

Discover more from Nicholas Vardy's The Global Guru
David Tepper’s $7 billion Bet; Bullish on Dr. Copper; Why I'm Shorting High Yield Bonds
Chat GPT Claims a Scalp; Don’t Be a Starbucks Bull in China
Today at a Glance:
· One Trade: Tepper’s $7 Billion Bet
· One Bull Market: Dr. Copper
· One Looming Bust: High Yield Bust
· One Victim: Chat GPT Claims a Scalp
· One Thing to Avoid: Don’t fall for the China Hustle
One Trade
Takes Testicles
"I am the animal at the head of the pack. … I either get eaten, or I get the good grass."
- David Tepper
George Soros famously made $1 billion betting against the British pound in 1992.
But fellow Pittsburgh native David Tepper made seven times that amount in 2009.
Here’s the story:
In early 2009, David Tepper, the founder of Appaloosa Management, made a bold bet on US banks.
At the time, most investors believed that major banks would shutter their doors in six months.
Tepper took the opposite view. Tepper had studied the government's Financial Stability Plan of February 2009 designed to shore up the banks.
As part of the plan, the government began to buy bank stocks. These shares would then be converted into common shares at prices exceeding the current value.
Tepper believed that this government intervention would lead to a rally in bank stocks.
He was right.
Tepper's firm Appaloosa purchased massive amounts of the biggest banks’ common stocks at pennies on the dollar.
Tepper's firm reportedly purchased Citigroup shares at 19 cents to the dollar. It bought Bank of America (BOA) at 12 cents to the dollar. Tepper also bought roughly $1 billion worth of AIG's commercial mortgage securities at 9 cents on the dollar.
Tepper then sat back and waited. Throughout 2009 he watched his investments double, then triple, and in BOA's case, quadruple within a year.
Appaloosa returned 132.7% by the end of the year. And Tepper made a staggering $7 billion.
Tepper's bet was both brilliant and contrarian.
Tepper recognized an opportunity where others did not. Moreover, he was also willing to take on the risk.
Tepper's bet paid off handsomely. It made him one of the wealthiest hedge fund managers in the world.
It also earned him the pair of brass bull testicles that adorn his desk.
One Bull Market
Dr. Copper on the Rebound
Copper prices may have fallen by 10% over the past year.
But the long-term investment case for copper remains intact.
Copper demand is expected to rise due to the global push for clean energy.
McKinsey forecasts global annual copper demand will rise from about 25 million tons to 36.6 million tons by 2031.
The United States provides billions of dollars in subsidies for clean-energy projects, including wind farms, batteries, and solar panels. These projects will require a lot of copper.
Here’s why this will lead to higher copper prices in the future.
First, it can take up to 20 years from when a mine is discovered to when it starts producing copper. It takes a long time for supply to come on-line.
Second, environmental concerns mean many countries are reluctant to approve new copper mines. This also puts a further damper on future supply.
Third, new technologies are boosting recovery rates. But it’s not enough to offset growing demand.
Limited supply and soaring demand mean only one thing:
Higher prices.
As Jim Rogers says, no one can revoke the law of supply and demand.
To bet on this trend, look at the iPath Series B Bloomberg Copper Subindex Total Return ETN (JJC).
One Looming Bust
Shorting High-Yield Bonds
The prices of risky corporate bonds have started to fall as credit conditions for US businesses and households tighten.
This is bad news for holders of high-yield bonds.
Investor confidence in risky ventures is unraveling.
The failure of Silicon Valley Bank in March was a major blow to the US banking system. The bank was a major lender to risky technology companies. That appetite for risk has collapsed.
Some analysts believe that a broader credit crunch is imminent.
Here are three factors they highlight:
The Fed's Senior Loan Officer Opinion Survey is a quarterly survey of US banks that measures their lending standards. The survey found that 46% of banks plan to raise their lending standards in the coming months.
Tighter lending standards can make it more difficult for businesses and households to borrow money. That, in turn, slows economic growth.
Tighter lending standards have also led to the spread between riskier corporate bonds and ultra-safe government bonds widening.
The US economy is already showing signs of slowing down. A credit crunch could tip the US economy into a recession. And when the US economy sneezes, the rest of the world catches a cold.
Some savvy investors are already shorting the sector. I’m one of them.
You can do the same by buying ProShares Short High Yield (SJB)
One Victim
Chat GPT Claims a Scalp
Chat GPT has claimed its most significant victim: online education company Chegg Inc.
Back in January, CEO Dan Rosenzweig was still optimistic.
His message was, "We've seen no impact so far, and AI represents a huge opportunity for Chegg."
Then a gale-force storm hit Chegg in March.
By early May, the fall in new customer acquisition were the focus of the analysts call.
The Q1 '23 results were shocking
* Revenues up by 1% yoy
* EPS down 92% yoy
* Net income is down 92% YoY
* Net profit margin collapsed by 92% YoY
* EBITDA fell by 30% YoY
Chegg is only the first of many companies that generative AI will disrupt.
The worse is yet to come.
Credit: Aman Verjee, CFA
One Thing to Avoid
Don’t Fall for the China Hustle
Connor Mac at Investment Talk set out a bullish case for Starbucks based on its prospects in China.
Here’s a quick summary:
Starbucks has over 30,000 stores in 80 countries. The company has been growing rapidly in recent years, and China is one of its key growth markets.
In 2023, Starbucks opened over 600 new stores in China, bringing its total count to over 6,200- or about 20% of the total. The company's revenue from China grew by 20% in 2023. It is expected to continue growing rapidly in the coming years.
Mac cites several reasons for Starbucks' success in China.
First, the Chinese consumer is becoming more affluent and is looking for more premium coffee options.
Second, Starbucks has a strong brand presence in China and is seen as a symbol of quality and luxury.
Third, Starbucks's robust loyalty program rewards customers for frequent visits.
Sounds good, right?
Wrong.
Here’s why.
In the end, China always favors its domestic champions. The list of companies thrown out of China is a veritable who's who of American business:
Facebook, Amazon, Google, YouTube, eBay, Uber, Dropbox, Twitter, Snapchat, Reddit, Wikipedia. And there’s plenty more.
Starbucks already faces increasing competition from domestic coffee chains, such as Luckin’ Coffee.
Meanwhile, the Chinese government has amped up its crackdown on foreign companies. Consulting firm Capvision is the latest victim. But, unfortunately, that's not about to change.
The bottom line?
Starbucks’ exit from China is not a question of if but when.
Don’t fall for the China Hustle.