(MSFT) Archives

June 16 Biweekly Strategy Webinar Q&A

Below please find subscribers’ Q&A for the June 16 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Lake Tahoe, NV.

Q: Does Copper (FCX) look like a buy now or wait for it to drop?

A: I would buy ⅓ now, ⅓ lower down, ⅓ lower down still. Worst case we get down to $30 in Freeport McMoRan (FCX) from $37 today. A new internal combustion engine requires 40 lbs. of copper for wiring, but new EVs require 200 lbs. per car, and the number of EV cars is about to go from 700,000 last year to 25 million in 10 years. So, you can do the math here. It's basically 24.3 million times 200 lbs., or 1.215 billion tons, and that's the annual increase in demand for copper over the next 10 years. There aren’t enough mines in the world to accommodate that, so the price has to go up. However, (FCX) has gone up 12 times from its 2020 low and was overdue for a major rest. So short term it's a sell, long term it's a double. That's why I put the LEAPS out on it.

Q: Lumber prices are dropping fast, should I bet the ranch that it’ll drop big?

A: No, I think the big drop has happened; we’re down 40% from the highs, the next move is probably up. And that is a commodity that will remain more or less permanently in short supply due to the structural impediments put into the lumber market by the Trump administration. They greatly increased import duties from Canada and all those Canadian mills shut down as a result. It’s going to take a long time to bring those back up to speed and get us the wood we need to build houses. Another interesting thing you’re seeing in the bay area for housing is people switching over to aluminum and steel for framing because it’s cheaper, and of course in an earthquake-prone fire zone, you’d much rather have steel or aluminum for framing than wood.

Q: I didn’t catch the (FCX) LEAP, can you reiterate?

A: With prices at today's level, you can buy the 35 calls in (FCX), sell short the 40 calls, and get nearly a 177% return by January 2022. That's an absolute screamer of a LEAPS.

Q: How do you see the working from home environment in the near future after Morgan Stanley (MS) asked everyone to return?

A: Well that’s just Morgan Stanley and that’s in New York. They have their own unique reasons to be in New York, mostly so they can meet and shake down all their customers in Manhattan—no offense to Morgan Stanley, but I used to work there. For the rest of the country, those in remote places already, a lot of companies prefer that people keep working from home because they are happier, more productive, and it’s cheaper. Who can beat that? That’s why a lot of these productivity gains from the pandemic are permanent.

Q: Is there a recording of the previous webinar?

A: Yes, all of the webinars for the last 13 years are on the website and can be accessed through your account.

Q: What makes Microsoft (MSFT) a perfect-looking chart?

A: Constant higher lows and higher highs. They also have a fabulous business which is trading relatively cheaply to the rest of tech and the rest of the main market. Of course, they were a huge pandemic winner with all the people rushing out to buy PCs and using Microsoft operating software. I expect those gains to improve. The new game now is the “wide moat” strategy, which is buying companies that have near monopolies and can’t be assailed by other companies trying to break into their businesses. The wide moat businesses are of course Microsoft (MSFT), Amazon (AMZN), Facebook (FB) and Alphabet (GOOGL). That's the new investment philosophy; that's why money has been pouring back into the FANGs for a month now.

Q: Do you have any concerns about Facebook’s (FB) advertising ability, given the recent reduction of tracking capabilities of IOS 4.5 users?

A: Well first of all, IOS 4.5 users, the Apple operating system, are only 15% of the market in desktops and 24% of mobile phones. Second, every time one of these roadblocks appears, Facebook finds a way around it, and they end up taking in even more advertising revenue. That’s been the 15-year trend and I'm sticking to it.

Q: Is Caterpillar (CAT) a LEAP candidate right now?

A: Not yet, but we’re getting there. Like many of these domestic recovery plays, it is up 200% from the March lows where we recommended it. The best time to do LEAPS is after these big capitulation selloffs, and all we’ve really seen in most sectors this year is a slow grind down because there's just too much money sitting under the market trying to get into these stocks. Let’s see if (CAT) drops to the 50-day moving average at $185 and then ask me again.

Q: If you have the (FCX) LEAPS, should you keep them?

A: I would keep them since I'm looking for the stock to double from here over the next year. If you have the existing $45-$50 LEAPS, I would expect that to expire at its max profit point in January. But you may need to take a little pain in the interim until it turns.

Q: Should I bet the ranch on meme stocks like (AMC) and GameStop GME)?

A: Absolutely not, I’m amazed you haven't lost everything already.

Q: Do you think Exxon-Mobile (XOM) could rise 30% from here?

A: Yes, if we get a 30% rise in oil. We are in a medium-term countertrend rally in oil which will eventually burn out and take us to new lows. Trade against the trend at your own peril.

Q: Disneyland (DIS) in Paris is set to open. Is Disneyland a buy here?

A: Yes, we’re getting simultaneous openings of Disneyland’s worldwide. I’ve been to all of them. So yes, that will be a huge shot in the arm. Their streaming business is also going from strength to strength.

Q: How long will the China (FXI) slowdown last?

A: Not long, the slowdown now is a reaction to the superheated growth they had last year once their epidemic ended. We should get normalized growth in China at around 6% a year, and I expect China to rally once that happens.

Q: Have you changed your outlook on inflation, real or imagined?

A: I don’t think we’re going to have inflation; I buy the Fed's argument that any hot inflation numbers are temporary because we’re coming off of a one-on-one comparisons from when the economy was closed and the prices of many things went to zero. If you look at that inflation number, it had trouble written all over it. Some one third of the increase was from rental cars. One of the hottest components was used cars. You’re not going to get 100% year on year increases next year in rental or used cars.

Q: When you issue a trade alert, it’s always in the form of a call spread like the Microsoft (MSFT) $340-$370 vertical bull call spread. What are the pros and cons of doing this trade on the put side, like shorting a vertical bear put spread?

A: It’s six of one, half a dozen of the other. There are algorithms that arbitrage between the two positions that make sure that they’re never out of line by more than a few cents. I put out call spreads because they’re easier for beginners to understand. People get buying something and watching it go up. They don’t get borrowing something, selling it short, and buying it back cheaper.

Q: Will gold (GLD) prices go up?

A: Yes, when inflation goes up for real.

Q: What is the future of the gig economy? How will that affect Uber (UBER) and Lyft (LYFT)?

A: I like both, because they just got a big exemption from California on part time workers, and that is very positive for their business models.

Q: Do you think the government doesn’t want to cancel student debt because it will unleash inflation?

A: It’s the exact opposite. The government wants to forgive student debt because it will unleash inflation. If you add 10 million new consumers to the economy, that is very positive. As long as former students have tons of debt, horrible credit ratings, and are unable to buy homes or get credit cards, they are shut out of the economy. They can’t participate in the main economy by buying homes, shopping, or getting credit. The fact that the US has so many college grads is why businesses succeed here and fail in every other country. That should be encouraged.

Q: Where is the United States US Treasury Bond Fund (TLT) headed?

A: Short term up, long term down.

Q: Options premiums are not melting away much today; I hope they start decaying after the Fed announcement.

A: In these elevated volatility periods—believe it or not, the (VIX) is still elevated compared to its historic levels—they hang on all the way to the very last day, before expiration, before they really melt the time value on options. It really does pay to run these into expiration now. When the VIX was down at like $9-$10, that was not the case.

Q: I bought a short term expiration going long the (TLT) to hedge my position; was this smart?

A: Yes, but only if you are a professional short-term trader. If you are in front of your screen all day and are able to catch these short term moves in (TLT), that is smart. My experience is that most individual investors don’t have the experience to do that, don’t want to sit in front of a screen all day, and would rather be playing golf. Such hedging strategies end up costing them money. Also, remember that half of the moves these days are at the opening; they’re overnight gap openings and you can’t catch that intraday trading—it’s not possible. So over time, the people who take the most risk make the most money. And that means the people who don’t hedge make the most money. But you have to be able to take the pain to do that. So that’s my philosophy talk on risk taking.

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 Trade

June 15, 2021

Diary, Newsletter, Summary

Global Market Comments
June 15, 2021
Fiat Lux

Featured Trade:

(THE BIG TECH LEAPS OPPORTUNITIES THAT JUST OPENED UP),
(AMZN), (MSFT), (AAPL)

June 10, 2021

Diary, Newsletter, Summary

Global Market Comments
June 10, 2021
Fiat Lux

Featured Trade:

(A NOTE ON OPTIONS CALLED AWAY),
(MSFT), (TLT), (BA), (GOOGL), (SPY)

May 27, 2021

Biotech Letter

Mad Hedge Biotech & Healthcare Letter
May 27, 2021
Fiat Lux

FEATURED TRADE:

(A SAFE STOCK FOR YOUR PEACE OF MIND)
(JNJ), (ABBV), (TDOC), (MSFT)

A Safe Stock for Your Peace of Mind

Biotech Letter

No matter how you look at it, the stock market is definitely facing serious volatility these days. How long this uncertainty will last and whether it’s a sign of a looming market crash or correction is anybody’s guess.

On a positive note, the current situation will not cause panic to long-term investors. After all, it’s not right to base stock-buying decisions on the market’s behavior over the course of a few days, weeks, or even months.

Meanwhile, if a major bear market is on the horizon, then this could present a good opportunity to add resilient and recession-proof stocks to your portfolio.

In the biotechnology and healthcare sector, one stock comfortably fits the mold, and that's Johnson & Johnson, JNJ.

In terms of market capitalization, JNJ is one of the biggest—if not the biggest—pharma companies in the world, weighing in at roughly $450 billion.

It also holds an undisputed status as a Dividend King, which is a title granted to those companies that increase their payouts annually and consistently over the course of 50 years.

Actually, JNJ’s dividend-hiking streak has stretched to 59 straight years—and it doesn’t seem to be ending anytime soon.

To date, its quarterly dividend per share jumped by 5% from $1.01 to reach $1.06.

That’s why it comes as no surprise that it’s one of the stocks that investors come running to for safety and stability during periods of volatility.

In its first quarter earnings report in 2021, JNJ showed off by outperforming revenue expectations of $21.98 billion to record $22.32 billion instead.

Its EPS also beat estimates of $2.34 and instead reported $2.59. Despite the less-than-stellar condition of the US economy in the past months, JNJ still managed to boost its sales in the first quarter and increased its sales by 7.9% year-over-year.

All of JNJ’s core business segments also expanded their revenues this quarter.

For instance, its Janssen pharmaceutical arm, which was in charge of its COVID-19 vaccine, saw a 9.6% year over year increase in sales to reach $12.19 billion.

Even its medical devices segment experienced an improved performance with a 7.9% bump to record $6.57 billion for this quarter alone.

Looking at the programs in its pharmaceutical division, it’s clear that JNJ has a strong focus on six areas: cardiovascular, pulmonary hypertension, immunology, neuroscience, metabolism, and, of course, oncology.

In fact, three of JNJ’s pharmaceutical treatments raked in more than $4 billion in sales in 2020.

The list was topped by Stelara, which is a drug for Crohn’s disease, psoriasis, ulcerative colitis, and psoriatic arthritis, at $7.7 billion.

It was followed by multiple myeloma treatment Darzalex at $4.2 billion.

The product of its collaborative work with AbbVie (ABBV), blood cancer drug Imbruvica, rounds up the list at $4.1 billion.

The sheer size and financial power of JNJ offer the company extensive M&A opportunities—and it’s definitely taking advantage of that to continue boosting its revenue streams.

In August 2020, amid the COVID-19 pandemic, JNJ acquired Momenta Pharmaceuticals for $6.5 billion. This all-cash transaction added a slew of drug candidates that enhanced JNJ’s immune-mediated and rare disease pipeline programs.

Jumping into the telehealth bandwagon, JNJ has invested in Madison Thirty around the same time last year as well.

Much like Teladoc (TDOC), this small telehealth company has also attracted attention since it started and thus far raised $70 million in funding.

Boosting its presence in the merging world of technology and medicine, JNJ recently revealed its six-armed robotic surgical assistant, Ottava.

Basically, Ottava will be a high-tech guidance system and assistant to surgeons in operating rooms.

Throughout its history, JnJ has proven itself to be a top biopharmaceutical stock —full stop.

A global leader in the healthcare industry, JNJ is one of only two corporations that hold an AAA credit rating from Standard & Poor. The other company is Microsoft (MSFT).

It has been generating record profits and boosting its dividends. More importantly, investors can expect JNJ stock to serve as a healthy long-term wealth generator.

It prides itself on a strong triad of business segments that continuously drive growth: consumer health, pharmaceuticals, and medical devices.

May 17, 2021

Tech Letter

Mad Hedge Technology Letter
May 17, 2021
Fiat Lux

Featured Trade:

(MULTIPLE CONTRACTION)
(QQQ), (AAPL), (GOOGL), (MSFT), (TDOC), (TSLA)

Multiple Contradiction

Tech Letter

High multiple tech stocks often overshoot on the way up and overshoot on the way down.

This is predominately driven by uncontrolled momentum as investors and traders resort to margin to borrow money and add leverage to positions and trends that seem to be working at the time.

Since the start of the year, technology has had to come to grips with a sudden rerating of valuations.

For example, a bellwether stock for the future success of tech, Tesla (TSLA) has corrected 20% year-to-date after more than 700% move up in 2020.

Reliable big-cap tech has been more steadfast in 2021 such as the likes of Apple (AAPL) who have only experienced a less than 2% year-to-date decline in shares.

The biggest winner so far of big-cap tech has to be Alphabet (GOOGL) whose shares have risen around 25% since the beginning of the year.

Even with sky-high expectations, Google is hitting it out of the ballpark and then some.

Simply meeting or doing a nudge over expectations this past earnings season has proved not enough for underlying shares to surge on the results meaning we are fully priced.

Naturally, the more speculative business has felt the worst of the carnage with SPACs down half from their peaks and “artisanal” tech down 30%-50%.

This doesn’t mean tech is over.

Hardly so – It’s just resting.

But readers and investors will need to traverse through a period of multiple contraction and consolidation as high-priced tech stocks are re-rated lower until we reach appetizing multiples.

Simply put, we got ahead of ourselves and there is only so much leverage that can be taken out to chase the rainbows and feed off the momentum.

Microsoft (MSFT) has been another stout stock that is up around 12% year-to-date and a great place to hide out during the consolidation phase.

The cause of the rerating derives specifically from upper management guiding down future revenue and profitability targets.

I have read countless earnings reports that describe a comprehensive dilemma in which the overall structure of the company couldn’t be healthier yet beating prior years’ Covid performance is impossible on a year-to-year basis.

Readers need to understand this year is still priced as a Covid year, but tech companies won’t nearly do as well because the conditions that engulfed Covid like work-from-home and the absence of a vaccine are not here anymore.

There is a health solution in the U.S. and in parts of Europe there are partial solutions and certainly, no lockdown as the Chief of the CDC signals masks are not needed for the vaccinated in public.

The tech market needs to readjust its expectations that will hand off to more of a normalized metric environment and that will happen naturally as we move closer to 2022 and into it.

On a calculation basis, comparing data from 2022 and 2021 will strip out the volatility from the 2020 and 2021 comparisons.

Remember that management uses the prior year as reference points for performance and that phenomenon is now hurting the appearance of relative outperformance.

A top executive at a fintech company had this to say, “The pandemic has accelerated a digital wave of change across almost every industry by three to five years, unleashing a profound and permanent structural transformation.”

I’ll take a 5-year digital transformation in one year if the second year is a time that is needed for earnings’ expectations to consolidate for half a year or so.

I would take that deal anytime if it was my company.

The data also suggests how breathtaking companies like Google and Microsoft are if their future guidance is immune to any expectation.

They are beating whatever consensus is in a Covid year or not.

Take a look at some of the darlings of tech in the height of pandemic like Teladoc (TDOC), and shares are off around 33% year-to-date and even went through a 40% drop from mid-February to the beginning of March.

Avoid those now!

Even if it's not related to cloud software stocks, the dearth of semiconductor chips is beginning to cause pain in every nook and cranny of the global economy catalyzing many firms to delay or even cancel production let alone roll out new models.

This adds to the global malaise of a supply chain that many managements describe as “topsy-turvy.”

Not only is the bottleneck happening as we speak, but it appears as though it could last at least 2 or more years.

When the Fed talks about “transitory” inflationary pressures, at least as it relates to tech, I am not sure what they are smoking.

There has been no concrete data in which they have offered to suggest that it will be transitory unless they have a different definition of transitory from mine.

The accumulation effect of these pressures is why the tech-heavy Taiwan stock market, FTSE TWSE Taiwan 50 Index, comprised of tech stalwarts like Taiwan Semiconductor Manufacturing (TSM) and Hon Hai Precision Industry, declined over 2% today after losing over 8% last week.

Ultimately, investors are moving to higher ground and seeking predictable profitability and raw size over elevated growth rates and loss-making EPS figures.

When the goalposts move, we must move with them and that is what has happened.

Tech investors are more conservative than last year and until the goalposts widen a bit as I expect as we move into Q3 and Q4, we need to be aware of the new rules of the game or who gets penalized for them.

May 17, 2021

Diary, Newsletter, Summary

- Global Market Comments
  May 17, 2021
  Fiat Lux
  
  Featured Trade:
- (MARKET OUTLOOK FOR THE WEEK AHEAD, or WHY HISTORY RHYMES),
  (TLT), (SPY), (FCX), (MSFT), (DAL), (QQQ), (VIX), (DAL), (UUP)

The Market Outlook for the Week Ahead, or Why History Rhymes

Diary, Newsletter

The 19^th century humorist and writer, Mark Twain, said, “History never repeats itself, but it rhymes.” This is certainly one of those rhyming times.

Remember back in 2011 when the Dow hit a short-term peak at $12,300 in May of 2011? The Cassandras had a heyday. The bull market was over, stocks were imminently going to crash, and the next stop for the Dow was $3,000. Gold and bonds were the only safe places.

Those who drank the Kool-Aid missed the greatest investment opportunity of the century and are now driving for Uber cars to earn their crust of bread. Those who drank the Kool-Aid twice sold their homes as well ahead of the greatest real estate boom of all time.

Not that a correction wasn’t sorely needed, we needed to scare money out of what I call the “super liquidity” investments like Bitcoin, SPACS, and tech companies selling at 100 times sales with failing business models.

We also needed to put the fear of god into newbie day traders by teaching them that stocks go down as well as up. We’ve already made good progress on this front. With many of the “meme” stocks down by half or more since February, we are already making good progress on that front.

What will power the Dow to my now very prescient looking $40,000 target by yearend? The unwind of the 40-year-old bull market in bonds has barely just begun. Ten-year US Treasury bond yields ($TNX) have only appreciated from 0.32% to 1.68%, compared to 5.6% at the last 2007 peak. That means there are still many tens of trillions of dollars to shift out of bonds (TLT) and INTO STOCKS!

Once the current correction ends, money will pour back into the recent leaders, the economic cyclicals, including financials, commodities, industrials, and commodities.

Technology will stay in the penalty box for the foreseeable future until they become under-owned and cheap again. The good news here is that tech earnings are growing at such a prolific rate that the sector is losing two price earnings multiple points a month and will return to the bargain basement in the not-too-distant future.

The long term view here is that you want to rent growth, but own tech, which still has double the growth rate of everything else.

It all makes my 2021 $40,000 Dow Average target look like a piece of cake, and my 2030 goal of $120,000 positively conservative, cautious, and circumspect.

Notice that our 2,000 point-swan dive in the Dow last week lasted only three days, and then delivered the sharpest fall in the Volatility Index (VIX) in history, from $29 to $19 in only 24 hours. The writing is still on the wall. People want to BUY.

Inflation explodes, with the Consumer Price Index posting a ballistic 4.2% YOY rate, the fastest gain since 2009. The Fed believes this is a temporary surge, the markets not so much. Bonds take it on the nose. Keep selling rallies in the (TLT). We’re making a fortune here.

Volatility Index (VIX) soars to $29, almost doubling in a week. Call me when it tops $30. That’s the usual signal for a short-term stock market bottom. I’m relaxed because I’m going into this with 80% cash and have just made a huge fortune on bond shorts.

Value and cyclicals are still the Big Play. That was the message of the stock market on Friday’s wild day which saw an 11-basis point trading range in the ten-year US treasury bond. If you think the next big move in rates is up, then Cyclicals will roar, and techs will fade.

It’s all about buying what people are underweight and selling what they are overweight. I’m looking for cyclicals that have recently corrected. Stay tuned to this station.

US Inventories see solid gains as retailers load the boat for the biggest economic recovery of all time. March was up 1.3%. One of an endless series of data points pointing to the best business conditions in a century.

The Home Buying Frenzy continues, with the median price for a single-family home soaring by 16.2% to $319,200 in Q1, according to the National Association of Realtors. Record high prices are hitting all markets. The perfect upside storm continues.

Weekly Jobless Claims come in at 473,000, a new post-Covid low. Continuing claims fall to 3,655,000. The greatest economic recovery of all time continues.

Producer Prices leap in April, up 0.6% following a 1% gain in March. It is a natural follow-on from the hot CPI. The PPI tracks changes in production costs, and supply bottlenecks and shortages tied to the pandemic recovery have caused commodity prices to soar. Temporary or continuing, that is the big debate. Watch the bond market for clues.

Stanley Druckenmiller says Bonds are Toast, and The Dollar is Worse. I couldn’t agree more with my old friend and trading counterparty. Current Fed policies are now the most extreme in history and threaten the reserve status of the US dollar. Sell all rallies in the (TLT) and the (UUP).

My Ten Year View

When we come out the other side of pandemic, 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% to 120,000 or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 120,000 here we come!

My Mad Hedge Global Trading Dispatch profit reached 3.83% gain so far in May on the heels of a spectacular 15.67% profit in April. That leaves me 30% invested and 70% cash.

My 2021 year-to-date performance soared to 63.59%. The Dow Average is up 13.47% so far in 2021.

During the stock market meltdown, my hedges with shorts in the S&P 500 (SPY), NASDAQ (QQQ), and the United States Treasury Bond Fund (TLT) performed spectacularly well, leaving me up on the week. I managed to limit myself to only two stop losses, in Microsoft (MSFT) and Delta Airlines (DAL).

While everyone else was running around like chickens with their heads cut off, I was as relaxed as ever. Our worst case for May is that we will be only up single digits, instead of the double-digit gains of the past six months. That is not a bad “worst case” to have.

That brings my 11-year total return to 486.14%, some 2.00 times the S&P 500 (SPX) over the same period. My 11-year average annualized return now stands at an unbelievable 42.45%, easily the highest in the industry.

My trailing one-year return exploded to positively eye-popping 127.09%. I truly have to pinch myself when I see numbers like this. I bet many of you are making the biggest money of your long lives.

We need to keep an eye on the number of US Coronavirus cases at 33 million and deaths topping 586,000, which you can find here.

The coming week will be a weak one on the data front.

On Monday, May 17, at 9:45 AM, the New York Empire State Manufacturing Index for May will be out

On Tuesday, May 18, at 10:00 AM, the Housing Starts for April are announced.

On Wednesday, May 19 at 2:00 PM, Minutes from the last Federal Reserve FOMC Meeting are published.

On Thursday, May 20 at 8:30 AM, the Weekly Jobless Claims are published.

On Friday, May 21 at 10:00 AM, Existing Homes Sales for April are announced. At 2:00 PM, we learn the Baker-Hughes Rig Count.

As for me, we had a big 4.7 earthquake at Lake Tahoe last week. The healthy live trees vibrated and swayed. But all of the brittle dead trees killed by pine beetles during the draught snapped at the base and fell over.

Those blocked all the fire roads, so every emergency and public service organization on the lake was called up and sent up into the mountains with chain saws. That included me, a member of Lake Tahoe Search and Rescue.

I hiked up to 9,000 feet with a 50-pound load and went to work. We cut these enormous 100-foot conifers into one-foot rounds and then rolled them off the road. Everyone else on the job was under 40.

After a day of heavy lifting, I hiked down the mountain and collapsed into bed. I slept for 12 hours, which is why the Monday letter was late. They say 70 is the new 40. I am the proof of that.

So can 100 be the new 60? One can only hope.

How was your weekend?

Stay healthy.

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