Global Market Comments
February 4, 2022
Fiat Lux
Featured Trades:
(FEBRUARY 2 BIWEEKLY STRATEGY WEBINAR Q&A),
(PYPL), (PLTR), (BRKB), (MS), (GOOGL), (ROM), (MSFT), (ABNB), (VXX), (X), (FCX), (BHP), (USO), (TSLA), (EDIT), (CRSP)
Global Market Comments
February 4, 2022
Fiat Lux
Featured Trades:
(FEBRUARY 2 BIWEEKLY STRATEGY WEBINAR Q&A),
(PYPL), (PLTR), (BRKB), (MS), (GOOGL), (ROM), (MSFT), (ABNB), (VXX), (X), (FCX), (BHP), (USO), (TSLA), (EDIT), (CRSP)
Below please find subscribers’ Q&A for the February 2 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Incline Village, Nevada.
Q: Thoughts on Palantir Technologies Inc. (PLTR)?
A: Well, we got out of this last summer at $28 because the CEO said he didn’t care what the share price does, and when you say that, the market tends to trash your stock. But Palantir is also in a whole sector of small, non-money-making, expensive stocks that have just been absolutely slaughtered. And of course, PayPal (PYPL) takes the prize for that today, down 25% and 60% from the top. So, we’re giving up on that whole sector until proven otherwise. Until then, these things will just keep getting cheaper.
Q: Given the weakness in January, do you think we still have to wait until the second half of the year for a viable bottom?
A: Definitely, maybe. If things are going to happen, they are going to happen fast; we got the January selloff, but that’s nowhere near a major selloff of 20%. And the fact is, the economy is still great so that’s why this is a correction, not a bear market. At some point, you want to buy into this, but definitely not yet; I think we take another run at the lows again sometime this month. We just have to let all the shorts come out and take their profits so they can reestablish again.
Q: Why are bank stocks struggling?
A: A lot of the interest rate rises that we’re getting now were already discounted last year—banks had a great year last year—so they were front running that move, which is finally happening. To get more moves out of banks, you’re going to have to get more interest rate rises, which we will get eventually. We still like the banks long term, we still like financials of every description, but they are taking a break, especially on the “sell everything” index days. A lot of the recent selling was index selling—banks have a heavy weighting in the index, about 15%. So, they will go down, but they will also be the ones that come back the fastest. We’re seeing that in some of the financials already, like Berkshire Hathaway (BRKB) and Morgan Stanley (MS) which are both close to all-time highs now.
Q: What about the situation with Russia and Ukraine?
A: It’s all for show. This is a situation where both the US and Russia need a war, or threat of a war, because the leaders of both countries have flagging popularity. Wars solve those problems—that’s why we have so many of them by the United States. We’ve been at war essentially for most of the last 40 years, ever since Ronald Reagan came in.
Q: I didn’t exit my big tech positions before the crash, should I just hang onto them at this point?
A: The big ones—yes. The Apples (AAPL), the Googles (GOOGL), the Amazons (AMZN) —they’re only going to drop about 20% at the most, maybe 25%, and then they’ll go to new highs, probably before the end of the year. If you’re good enough to get out and get back in again on a 20% move, go for it. But most people can’t do that unless they’re glued to their screens all day long. So, if you have stock, keep the stock; if you have options, get out of the options, because there the time decay will wipe you out before a turnaround can happen. This is not an options environment, unless you’re playing on the short side in the front month, which is what we’re doing.
Q: When you send out the trade alerts, I have a hard time getting them executed. How do you advise?
A: Move the strike price, go out in maturity, and you can get our prices at slightly higher risk. Or, just leave it and, quite often, people’s limit orders get done at the end of the day when the algorithms have to dump their positions at the close because they’re not allowed to carry overnight positions. Also, even if you get half of my trade alerts, you’re doing pretty good—we’re running at a 23% rate in 6 weeks, or 200% annualized. And remember, when I send out a trade alert, you’re not the only one trying to get in there, so you can even go onto a similar security. If I recommend Alphabet (GOOGL), consider going over to Microsoft (MSFT), because they all tend to move together as a group.
Q: I am sitting on a 16% profit in the ProShares Ultra Technology (ROM), which you recommended. Should I take the money and run, and get back in at a lower price?
A: Yes, this is just a short covering rally in a longer-term correction, and you make the money on the volume. You win games by hitting lots of signals, not hanging on to a few home runs where people usually strike out.
Q: You said inflation will be short lived, so why would there be 9 interest rates after the initial 4?
A: It’s going to take us 8 interest rates just to get us back to the long-term average interest rate. Remember the last 2% is totally artificial and only happened because there was a financial crisis 13 years ago. So, to normalize rates you really need to get overnight rates back up to about 3.0%. And that means 12 interest rate hikes. If you don’t do that, you risk inflation going from controllable to uncontrollable, and that is the death of the Fed. So, that’s why I expect a lot more interest rate rises.
Q: Will the tension between Russia and the Ukraine affect the market?
A: No, it hasn’t so far and I don’t expect it to. Although, it’s hard to imagine going through all of this and not seeing a shot fired. When that one shot gets fired, then maybe you get a down-500-point day, which it then makes back the next day.
Q: Anything to do with Alphabet (GOOGL) announcing its 20 to one split?
A: No, it’s too late. We had a trade alert out on a Google 20 call spread which we actually took profits on this morning. So, nice win for the Mad Hedge Technology Letter there. There’s nothing to do with these splits, it’s not like they’re going to un-announce it, this isn’t a risk-arbitrage situation where there’s always an antitrust risk hovering over the deal that may crash it. This is pretty much a done deal and doesn’t even happen until July 1. People think bringing the share price from $3,000 down to $150 makes it available for a lot more potential retail buyers, which it does. It also makes call spreads on the options a lot cheaper too. When we put out these alerts, we can only do one or two contracts, even tying up $10,000—divide that by 20 and all of a sudden your cheapest Google call spread cost $500 instead of $10,000.
Q: Can you speak about the liquidity on your strikes? Sometimes we’re trading against strikes that have no open interest.
A: Whenever you put in an order for one strike, even if there’s nothing outstanding on that strike, algorithms will arbitrage against that strike—where your order is—against all the other strikes on the whole options chain. So, don’t worry if you have limited open interest or no open interest on our trade alerts. They will get done, and it may get done by some algorithm or some market maker taking more of another strike, that’s how these things get done. It’s all thanks to the magic of computers.
Q: Do you have thoughts about Freeport-McMoRan (FCX)? I have some profitable LEAP positions open.
A: It’ll go higher, keep them. And I like the whole commodity space, which means iron ore (BHP), copper, steel (X), etc.
Q: Would you trade Barclays iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX) at this point?
A: No, because we’re dead in the middle of the recent range. That’s a horrible place to enter—you only enter (VXX) on extremes on the upsides and the downside.
Q: What should I do about Airbnb (ABNB) at this price? They’ve been profitable for 2-3 years, with revenues rising.
A: I think Airbnb is one of the best run companies in the world, and I expect their earnings to keep growing like crazy, especially once we get out of the pandemic. I am also a very frequent Airbnb user, having stayed in Airbnb’s in at least 10 countries, so I’m a big fan of them. The stock just got dragged down by the small tech bust but it will come back. This is a “throwing the baby out with the bathwater” situation.
Q: Are there any good LEAPS candidates now?
A: I’m not doing any LEAPS until we reach the final cataclysmic selloff of the correction. Otherwise, the time value will run against you enormously; I’d rather wait for better prices.
Q: Do you see a cataclysmic selloff?
A: Yes, I do. Maybe in a few more weeks, and maybe next week if we get a really hot 8%+ inflation rate—that would really kill the market.
Q: What will tell you if inflation is ending or slowing labor?
A: Labor is 70% of the inflation calculation. So, when these huge pay awards slow down, that's when inflation slows down. By the way, a lot of pay increases that are happening now are catch-up from the last 40 years of no pay increases for American workers in real inflation adjusted terms. So, a lot of this is catch-up—once that’s done, you can forget about inflation. Also, the long-term pressure of technology on prices is downwards, so allow that to reignite deflation, and that will be your bigger issue over the long term.
Q: What should I do about Editas Medicine Inc (EDIT) or CRSPR Therapeutics AG (CRSP)?
A: Don’t touch the sector, it’s out of favor. Let this thing die a slow death. When they come up with profitable products, that’s when the sector recovers. So far, everything they have works in labs but there are no mass-produced Crispr products, they’re trying for mass production on sickle cell anemia and a couple of other things, but still very early days in CRSPR technology.
Q: When will this recording be posted?
A: In two hours, it will be posted on the website. Go to “My Account” and you’ll find the last 13 years of recorded webinars.
Q: What do you mean by “stand aside from Foreign Exchange”?
A: The volatility in the foreign exchange market is just so low compared to equities and bonds, it’s not worth trading right now. When you can trade everything in the world—foreign exchange is at the bottom of the list. If I see a good entry point, I’ll do a trade; but do I trade Tesla (TSLA) with a volatility of 100%, or foreign exchange with a volatility of 5%? Those are the choices.
Q: Should I do any short plays in oil (USO)?
A: Generally, you don’t want to short any commodity unless you're a professional; I say that having been short beef futures when Mad Cow Disease hit in 2003 and you had three limit-up days in a row in the futures market. That happens in the commodity areas—liquidity is so poor compared to stocks and bonds that if you get caught in one of these one-way moves, you can’t get out. So that is the risk; and I’ve known people who have gone bust trading oil both long and short, so this is for professionals only. With stocks you get vastly more data and information than you do in the commodity markets where industry insiders have a much bigger advantage.
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
The Aga Sophia Mosque in Istanbul
Mad Hedge Technology Letter
February 2, 2022
Fiat Lux
Featured Trade:
(GOOGLE IS STILL ON SALE)
(GOOGL), (ARKK), (MSFT), (AAPL)
Google (GOOGL) shares were up 65% last year and I would still call the name cheap in 2022.
It’s interesting for me to see ARK (ARKK) Funds CEO Cathy Woods claim that growth is on sale now.
I take the other side of the argument and would pontificate that quality is for sale, like Google, who has carved out an unrivaled position in the digital ad space.
Their cash cow business is so effective that they are set to achieve $100 billion in free cash flow by 2023.
It’s mind-boggling that a company of this magnitude still trades at a discount even though generating more free cash flow than Apple (AAPL) and Microsoft (MSFT).
Google’s ad revenue was up to $61 billion which was up from $46 billion last year.
These numbers are staggering because of the sheer math it takes to jump to 33% when we are talking about over $50 billion.
Google is so big that the law of large numbers works against them, but they still shrug that off and register these outlandish numbers.
This company is one of the sure-fire bets in tech along with Microsoft and it’s no surprise that the best companies are taking the rest of the market on their back to diffuse this recent volatility.
The plaudits don’t stop there with their critical cloud division growing 45% year over year to $5.5 billion.
The cloud and ad revenue serve as the structural stabilizers to a healthy business and all signs point to Google having tremendous value as a stock.
Google also announced a 20:1 stock split which should allow investors with smaller bank accounts access to the stock.
Apple and Tesla saw huge inflows after they announced stock splits and I see no reason why this should be different for Google.
Fortunately, it appears that supply chain bottlenecks aren’t materially damaging Google’s ad demand.
Now Google is on the verge of cruising by $2 trillion in market cap.
Since we are in a market where outperformers are rewarded, Google is in great shape for 2022 when supply chain problems are set to improve.
I have repeatedly said to stay away from those companies that cannot meet expectations and aren’t cash flow-positive.
There is no more free money to subsidize poor management or a poor product or both.
When we analyze Google’s ad business from a microeconomic level, then it’s easy to understand that businesses cannot get rid of their services because of its deep application for consumers.
People also want deals.
They're looking for value.
For shoppers, Google made it possible to browse and discover the hottest deals for major moments like Black Friday and Cyber Monday on Google Search.
For merchants, Google made it even easier to list promotions via automated imports from third-party integrations like Shopify and WooCommerce.
Google is easily selling ad inventory, attracting new customers, and building brand loyalty.
In the holiday season, the number of merchants using promo features jumped 280% year over year.
Retailers are also turning to Google to help them transform and accelerate growth such as Warby Parker, who drove a 32% year-over-year increase.
They accomplished this by not only opening stores and expanding their contact lens business but also by tapping into Google across services.
Omnichannel bidding, smart shopping campaigns and an expanded presence in Google Maps to promote in-store eye exams contributed to Warby Parkers’ success.
Google is making it easier for viewers to buy what they see and simpler for advertisers to drive action with innovative solutions like product feeds and video action campaigns and emerging formats like live commerce.
Backcountry.com generated a 12-1 return on ad spend with product feeds in 2021 and plans to double its investment in 2022, while Samsung, Walmart, and Verizon partnered with creators to host shoppable holiday live stream events in the U.S.
In short, Google has pricing power, and its strategic position is such that it’s hard not to see rampant growth ahead in the short and long term.
Its cash position is enviable to any tech or non-tech company and at some point a dividend is inevitable.
Even with its success, Google is still investing aggressively for the future and is part of every cutting-edge technology from artificial intelligence to self-driving and even the metaverse.
Mad Hedge Technology Letter
January 28, 2022
Fiat Lux
Featured Trade:
(APPLE PUSHES THE ENVELOPE)
(MSFT), (AAPL), (GOOGL), (FB)
We can flip through the thesaurus to look for superlatives that would describe how Apple (AAPL) is performing versus the rest of the market or tech sector, yet it really doesn’t matter who we compare them to, because no matter what we do, somebody would need to be clinically insane to bet against this well-oiled machine.
To give credit where credit is due, Apple CEO Tim Cook parlayed his friendship with co-founder Steve Jobs into the top job at Apple precisely because he was and still very much is an operational specialist.
In times of pandemic, climate change, supply chain problems, hyperinflation, and geopolitical volatility, this is the man you want at the helm to make those operational decisions that benefit shareholders.
Cook even pulled off China and is the only person in Silicon Valley that can claim that level of tech success in the Middle Kingdom.
Not many US tech companies can outdo the Chinese in China, but that is what Cook has managed to achieve and that sometimes gets overlooked.
I have undeniably been a major skeptic about China, but he has managed to penetrate so deeply into Chinese culture that the Chinese can’t root him and his products out without massive disruption and possible social unrest.
Cook, being the operations guy that he is, told the media that he expects supply bottlenecks to ease, which is a major bullish signal to the rest of tech and the semiconductor industry.
That comment alone will mean that the Nasdaq will finish the year at least 7-10% higher than if he didn’t make that comment and to nobody’s surprise, Apple is trending higher by over 6% today and rightly so.
The market trusts Tim Cook and what he says, and I can’t say the same for Tesla’s Elon Musk who loves to overpromise and underdeliver.
This is also good news for the EV sector such as Lucid (LCID) and Rivian (RIVN) which I highlight as two stocks with massive potential even if they can’t ramp up to Tesla levels right away.
Optimizing the supply chain has never been more important today because of the de-globalized elements that have filtered through to corporate America.
Part of streamlining the operations helps when you are Apple and you are Tim Cook and you can negotiate contracts down to the fractional cent.
Other companies simply don’t have that negotiating leverage.
They have curried together that type of goodwill that Apple has with their brand name and footprint.
Moving forward, the best way to decode the content of Apple’s earnings report is by viewing it as an equivalent to an implicit guarantee that margins and operations will be running smoothly for the rest of the year.
That in itself carries more weight than the Fed supplying capital for zombie companies.
I keep mentioning that this is the era in which the balance sheet matters; and wow, Apple has a crystal clean sheet that almost doesn’t need balancing.
Apple’s optionality is just mind-boggling from unlimited buybacks, to possibly raising their dividend from 22 cents, to hiring and expanding their workforce, adding more data centers, and so on.
They literally have any tool in the tool kit to respond to any possible headwind.
That is a luxury that most tech companies cannot claim to possess aside from a handful.
As Microsoft reported stellar earnings, this is just another feather in the cap for big tech.
Big tech is protected from the carnage that smaller tech companies must face, and who have less options to remediate possible devastating internal or external threats.
Not only is Apple riding high on their horse at the vanguard, but they possess products and software that simply can’t be substituted out, which easily creates an overwhelming strong hand when it comes to pricing power.
Next in the queue with earnings is Alphabet (GOOGL), where I fully expect them to reveal record earnings. Facebook (FB) too should do well, but not as good as GOOGL.
Don’t bet against Goliath.
Mad Hedge Technology Letter
January 26, 2022
Fiat Lux
Featured Trade:
(MSFT DIGS US OUT OF A HOLE)
(MSFT), (AMZN), (GOOGL), (AAPL)
The 14% selloff year to date in tech shares finally met its match when Microsoft (MSFT) soothed us with its most recent quarterly performance.
It’s starting to feel like a broken record, but this world belongs to 5 large Silicon Valley tech companies and for the rest of the other few hundred publicly listed companies, we are just living in their world.
And it just so happens that if anybody or anyone is anointed as the savior to save this market from capitulating, it has to be the heavy lifters and we are getting validation from the strongest of cloud/enterprise companies.
Just as resonating, MSFTs positive quarter draws yet one more line in the sand for Mr. Market, offering us support and offering us evidence this could morph into a short-term bottom.
Even more salient, this is even deeper evidence that the software sector is the cream of the crop in tech and their strategic position is only getting stronger.
The thing that these guys have that is critical in today’s economic environment is tinged with inflation headwinds — pricing power.
Starting in March, Microsoft is pushing through an MSFT 365 price hike and consumers and businesses will see their monthly bill go up a few bucks.
According to Microsoft, those increases will apply globally with local market adjustments for certain regions.
And it’s not that 365 is MSFT's cutting edge division, it’s just another example of how MSFT can raise prices and consumers have no other choice but to comply because, at this point, 365 is a utility.
Sure, you can find a substitute, but it wouldn’t be as good of a product.
It was a record quarter, driven by the continued strength of the Microsoft Cloud, which surpassed $22 billion in revenue, up 32% year over year. We are living through a generational shift in our economy and society. Digital technology is the most malleable resource at the world's disposal to overcome constraints and reimagine everyday work and life.
Anyone who bet the ranch on the cloud and enterprise is happy they bet the ranch on it.
MSFT's earnings were just a giant confirmation of how tech won’t be knocked off its perch as the apex warrior, not only in the Nasdaq index but the broader market.
The stock market has been a tech market for quite a few years and that can’t be ignored or discounted.
Fundamentally, the foundations of profitable tech stocks have never been healthier, and they are extracting more of the pie than ever.
Then as we hear nonstop about the upcoming metaverse project and its entryways through gaming, MSFT is so on top of that new development that they will put all other companies to shame.
Granted, there are other heavyweights like Apple (AAPL), Amazon (AMZN), Alphabet (GOOGL) that MSFT must take measures of to see if they are pushing ahead with something they are unaware of, but all is good is Redmond, Washington.
As data volumes and transactions increased over 100% year over year, MSFT has a grip on what’s going on and can quickly pivot to anything that’s worth it with its army of high-quality developers.
MSFT’s ubiquitous fingerprints are everywhere with even over 90% of Fortune 500 companies using Teams Phone this past quarter highlighting the deep penetration into the richest corners of corporate America.
My overarching point is that MSFTs products aren’t just a one-trick pony ala Facebook.
More than half of customers have four or more MSFT workloads, up 75% year over year, underscoring MSFTs end-to-end differentiation.
On a short-term trading basis, traders must adopt tech winners with robust balance sheets, and this must be looked at as a dealbreaker or deal winner of sorts.
In a world that is clamoring for quality tech names, it’s no time to allocate your hard-earned savings into Podunk technology.
Once the macro washout fades, pile into MSFT!
What I am saying is that there is a great deal of the market to plain out avoid, and don’t get caught up in those lemons.
Mad Hedge Technology Letter
January 24, 2022
Fiat Lux
Featured Trade:
(BEST OF THE REST GETS SLAUGHTERED)
(MSFT), (SNAP), (GOOGL), (AAPL), (AMZN), (FB), (TIKTOK)
Popular nostrum has it that earnings will save the stock market.
The strength of corporate America time and time again is on display to show investors how high short-term growth follows through.
Anytime the Nasdaq enters a little rut, earnings bail us out and the next move is usually higher for tech shares.
Well, wait a second, things are different this time.
The bad news now is that confirmation of solid fundamentals during the upcoming earnings season, won’t make the Nasdaq index go higher.
The market is pricing in business as usually for the largest 5 tech stocks which are really the only ones that matter.
Internally, the rest of tech has been deeply damaged by this January sell-off and we are talking about 8-9% one-day sell-offs for the small cap tech growth and I haven’t even mentioned the peak to trough underperformance which is much worse.
Larger cap Enterprise and Cyber Security stocks still boast solid foundations and are going down less than the meme stocks, shelter-at-home stocks, and the best of the rest tech stocks.
Basically, we need to get through earnings because there is minimal upside for tech stocks as investors peruse through a lack of short-term catalysts.
We are stuck in a ditch where monetary and fiscal policy has been set dead straight against an environment of potentially appreciating tech stocks.
Until that changes, I don’t envision a snappy reversal apart from a dead cat bounce to sell into.
Chasing growth in a low-interest rate environment gave us an overshoot to the upside and now that is all working in reverse.
And for the big FANG stocks outperforming small cap, it just means shares are performing better than tech growth because they command lower volatility due to stronger balance sheets.
Resilience to indiscriminate selling is currency in today’s trading world.
Nothing wrong with growth, but they are what they are, so much so that if you cannot generate profitability now, sell-offs are indicative of their poor strategic position among bigger tech.
The carnage under the hood is stark today with Snap stock cratering after the social media company’s shares were downgraded amid risks to revenue growth and tough competition from rival TikTok.
Snap’s headwinds result from a weakening business profile stemming from IDFA headwinds, difficult [year-over-year comparisons] from stellar growth in 2020-21, and increasing competition from TikTok.
IDFA is a serious thorn in the side for the android-based systems of Google as well as for Facebook.
IDFA is Apple minimizing the reach of data harvesting platforms by turning off their data reach and these modifications by Apple (AAPL) to rules for advertising on mobile apps have forced companies like Snap to lower guidance.
When it reported quarterly earnings last October, Snap revealed that the impact on its advertising business could be long lasting and now we are experiencing that.
The IDFA issues could cut growth rates by half as these social media firms have been unable to remedy its loss of reach in digital advertising.
Snap has the unenviable position to not only be behind Google and Facebook, but they are also the next company to be upended by TikTok that has really come on the last few years.
TikTok has supplanted Snap as the go-to social media platform for teens and young adults.
In a rising interest rate environment, the best of the rest like Snap gets punished for not being the best of class.
Snap shares are down over 200% from its peak and threatening to close in on 300% in the red.
Snap represents the fortunes for the marginal tech stocks that rely on growth and that is not working in 2022.
Although not as loss-making as other tech growth, SNAP has been fairly pigeonholed as the tech you don’t want to own now.
It’s a dangerous position to fill in times of the VIX spiking to 30.
The problems don’t stop there with TikTok really threatening Snap’s position and the momentum signaling that Snap is prepared for a deeper slowdown than initially expected.
Snap’s foothold is strongest in the 13-34-year-old range in the U.S., Canada, the U.K., France, Australia, and the Netherlands, but TikTok’s audience is the most similar to Snap’s which means it puts both Snap’s user face time spent and ad dollars at risk.
From a monetary standpoint, digital advertisers will start to play off ad competition between TikTok and Snap, resulting in discounted ad revenue per unit which will narrow margins moving forward.
Not being able to command the prior ad premium is a stinging blow to Snap who thought they were in the driving seat to the third position behind Google and Facebook, but it shows that being a tech minnow is a harrowing experience and fending off toxicity is part of the playbook just to survive.
Head to higher waters in this volatile environment.
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