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)
Posts
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 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 5, 2021
Fiat Lux
Featured Trade:
(FEBRUARY 3 BIWEEKLY STRATEGY WEBINAR Q&A),
(MRNA), (PFE), (JNJ), (AMZN), (SLV), (GME), (GLD), (CLDR), (SNOW), (NVDA), (X), (FCX),
(AAPL), (TSLA), (FEYE), (PANW), (SWI), (WYNN), (MGM), (LVS)
Below please find subscribers’ Q&A for the February 3 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Incline Village, NV.
Q: Is there a big difference between COVID-19 vaccines?
A: The best vaccine is the one you can get. It’s better than being dead. But there are important differences. The Pfizer (PFE) and Moderna (MRNA) vaccines are RNA vaccines, they’re very safe, and getting similar results. But the evidence shows that about 15% of Moderna recipients are coming down with flu-like symptoms on their second shot. Nobody knows why, as the two are almost biochemically identical. AstraZeneca is a killed virus type vaccine, which means if they have a manufacturing error, you end up giving the disease to people by accident, as with the original polio vaccine. So that's the less safe vaccine. So far, that one has only been used in Europe and Australia, as it is made in England. There isn’t enough data about the John & Johnson (JNJ) single-shot vaccine.
Q: Is Moderna (MRNA) a long term buy?
A: The trouble with all the vaccine plays is that we’re heading for a global vaccine glut in about 4 months when we’ll have something like 12 companies around the world making them. The rush for everyone to get a vaccination as soon as possible is leading to inevitable overproduction and falling stock prices. Moderna is already a 12 bagger for us. I’m not really looking to overstay my welcome, so to speak. Time to cash in and say, “Thank you very much, Mr. Market.” There will be another cycle down the road for (MRNA) as its technology is used to cure cancer, but not yet.
Q: Would you recommend a silver (SLV) LEAP?
A: Yes, silver was run up 35% for a day by the GameStop (GME) crowd and crashed the next day, which was to be expected because there are no short positions in silver. Everything was just hedged to look like there were short positions because the big banks had huge open short options positions that were public and hedges in the futures and silver bars that were private. The (GME) people only saw the public short positions. Long term, I would go for a $30-$32 vertical call spread expiring in 2023. Go out 2 years, and I think you could get silver at $50. So, a good LEAP might get you a 1000% return in two years. Those are the kinds of trades I like to do.
Q: What do you think of Amazon now that Jeff Bezos is retiring?
A: Buy the daylights out of it. That was the great unknown overhanging the stock for years, Jeff’s potential retirement. Now it's no longer unknown, you want to buy (AMZN). Even before the retirement, I was targeting $5,000 a share in two years. Now we have everybody under the sun raising their targets to $5,000 or more— we even had one upgrade today to $5,200. There are at least half a dozen businesses that Amazon can expand into, like healthcare, which will be multibillion-dollar earners. And then if you break it up because of antitrust, it doubles in value again, so that's a screaming buy here. We have flatlined for six months, so this could be a trigger for a long-term breakout.
Q: Is there anything else left after GameStop? Another short play?
A: Well, this was the worst short squeeze in 25 years, and everyone else covered their other shorts because they don't want to get wiped out like the one Melvin Capital. There were only around a dozen potential single-digit heavily shorted stocks out there, and those are mostly gone. So, the GameStop crowd will have to roll up their sleeves and do some hard work finding stocks the old fashion way—by doing research. I’m guessing that GameStop was a one-hit-wonder; we probably won’t be surprised again. At the same time, you should never underestimate the stupidity of other investors.
Q: What do you think of the cloud plays like Cloudera and Snowflake?
A: I love cloud plays and there will be more coming. The entire US economy is moving on to the cloud. But everyone else loves them too. Snowflake (SNOW) doubled on its first day, and Cloudera (CLDR) doubled over the last three months, so they're incredibly expensive and high risk. But you can't argue with their business models going forward—the cloud is here to stay.
Q: Would you buy LEAPS in financials?
A: Absolutely yes; go out two years for your maturity and 30% on your strike prices, you will get a ten bagger on the trade. If I’m wrong, it only goes to zero.
Q: Is US Steel (X) a buy?
A: Yes. They are being dragged up by the global commodity boom triggered by the global synchronized recovery. (X) took a hit today because they just priced a $700 million secondary share issue which the flippers dumped like a hot potato. If given the choice, I’d rather do a copper play with Freeport McMoRan (FCX) which is seeing much more buying from China. I bought it on Monday.
Q: Any chance you can include one-, three-, and five-year price targets?
A: No chance whatsoever. I’ve never heard of a fund manager that could do that and be right. Stocks are just too imprecise an instrument with all the emotion that’s involved. But for the better stocks, you can with confidence predict at least a double. And by the way, all my predictions for the last 13 years have been way, way on the low side, so I tend to be conservative. Like, remember when Amazon was at $10? I said it would go to $20. Boy was I right!
Q: How can you say the next four years will be good for the stock market?
A: Well, $10 trillion in fiscal stimulus, $10 trillion in QE; stocks tend to like that. Oh, and technology exponentially accelerating on all fronts and far more broadly than what we saw in the 1990s. Also, there is a certain person who is no longer president, so add about 10-20% on top of all stock valuations. Companies can finally do long term planning again, after being unable to do so for four years because policies were anti-trade, anti-business, and flip-flopping every other day. So yes, I think that's enough to make the next 4 four years good; and actually, I think the next 8 years could be good—I'm predicting Dow 120,000 by 2030, if you recall.
Q: When do you expect the next 5% correction if there is one? February is always very volatile.
A: With an unlimited liquidity market like we have, it is really tough to see negatives of any kind. What kind of negatives are out there? The pandemic doesn’t stop—that's the main one. There’s another one people aren't talking about: the reason we got all these vaccines so fast is they took all regulation and threw it out the window. What if one of these vaccines kill off a million people? That would be pretty negative for the market. Interest rates could rocket faster than expected. But I’m always short there so that would be a moneymaker. But these are pretty out there possibilities, and that is why the market is not backing off, and when it does, it only gives us 5%.
Q: Is the Fed stimulating the economy too much?
A: The bond market says no with a ten-year yield of 1.10%, and the bond market is always the ultimate arbiter of when the stimulus ends. That’s because the Fed can’t directly control bond market interest rates, only overnight rates. But when we get bonds up to, say, a 3% yield (which is probably 2 or 3 years off), that’s when we’re getting too much stimulus, and we’ll probably take our foot off the pedal way before then. I know Janet Yellen and she agrees with me on this point. She’ll be throttling back well before we see a 3% yield in the Treasury market.
Q: Do you manage other people’s money?
A: No, because it costs a million dollars in legal fees to set up even a small fund these days. When I set up my hedge fund 30 years ago, there were no regulatory costs because no one knew what a hedge fund was; they all thought they were doing something illegal, so they didn't have to register for anything. That’s why it’s changed now.
Q: What is your target on NVIDIA (NVDA), and will it split?
A: It’s an easy double, with a global chip shortage running rampant. They make the best graphics cards in the world, bar none. These big tech companies tend not to split until they get share prices into the thousands, which is what Apple (AAPL) and what Tesla (TSLA) did three or four times.
Q: If we get 3.25% in bonds, is that going to hurt gold?
A: Yes, and that’s one of the reasons I bailed on my gold positions a couple of weeks ago. It effectively turned into a bond long. A sharp rise in interest rates is bad for gold because we all know that gold yields to zero.
Q: What about Fireye (FEYE)?
A: Yes, we also love Fireye in addition to Palo Alto Networks (PANW) because there is a near-monopoly—there are only about six players in the entire cybersecurity industry and hacking is getting worse by the day. Look at the Solar Winds (SWI) fiasco and the national Russian hack there.
Q: What about copper as a recovery play?
A: Well, I voted with my feet on Monday when I bought a position in Freeport McMoRan, after it just sold off 15%. I think (FCX) could double at some point in the coming economic recovery. So, copper is an absolute winner, and when having to choose between copper and steel, I’ll pick copper all day long.
Q: What do you recommend for gold (GLD)?
A: Gold is a trading range for the time being. Buy the dips, sell the rallies; you won’t get more than about 10% or 15% range on that. And there are just better fish to fry right now, like financials, which benefit from rising interest rates as opposed to being punished. Bitcoin is stealing gold’s thunder and the markets keep creating more Bitcoins.
Q: Should high-frequency trading be banned?
A: I don’t think it should be. It does create liquidity; the effect on the market is wildly overexaggerated. They’re basically trading for pennies or tenths of pennies, so they do provide buying on selloffs and selling at huge price spikes. They do have a positive effect and they’re probably only taking about $10 or $20 billion in profit a year out of the market.
Q: Should I buy Wynn Resorts (WYNN) here?
A: Buy the dips for sure; this is a major recovery play. We here in Nevada are expecting an absolute tidal wave of people to hit the casinos once the pandemic ends, and (WYNN), (MGM), and (LVS) would be a great play in those areas.
Good Luck and Stay Healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Global Market Comments
January 22, 2021
Fiat Lux
Featured Trade:
(JANUARY 20 BIWEEKLY STRATEGY WEBINAR Q&A),
(QQQ), (IWM), (SPY), (ROM), (BRK/A), (AMZN), NVDA), (MU), (AMD), (UNG), (USO), (SLV), (GLD), ($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
December 21, 2020
Fiat Lux
Featured Trade:
(THE BEST WAY TO SUPERCHARGE YOUR TECH PORTFOLIO)
(NVDA), (PLTR), (AMD), (APPL), (OTC:SFTBF), (INTC), (QCOM)
Superiority is mainly about taking complicated data and finding perfect solutions for it. Trading in technology stocks is no different.
Investing in software-based cloud stocks has been one of the seminal themes I have promulgated since the launch of the Mad Hedge Technology Letter way back in February 2018.
Well, if you thought every tech letter until now has been useless, this is the one that should whet your appetite.
Instead of racking your brain to find the optimal cloud stock to invest in, I have a quick fix for you and your friends.
Invest in The WisdomTree Cloud Computing Fund (WCLD) which aims to track the price and yield performance, before fees and expenses, of the BVP Nasdaq Emerging Cloud Index (EMCLOUD).
What Is Cloud Computing?
The “cloud” refers to the aggregation of information online that can be accessed from anywhere, on any device remotely.
Yes, something like this does exist and we have been chronicling the development of the cloud since this tech letter’s launch.
The cloud is the concept powering the “shelter-at-home” trade which has been hotter than hot in 2020.
Cloud companies provide on-demand services to a centralized pool of information technology (IT) resources via a network connection.
Even though cloud computing already touches a significant portion of our everyday lives, the adoption is on the verge of overwhelming the rest of the business world due to advancements in artificial intelligence and the Internet of Things (IoT) hyper-improving efficiencies.
The Cloud Software Advantage
Cloud computing has particularly transformed the software industry.
Over the last decade, cloud Software-as-a-Service (SaaS) businesses have dominated traditional software companies as the new industry standard for deploying and updating software. Cloud-based SaaS companies provide software applications and services via a network connection from a remote location, whereas traditional software is delivered and supported on-premise and often manually. I will give you a list of differences to several distinct fundamental advantages for cloud versus traditional software.
Product Advantages
Speed, Ease, and Low Cost of Implementation – cloud software is installed via a network connection; it doesn’t require the higher cost of on-premise infrastructure setup and installation.
Efficient Software Updates – upgrades and support are deployed via a network connection, which shifts the burden of software maintenance from the client to the software provider.
Easily Scalable – deploying via a network connection allows cloud SaaS businesses to grow as their units increase, with the ability to expand services to more users or add product enhancements with ease. Client acquisition can happen 24/7 and cloud SaaS companies can more easily expand into international markets.
Business Model Advantages
High Recurring Revenue – cloud SaaS companies enjoy a subscription-based revenue model with smaller and more frequent transactions, while traditional software businesses rely on a single, large, upfront transaction. This model can result in a more predictable, annuity-like revenue streams making it easy for CFOs to solve long-term financial solutions.
High Client Retention with Longer Revenue Periods – cloud software becomes embedded in client workflow, resulting in higher switching costs and client retention. Importantly, many clients prefer the pay-as-you-go transaction model, which can lead to longer periods of recurring revenue as upselling product enhancements does not require an additional sales cycle.
Lower Expenses – cloud SaaS companies can have lower R&D costs because they don’t need to support various types of networking infrastructure at each client location.
I believe the product and business model advantages of cloud SaaS companies have historically led to better margins, growth, higher free cash flow, and efficiency characteristics as compared to non-cloud software companies.
How does the WCLD ETF select its indexed cloud companies?
Each company must satisfy critical criteria such as they must derive the majority of revenue from business-oriented software products, as determined by the following checklist.
+ Provided to customers through a cloud delivery model – e.g., hosted on remote and multi-tenant server architecture, accessed through a web browser or mobile device, or consumed as an application programming interface (API).
+ Provided to customers through a cloud economic model – e.g., as a subscription-based, volume-based, or transaction-based offering Annual revenue growth, of at least:
+ 15% in each of the last two years for new additions
+ 7% for current securities in at least one of the last two years
Some of the stocks that would epitomize the characteristics of a WCLD stock are Salesforce, Microsoft, Amazon-- I mean, they are all up, you know, well over 100% from the nadir we saw in March and contain the emerging growth traits that make this ETF so robust.
If you peel back the label and you look at the contents of many tech portfolios, they tend to favor some of the large-cap names like Amazon, not because they are “big” but because the numbers behave like emerging growth companies even when the law of large numbers indicate that to push the needle that far in the short-term is a gravity-defying endeavor.
We all know quite well that Amazon isn't necessarily a direct play on cloud computing, but the elements of its cloud business are nothing short of brilliant.
But ETF funds like WCLD, what they look to do is to cue off of pure plays and include pure plays that are growing faster than the broader tech market at large. So you're not going to necessarily see the vanilla tech of the world in that portfolio. You're going to see a portfolio that's going to have a little bit more sort of explosive nature to it, names with a little more mojo, a little bit more risk because you're focusing on smaller names that have the possibility to go parabolic and gift you a 10-bagger.
One stock that has the chance of a 10-bagger is my call on Palantir (PLTR).
Palantir is a tech firm that builds and deploys software platforms for the intelligence community in the United States to assist in counterterrorism investigations and operations, and my call was to buy them at $10 after it’s IPO, it's up to $26 and has an easy pathway to $50.
This is one of the no-brainers that procure revenue from Democrat and Republican administrations even though its CEO Alex Karp has been caught on video making fun of the current administration’s leaders.
In a global market where the search for yield couldn’t be tougher right now, right-sizing a tech portfolio to target those extraordinary, extra-salacious tech growth companies is one of the few ways to produce alpha without overleveraging.
No doubt there will be periods of volatility, but if a long-term horizon is something suited for you, this super-growth strategy is a winner and don’t forget about PLTR while you’re at it.
