Mad Hedge Technology Letter
July 15, 2022
Fiat Lux
Featured Trade:
(THE HUNT FOR RAW MATERIALS)
(TSLA), (F), (GM), (CATL)
Tag Archive for: (TSLA)
Tesla (TSLA) CEO Elon Musk has been in the headlines a lot lately, and I don’t write about him because I idolize the guy.
He is simply the richest man in the world and straddles the vanguard of space technology and EV technology, all while failing to purchase one of the biggest social media platforms in the world.
Naturally, his point of contact in the business world is immense, the man moves markets and we need to acknowledge it.
His latest quip has to do with natural resources - particularly lithium.
He defined the term energy independence for a world full of electric cars: You simply need the batteries.
His tweet of “lithium batteries are the new oil” is an updated variation of “data is the new oil.”
It doesn’t mean lithium is the new data but in a conceptual future when lithium batteries power the potential iPhone on wheels product, it gets close to or at the very minimum, it is complicit in accelerating data generation.
Batteries may be the future. But for now, oil is still the new oil.
About 20 million barrels of oil are consumed in the US every day. (About eight million barrels are imported.)
About two-thirds of oil ends up in gas tanks, according to the US Department of Energy.
Outrageous oil prices is why the American consumers want to buy an EV, there is a massive backlog of orders.
The American Automobile Association reported that 25% of new car buyers surveyed are considering an EV as their next car.
But, as Musk said, EVs can't completely solve the energy independence problem. Because the oil problem is simply replaced by the problem with lithium-ion batteries.
OPEC countries don't produce many lithium-ion batteries.
They are mainly produced in Asia. The Chinese company Contemporary Amperex Technology, better known as CATL, manufactures about 30% of the electric car batteries produced worldwide, according to Ford CEO Jim Farley.
CATL has grown into the 800-pound gorilla in the room with a market capitalization of $200 billion, it competes with Toyota and competes well.
Most automakers, including General Motors (GM) and Ford (F), predict that by 2030 around 50% of new cars sold will be battery-powered. That corresponds to up to ten million EVs per year in America alone.
Manufacturing batteries in the US is part of a strategy to become independent in the lithium-ion battery space.
Another factor is the raw materials required for the batteries. Lithium is mainly mined in South America and Australia and mostly processed in China.
Other raw materials such as nickel and cobalt come from many other countries like the Congo.
Automakers, including Tesla, may be considering investing early in the battery value chain. This could protect them from commodity price shocks like those experienced by US consumers in 2022.
Musk hopes to front-run the situation and that means investing in Lithium-ion solutions instead of one day held hostage by Chinese price gouging.
The communist Chinese are the ones who hope to corner the market with state subsidies.
There are many things I envy about Musk, but I particularly appreciate his knack for pre-emptively looking for unique solutions before problems get out of hand.
That can’t be said for most American corporations that are held hostage by the short-termism of quarterly earnings reports.
Musk has a longer leash, and he certainly uses it to abandon which is why he can handle a higher risk tolerance.
Tesla shares were only recently at $1,200 and at $700, this represents immense value for long-term buy and hold investors.
Global Market Comments
July 13, 2022
Fiat Lux
Featured Trade:
(JULY 22 ZERMATT, SWITZERLAND STRATEGY SEMINAR),
(HOW TO HANDLE THE FRIDAY, JULY 15 OPTIONS EXPIRATION),
(TSLA), (NVDA), (MSFT), (BRKB), (TLT)
Followers of the Mad Hedge Fund Trader alert service have the good fortune to own deep in-the-money options positions that expire on Friday, October 15, and I just want to explain to the newbies how to best maximize their profits.
These involve the:
(MSFT) 7/$200-$210 call spread 10.00%
(NVDA) 7/$120-$130 call spread 10.00%
(TSLA) 7/$500-$550 call spread 10.00%
(BRKB) 7/$220-$230 call spread 10.00%
(TLT) 7/$119-$122 put spread 10.00%
Provided that we don’t have another 2,000-point move down in the market this week, these positions should expire at their maximum profit points.
So far, so good.
I’ll do the math for you on our deepest in-the-money position, the Tesla (TSLA) July 2022 $500-$550 vertical bull call spread, which I almost certainly will run into expiration. Your profit can be calculated as follows:
Profit: $50.00 expiration value - $42.00 cost = $8.00 net profit
(2 contracts X 100 contracts per option X $8.00 profit per option)
= $1,600 or 19.05% in 21 trading days.
Many of you have already emailed me asking what to do with these winning positions.
The answer is very simple. You take your left hand, grab your right wrist, pull it behind your neck, and pat yourself on the back for a job well done.
You don’t have to do anything.
Your broker (are they still called that?) will automatically use your long position to cover your short position, canceling out the total holdings.
The entire profit will be credited to your account on Monday morning, July 18 and the margin freed up.
Some firms charge you a modest $10 or $15 fee for performing this service.
If you don’t see the cash show up in your account on Monday, get on the blower immediately and find it.
Although the expiration process is now supposed to be fully automated, occasionally machines do make mistakes. Better to sort out any confusion before losses ensue.
If you want to wimp out and close the position before the expiration, it may be expensive to do so. You can probably unload them pennies below their maximum expiration value.
Keep in mind that the liquidity in the options market understandably disappears, and the spreads substantially widen when a security has only hours, or minutes until expiration on Friday July 15. So, if you plan to exit, do so well before the final expiration at the Friday market close.
This is known in the trade as the “expiration risk.”
One way or the other, I’m sure you’ll do OK, as long as I am looking over your shoulder, as I will be, always. Think of me as your trading guardian angel.
I am going to hang back and wait for good entry points before jumping back in. It’s all about keeping that “Buy low, sell high” thing going.
I’m looking to cherry-pick my new positions going into the next month end.
Take your winnings and go out and buy yourself a well-earned dinner. Just make sure it’s take-out. I want you to stick around.
Well done, and on to the next trade.
You Can’t Do Enough Research
Mad Hedge Technology Letter
July 11, 2022
Fiat Lux
Featured Trade:
(TOYING WITH BAD MANAGEMENT)
(TWTR), (TSLA)
Musk has pulled out of the Twitter deal.
By the time Twitter (TWTR) gets this acquisition through the courts which is now estimated as much as 5 years, Twitter will be bankrupt.
There will naturally be some movement before then.
Regardless of timing, Twitter shares are set to plunge. And you can't then blame Elon Musk for Twitter's demise and poor management.
In fact, Twitter is quite infamous in Silicon Valley for one of the worst management teams and this open secret has come back to hurt them in the wallet.
This is highly bullish for Tesla’s (TSLA) stock because it avoids Musk’s capital getting tied up in an overpriced Twitter deal.
TSLA stock bounced on this news and even if he does reverse course and buy Twitter for a discount as it drops fast, it will be seen as a great bargain for Musk and TSLA shares.
Tesla’s CEO announced his plans to buy social networking site Twitter in April for $44 billion and many thought this wasn’t a serious offer to begin with.
The contract says that Musk is required to pay a $1 billion breakup penalty and he has indicated that he is also trying to get out of that.
I believe Twitter was foolish in setting such a low break-up fee for the richest man in the world.
For most people, a $1 billion fee would be astronomical, but not when one can just liquidate a few odd Tesla shares with a snap of the fingers.
This low fee has been exploited and leveraged to get what he wants because he doesn’t care if he has to pay it.
In hindsight, management should have set Twitter’s breakup fee at a level which would have hurt the richest man in the world meaningfully and created a massive windfall for Twitter.
They didn’t and now the circus begins and who knows when, who, and how much will be the payout if any.
My guess is a termination fee of something around $10 billion would have been quite painful and cost-prohibitive for Musk.
Readers should remember that Musk offloaded $4 billion of Tesla shares around April to pay for Twitter. He sold out at all-time highs and so even if he paid back the $1 billion, the penalty is largely blunted by shifting around his resources.
My guess is that Musk exploits this situation to drain Twitter of its financial resources while buying its stock on the way down.
After he beats the company into submission, there will likely be a huge discount.
If the stock goes to $25, he’ll get a 60% discount on what at first would have been a $44 billion price tag.
Twitter has been fooled big time, made to look incompetent which exactly was the working assumption taken into this deal, which management has totally botched.
TWTR is trading at $34 today which is a far cry from the $54.20 he agreed to buy Twitter at.
This isn’t about Musk because everyone with half a brain would pull out of this deal with a deleveraging tech bubble.
My bet is Twitter slowly grinds lower and Musk finds a way to get Twitter on the cheap then fires the whole management team.
Mad Hedge Technology Letter
July 6, 2022
Fiat Lux
Featured Trade:
(GOOD NEWS IS BAD NEWS)
(ARKK), (TSLA), (APPL), (ASML)
As the bear market rally picked up steam Tuesday with even Cathy Wood’s growth ETF (ARKK) gaining 9%, it’s clearly a reaction to the Nasdaq repricing its biggest underlying risk.
The market is now pricing in a global recession and that has replaced inflation as the number one worry for investors.
This new development has led to the Nasdaq sniffing out the return to the bad news is good news effect.
That is why the U.S. 10-year treasury yield cratered from 3.5% to 2.8% which reflects the future expectation of a pulled-forward global recession.
This would trigger a fresh interest rate lowering cycle by global central banks.
Lowering rates is good for Nasdaq stocks and tech stocks will be a big beneficiary of lowered rates as they have overshot to the downside on this rate rise cycle.
That doesn’t mean it’s all rosy in the land of the Nasdaq, hardly so.
We are still in the fog of war and amid improving technical data like lower oil prices, worsening economic relations between the large nuclear-equipped countries are not only moving the world towards a soft technological decoupling but a hard fracturing of general relations.
My first thought was will China finally strike back against the United States in the form of destroying Tesla’s (TSLA) Gigafactory in Shanghai or blacklist Apple (AAPL) iPhones in China.
These two events would be the point of no return for the two countries’ economic cooperation and anything beyond that, relations could spiral out of control rapidly and even be the impetus for a Taiwan takeover.
Clearly, Silicon Valley does much better when the world is getting along, and everyone is paying for their stuff.
That can’t happen as smoothly with the world rapidly balkanizing which is a big reason for massive selloffs in Netflix whose international audience has soured.
On the production side of things, Chinese-produced stuff won’t be able to get sold back to Americans using Guangdong factory production as semiconductor chips and equipment have become the focal point of national security efforts.
The US has placed export controls against Chinese technology firms from purchasing chips and equipment.
Now Biden is blackmailing the Netherlands to ban one of its top chipmakers from selling semiconductor equipment to Chinese companies.
The Biden administration is pushing hard for Dutch chip equipment maker ASML Holding NV (ASML) to halt selling some of its older deep ultraviolet lithography, or DUV, systems.
Even though these machines are one generation behind cutting-edge, they offer high-tech chips for automobiles and consumer electronics.
Washington has also pressured Japan to stop shipping semiconductor machines to China.
Since the Trump tariffs, China has been the biggest buyer of chipmaking gear for the last two years.
On the European front, regulation is hitting home hard as the U.K. has initiated investigations on Amazon’s selling practice by in-house brands and is looking into Microsoft’s anti-competitive acquisition of Activision.
If American tech companies have nowhere to produce, nobody to acquire for instant growth, and nobody to sell to then it becomes a massive issue for shareholders.
Even though the equity mojo boost of good news is bad news is a nice reprieve, a global recession where many companies fire staff and can’t sell their product because lack of parts is worse.
Therefore, we are still issuing a sell the rallies in tech type of recommendation to our readers while acknowledging there has been a small wave of dip buyers entering back into the game.
Mad Hedge Biotech and Healthcare Letter
July 5, 2022
Fiat Lux
Featured Trade:
(AN AAA-RATED STOCK POISED TO DELIVER MARKET-BEATING RETURNS)
(JNJ), (AAPL), (GOOGL), (AMZN), (MSFT), (TSLA), (META), (BRK.A)
More than six months after what appeared to be a never-ending assault on the biotechnology and healthcare industries, the sector seems to be slowly reviving.
While it is still too early to declare the pullback over, there are a few companies that provide a ray of hope for investors.
In the US, only four stocks have recorded a market capitalization of $1 trillion or higher: Apple (APPL), Alphabet (GOOGL), Amazon (AMZN), and Microsoft (MSFT). This year's market crash saw Tesla (TSLA) and Meta Platforms (META) departure from this elite group.
The market-wide selloff also made it more difficult for stocks to reach the $1 trillion mark. However, this does not necessarily preclude them from achieving this goal in the future.
Companies are rapidly expanding and equipped with the right tools and strategies to capitalize on growth opportunities, making them prime candidates to make the $1 trillion cut in a couple of years.
One of them is Johnson & Johnson (JNJ).
Almost everyone is familiar with JNJ's century-old brands, such as Band-Aids and Listerine. What many people probably do not realize is that the company's med-tech and pharmaceutical segments account for the vast majority of its total revenue.
In 2021, its pharmaceuticals segment alone comprised 55% of JNJ sales, while its medical devices unit contributed 29% to the company’s top line.
So far, the most promising drug in JNJ’s pharmaceutical segment is Tremfya. First-quarter sales for this psoriasis treatment jumped to a whopping 41% year over year to record an annualized $2.4 billion.
Meanwhile, JNJ's med-tech segment is poised for massive growth as a result of the strong demand for its electrophysiology products. These devices, used to keep hearts beating normally, have been identified as lucrative revenue streams and growth drivers in the long run.
The company has been working on spinning off its consumer segment into a separate publicly traded entity in the following months. This means that investors with JNJ stock will eventually end up owning shares of two different companies by 2023.
The decision to spin off its consumer health segment is part of the company's effort to shed a cyclical segment and become a health pure play focused on pharmaceuticals and medical devices.
Hence, now is an excellent time to buy JNJ shares.
While JNJ isn’t known as a high-growth stock, the company’s strategies have the potential to spur exponential growth and send shares soaring.
The next decade will be crucial for the company's success as it transforms. If the company executes its plans successfully, its current market capitalization of $467 billion could slowly but steadily increase to approximately $1 trillion.
J&J will be able to invest and concentrate its resources on segments with high sales and margins, which should increase the company's income and cash flows at a faster rate than at present.
Furthermore, JNJ's plan is expected to increase shareholder returns through higher dividends and share repurchases because of its growing cash flow. With these factors combined, JNJ's stock price will undoubtedly rise, as will its market cap.
On top of these, JNJ offers a 2.6% dividend yield. Admittedly, this isn’t remarkably high. However, investors can rely on its steady rise. Moreover, JNJ is a Dividend King. In fact, it recently raised its payout for the 60th year in a row.
If these aren’t enough to cement the company’s reputation as a solid investment, consider the fact that JNJ is one of the largest holdings in Warren Buffett’s (BRK.A) portfolio.
It’s also one of the only two publicly traded companies with the coveted AAA credit rating from S&P. For context, the US government only has an AA rating. Needless to say, this makes JNJ one of the safest—if not the safest—income stock to date.
Overall, JNJ has been diligent in getting all of its ducks in a row and is poised to provide market-beating returns to patient investors.
