Mad Hedge Biotech & Healthcare Letter
February 11, 2021
Fiat Lux
FEATURED TRADE:
(WHEN TECHNOLOGY MEETS HEALTHCARE)
(TDOC), (FB), (AAPL), (AMZN), (NFLX), (GOOGL)
Posts
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 $288.8 million in 2020.
Meanwhile, the total number of its telehealth visits increased by a staggering 206% to reach 2.8 million.
With the addition of new services in its roster, Teladoc is presented with a considerable growth opportunity just by simply boosting the usage of its current clients.
To give you a better picture of how big this could get, the company recorded a total of 73 million members by the end of the third quarter last year.
Following the mergers and the new deal last January 2021, Teladoc is anticipating an additional 65 million clients.
Teladoc is one of the most exciting healthcare stocks out there today. Its move to combine technology and doctor’s visits make it a uniquely innovative and stand-out business in an age-old industry.
More importantly, it has shown that its growth is not solely reliant on the demands brought about by the COVID-19 pandemic. Instead, it has made key moves to fortify its market share.
Global Market Comments
January 22, 2021
Fiat Lux
Featured Trade:
(JANUARY 20 BIWEEKLY STRATEGY WEBINAR Q&A),
(QQQ), (IWM), (SPY), (ROM), (BRK/A), (AMZN), NVDA), (MU), (AMD), (UNG), (USO), (SLV), (GLD), ($SOX), CHIX), (BIDU), (BABA), (NFLX), (CHIX), ($INDU), (SPY), (TLT)
Below please find subscribers’ Q&A for the January 20 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Incline Village, NV.
Q: What will a significant rise in long term bond yields (TLT) do to PE ratios in general, and high tech specifically?
A: Well, the key question here is: what is “significant”. Is “significant” a move in a 10-year from 120 to 150, which may be only months off? I don’t think that will have any impact whatsoever on the stock market. I think to really give us a good scare on interest rates, you need to get the 10-year up to 3.0%, and that might be two years off. We’re also going to be testing some new ground here: how high can bond interest rates go while the Fed keeps overnight rates at 25 basis points? They can go up more, but not enough to hurt the stock market. So, I think we essentially have a free run on stocks for two more years.
Q: What about the Shiller price earnings ratio?
A: Currently, it’s 34.5X and you want to completely ignore anything from Shiller on stock prices. He’s been bearish on stocks for 6 years now and ignoring him is the best thing you can do for your portfolio. If you had listed to him, you would have missed the last 15,000 Dow ($INDU) points. Someday, he’ll be right, but it may be when the market goes from 50,000 to 40,000, so again, I haven't found the Shiller price earnings ratio to be useful. It’s one of those academic things that looks great on paper but is terrible in practice.
Q: Do you see any opportunity in China financials with the change of administration, like the (CHIX)?
A: I always avoid financials in China because everyone knows they have massive, defaulted loans on their books that the government refuses to force them to recognize like we do here. So, it’s one of those things where they look good on paper, but you dig deeper and find out why they’re really so cheap. Better to go with the big online companies like Baidu (BIDU) and Alibaba (BABA).
Q: Is it too late to enter copper?
A: No, the high in the last cycle for Freeport McMoRan (FCX) was $50 dollars and I think we’re only in the mid $ ’20s now, so you could get another double. Remember, these commodity stocks have discounted recovery that hasn’t even started yet. Once you do get an actual recovery, you could get another enormous move and that's what could take the Dow to 120,000.
Q: Do you see the FANGs coming back to life with the earnings results?
A: I think it'll take more than just Netflix to do that. By the way, Netflix (NFLX) is starting to look like the Tesla of the media industry, so I’d get into Netflix on the next dip. You could get a surprise, out-of-nowhere double out of that anytime. But yes, FANGs will come to life. They've been in a correction for five months now, and we’ll see—it may be the end of the pandemic that causes these stocks to really take off. So that's why I'm running the barbell portfolio and buying the FANGs on weakness.
Q: Are you recommending LEAPS on gold (GLD) and silver (SLV)?
A: Absolutely yes, go out two years with your maturity, you might buy 120% out of the money. That's where you get your leverage on the LEAPS. Something like a (GLD) January 2023 $210-$220 in-the-money vertical bull call spread and generate a 500% profit by expiration.
Q: Do you foresee a cool off for semiconductors ($SOX) even though there's been recent news of shortages?
A: No, not really. There are so many people trying to get into these it’s incredible. And again, we may get a time correction where we sideline at the top and then break out again to the upside. This is classic in liquidity-driven markets, which is what we have in spades right now. Thanks to 5G, the number of chips in your everyday devices is about to increase tenfold, and it takes at least two years to build a new chip factory. So, keep buying (NVDA), (MU), and (AMD) on dips.
Q: Where are the best LEAPS prospects (Long Term Equity Participation Securities)?
A: That would have to be in technology—that's where the earnings growth is. If you go 20% out of the money on just about any big tech LEAPs two years out, to 2023 those will be worth 500% more at expiration.
Q: What about SPACs (Special Purpose Acquisition Company) now, as we’re getting up to five new SPACs a day?
A: My belief is that a SPAC is a vehicle that allows a manager to take out a 20% a year management fee instead of only 1%. And it's another aspect of the current mania we’re in that a lot of these SPACs are doubling on the first day—especially the electric vehicle-related SPACs. Also, a lot of these SPACs will never invest in anything, but just take the money and give it back to you in two years with no return when they can't find any good investments…. If you’re lucky. There's not a lot of bargains to be found out there by anyone, including SPAC managers.
Q: Does natural gas (UNG) fall into the same “avoid energy” narrative as oil?
A: Absolutely, yes. The only benefit of natural gas is it produces 50% less carbon dioxide than oil. However, you can't get gas without also getting oil (USO), as the two come out of the pipe at the same time; so I would avoid natural gas also. Gas and oil are also about to lose a large chunk, if not all, of their tax incentives, like the oil depletion allowance, which has basically allowed the entire oil industry to operate tax-free since the 1930s.
Q: What about hydrogen cars?
A: I don't really believe in the technology myself, and when you burn hydrogen, that also produces CO2. The problem with hydrogen is that it’s not a scalable technology. It’s like gasoline—you have to build stations all over the US to fuel the cars. Of course, it produces far less carbon than gas or natural gas, but it is hard to compete against electric power, which is scalable and there's already a massive electric grid in place.
Q: If you inherited $4 million today, would you cost average into (QQQ), (IWM), or (SPY)?
A: I would go into the ProShares Ultra Technology ETF (ROM), which is double the (QQQ); and if you really want to be conservative, put half your money into (QQQ) or (ROM), and then half into Berkshire Hathaway (BRK/A), which is basically a call option on the industrial and recovery economy. I know plenty of smart people who are doing exactly that.
Q: Is it weird to see oil, as well as green energy stocks, moving up?
A: No, that's actually how it works. The higher oil and gas prices go, the more economical it is to switch over to green energy. So, they always move in sync with each other.
Q: I heard rumors that Amazon (AMZN) is likely to raise Prime’s annual fee by $10-20 a year in 2021. Will that be a catalyst for the stock to go higher?
A: Yes. For every $10 dollars per person in Prime revenue, Amazon makes $2 billion more in net profit. I would say that's a very strong argument for the stock going up and maybe what breaks it out of its current 6-month range. By the way, Amazon is wildly undervalued, and my long-term target is $5,000.
Q: Do you think that the spike in Apple (AAPL) MacBook purchases means that computers will overtake iPhones as the revenue driver for Apple in 2021, or is the phone business too big?
A: The phone business is too big, and 5G will cause iPhone sales to grow exponentially. Remember, the iPhones themselves are getting better. I just bought the 12G Pro, and the performance over the old phone is incredible. So yeah, iPhones get bigger and better, while laptops only grow to the extent that people need an actual laptop to work on in a fixed office. Is that a supercomputer in your pocket, or are you just glad to see me?
Q: Share buybacks dried up because of revenue headwinds; do you think they will come back in a massive wave, giving more life to equities?
A: Absolutely, yes. Banks, which have been banned from buybacks for the past year, are about to go back into the share buyback business. Netflix has also announced that they will go buy their shares for the first time in 10 years, and of course, Apple is still plodding away with about $100 or $200 million a year in share buybacks, so all of that accelerates. The only ones you won't see doing buybacks are airlines and Boeing (BA) because they have such a mountain of debt to crawl out from before they can get back into aggressive buybacks.
Q: Interest rates are at historic lows; the smartest thing we can do is act big.
A: That’s absolutely right; you want to go big now when we’re all suffering so we can go small later and run a balanced budget or even pay down national debt if the economy grows strong enough. The last person to do that was Bill Clinton, who paid down national debt in small quantities in ‘98 and ‘99.
Q: What do you think about General Motors (GM)?
A: They really seem to be making a big effort to get into electric cars. They said they're going to bring out 25 new electric car models by 2025, and the problem is that GM is your classic “hour late, dollar short” company; always behind the curve because they have this immense bureaucracy which operates as if it is stuck in a barrel of molasses. I don’t see them ever competing against Tesla (TSLA) because the whole business model there seems like it’s stuck in molasses, whereas Tesla is moving forward with new technology at warp speed. I think when Tesla brings out the solid-state battery, which could be in two years, they essentially wipe out the entire global car industry, and everybody will have to either make Tesla cars under license from Tesla—which they said they are happy to do—or go out of business. Having said that, you could get another double in (GM) before everyone figures out what the game is.
Q: Will you update the long-term portfolio?
A: Yes, I promise to update it next week, as long as you promise me that there won’t be another insurrection next week. It’s strictly a time issue. After last year being the most exhausting year in history, this year is proving to be even more exhausting!
Q: Do you see a February pullback?
A: Either a small pullback or a time correction sideways.
Q: Do you think the Zoom (ZM) selloff will continue, or is it done now that the pandemic is hopefully ending?
A: It’s natural for a tech stock to give up one third after a 10X move. It might sell off a little bit more, but like it or not, Zoom is here to stay; it’s now a permanent part of our lives. They’re trying to grow their business as fast as they can, they’re hiring like crazy, so they’re going to be a big factor in our lives. The stock will eventually reflect that.
Good Luck and Stay Healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Mad Hedge Technology Letter
October 14, 2020
Fiat Lux
Featured Trade:
(TECH OPTION VOLUME UNHINGED)
($COMPQ), (APPL), (FB), (MSFT), (GOOGL), (NFLX)
The euphoria in big cap tech shares is the catalyst moving the Nasdaq index recently.
Call option activity is taking the top off of tech shares with usual low beta stocks surging over 5% in single trading sessions.
This unfortunately is causing our options trades to experience heightened stock volatility and the knock-on effect is our strikes getting blown out.
Some of the excess volatility comes down to traders making big bets in the run-up to the election.
Remember when Trump won in 2016, the market exploded higher when many “experts” guaranteed a massive sell-off would ensue.
In the short-term, the unsustainable pace of speculation in derivatives will translate into wild price swings. Monday brought the biggest rally for the Nasdaq 100 Index since April, but measures of volatility rallied as well.
One proxy for the froth still latent in options, the percentage of overall volume represented by single-stock contracts, remains up 19% from a year ago.
Most of the action is concentrated in mega cap technology and momentum-driven shares.
A consensus is coalescing around a few big buyers coming into the options market to corner it with rumors of purchases around $300 million worth of call contracts on tech stocks in a single day.
The Nasdaq 100 Index has gained in all but two sessions this month and just notched its best week since July after last month’s sharp drop.
Whipsawing markets are also possible when liquidity remains thin.
Trading in options showed itself capable of influencing share movement in August and September when dealer hedging (demand from people who sell options for the underlying stock) created feedback loops that helped drive the Nasdaq higher.
That dynamic can also make sell-offs worse than they should be as well as sellers adjust positions.
Big trades in thin markets, especially in technology or momentum trades considered overbought or oversold, increase the potential for exacerbated stock moves as dealers hedge exposure.
Call open interest in Facebook (FB), Amazon (AMZN), Netflix (NFLX), Alphabet (GOOGL), Apple (APPL) and Microsoft (MSFT) has averaged 12.8 million contracts over the 30 days through Friday, the highest since early 2019.
The tech-heavy Nasdaq index has gyrated an average of 1.8% per day since the beginning of September, while the broader market gauge has fluctuated by 1.2% over that time period.
Recent options activity has been momentum-based, meaning that stocks tend to attract more interest in calls when it’s rallying versus when it trades lower.
Throw in structural forces that are contributing to a sustained high implied volatility environment, and election hedgers have their work cut out for them.
There are fewer short-volatility players as well in the wake of the health crisis.
There’s also less volatility selling by retail investors after the delisting of some popular VIX products earlier this year like the volatility ETF ticker symbol XIV.
It could take a few years for the imbalances to work itself through the system.
Then there’s the resurfacing of an event similar to the “Nasdaq whale” which is reported as Softbank acting like a hedge fund and buying as many big tech call options they could afford.
Softbank CEO has essentially turned his failed hedge fund named the Vision Fund from a start-up investor into a speculative hedge fund in risky option contracts solely betting on the rise of Silicon Valley tech in the age of the coronavirus.
After being burnt by Uber and WeWork, he finally decided to stay out of the messy acquisitions/seed funding and just speculative through derivatives from Tokyo.
The avalanche of options volume will no doubt cause the tech markets to become jittery and it certainly puts a floor under tech implied volatility for a while.
Retail investors have taken notice of this insane volume and largely stayed on the sideline.
At the apex of the madness, retail traders spent more than $511 billion in notional value on call options and that figure was slashed to $343 billion in the first week of October.
Retail traders tend to buy less-expensive short-dated contracts which tend to have greater convexity and ability to exacerbate share movements.
The level of risk-taking occurring in the public markets is at an all-time high.
Just look at America’s most elite university endowments who have slashed their exposure to the stock markets to the lowest levels since before the crash of 1929. And now they’re betting the ranch on secretive, illiquid, and high-risk private-equity funds and hedge funds.
A US teachers’ pension fund has sued Allianz Global Investors, accusing one of the world’s biggest asset managers of employing a “reckless strategy” that cost retirees almost $800m during this year’s market turmoil.
This is just one example of the high-risk strategies taking place with pension money.
In a lawsuit filed on Monday in New York, the Arkansas Teacher Retirement System claims that Alpha Funds, investment vehicles marketed by AllianzGI, had placed bets against an escalation of market volatility in an effort to recover losses they incurred from the same strategy in February.
So here we stand with derivative trading in tech options and general equity strategies leveraged to the hills that are betting on the system not breaking, or at least not breaking yet.
Even if the system reaches breaking point, many of these private investors are betting on governments to come rescue them perpetuating the feedback loop and offers a conundrum to savvy asset managers to miss or partake in the gaps up themselves.
Global Market Comments
October 2, 2020
Fiat Lux
Featured Trade:
(SEPTEMBER 30 BIWEEKLY STRATEGY WEBINAR Q&A),
(NVDA), (AMD), (JPM), (DIS), (GM), (TSLA), (NKLA),
(TLT), (NFLX), (PLTR), (VIX), (PHM), (LEN), (KBH), (FXA), (GLD)
Below please find subscribers’ Q&A for the September 30 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Silicon Valley, CA with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: Which is a better buy, NVIDIA (NVDA) or Advanced Micro Devices (AMD)?
A: NVIDIA is clearly the larger, stronger company in the semiconductor area, but AMD has more growth ahead of it. You’re not going to get a ten-bagger from NVIDIA from here, but you might get one from Advanced Micro Devices, especially if a global chip shortage develops once we’re out the other side of the pandemic. So, I vote for (AMD), and did a lot of research on that company last week. You can find the report at www.madhedgefundtrader.com but you have to be logged in to see it.
Q: Do you have any thoughts on the JP Morgan Chase Bank (JPM) spoofing cases, where they had to pay about a billion in fines? Is this a terrible time to invest in banks?
A: No, this is a great time to invest in banks because this is the friendly administration to banks now; the next one will be less than friendly. On the other hand, an awful lot of bad news is already in the price; buying these companies at book value or discount of book like JP Morgan, it's a once in a lifetime opportunity. All the bad behavior they’re being fined on now happened many years ago. So yes, I still like banks, but you really have to be careful to buy them on the dip, just in case they stay in a range. If you stay in a range, you’re buying them call spread, you always make money. The bigger drag on share prices will be the Fed ban on bank share buybacks but that may end after Q4.
Q: Is it time to buy Disney (DIS) after they laid off 28,000?
A: This is a company that practically every fund manager in the company wants to have in their portfolio. However, it could be at least a year before they get back to normal capacity in the theme parks, meaning customers packing in shoulder-to-shoulder. So, it could be another wait-for-a-turnaround, buy-on-the dip situation for sure. This company is so well managed that you’re always going to have to pay up to get into the Mouse House. By the way, my dad did business with Disney during the 1950s so we got Disneyland opening day tickets and I got to shake Walt Disney’s hand.
Q: How desperate is General Motors (GM) in buying the fake Tesla (TSLA) company, Nikola (NKLA), who've been exposed as giant frauds? Is GM hopeless?
A: Yes, the future is happening too fast for a giant bureaucracy like General Motors to get ahead of the curve. The fact that they’re trying to buy in outside technologies shows how weak their position is, and of course, it’s a great way to get stuck with a loser, as Tesla selling out to anyone. The Detroit companies are all stuck with these multibillion-dollar engine factories so they can’t afford to go electric even if they wanted to. So, I expect all the major Detroit car companies to go under in the next 5 years or so. Electric cars are already beating conventional internal combustion engines on a lifetime cost basis and will soon be beating them, within 3 years, on an up-front cost basis as well.
Q: Will Netflix (NFLX) pass $600 before the year's end?
A: I’m expecting a monster after-election rally to new all-time highs in the market and Netflix will be one of the leaders, so easy to tack on another hundred bucks to Netflix. That’s one of my targets for a call spread if we can get in at a lower price. And if you really want to be conservative, buy 2-year LEAPS, two-year call options spreads on Netflix, and you’ll get an easy 100% return on those.
Q: Who will win, Trump or Biden?
A: Neither. You will win. I am not a member of any political party as I would never join any club that would stoop to have me as a member. Groucho Marx told me that just before he died in the early 70s. Don’t ask me, ask the polls. Suffice it to say that the London betting polls are 60%-40% in favor of Biden, having just added another 5% for Biden after the debate. My expectation is that Biden picks up another point in the opinion polls in all the battleground states this weekend. So, Biden will be up anywhere from 6-10% in the 6 states that really count.
Q: What will the market impact be?
A: It makes no difference who wins. The mere fact that the election is out of the way is worth a 10% move up in the stock market.
Q: Should we keep the January 2022 (TLT) 140/143 bear put spread?
A: Absolutely, yes. That’ll be a chip shot and we in fact should go in the money on those number sometime next year. A huge cyclical recovery will create an enormous demand for funds and crowding out by the government will crush the bond market.
Q: Do you think it would be better to wait a week or two to lock in refis on home loans?
A: I think we are at the low in interest rates in the refi market. Even if the Fed lowers interest rates, banks aren’t going to lower their lending rates anymore because there's no money in it for them. It’s also taking anywhere from 2-4 months to close on a loan, as the backlogs are so enormous. If you can even get a loan officer to return a phone call, you’re lucky. So, I wouldn't be too fancy here trying to pick absolute bottoms; I would just refi now and whatever you get is going to be close to a century low.
Q: Why so few trade alerts?
A: Well, very simple. We only do trade alerts when we see really good sweet spots in the market. There aren’t sweet spots in the market every day; you’re lucky if you get 1 or 2 in a month. Then we tend to pour in and out of the market very quickly with a lot of alerts. There is no law that says you have to have a position every day of the year. That buys the broker’s yacht, not yours. You should only have positions when the risk reward is overwhelmingly in your favor. That is not now when our market timing index is hugging the 50 level. At 50, you actually have the worst possible entry point for new trades, long or short, so I’d rather wait for it to get away from that level before we get aggressive again. We have gone 100% invested multiple times in the last two months and made a ton of money. So, you just have to wait for your turn to get a sweet spot, and then you’ll make a very quick 10% or 15% in the market. Patience is rewarded in this business.
Q: Would you wait for the election because of the high implied volatility?
A: No, I would not wait. The game is to get in at the lowest price before the election. When the implied volatilities drop after the election, the profits you can make on these deep out of the money LEAPs drop by about half. Thank the volatility while it’s here because it’s creating great trading opportunities now, not in two months after the volatility Index (VIX) has collapsed.
Q: What about Zoom (ZM)?
A: As much as Zoom has had a 10-fold return since we recommended it a year ago, it looks like it wants to go higher. The Robinhood traders just love this stock; it’s a stay at home stock, stay at home is lasting a lot longer than anyone thought. Zoom is just coining it on that.
Q: Is the best outcome a Biden presidency and a Republican Senate?
A: No, that is the worst outcome. When you have a global pandemic going on, you don’t want gridlock in Washington. You want a very active Washington, controlled by a single party that can get things done very quickly. That is not now, which is possibly a major reason that we have the highest Covid-19 death rate in the world. It’s because Washington is doing absolutely nothing to stop the virus; the president won’t even wear a mask, so yes, you need one party to control everything so they can push stuff through. If it works, great, and if not then you kick them out of office next time and let the other guys have a try.
Q: Will property markets be up 20% by the end of the year?
A: If you live in a suburb of New York or San Francisco, then yes it will be up that much. For the whole rest of the country, the average is more like 5% gains year on year. In the burbs of these big money-making cities, prices are going absolutely nuts. My neighbor put his house up and it sold in a week for a $1 million over asking. So, the answer to that is yes, hell yes.
Q: Can you explain why the IPO market is suddenly booming now?
A: A lot of these companies like Palantir (PLTR) have been in development for 20 years, and prices are high. On valuation terms, we are at dot com bubble peaks now. That is the very best time to take your company public and get a huge premium for your stock. When the world is baying for paper assets, you print more of them.
Q: What is the best way to play real estate?
A: Buying the single home building companies like Pulte Homes (PHM), Lennar Homes (LEN), and KB Homes (KBH).
Q: What is your Tesla overview in China?
A: Tesla’s already announced that they’re doubling production of the Shanghai factory, from 250,000 units a year to 500,000. They built the last one in 18 months. It would take (GM) like 5 years to build something like that.
Q: Why has gold (GLD) lost its risk-off status?
A: It’s now a quantitative easing asset—like tech stocks, like bitcoin, and the stay at home stocks. It is being driven much more by QE-driven speculators flush with free cash than anyone looking for a flight to safety bid. When this group sells off, gold drops as well. The only risk-off asset right now is cash. That is the only “no risk” trade.
Q: What does reversal in lumber prices tell you?
A: Lumber was another one of those QE assets—it tripled. But you have this monster increase in new home building, huge demand for new homes in the suburbs, huge import duties leveled by the Trump administration on lumber coming from Canada. Also, a lot of people are getting COVID-19 in the lumber mills. So, they’re having huge problems on the production side in lumber, as a result of the pandemic.
Q: Are there any alternative ways to buy the Australian dollar besides (FXA)?
A: You go into the futures market and buy the Australian dollar futures. That is an entirely new regulatory regime so can be a huge headache. It requires you to register with the Commodities Futures Trading Commission, which is the worst of all the major regulators, but that is an alternative. If you’re an individual and not regulated instead of being a professional money manager, then it’s much easier.
Good Luck and Stay Healthy
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Summit of Mount Rose
Global Market Comments
September 23, 2020
Fiat Lux
Featured Trade:
(AN INSIDER’S GUIDE TO THE NEXT DECADE OF TECH INVESTMENT),
(AMZN), (AAPL), (NFLX), (AMD), (INTC), (TSLA), (GOOG), (FB)
Last weekend, I had dinner with one of the oldest and best performing technology managers in Silicon Valley. We met at a small out of the way restaurant in Oakland near Jack London Square so no one would recognize us. It was blessed with a very wide sidewalk out front and plenty of patio tables to meet current COVID-19 requirements.
The service was poor and the food indifferent as are most dining experiences these days. I ordered via a QR code menu and paid with a touchless Square swipe.
I wanted to glean from my friend the names of the best tech stocks to own for the long term right now, the kind you can pick up and forget about for a decade or more, a “lose behind the radiator” portfolio.
To get this information I had to promise the utmost confidentiality. If I mentioned his name, you would say “oh my gosh!”
Amazon (AMZN) is now his largest holding, the current leader in cloud computing. Only 5% of the world’s workload is on the cloud presently so we are still in the early innings of a hyper-growth phase there.
By the time you price in all the transportation, labor, and warehousing costs, Amazon breaks even with its online retail business at best. The mistake people make is only focusing on this lowest of margin businesses.
It’s everything else that’s so interesting. While its profitability is quite low compared to the other FANG stocks, Amazon has the best growth outlook. For a start, third party products hosted on the Amazon site, most of what Amazon sells, offer hefty 30% margins.
Amazon Web Services (AWS) has grown from a money loser to a huge earner in just four years. It’s a productivity improvement machine for the world’s cloud infrastructure where they pass all cost increases on to the customer who, once in, buys more services.
Apple (AAPL) is his second holding. The company is in transition now justifying a massive increase in earnings multiples, from 9X to 40X. It now trades at 30X. The iPhone has become an indispensable device for people around the world, and it is the services sold through the phone that are key.
The iPhone is really not a communications device but a selling device, be it for apps, storage, music, or third party services. The cream on top is that Apple is at the very beginning of an enormous replacement cycle for its installed base of over one billion phones. Moving from up-front sales to a lifetime subscription model will also give it the boost.
Half of these are more than four years old, positively geriatric in the tech world. More than half of these are outside the US. 5G will add a turbocharger.
Netflix (NFLX) is another favorite. The world is moving to “over the top” content delivery and Netflix is already spending twice as much on content as any other company in this area. This is why the company won an amazing 21 Emmys this year. This will become a much more profitable company as it grows its subscriber base and amortizes its content costs. Their cash flow is growing by leaps and bounds, which they can use to buy back stock or pay a dividend.
Generally speaking, there is no doubt that the pandemic has pulled forward some future technology demand with the stay-at-home trend. But these companies have delivered normal growth in a hard world. Tech growth will accelerate in 2021 and 2022.
5G will enable better Internet coverage for everyone and will increase the competitiveness of the telecom companies. Factory automation will be another big area for 5G, as it is reliable and secure and can be integrated with artificial intelligence.
Transportation will benefit greatly. Connected self-driving cars will be a big deal, improving safety and the quality of life.
My friend is not as worried about government threatened breakups as regulation. There will be more restraints on what these companies can do going forward. Europe, which has no big tech companies if its own, views big American tech companies simply as a source of revenues through fines. Driving companies out of business through cutthroat competition is simply not something Europeans believe in.
Google (GOOG) is probably more subject to antitrust proceedings both in Europe and the US. The founders have both retired to pursue philanthropic activities, so you no longer have the old passion (“don’t be evil”).
Both Google and Facebook (FB) control 70% of the advertising market between them, which is inherently a slow-growing market, expanding at 5% a year at best. (FB)’s growth has slowed dramatically, while it has reversed at (GOOG).
He is a big fan of (AMD), one of his biggest positions, which is undervalued relative to the other chip companies. They out-executed Intel (INTC) over the last five years and should pass it over the next five years.
He has raised value tech stocks from 15% to 30% of his portfolio. Apple used to be one of these. Semiconductor companies today also fall into this category. Samsung with 40% margins in its memory business is a good example. Selling for 10X earnings, it is ridiculously cheap. It is just a matter of time before semiconductors get rerated too.
He was an early owner of Tesla (TSLA) back in the nail-biting days when it was constantly running out of cash. Now they have the opposite problem, using their easy access to cash through new share issues as a weapon to fight off the other EV startups. Tesla is doing to Detroit what Apple did to the cell phone companies, redefining the car.
Its stock is overvalued now but will become much more profitable than people realize. They also are starting to extract services revenues from their cars, like Apple has. Tesla will grow revenues 30%-50% a year for the next two or three years. They should sell several million of the new small SUV Model Y. Most other companies bringing EVs will fall on their faces.
EVs are a big factor in climate change, even in China, the world’s biggest polluter. In Europe, they are legislating gasoline cars out of existence. If you can make money building cars in Fremont, CA, you can make a fortune building them in China.
Tech valuations are high, there is no doubt about it. But interest rates are much lower by comparison. The Fed is forcing people to buy stocks, enabling these companies to evolve even faster.
When rates rise in a year or so, tech stocks may have to come down. They have a lot more things going for them than against them. The customers keep coming back for more.
Needless to say, the above stocks should make up your shortlist for LEAPS to buy at the coming market bottom.
