March 2018

How Environmentalists May Kill Off Bitcoin

If Jack Dorsey's proclamation that bitcoin will be anointed the global "single currency," it could spawn a crescendo of pollution the world has never seen before.

In a candid interview with The Times of London, Dorsey, the workaholic CEO of Twitter (TWTR) and Square (SQ), offered a 10-year time horizon for his claim to come to fruition.

The originators of cryptocurrency derive from a Robin Hood-type mentality circumnavigating the costly fees and control associated with banks and central governments.

Unfolding before our eyes is a potential catastrophe that knows no limits.

Carbon emissions are on track to cut short 153 million lives as environmental issues start to spin out of control while the world's population explodes to 9.7 billion in 2050, from 8.5 billion people in 2030, up from the 7.3 billion today. All these people will need to barter in bitcoin, according to Jack Dorsey.

Cryptocurrency is demoralizingly energy intensive, and the recent institutional participation in crypto server farms will exacerbate the environmental knock on effects by displacing communities, destroying wildlife, and climate-changing carbon emissions.

This seemingly controversial means to outmaneuver the modern financial system has transformed into a murky arms race among greedy crypto currency miners to use the cheapest energy sources and the most efficient equipment in a no-holds-barred money grab.

Bitcoin and Ethereum mining combined energy consumption would place them as the 38^th-largest energy consuming country in the world - if they were a country - one place ahead of Austria.

Mining a bitcoin adjacent to a hydropower dam is not a coincidence. In fact, these locales are ground zero for the mining movement. The common denominator is the access to cheap energy usually five times cheaper than standard prices.

Big institutions that mine cryptocurrency install thousands of machines packed like a can of sardines into cavernous warehouses.

In 2015, a documentary detailed a large-scale foreign mining operation with an electricity outlay of $100,000 per month to create 4,000 bitcoins. These are popping up all over the world.

An additional white paper from a Cambridge University study uncovered that 58% of bitcoin mining comes from China.

Cheap power equals dirty power. Chinese mining outfits have bet the ranch on low-cost coal and hydroelectric generators. The carbon footprint measured at one mine per day emitted carbon dioxide at the same rate as five Boeing 747 planes.

The Chinese mining ban in January set off a domino effect with the Chinese mining operations relocating to mainly Canada, Iceland, and the United States. Effectively, China has just exported a tidal wave of new pollution and carbon emissions.

Bitcoin is mined every second of every day and currently has a supply of from approximately 17 million today, up from 11 million in 2013. Bitcoin's electricity consumption has been elevated compared to alternative digital payment currencies because the dollar price of bitcoin is directly proportional to the amount of electricity that can profitably be used to mine it.

To add more granularity, miners buy more servers to maintain profitability then upgrade to more powerful servers. However, the new calculating power simply boosted the solution complexity even faster. The mine was practically outdated upon launch, and profitability could only occur by massively scaling up.

Consumer grade personal computers are useless now because the math problems are so advanced and complicated.

Specialized hardware called Application-Specific Integrated Circuit (ASIC) is required. These mining machines are massive, hot, and guzzle electricity.

Bitcoin disciples would counter, describing the finite number of bitcoins - 21 million. This was part of the groundwork laid down by Satoshi Nakamoto (a pseudonym), the anonymous creator of bitcoin, when he (or they) constructed the digital form of money.

Nakamoto could not have predicted his digital experiment backfiring in his face.

The bottom line is most people use bitcoins to literally create money out of thin air in digital form, rather than using it as a monetary instrument to purchase a good or service. That is why people mine cryptocurrency, period.

Now, excuse me while I go into the weeds for a moment.

Enter hard fork.

A finite 21 million coins is a misnomer.

A hard fork is a way for developers to alter bitcoin's software code. Once bitcoin reaches a certain block height, miners switch from bitcoin's core software to the fork's version. Miners begin mining the new currency's blocks after the bifurcation, creating a new chain entirely and a brand spanking new currency.

Theoretically, bitcoin could hard fork into infinite new machinations, and that is exactly what is happening.

Bitcoin Cash was the inaugural hard fork derived from the bitcoin's blockchain, followed by Bitcoin Gold and Bitcoin Diamond.

Recently, the market of hard fork derivations include Super Bitcoin, Lightning Bitcoin, Bitcoin God, Bitcoin Uranium, Bitcoin Cash Plus, Bitcoin Silver, and Bitcoin Atom. All will be mined.

The hard fork phenomenon could generate millions of upstart cryptocurrency server farms universally planning to infuse market share because new currencies will be forced to build up a fresh supply of coins.

If Peter Theil's prognostication of a 20% to 50% chance of bitcoin's price rising in the future is true, it could set off a cryptocurrency server farm mania. By the way, Theil also believes that there is a 30% chance that Bitcoin could go to zero.

A surge in price of bitcoin results in mining cryptocurrency operations everywhere by any type of electricity, especially if the surge maintains price stability. Even mining in Denmark, where one finds the world's costliest electricity at $14,275 per bitcoin, would make sense.

Recently, miners' appetite for power is causing local governments to implement surcharges for extra infrastructure and moratoriums on new mines. Even these mines built adjacent to hydro projects are crimping the supply lines, and consumers are forced to buy power from outside suppliers. Miners are often required to pay their utility bills months in advance.

By July 2019, mining will possibly need more electricity than the entire United States consumes. And by February 2020, bitcoin mining will need as much electricity as the entire world does today, according to Grist, an environmental news website.

Geographically, most locations around the world could be profitable based on today's bitcoin price of $9,000. The few places that are exorbitant are distant, tropical islands, such as the Cook Islands at $15,861, to mine one bitcoin. If you'd like to drop your life and make a fortune mining bitcoin, then Venezuela is the most lucrative at $531 per bitcoin.

Who doesn't like free money? Set up a few devices, crank up the power, collect the coins, pay off the electricity bill, pocket the difference and hopefully the world hasn't keeled over by then.

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Quote of the Day

"If privacy is outlawed, only outlaws will have privacy," - said Philip R. "Phil" Zimmermann, Jr., creator of the most widely used email encryption software in the world.

March 22, 2018 - MDT Pro Tips A.M.

MDT Alert

While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to six-month time frame, Mad Day Trader, provided by Bill Davis, will exploit money-making opportunities over a brief ten minute to three day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points. Read more

March 22, 2018

Diary, Newsletter

Global Market Comments
March 22, 2018
Fiat Lux

Featured Trade:
(THE FED SIGNALS HALF SPEED AHEAD),
(TLT), (UUP), (FXE), (FXY), (FB),
(WHY YOU WILL LOSE YOUR JOB IN THE NEXT FIVE YEARS, AND WHAT TO DO ABOUT IT)

Fed Signals Half Speed Ahead

Diary, Newsletter

OK, the number is out!

The Fed just raised interest rates by 25 basis points, taking the cost of overnight money for the big banks to a 1.50%-1.75% range.

The boiling frog analogy comes to mind. Keep raising the temperature so slowly you don't notice it until your portfolio eventually gets cooked.

I believe we have two years of quarter point rises ahead of us like clockwork. This will invert the yield curve in a year, meaning that short term interest rates will exceed the 10-year US Treasury bond, now at 2.87%.

A bear market in stocks ALWAYS follows in six to 12 months. So, make hay while the sun shines, because this bull is rapidly becoming a short-dated option, with only a year or more life left to it.

How could I be wrong? Inflation accelerates, forcing our august central banks to raise rates in one shot by 50 basis points instead of the expected 25.

That would really set the cat among the pigeons, and trigger our next Dow 1,000 point down day.

My long-term economic forecast is still holding water that the benefits of the tax cuts will be entirely offset by rising interest rates and costs, keeping GDP growth at 2.5%...and then to zero.

The unfolding global trade war may also take down global growth and bring forward the next bear market and recession by months, if not a full year. Watch those headlines!

At the end of the day, we will be left with zero economic growth (a recession), higher interest rates, and A LOT more debt, both at the personal and the national level, and naturally exploding deficits everywhere.

That certainly is how the foreign exchange market is reading it, which completely savaged the greenback today. The dollar (UUP) got slaughtered against the Euro (FXE) and the Japanese Yen (FXY). Bonds actually rose on the news, which is why I'm out of that market.

It all works for me, as there will be more trading opportunities playing out in this scenario than pimples at a high school prom.

The biggest imbalance in the current tax policy is allowing multinationals to bring trillions of dollars home by paying minimal tax.

The overwhelming majority of these are big technology companies, meaning that the money is coming back here in the San Francisco Bay Area, causing local asset prices to explode.

I just received a letter from a local real estate broker telling me that the value of my home has risen by 27% in the past year to $5 million, and that now is the best time in history TO SELL!

They may be right.

March 22, 2018

Tech Letter

Mad Hedge Technology Letter
March 22, 2018
Fiat Lux

Featured Trade:
(HOW LAM RESEARCH HAS CORNERED THE MARKET FOR SEMICONDUCTOR MANUFACTURING EQUIPMENT)
(LRCX), (MU)

How LAM Research Has Cornered the Semiconductor Manufacturing Equipment Market

Tech Letter

Micron Technology (MU) is one of the hottest semiconductor stocks of 2018, and the Wafer Fab Equipment (WFE) used to produce the chips comes from Lam Research (LRCX) - a bedrock recommendation of ours for the past several years.

I have been shouting from the mountain tops for investors to not only dip their toe in but dive head first into Lam Research.

The chipmakers are allocating greater funds into WFE to keep pace with the vigorous consumer demand. Micron Technology (MU), Samsung Electronics and SK Hynix each amount to more than 10% of Lam's annual sales.

Overall, Lam's total shipments rose nearly 37% YOY reflecting the thirst for WFE.

The memory segment of 3D NAND flash, which you find in SSDs, flash cards, and arrays, and DRAM constituted 77% of shipments, up 11% from the previous quarter, highlighting the industry's shift to non-volatile memory - meaning big data.

The momentum shows no sign of slowing down. During a recent analyst meeting, Martin Anstice, president and CEO of Lam Research, gushed about expected "record levels" of WFE shipments in 2018. Higher WFE shipments are the most pronounced indicator of promising upcoming earnings results. It doesn't get any better than that.

Lam expects next quarter shipments of $3.175 billion. Gross margins should remain impressive at 46%.

Semiconductor equipment is truly a capital-intensive proposition, and bankrolling strategic R&D programs to maintain a technological edge as well as productivity leadership will continue full speed ahead.

These investments are key to the primary objective of growing at a faster pace relative to the industry.

Lam's WFE capital investments in 2017 were a gargantuan $47 billion, up approximately 30% from the prior year. In 2017, 55% of investments leaned primarily toward NAND flash.

Exponential demand for data will support chip business, which includes a vast expansion in the need for silicon for autonomous vehicles, A.I., and the Internet of Things.

None of this could happen without the outperformance of the chipmakers. Lam Research is riding an influx of spending by its chipmaker customers taking advantage of higher ASPs (Average Selling Price) of DRAM chips, used in PCs and servers, and NAND chips, used in smartphones.

Mainstay customer Micron Technology said last month that it expected capital expenditure around $7.5 billion for 2018, up from $5.1 billion in 2017. Record amounts of cash flow allow Micron to double down on technology refinement as it positions itself for the next generation set of chips.

Equipment investment by clients is at a 15-year low as a percentage of profits. Money is raining down on the chip sector, and the economics that scale juice up profit margins to 47.6%.

To add more color, DRAM is the recipient of meaningfully higher levels of investments required to drive similar levels of bit supply growth compared to historical levels.

Lam leads the industry in enhancing performance and bit growth with annual increases in the low 20% for DRAM and high 40% for NAND.

The server phone content in DRAM and the smartphone bit growth for NAND will help facilitate the mass amounts of data going forward.

The average smartphone today has capacity of around 40GB of NAND content, and higher-grade phones have 256GB, and this number will only increase.

Lam's key markets in NANDs are growing faster as customers transition from 64-layers to 96-layer fabrication investments starting late in 2018 and into 2019.

NAND is such a decisive cog in the tech ecosphere that Lam has no choice but to oblige and invest in this space.

Undoubtedly, NAND is probably the poster child for a market with elasticity of demand. The sector adopted new technology and it is scaling it, which will result in relative cost reduction.

Chips with 3D NAND technology are relatively efficient, reducing the cost per GB (gigabyte) of storage and lowering power consumption.

Basically, chip companies won't gobble up Lam's products if the productivity yields are suboptimal, causing Lam to push the envelope with enhanced bit technology.

Carefully planned cost road maps create opportunities to carve out incremental demand for companies such as Micron and Samsung, and enhanced bit performance boost the degree of chip capacity.

Often overlooked but equally relevant is that 25% of Lam's business is perpetuating equipment. For example, it buys back used equipment, refurbishes it, and turns around and sells it as "certified pre-owned," such as a used-car or used computer business. This service side of the business harvests a higher margin than other segments at 75%.

Ultimately, humans live in a world where smart devices require the capacity to store collected data efficiently and cost effectively. Lam's equipment is one small input that goes into inventing these high-performance computing contraptions that create value either in an enterprise or in a consumer context.

The incredible profits amassed have given Lam the impetus to implement an aggressive, broad-based capital allocation policy.

Lam boosted capital returns to a more-than-doubling of the dividend from 50 cents to $1.10 per share per quarter, or $4.40 annually along with another $2 billion in buybacks on top of an existing $2 billion authorization. The catalyst was the US tax reform freeing up $6 billion in overseas cash.

Lastly, Lam expects double-digit growth in overall memory WFE in 2018 combined with annual growth in overall WFE shipments in the low-double-digit percentages. The year 2018 will be a great year for holders of Lam Research stock with no signs of disruption on the horizon.

The shares were up around 300% in the past 16 months and well deserved. The parabolic move is vindicated by sequential earnings' beats, boosting forward guidance and product improvement.

Investors finally realize the precious value in semiconductor companies and the equipment makers. Buy Lam Research on any weakness because entry points are few and far between.

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Quote of the Day

"Jeff Bezos is opening a retail store and owns a newspaper. Turns out everything we thought about the Internet is wrong." - Aaron Levie, the co-founder and CEO of Box.

March 21, 2018 - MDT Alert (AMC)

MDT Alert

While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to six-month time frame, Mad Day Trader, provided by Bill Davis, will exploit money-making opportunities over a brief ten minute to three day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points. Read more

March 21, 2018 - MDT Alert (VRX)

MDT Alert

While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to six-month time frame, Mad Day Trader, provided by Bill Davis, will exploit money-making opportunities over a brief ten minute to three day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points. Read more

Trade Alert - (GS) March 21, 2018 BUY

Diary

When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more

March 21, 2018 - MDT Pro Tips A.M.

MDT Alert

While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to six-month time frame, Mad Day Trader, provided by Bill Davis, will exploit money-making opportunities over a brief ten minute to three day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points. Read more