since the 2001 tech bust.

Marginal tech companies or even quasi-fraudulent ones have been exposed for what they are, while the secondary effects from the virus have supercharged the behemoths of the industry.

The stock market has no earnings growth in the past 5 years without the earnings from Microsoft (MSFT), Facebook (FB), Apple (AAPL), Google (GOOGL), Amazon (AMZN), and Netflix (NFLX). That means that without the Republican corporate tax cut, there has been negative earnings growth in the past five years.

One of those tech companies at the bottom of the barrel has been chauffeur service company Uber (UBER) and their latest earnings report is a glaring indictment of a shoddy business model that operates in a gray area.

The only reason this stock is at $33 is because of the piles of easy money printed by the central bank.

Uber needs all the help they can get, and shares are still trading 20% below the IPO price.

Competitor chauffeur service Lyft (LYFT) is doing even worse registering a 50% decline since the IPO.

Let’s do a little snooping around to see why these companies are doing so poorly and why you shouldn’t even think about investing in these companies long-term.

No matter how you dice it up, Uber’s core business, the one where they refuse to properly compensate their drivers, had a disaster of a quarter with gross ride volumes down 73% year-over-year.

Before we go any further with this one, I would like to point out yes, other areas of the business grew substantially, the problem is that the “other” part of the business is only 30% of total revenue.

Therefore, when 70% of your business that relies on pure volume to scale out crashes by 73%, it doesn’t really matter what else is in the report.

The only sensible idea now is capturing a snapshot of the silver linings, of which there were a few.

Delivery volumes through Uber Eats were up 49%, but the problem here is that first, it’s not profitable per delivery and second, it’s still a small part of the business.

Uber acquired Postmates who is another loss-making delivery service and the idea behind this is to achieve significant cost savings by scaling out these powerful assets.

The problem here is that it is essentially throwing good money on top of bad money because it’s proven that deliveries don’t make money per ride and that won’t change in the near future.

CEO of Uber Dara Khosrowshahi is on record saying Uber will become “profitable on an adjusted earnings basis before interest, taxes, depreciation, and amortization before the end of the year.”

This is almost like saying we won’t lose as much money as before and ironically, Dara Khosrowshahi has withdrawn this statement as the ride-sharing model has been repudiated by the consumer during the coronavirus.

Nowhere in the earnings report is the explanation of how Dara Khosrowshahi plans to attract people to share a car ride with a stranger during a global pandemic.

He didn’t share a solution because there isn’t one, hence the 73% decline in ride volumes.

If we assume this company is semi-fraudulent, then the silver lining would be that ride volumes didn’t decline by 100%.

That is where we are now with U.S. corporate companies such as the airlines that fired their employees but have subsidized them to stick around even though there is no work.

Instead of re-imagining itself through bankruptcies, the Fed has encouraged many marginal companies by breathing life into their finances through cheap loans.

This gives failing firms a last chance to enrich management with the capital and “cash out” before they hand the business off to someone who will essentially plan to do the same.

I will say that traders might have a trade or two in this one, because it’s hard to imagine Uber posting another 73% loss in ride volume and a dead cat bounce trade could be in the cards.

Long term investors should steer clear of this one and allow Uber to struggle on its own and just maybe in 5 or 10 years, it might just be “profitable on an adjusted earnings basis before interest, taxes, depreciation, and amortization before the end of the year.”

With so many high-quality tech companies and even one that is about to add super growth elements like TikTok into its portfolio, there are so many superior names to deploy capital in the tech ecosphere.

Either you must be galvanized by a gambler’s mentality to invest in Uber, or losing money is something that is habitual in your routine.

uber

August 5, 2020

Tech Letter

Mad Hedge Technology Letter
August 5, 2020
Fiat Lux

Featured Trade:

(MICROSOFT GOES FROM STRENGTH TO STRENGTH)
(MSFT), (GOOGL), (FB), (AMZN)

Microsoft Goes from Strength to Strength

Tech Letter

Microsoft (MSFT) is on the cusp of becoming the best tech company in America and that is the reward they get for staying out of the data privacy quagmire that the other tech titans find themselves in.

A TikTok acquisition would offer a major platform to rival Facebook and Google-owned YouTube and will revamp its image with young people.

TikTok itself will grow into a $300 billion company in the next 5-7 years just by itself.

This purchase is a massive blow to Facebook (FB) and Google’s (GOOGL) prospects as their once-fortified duopoly morphs into a 4-way race between Microsoft, Amazon (AMZN), Google, and Facebook (FB).

This would make up for all the prior missteps with Nokia’s handset business and Skype.

This could be described as the "crown jewel" snapped up at a discount.

This is essentially an asset with 100 million users, massive momentum, engagement, advertising revenue, and something they could cross-sell into the broader Microsoft base.

The treasure trove of data is what makes this deal a can’t-miss proposition.

Think about Microsoft in building software and hardware projects, and not just Xbox. For the first time, it would have proprietary data on a level that they can understand consumer behavior and not just with their enterprise customers.

Data privacy is Microsoft’s biggest selling point to the Trump administration which is concerned about TikTok’s ties to the Chinese government.

TikTok, which is currently owned by a Chinese company, has come under scrutiny and investigation in the U.S. over allegations it is supplying user data to Beijing, a charge that company officials have denied, but have no way to prove that they don’t bend to the whims of the Chinese Communist Party.

This episode follows on the heels of the U.S. effectively banning Chinese telecom giant Huawei in the U.S.

TikTok represents the dual threat of destroying America's edge in technological dominance.

TikTok has become the fastest-growth social platform in history and its inception as a Chinese technology threatens the U.S. reputation.

What specific data is TikTok able to aggregate from U.S. users?

Personal location, app usage, behavioral trends, thematic trends, and economic indicators.

This personal data could be used to take advantage of the American population through military or economic means.

India was first to ban TikTok and didn’t allow a sale of the Indian data to a local firm. They didn’t want money flowing back into Chinese hands.

China is notorious for the mishandling of data and most of the data is resold infinitely inside of mainland China.

How will Microsoft earn dollars from TikTok?

Digital ads.

TikTok would boost Microsoft’s share of the U.S. digital display ad market.

This year, eMarketer predicts Microsoft to hold just 1.5% of that market, slightly ahead of Snapchat but well behind Facebook’s 42% and Google’s 10.4%.

That is about to change.

Just how popular is TikTok?

TikTok is a disruptive force in social media and video.

In the second quarter, TikTok had 30% penetration of U.S. respondents 18 and older in a survey of 2,500 U.S. consumers.

Among respondents 18 to 24, TikTok's popularity is even greater, at about 42%, versus 65% for Facebook, 78% for Instagram and 63% for Snapchat.

Along with this, Microsoft finally gets the “cool factor” they have been missing for generations.

What are the chances of Microsoft buying TikTok?

I would put it at 85%-90%.

ByteDance needs to seal a deal or they leave the table with zilch and at the same time kicked out of America.

The company, a massive social media player in China, is valued at about $100 billion, half of which is due to TikTok.

The deadline gives Microsoft the added effect of increased negotiating leverage and it will be interesting to see what concessions they get from TikTok.

No other major tech company has been given the green light to make the deal and Microsoft has plenty of cash available to make this deal happen.

The deal could be especially beneficial for Microsoft because the TikTok business in the U.S. is valued in the $40-billion range but could eventually reach $300 billion if they nurture it properly.

I would be shocked if Microsoft flubs this golden opportunity to add a trophy asset to put in their trophy cabinet.

CEO Satya Nadella is too shrewd to let this once-in-a-lifetime chance to cement Microsoft as the top dog go to waste.

I was highly bullish on Microsoft before this news, and I can easily say now that this is not only the best American tech company but the best company overall in the world.

July 31, 2020

Tech Letter

Mad Hedge Technology Letter
July 31, 2020
Fiat Lux

Featured Trade:

(BIG TECH IS UNSTOPPABLE)
(FB), (AAPL), (AMZN), (GOOGL), (MSFT)

Big Tech is Unstoppable

Tech Letter

The big loser at the Congress hearing grilling the top 4 CEOs in big tech was by far and away the U.S. government.

The U.S. government accused big tech of operating as illegal monopolies and big tech’s answer was largely indifference, betting that the government is too disjointed to actually hit them with some venom.

The only member of congress who was on point with her questions was Democratic Rep. Pramila Jayapal, who used internal Facebook documents to show data theft artist Mark Zuckerberg suppressing competition when he purchased Instagram in 2012.

Jayapal then cornered Amazon (AMZN) CEO Jeff Bezos into a corner, peppering him with questions about Amazon’s 3^rd party data handling.

There has been a long-lasting campaign against Amazon in regard to them using internal data to hijack 3^rd party sellers’ products deemed successful by recreating them as in-house products and catapulting their in-house branded products to the top of the Amazon search results.

The success of Congress stopped at Jayapal, as the rest of the motley crew appeared so out of touch with what real tech issues exist that it felt they were unfit to ask questions.

Playing into their inefficient display was the fact that they chose a time delegated for antitrust issues to complain about anti-conservative bias in social media, which is a separate issue entirely.

These arguments were armed with zero data to back up the claims, and gave the tech leaders an easy way out by just grandstanding about the issue.

The biggest winner was the company that was not invited to the session – Microsoft (MSFT).

They were the only tech company over $1 trillion that wasn’t in attendance, and for good reason.

Microsoft CEO Satya Nadella has been able to position the company as a trust-first cloud enterprise and refuse to traverse into that gray area where conflicting interests exist.

They are living proof that tech companies don’t need to swindle personal data to grow revenue, which is why I keep putting on call spreads in this brilliant company.

Microsoft is in great strategic position to expand their business, and the same cannot be said for Facebook because unlike Microsoft, Facebook produces nothing of meaningful substance.

This was evident as Congress picked on Zuckerberg’s company the most, even catching him in a bold face lie.

The most convenient line of reasoning for these tech companies doing what they do was the “American-first” playbook.

Highlighting China’s rise as tech competitor, fearmongering that China could one day be at the top of the tech pyramid but actually just demonstrating another way of avoiding the real issues.

Watching this discussion made me realize that these tech companies have reached a level of power that supersedes the government.

Politicians are only invested in short-term interest and protecting their tenure in government. Bezos, Zuckerberg, Cook, and Pichai can play the long game.

This is exactly why investors pour capital into these 4 stocks plus Microsoft.

Apple earns over $55 billion in profits annually on $260 billion of revenue.

Amazon makes up 40% of U.S. online sales.

Facebook (FB) has 2.6 billion users which is 34% of the world’s population.

Lastly, 90% of internet searches are done through Google (GOOGL) search.

The real question should be: when will these companies hit the $2 trillion mark?

And even if Congress could conjure up some meaningful regulation against these 4, they certainly have the resources to navigate around it, especially when half of Congress still doesn’t understand what they actually do.

As it stands, these data empires are left to go their merry way and Congress is failing to protect individual user data on an epic scale.

To put the cherry on top, I would argue that the coronavirus has done big tech’s dirty work wiping out many businesses while big tech gets stronger.

I am bullish big tech.

July 27, 2020

Tech Letter

Mad Hedge Technology Letter
July 27, 2020
Fiat Lux

Featured Trade:

(IS BIG TECH JUST A FLASH IN THE PAN?),
(MSFT), (AMZN), (AAPL), (GOOGL), (FB)

Is Big Tech Just A Flash in the Pan?

Tech Letter

Today’s tech newsletter might be the most important one you will ever read.

It’s my job to distill exactly what is going on in tech and disburse this information in a way that readers can take advantage of it in real-time.

The tech market is all about striking when the soil is fertile.

The five largest stocks in the S&P 500, Microsoft (MSFT), Amazon (AMZN), Apple (AAPL), Google (GOOGL), and Facebook (FB) have accrued a combined valuation that surpasses the valuations of the stocks at the bottom 350 of the index.

This means that if you weren’t in tech the past few years, chances are that your portfolio significantly underperformed the broader market.

Even in August 2018, many active managers could have thrown in the towel and said the late economic cycle was way too frothy for their taste and time to take profits.

Little did they know that betting against the best growth industry in the last 2 generations would equate to self-firing themselves, because to replicate the same type of performance would have meant staying in tech through the coronavirus scare.

Many in the trading community would even go as far as to say to wait for the bear market, then big tech would get hammered first and deepest because of their lofty valuations.

These tech companies were in for a rude awakening and shares had to consolidate, right?

Well, anyone who doesn’t live under a rock is seeing the exact opposite play out with Amazon, Microsoft, and Apple valued above $1 trillion and still soaring as we speak.

This goes to show that betting against something because they are “too expensive” or “too cheap” is a fool’s game.

Just take oil for instance, that many retail investors bought because they came to the conclusion that oil could never go below zero.

Then playing oil through an ETF with massive contango meant that the index is likely to go down even if the price of oil is up.

Not only do investors bear insanely high risk in these trading vehicles, but also a systemic risk of oil ETFs blowing up.

Oil is cheap, and it can get cheaper, while tech is expensive and can get a lot more expensive.

Until there are structural changes, there is no point to bet on a sudden reversal out of thin air.

The “reversion to the mean” trade can blow up in your face if used irresponsibly.

Betting against things that an individual perceives as unsustainable and secretly hoping that they cannot continue to go on is probably the worst strategy that I have ever heard of in my life.

The reality is that these things are sustainable, and tech shares will keep moving higher uninterrupted until they don’t.

"Until they don’t" would mean meaningful structural damage to big tech’s business model, which I do not see one iota in today’s business climate.

In fact, these companies just keep going from strength to strength.

Active managers are the ones who set market prices and they help the momentum accelerate in tech with full knowledge that if they miss out, there is likely no other solution to hit yearend targets.

What active manager doesn’t want their year-end bonus?

Even analyze the value investors who, in a normal world, would not even consider tech companies because they avoid the traditional “growth” profile.

Funnily enough, these “value” investors have Microsoft in their portfolios now, even though it is not close to a value stock.

So what has Microsoft accomplished recently?

CEO of Microsoft Satya Nadella has rebuilt a company Microsoft that is now equal in value to The Financial Times Stock Exchange 100 Index, the share index of the 100 companies listed on the London Stock Exchange with the highest market capitalization.

That’s right, one American company is just as valuable as the top 100 public companies in England.

Even more hilarious, Jeff Bezos’s wealth is greater than the entire European country of Hungary.

Yes, the one south of Poland that serves goulash as the national cuisine.

An even broader view of tech would give us an even more stunning snapshot of the success showing that the Top 5 tech stocks are now worth more than the entire developed stock market outside the U.S. such as Europe, Canada, Japan, Hong Kong combined.

Then take into consideration that these companies are on the cusp of penetrating high margin industries like medicine and healthcare which will translate into another golden decade of accelerating revenue and elevated profits relative to the rest of the S&P index.

The U.S. is a place where unfettered capitalism is promoted and implemented, and tech’s outperformance manifests itself by pouncing on the winner-takes-all mentality.

Americans like winners and the rules are no different in corporate America.

These 5 tech names have contributed over 20% of the gains in the past month and until they falter, there will be no tech sell-off.

July 22, 2020

Diary, Newsletter, Summary

Global Market Comments
July 22, 2020
Fiat Lux

Featured Trade:

(MY NEWLY UPDATED LONG-TERM PORTFOLIO),
(PFE), (BMY), (AMGN), (CELG), (CRSP), (FB), (PYPL), (GOOGL), (AAPL), (AMZN), (SQ), (JPM), (BAC), (BABA), (EEM), (FXA), (FCX), (GLD)

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