- Don’t panic about this gas…
- Is a leveraged ETF a good idea?
- Will we be allowed to drive our own cars?
Dear Reader,
Welcome to our weekly mailbag edition of The Bleeding Edge. All week, you submitted your questions about the biggest trends in technology. Today, I’ll do my best to answer them.
If you have a question you’d like answered next week, be sure you submit it right here.
The last 10 days or so have been exciting at Brownstone Research. Regular readers will know that I finally launched a secret project that I had been working on for years – Project Perceptron.
It was something that I had long wanted to do – develop an artificial intelligence capable of predicting short-term prices in an asset class. This was the most fun and intense project that I’ve ever done, and the end result has been fantastic.
As it turns out, digital assets and cryptocurrencies turned out to be a great place to focus the Perceptron. The volatile and rapidly evolving nature of the asset class make it a perfect focus for this AI-enabled trading system.
My team and I found that the strongest signals and accuracy all happen within a 60-day window. We’ve already released our first three trade recommendations, and I’m tracking two other cryptocurrencies that are moving quickly up the rankings for signal strength. I expect the next trade recommendation within the next 5–7 days.
Also worth mentioning is that both Bitcoin and Ethereum are exhibiting strong signals within the 60-day window. We can interpret this as being bullish for the cryptocurrency industry as a whole, and these signals are consistent with my team’s own fundamental analysis of the industry.
We believe that the first quarter volatility will give way to positive price momentum in the markets as we enter into the second quarter… But the reality is, my analysis isn’t what’s important in this trading system. The Perceptron can “see” things amidst mountains of data that even a team of a hundred talented analysts can’t see.
So when I get strong signals from the Perceptron, I know it’s time to act. If you’d like to take some time over the weekend and learn more, please check it out here.
Are our semiconductors at risk?
Let’s begin with a question on the war’s impact on chips…
What about the neon gas in Ukraine? It holds 70% of the reserves and is critical for the making of computer chips; you cannot make them without it. Do you think this was one of the main objectives of Russia?
– Micheal M.
Hi, Micheal, and thanks for writing in.
I actually addressed this topic this week in The Bleeding Edge… It’s certainly been a growing concern given the events in Ukraine.
The media has been worrying about a shortage of neon gas due to the war in Ukraine right now.
As much as 54% of the world’s neon gas used to make semiconductors comes from Ukrainian companies Ingas and Cryoin. Understandably, those two companies aren’t operating at present.
Yet we must look at the nuance in this situation.
While it’s true that we may not receive as much Ukrainian neon this year, it’s not the only country that can produce this gas.
In fact, neon gas is a natural byproduct of steelmaking. After further refinement, we can use this byproduct in our semiconductors.
Countries like China, India, the U.S., South Korea, and even Japan can step in to fill this gap with their own steelmaking processes. And there are companies with neon stockpiles that can tide chip companies over until we can ramp up this new production.
Additionally, we should keep in mind that neon is only used in deep ultraviolet (DUV) machines, not in extreme ultraviolet (EUV) machines.
EUV machines are the ones we use to manufacture the most advanced semiconductors for smartphones, computing systems, and artificial intelligence (AI) applications. Readers can learn more about this bleeding-edge EUV technology – and my recommendation for how to profit from it – right here.
So ultimately, we don’t need to panic about the war in Ukraine’s influence on semiconductors.
There are plenty of neon gas stockpiles in the market to support the industry this year, and there are other sources of highly pure neon gas that can either be brought online, or increase production, to meet any shortfalls.
Any struggles the chip industry has this year will involve the sheer demand for semiconductors versus our available production capacity… not from any lack of neon gas.
How to capture biotech upside…
Next, a reader wants to know more about using leverage…
Jeff, How close are we to the bottom of biotech? I know you are very bullish on the biotech sector. Is it a good idea to buy a 3x leveraged ETF like LABU to capture the huge upside? Do you have any thoughts on this?
– Lakshmi N. K.
Hi, Lakshmi – thanks for writing in. We’ve just gone through a “biotech winter” where the entire industry has been feeling the pain.
The COVID-19 pandemic delayed almost every clinical trial that wasn’t related to vaccines or therapies for the virus. Lockdowns temporarily halted some trials. And even when lockdowns lifted, many patients stayed home rather than going in for appointments.
All of this, unfortunately, led to delayed results. The market doesn’t like delays, even when tied to a clear reason like the unprecedented events – and the irrational response – we experienced with COVID.
That, along with an overall sector rotation, has meant biotech stocks have been hurting over the past 18 months or so.
Yet money from venture capital (VC) firms and corporate investment funds is still flowing into the biotech space.
Biotech using artificial intelligence (AI) saw strong investment, with investors supplying a record-setting $4.1 billion last year. That was a 36% increase over 2020.
And overall, VC investment into private biotech companies hit $52.7 billion last year – a 32% increase over 2020:
I expect to see this trend continue in 2022.
We’re also seeing strong interest in mergers and acquisitions (M&A) from pharma giants. These companies are flooded with cash… and that means many will want to invest in future growth.
As I’ve written recently in my biotech research service, Early Stage Trader, more than a quarter of biotech startups that went public through the traditional initial public offering (IPO) process in 2020 are trading now at negative cash value… More than 25%!
Negative cash value means that a company has cash or cash equivalents on its books higher than its market capitalization. Needless to say, it is very rare to have the chance to buy a best-in-breed company for less than the cash it has on its book.
So yes, I am bullish on the biotech sector going forward.
As for using a 3x leveraged ETF to play this sector… I cannot provide any personalized investment advice.
With that said, I can provide some general words of caution about using an instrument like this for trading.
3x ETFs apply leverage in order to (ideally) gain three times the usual return of the underlying index.
This is a powerful tool when the investment goes up. If the benchmark index goes up 5%, the 3x ETF goes up 15%.
However, this kind of leverage can be devastating when the market moves against us. Say the benchmark index loses 20% in a month… then the 3x ETF will lose 60% of its value.
Without leverage, the index would only need to rise 25% to recover that loss. With 3x leverage, the index must recover 50% in order for us to recoup our losses.
And if the underlying index drops more than 33% in a day, the 3x leveraged ETF goes under completely. While this kind of crash is rare, it’s not impossible.
Readers can imagine how easily this kind of trading can get out of hand. In volatile periods, a leveraged fund can rapidly lead to losses.
Likewise, 3x ETFs often come with high expense ratios that investors will also want to account for. The expense ratio reduces an ETF’s returns as well.
So in general, these kinds of trading instruments are not the best ways to invest or gain exposure to an asset class… They just come with too much risk.
In order to do well with a leveraged instrument like this, an investor/trader really needs to get the timing just right. It’s not impossible to do, it just carries a lot more risk.
With all that said, to answer your question directly, I do believe that the biotech industry has bottomed this quarter and will resume a bull market this year.
Self-driving cars protect from human error…
Let’s conclude with a question about self-driving cars…
Jeff, If the NHTSA believes self-driving vehicles are safer, will we even be allowed to drive our own automobiles? I can see how the government could quickly conclude that non-autonomous drivers are a safety hazard. Just thinking,
– Chris R.
Hi, Chris, and thanks for being a reader. This is an interesting topic tied to self-driving car adoption and also the potential for government overreach.
For new readers, earlier this month, the U.S. National Highway Traffic Safety Administration (NHTSA) ruled that autonomous vehicles (AVs) no longer need to have a steering wheel or pedals.
This means the technology is ready for prime time. Soon, we’ll start seeing more vehicles on the roads that don’t resemble our traditional cars.
Even though no human driver will be able to “take the wheel” in these cars, we’re going to see safety on our roads improve.
94% of serious car crashes are a result of human error. And globally, road traffic deaths are the leading cause of death among young people aged 5–29. In essence, traffic collisions are an epidemic of epic proportions.
Self-driving technology removes human error from the equation… And fatalities or serious injuries will drop as we adopt this technology widely.
Given that’s the case, could we then see rules against us as human drivers in the future?
While it is certainly possible… it’s far more likely we’ll see a natural migration to self-driving cars. It won’t be necessary for the government to force this shift.
After all, even discounting safety, there are many more benefits that will make autonomous vehicles a compelling option for consumers.
For one, they will give us back our time. As of 2019, drivers in the U.S. spent an average of 10 hours and 50 minutes a week in their cars. With self-driving cars, we’d regain those hours for productive or personal use.
And as I’ve discussed before, shared autonomous vehicles (SAVs) will be the future of self-driving technology. Companies are already beginning to spring up to manage fleets of autonomous vehicles that could essentially run 24 hours a day.
These SAVs will be on-demand and available through a simple smartphone application, just like how on-demand transportation services Uber and Lyft are available today. (To learn how to invest in this rapidly growing trend, go right here for my top recommendations.)
And they will offer us sharp cost savings…
When these shared car networks take the place of a traditional vehicle, we won’t have to pay for insurance, gas, maintenance, parking, registration, or other fees. Those costs will be the responsibility of the SAV providers.
Given that the average utilization rate of a personal car is just about 5% in the U.S., we can see why people will begin to make the switch. Why pay all that for a car that just sits for over 20 hours a day?
Of course, some people will still want to own personal vehicles. But I expect, over time, that those numbers will shrink.
After all, those who are aging and experiencing weakening eyesight would quickly see the benefit of owning a self-driving vehicle. This also may be one demographic where the NHTSA might require those who have been “medically determined to be unsafe on the road” to shift to an autonomous vehicle.
And pretty soon, kids will grow up only knowing self-driving vehicles. They’ll have no desire to get a license and will feel perfectly at home being driven around by their car. Driving would be seen as an inconvenience.
I suspect that this shift will happen naturally over a period of the next couple of decades. But we’ll start to see the early stage of these behavioral changes in a shorter time period than we might think.
That’s all we have time for this week. If you have a question for a future mailbag, you can send it to me right here.
Have a great weekend.
Regards,
Jeff Brown
Editor, The Bleeding Edge
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