Dear Reader,
Happy New Year!
We somehow survived the chaos and insanity that defined 2020. And at Brownstone Research, not only did we survive – our subscribers thrived.
All three of my research publications crushed both the S&P 500 and the Nasdaq Composite by extremely large margins.
This was a great cause to celebrate over the holidays. Nothing makes us happier than seeing our subscribers winning. And the best part is, our portfolios are full of positions sitting on extraordinary gains.
Why not sell? In short, the best is yet to come.
Before we delve back into the sheer insanity of the pandemic in the coming days, we’re going to kick off the year with nothing but positivity.
2021 is going to be another incredible year of investment opportunities. Of course, technology and biotechnology will continue to lead the way. But other sectors will also do well as the world stops the widespread practice of lockdowns.
After all, over the holidays a third vaccine was approved in the U.K. for COVID-19. The first doses of the Oxford/AstraZeneca vaccine have already been administered today in the U.K. Other countries will follow suit.
And there are so many doses of vaccines available to hospitals across the U.S. that they are stockpiling them. Hospitals and health care facilities had more than six months to prepare, but as it turns out, people haven’t exactly been lining up to take the vaccines.
Still, the widespread availability of these vaccines is a great thing. The doses are more than enough to cover the most “at risk” part of society, which will allow us to begin the process of returning back to normal.
We’re in for an incredible year of technological development in 2021. We’re going to see several deployments of fully self-driving technology not only in the U.S., but around the world.
We’ll also have not one but several different versions of augmented reality (AR) eyewear to choose from. 5G wireless network coverage will continue to proliferate. We won’t see super high speeds everywhere, but the wireless network operators are building out these new high-speed networks as quickly as they can.
Genetic editing and genetic sequencing technology will continue to develop and accelerate therapeutic development faster than anyone is forecasting. Quantum computing will have another major breakthrough this year.
And underlying just about everything will be the application of artificial intelligence (AI) and machine learning (ML) to optimize, improve, discover, solve, and accelerate development.
If that wasn’t exciting enough, we can expect Blue Origin (backed by Jeff Bezos) and Virgin Galactic (backed by Richard Branson) to begin taking the first passengers to space this year.
With record low interest rates, a recovering global economy, record levels of private capital in the markets, and the clear acceleration of technological development – we’re going to have a lot of fun in 2021.
And I’m going to kick 2021 off with the launch of a brand new investment research product on January 13. It’s an area that I’ve been following for more than 20 years, and I’ve intensely researched it for more than a year.
It’s an exciting way to get pre-IPO shares in some of the most exciting private companies on the planet. Of course, technology and biotechnology will be major parts of this new service.
But I’ll also be venturing into some other sectors that are experiencing high growth. I hope you can join me on the 13th. If you’d like to learn more about this exciting opportunity, go right here for all the details.
Best wishes for a fantastic year.
Now let’s turn to today’s insights…
Let’s start today by talking about one of the biggest stories of 2020 – the shift of institutional capital into bitcoin.
Back in October, we talked about how successful corporations face a big challenge when it comes to managing the cash on their books. If the cash just sits in the bank, inflation eats away at its purchasing power over time. And with record low interest rates, cash reserves simply don’t generate that much income.
So how does a corporation put its cash reserves to work without incurring an uncomfortable amount of risk?
Well, more and more companies are diversifying and turning to bitcoin as the answer.
Previously, we wrote about how financial technology innovator Square put a portion of its treasury – $50 million – into bitcoin. And information technology (IT) services firm MicroStrategy moved nearly its entire cash reserves, a whopping $425 million, into bitcoin.
MicroStrategy then went even further over the holiday break. The firm issued $650 million worth of new convertible bonds (debt) and invested all of the proceeds into bitcoin. Talk about a bold move. MicroStrategy now sits on about $1.5 billion worth of bitcoin.
But the most interesting move happened just a few weeks before 2020 came to a close. That was when Massachusetts Mutual Life Insurance Co. (MassMutual) invested $100 million into bitcoin. It also took a 5% stake in New York Digital Investment Group (NYDIG), the firm that facilitated its purchase of bitcoins.
Founded in 1851, MassMutual is one of the oldest life insurance companies in the world. And as I am sure many readers know, these old insurance companies are notoriously conservative and risk averse.
After all, they take in the insurance premiums and need to invest wisely so that they can pay out insurance claims when they happen. That’s why MassMutual has survived and thrived through the American Civil War, both World Wars, the Great Depression, and the financial crisis of 2008.
Watching a firm like MassMutual move $100 million into bitcoin is a big deal. Stodgy old insurance companies don’t make asset allocation decisions on a whim. They diligently assess all risks involved.
Granted, this is just a fraction of MassMutual’s massive $235 billion cash reserve. But it speaks to the larger shift at play.
Bitcoin is no longer seen as a speculative asset in the institutional world. Instead, it is rapidly becoming a Treasury reserve asset. It is also a way to diversify assets.
For this reason, we can expect to see institutions continue to allocate a portion of their assets to bitcoin throughout 2021. And that bodes well for bitcoin’s price.
I recommended bitcoin back in the summer of 2015 when it was trading around $230. As I write this, it is trading over $31,100 – that’s a 135x return on investment.
Long term, I’m still bullish on bitcoin. But right now there is too much hype. Bitcoin has gone nearly vertical in the last two months, and it could correct just as quickly.
In another big shift, Microsoft is finally ditching Intel’s (INTC) x86 semiconductor architecture for its servers. Instead, Microsoft is developing its own customized semiconductors using ARM-based processors.
This is the continuation of a big trend in the industry that started last year. Companies are switching from Intel’s “one for all” x86 semiconductors to custom-designed silicon. The performance gains are just too good to pass up.
It started when Apple announced that it was shifting away from Intel’s x86 semiconductor architecture to a custom design using ARM-based processors for its desktops and laptops last July.
And then Amazon announced that it was working on custom semiconductors to power Alexa in November. And both Google and Facebook have done the same with their own technologies.
Those were all big blows for Intel. And Microsoft’s switch is a death knell. It was the last major holdout.
Microsoft is one of the largest cloud computing companies in the world – just behind Amazon and Google. And Microsoft has heavily relied on Intel’s x86 architecture for its servers for decades. This is a big reason why Intel’s most successful business has been the x86 semiconductor unit for cloud computing.
Microsoft pulling the plug is bearish for Intel. And this hasn’t gone unnoticed.
Activist investor Dan Loeb has taken a large stake in the company through his Third Point LLC fund. Loeb is demanding the breakup of Intel and divestitures of failed acquisitions. This is something that I’ve been saying for years.
I particularly liked one pointed comment from Loeb in his letter to Intel’s board:
We cannot fathom how the boards who presided over Intel’s decline could have permitted management to fritter away the company’s leading market position while simultaneously rewarding them handsomely with extravagant compensation packages.
If Intel is going to have a chance of recovering any kind of leadership, it will have to do so through a very painful restructuring. I’m rooting for Intel. I want the company to make the hard decisions, but I’m not optimistic over the next couple of years.
And to make matters worse for Intel, semiconductor giant NVIDIA (NVDA) is in the process of acquiring ARM Holdings – the company that provides the technology and intellectual property enabling all of these customized semiconductor designs.
It’s not a foregone conclusion that this acquisition will go through yet. But if it does, NVIDIA will be the biggest winner here. And it will be in an incredibly powerful position in the entire semiconductor industry.
So this architectural shift in the semiconductor industry will be important for us to follow in 2021. And my advice remains the same – steer clear of Intel.
Flash Boys by Michael Lewis is a book every investor should read. It pulled back the curtain on the world of high-frequency trading (HFT). It is an entertaining and fascinating read.
HFT is all about front running orders. Front running refers to buying or selling a security ahead of a customer’s order of that same security. This allows high-frequency traders to scalp pennies or even just fractions of a penny from every trade executed – day in and day out.
That may not sound like much. But data from the Chicago Board Options Exchange (CBOE) suggests that an average of nearly 72.4 million trades were executed every single day last year. Given this volume, HFT firms had the opportunity to make nearly $1 million in profits every day just by front running trades.
This should be illegal. But instead, hedge funds have made billions by doing this over the last decade… at the expense of normal investors like us.
The key to HFT is the ability to see orders coming in faster than everyone else. That’s what allows for front running.
And to make sure they can see orders first, HFT firms have spent the last decade trying to get the shortest fiber-optics connections to the exchanges. The shorter the cable, the faster the connection. Even nanoseconds of difference can mean millions in profits.
And it appears they are now upping their game.
HFT firms are now flocking to hollow-core fiber for their connections to the exchanges.
As the name implies, these cables are completely hollow. They are narrower than a single human hair. And because they are hollow, and not glass like normal fiber-optic cables, the speed of transmission increases about 50%.
Switching to hollow-core fiber enables HFT firms to see orders fractions of a second faster than they could previously.
For any other function, such meager performance gains would not be worth it. But in the HFT world, fractions of a second are everything. And these firms are spending tons of money to upgrade their fiber. The HFTs are getting even faster.
For investors, this means that we never get the best execution on our trades because the HFTs are front running us. As a result, we lose pennies on every trade we make. Sure, it’s not much per trade. But it adds up over a lifetime of investing.
I wish I had good news about this problem, but high-frequency trading won’t stop. We’ll see more of it throughout 2021.
One firm – IEX – built an exchange to make trading fair by not allowing any market participant to have an advantage, not even by a nanosecond.
But the IEX exchange just couldn’t gain traction. After all, the industry continues to profit immensely from front running trades. Why would these firms want to enable an exchange like IEX to be in any way successful?
With shady things like HFT working against us behind the scenes, it’s critical as investors that we look for ways to stack the deck in our favor.
We do this by getting out in front of Wall Street and acquiring technology and biotechnology companies when their value is not well understood. And that’s precisely what we did in 2020.
That’s what my premium research services are all about – creating a level playing field for normal investors. And if you’d like to learn more about joining me this year, go right here for all the details.
Regards,
Jeff Brown
Editor, The Bleeding Edge
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The Bleeding Edge is the only free newsletter that delivers daily insights and information from the high-tech world as well as topics and trends relevant to investments.
The Bleeding Edge is the only free newsletter that delivers daily insights and information from the high-tech world as well as topics and trends relevant to investments.
