Mad Hedge Technology Letter
February 24, 2021
Fiat Lux
Featured Trade:
(THE LARGEST RISK TO TECH GROWTH SHARES)
(PYPL), (SQ), (GOOGL), (BTC), (TSLA), (FOMO)
Tag Archive for: (GOOGL)
The U.S. Central Bank has chosen to be as accommodative as possible in order to put a floor under the stock market with near-zero interest rates and large-scale asset purchases.
This will have an inordinate effect on tech stocks moving forward because the rhetoric from the Fed is as close as one can get to admitting that tech stocks should be bought in droves.
Fed policy won’t kill the rally and talk up higher interest rates until “substantial further progress (to unemployment numbers) has been made,” and “is likely to take some time” to achieve said Fed Governor Jerome Powell.
Yes, it’s possible to attribute some of the bullishness to the “reopening” trade and the massive migration to digital, but the loose monetary policy is overwhelmingly the predominant catalyst to higher tech shares.
As Powell spoke, the Nasdaq did a wicked U-turn in real-time after being in the red almost 4% and sprinted higher to finish up the trading day only ½ of a percent down on the day.
What does this mean for the broader tech market and Nasdaq index?
We started seeing all sorts of wonky moves like Tesla (TSLA) making a $1.5 billion bitcoin (BTC) investment earlier this month.
Fintech player Square (SQ) bought Bitcoin on the dip pouring $170 million into it.
Yes, this isn’t a joke.
Corporations are becoming the dip buyers in bitcoin which would have never been fathomable a year ago from today.
The risk-taking has literally gone into hyper-acceleration in the tech world and is transforming into a fantasy world of corporations swimming knee-deep in capital trying to outdo one another with fresh bitcoin orders of millions upon billions.
That’s where we are at right now in the tech markets.
Treasury Secretary Janet Yellen has also gotten into the bitcoin story condemning the digital gold by saying that bitcoin is an “extremely inefficient” way to conduct monetary transactions.
But because of the extreme low-rate nature of debt, this just gives investors another entry point into the digital gold.
This sets the stage for a correction in tech stocks and the likely reason for it would possibly be higher interest rates or even negative lockdown news or some combination of both.
On the technical side of things, a result of this magnitude would be set off by first, cascading sell orders at one time, eerily similar to what got us the March 2020 low.
This could happen in either biotechnology stocks or Tesla shares and cause performance to deteriorate which could trigger net outflow and that would trigger a violent feedback loop.
Catherine D. Wood is the Founder, CEO, and CIO of ARK Invest and has been hyping up the super-growth tech assets like she was betting her life on it.
The only way she can get away with this chutzpah is in an anemic rate environment that pushes investors to search for yield.
Her reaction to yesterday’s market action wasn’t to buy bitcoin on the dip but go into a safer asset that actually produces something, and she bought another big chunk of Tesla.
Risk-taking and leverage in tech shares have gone up the wazoo which means that any incremental rising of rates is harder for the overall tech market to absorb.
Bitcoin is now being viewed as just one risk point higher on the risk curve than Tesla and that is a dangerous concept.
Technology often promises investors that they are paying for future cash flows of tomorrow and that story doesn’t work if the margins are turning against the management.
The low rates offer the impetus for characters like Wood to boast that she was surprised by how fast companies are adopting bitcoin and that her “confidence in Tesla has grown.”
It is just a sign of the times and even more money has been injected into zombie companies that have no hope of improving margins ala the retail sector.
Awash in liquidity has the ultimate effect of making tech growth stocks even more attractive than the rest of the crowd which is why we have been seeing sharp upward moves in second derivative plays to bitcoin like PayPal (PYPL), Square while the FANGs, aside from Google (GOOGL), have treaded sideways.
Markets tend to overshoot on the upside and downside and as the sell-off was met with shares that came roaring back in a speculative frenzy, we are now in a situation with many markets, even the foreign ones, hitting fresh records, even as the nations they were based in suffered their sharpest recessions since at least the Great Depression.
The overshooting tends to come from the fear of missing out (FOMO) amongst other reasons.
Ultimately, as the corporate list of characters and billionaire hedge fund community load up on tech growth stocks, just a small movement to higher yield could cause a Jenga-like toppling of their strategy and profits.
This could snowball into a massive unwind of positions to meet margin calls after margin calls.
If we can avoid this indiscriminate fire sale, then, like Bank of America recently just said, it’s hard to make a different analysis aside from being overly bullish as the treasury, Fed, and macroeconomic factors have made a major sell-off less likely.
I am bullish technology and would advise readers to go back into growth names as volatility subsides, but keep an eye out for rates creeping higher because, at the end of the day, it’s clearly the biggest risk to the tech sector.
Global Market Comments
February 12, 2021
Fiat Lux
Featured Trade:
(TEN STOCKS TO BUY BEFORE YOU DIE)
(MSFT), (AAPL), (GOOGL), (QCOM), (AMZN),
(V), (AXP), (NVDA), (DIS), (TGT)
A better headline for this piece might have been “Ten stocks to Buy at the Bottom”, except that you have to redefine the word “bottom.”
The rules of the greatest liquidity-driven market of all time demand a different explanation of The NEW bottom, and that is something that hasn’t gone up lately.
And that would be big tech, which appears ready to blast out to the upside from a six-month long sideways “time” correction.
It would be a perfectly rational thing to see in these highly irrational markets. After all, these names just announced blockbuster earnings presaging greater things to come. And these companies actually HAVE earnings, compared to recent market frontrunners, which have none at all.
Coming in here and betting the ranch is now a no-lose trade. If I’m right, the pandemic ends in three months, stocks will soar. If I’m wrong and the global epidemic explodes from here, you’ll be dead anyway and won’t care that the stock market crashed further.
Needless to say, I have a heavy tech orientation with this list, far and away the source of the bulk of earnings growth for the US economy for the foreseeable future. If anything, the coronavirus will accelerate the move away from shopping malls and towards online commerce as consumers seek to shy away from direct contact with the virus.
What would I be avoiding here? Directly corona-related stocks like those in airlines, hotels, casinos, and cruise lines. Avoid human contact at all cost! There is no way of knowing when or where these stocks will bottom. Only the virus knows for sure.
Microsoft (MSFT) – still has a near-monopoly on operating systems for personal computers and a huge cash balance. Their inroads with the Azure cloud services have been impressive.
Apple (AAPL) – Even with the Coronavirus, Apple still has a cash balance of $225 billion. Its 5G iPhone launches in the fall, unleashing enormous pent-up demand. Apple’s rapid move away from a dependence on hardware to services continues.
Alphabet (GOOGL) – Has a massive 92% market share in search and remains the dominant advertising company on the planet.
QUALCOMM (QCOM) – Has a near-monopoly in chips needed for 5G phones. It also won a lawsuit against Apple over proprietary chip design. In the very near future, you won’t be able to do ANYTHING without 5G. It’s also not a bad idea to own a chip stock during the worst global chip shortage in history.
Amazon (AMZN) – The world’s preeminent retailer is growing by leaps and bounds. Dragged down by its association with the world’s worst industry, (AMZN) is a bargain relative to other FANGs.
Visa (V) – The world’s largest credit company is a call on the growth of the internet. We still need credit cards to buy things. And guess what? Coronavirus will accelerate the move of commerce out of malls where you can get sick to online where you can’t.
American Express (AXP) – Ditto above, except it charges higher fees and has snob appeal (read higher margins). Its stock has lagged Visa and MasterCard in recent years.
NVIDIA (NVDA) – The leading graphics card maker that is essential for artificial intelligence, gaming, and bitcoin mining. Another great chip play that has flatlined for half a year.
Advanced Micro Devices (AMD) – Stands to benefit enormously from the chip shortage created by the coming 5G and the explosion of the cloud.
Target (TGT) – The one retailer that has figured it out, both in their stores and online. It can’t be ALL tech.
Good Luck and Good Trading
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Looks Like a “BUY” Signal to Me
Mad Hedge Biotech & Healthcare Letter
February 11, 2021
Fiat Lux
FEATURED TRADE:
(WHEN TECHNOLOGY MEETS HEALTHCARE)
(TDOC), (FB), (AAPL), (AMZN), (NFLX), (GOOGL)
The decision to invest in FAANG stocks—Facebook (FB), Apple (AAPL), Amazon (AMZN), Netflix (NFLX), and Google (GOOGL)—is basically a no-brainer.
These are some of the most highly rated stocks to date, and these companies continue to grow in value.
In fact, they managed to soundly outperform the 16% returns of the S&P 500 in 2020, with the weakest stock in the list, Google’s Alphabet, climbing 31% while Apple rose by an impressive 81%.
Outside of FAANG, those who read my Mad Hedge Technology Letter know of the advantages of Software-as-as-a-Service (SaaS) and the growth of the companies behind it.
I’ve always been a fan of emerging innovations, and this is one of the reasons why I’m excited about the collaboration between technologies like SaaS to bolster age-old industries like the healthcare field.
It’s dubbed healthcare-as-a-service (HaaS).
So far, one promising stock comes to mind when it comes to HaaS: Teladoc Health (TDOC).
Teladoc is one of the companies that benefited massively from the COVID-19 lockdowns.
So far, this healthcare stock is up by over 40% year to date after skyrocketing 139% in 2020.
During the first nine months of 2020, it recorded a whopping 163% rise on virtual visits compared to the same period in 2019. Meanwhile, its revenue rose by 79%.
The convenient technology it offers, which allows patients to connect with physicians without physically visiting the doctors’ offices, allowed Teladoc to enjoy strong growth amid the pandemic.
However, Teladoc isn’t merely a reasonable investment during the COVID-19 pandemic.
The company has been quietly gaining traction in the past years.
In its 2015 to 2019 reports, Teladoc reported an impressive growth in its revenues at 78%, 59%, 89%, 79%, and 32%, respectively.
The telehealth market is projected to grow to nearly $560 billion by 2027—an estimate that’s over 9 times the $61.4 billion the industry was worth in 2019.
Needless to say, the growth in the telehealth industry is just beginning, and Teladoc is well-positioned to take advantage of the momentum.
In 2020, it has strengthened its position with its massive $18.5 billion merger with Livongo Health.
Given Livongo’s more specialized portfolio, which puts a premium on chronic care and diabetes, the newly combined companies can offer a more extensive scope of telehealth services.
By 2023, the combined Teladoc and Livongo is estimated to generate more than $3 billion in sales alone.
As for its 2021 plans, Teladoc welcomed the new year with a partnership with continuous glucose monitoring (CGM) systems manufacturer DexCom.
With this collaboration, the company would be able to offer its users “CGM-powered insights.”
In other words, patients would be able to conveniently see and monitor their own glucose levels.
While Teladoc clearly benefited from its partnerships with Livongo and DexCom, its core business continues to show strong growth.
In its third quarter earnings report, which was released days before its Livongo merger, it more than doubled its $138 million sales in 2019 to $288.8 million in 2020.
Meanwhile, the total number of its telehealth visits increased by a staggering 206% to reach 2.8 million.
With the addition of new services in its roster, Teladoc is presented with a considerable growth opportunity just by simply boosting the usage of its current clients.
To give you a better picture of how big this could get, the company recorded a total of 73 million members by the end of the third quarter last year.
Following the mergers and the new deal last January 2021, Teladoc is anticipating an additional 65 million clients.
Teladoc is one of the most exciting healthcare stocks out there today. Its move to combine technology and doctor’s visits make it a uniquely innovative and stand-out business in an age-old industry.
More importantly, it has shown that its growth is not solely reliant on the demands brought about by the COVID-19 pandemic. Instead, it has made key moves to fortify its market share.
Mad Hedge Technology Letter
February 8, 2021
Fiat Lux
Featured Trade:
(VENTURE CAPITALISTS SHARE THE CLUES TO THE TECH MARKET)
(NVDA), (OTCMKTS: SFTBY), (GOOGL), (BABA), (AMZN), (UBER), (FB)
To gain a glimpse into the current psyche of tech investing, we need to take a raw snapshot of the state of Softbank’s Vision Fund.
The Vision Fund is the brainchild of the Japanese telecom company’s founder Softbank Masayoshi Son and is the world’s largest technology-centric venture capital fund with over $100 billion in capital.
The torrent of bullish price action of late has meant that SoftBank recorded a record quarterly profit in its Vision Fund as a gangbusters’ stock market lifted the value of its portfolio companies.
However, the significant gains accrued in equity were also substantially offset by painful derivatives losses as Son attempted to parlay his winnings into leverage directional bets in the short-term.
The Vision Fund’s $8 billion profit in the December quarter is a stark change from the prior March when the pandemic was in full gear and the Fund booked major losses amid embarrassing flops like office space sharing company WeWork.
As 2020 came to a close, tech growth firms like Uber (UBER) stock exploded higher and DoorDash (DASH) gave the Vision Fund a nice payday going public at the end of the year in stellar fashion.
On the options trading front, things didn’t go so rosy.
SoftBank posted a 285.3 billion yen or $2.7 billion derivatives loss in the period.
I understand “hedging your bets” but for Son to create this massive loss undeniably has to infuriate deep-pocketed investors from Arab nations that have stuck with him through tumultuous events.
The staggering option losses was why the asset management arm registered a loss of 113.5 billion yen or $1.08 billion, up from losses of 85.2 billion yen in the previous three-month period.
Experiencing wonderful gains only to have the narrative wiped out because of high stakes option bets is perhaps a sign of the times as phenomena like the Gamestop (GME) have moved to the forefront indicating that players have access to too much liquidity at this point in the market cycle.
Some 15 companies have gone public from the Vision Fund so far, and Son does have a long list of busts and winners.
However, one might assume that he won’t hit on every company as he revealed that his Vision Fund 1 and Vision Fund 2 have invested in a total of 131 companies. In the case of DoorDash, SoftBank invested about $680 million for a stake now worth about $9 billion while its $7.7 billion investment in Uber is worth $11.3 billion.
There are still shining stars on the balance sheet.
Another six more portfolio companies are planning IPOs this year and bringing this volume model to the public markets is logical considering even zombie companies are getting funded out the wazoo at this point.
Tech is also still holding its perch as the darling of the market and Son is simply delivering to market what investors want which is growth tech and more of it.
Other issues on Softbank’s list are to sell off its interests in Alibaba, T-Mobile US Inc., and SoftBank Corp., the Japan telecommunications unit. SoftBank also announced a deal to sell its chip designer Arm to Nvidia (NVDA) for $40 billion.
On top of the risky growth companies, Softbank has also parked its capital in a who’s who of tech firms such as a $7.39 billion investment in Amazon.com (AMZN), $3.28 billion in Facebook (FB). and $1.38 billion in Alphabet or Google (GOOGL). The operation is managed by its asset management subsidiary SB Northstar, where Son personally holds a 33% stake.
Son labeled his options debacle as a “test-drive stage” hoping to play down the fact that he should have made a lot more with the massive ramp-up in tech demand in 2020.
It’s not all smooth for Son with the chaos at Alibaba (BABA), Son’s most exotic investment success to date and SoftBank’s largest asset, tanked 20% last quarter amid a Chinese government clampdown on Alibaba Founder Jack Ma.
This has to worry Son’s future tech investing prospects in China (P.R.C.).
SoftBank’s own sale of Arm to Nvidia (NVDA) is still making the rounds through the EU approval process. The United Kingdom and European Union are both preparing to launch probes into the deal.
All in all, a mixed bag for the Vision Fund where profits should have been higher and most of the damage was self-inflicted.
At some point, throwing massive amounts of capital to juice up tech growth firms will backfire, but the generous access to liquidity that Son has makes this strategy work while even affording him some massive failures.
In short, the Vision Fund should be many times more profitable and it’s a reminder that these leveraged bets aren’t going away which should mean enough liquidity out there to take the markets higher.
We should also be aware that the eventual “market mistake” could give us 10% tech corrections, which are no brainer buying opportunities if the same liquidity volume persists.
Then consider that many tech companies have done well in the recent earnings season and combine that with the eventual reestablishment of buybacks and the neutral observer must think that tech has more room to run in 2021.
Global Market Comments
February 2, 2021
Fiat Lux
Featured Trade:
(MY NEWLY UPDATED LONG-TERM PORTFOLIO),
(PFE), (BMY), (AMGN), (CELG), (CRSP), (FB), (PYPL), (GOOGL), (AAPL), (AMZN), (SQ), (JPM), (BAC), (MS), (GS), (BABA), (EEM), (FXA), (FCX), (GLD), (SLV), (TLT)
I am really happy with the performance of the Mad Hedge Long Term Portfolio since the last update on July 21, 2020. In fact, not only did we nail the best sectors to go heavily overweight, we also completely dodged the bullets in the worst-performing ones.
For new subscribers, the Mad Hedge Long Term Portfolio is a “buy and forget” portfolio of stocks and ETFs. If trading is not your thing, these are the investments you can make, and then not touch until you start drawing down your retirement funds at age 72.
For some of you, that is not for another 50 years. For others, it was yesterday.
There is only one thing you need to do now and that is to rebalance. Buy or sell what you need to reweight every position to its appropriate 5% or 10% weighting. Rebalancing is one of the only free lunches out there and always adds performance over time. You should follow the rules assiduously.
Despite the seismic changes that have taken place in the global economy over the past nine months, I only need to make minor changes to the portfolio, which I have highlighted below.
To download the entire new portfolio in an excel spreadsheet, please go to www.madhedgefundtrader.com, log in, go “My Account”, then “Global Trading Dispatch”, then click on the “Long Term Portfolio” button.
Changes
I am cutting back my weighting in biotech from 25% to 20% because Celgene (CELG) was taken over by Bristol Myers (BMY) at a 110% profit compared to our original cost. We also earned a spectacular 145% gain on Crisper Therapeutics (CRSP). I’m keeping it because I believe it has more to run.
My 30% weighting in technology also gets pared back to 20% because virtually all of my names have doubled or more. These have been in a sideways correction for the past six months but are still an important part of any barbell portfolio. So, take out Facebook (FB) and PayPal (PYPL) and keep the rest.
I am increasing my weighting in banks from 10% to 20%. Interest rates are finally starting to rise, setting up a perfect storm in favor of bank earnings. Loan default rates are falling. Banks are overcapitalized, thanks to Dodd-Frank. And because of the trillions in government stimulus loans they are disbursing, they are now the most subsidized sector of the economy. So, add in Morgan Stanley (MS) and Goldman Sachs (GS), which will profit enormously from a continuing bull market in stocks.
Along the same vein, I am committing 10% of my portfolio to a short position in the United States Treasury Bond Fund (TLT) as I think bonds are about to go to hell in a handbasket. I rant on this sector on an almost daily basis, so go read Global Trading Dispatch.
I am keeping my 10% international exposure in Chinese Internet giant Alibaba (BABA) and the iShares MSCI Emerging Market ETF (EEM). The Biden administration will most likely dial back the recent vociferous anti-Chinese stance, setting these names on fire.
I am also keeping my foreign currency exposure unchanged, maintaining a double long in the Australian dollar (FXA). The Aussie has been the best performing currency against the US dollar and that should continue.
Australia will be a leveraged beneficiary of the synchronized global economic recovery, both through strong commodity prices and gold which has already started to rise, and the post-pandemic return of Chinese tourism and investment. I argue that the Aussie will eventually make it to parity with the US dollar, or 1:1.
As for precious metals, I’m baling on my 10% holding in gold (GLD), which delivered a nice 20% gain in 2020. From here, it is having trouble keeping up with other alternative assets, like Bitcoin, and there are better fish to fry.
Yes, in this liquidity-driven global bull market, a 20% return is just not enough to keep my interest. Instead, I add a 5% weighting in the higher beta and more volatile iShares Silver Trust (SLV), which has far wider industrial uses in solar panels and electric vehicles.
As for energy, I will keep my weighting at zero. Never confuse “gone down a lot” with “cheap”. I think the bankruptcies have only just started and will stretch on for a decade. Thanks to hyper-accelerating technology, the adoption of electric cars, and less movement overall in the new economy, energy is about to become free. You are looking at the next buggy whip industry.
My ten-year assumption for the US and the global economy remains the same. I’m looking at 3%-5% a year growth for the next decade.
When we come out the other side of this, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 400% or more in the coming decade. The America coming out the other side of the pandemic will be far more efficient, productive, and profitable than the old.
You won’t believe what’s coming your way!
I hope you find this useful and I’ll be sending out another update in six months so you can rebalance once again.
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
