Mad Hedge Technology Letter
April 5, 2018
Fiat Lux
Featured Trade:
(GOOGLE IS FIRING ON ALL CYLINDERS ... BUY THE DIP),
(GOOGL), (FB), (AMZN), (AAPL), (MSFT)
I'm sure that most of you are spending your free time devouring the utterly fascinating pages of "Fire and Fury" these days, now in its 12th week on the New York Times best-seller list.
I, however, am reading slightly different subject matter.
As obscure, academic, and abstruse the "Global Dollar Credit: Links to US Monetary Policy and Leverage" may sound, published by the Bank for International Settlements (BIS), it has been an absolute blockbuster among strategists at the major hedge funds.
And given the apocalyptic conclusions of the report, it might well rank as one of the best horror stories of the year, worthy of the bloodiest zombie flick.
I'll give it to you in a nutshell.
Corporate borrowers outside the US have ramped up their borrowing astronomically over the past 17 years, from $2 trillion to $9 trillion.
This makes them extraordinarily sensitive to any rise in US interest rates and the dollar. Emerging market debt alone has doubled to $4.5 trillion.
Easy money has encouraged mal investment and overinvestment in projects that never would have seen the light of day if unlimited financing were not available at 1%. In other words, it is all a giant house of cards ready to collapse.
I know a lot of you thrive on folk-based economic theories you picked up on the Internet based on monetarism, Austrian economics, and the theories of Friedrich August von Hayek, that all have the dollar collapsing under a mountain of debt.
In fact, the complete opposite has come true. The global economy has become "dollarized," with companies and governments in almost all nations relying on the buck as their principal means of financing.
The end result of all this has been to vastly expand the power of the Federal Reserve far beyond America's borders. Even the smallest rise in US interest rates, such as the 1/4% hike mooted for June, could trigger a cascade of corporate defaults around the world.
Think of subprime, with a turbocharger, running on pure nitro.
This is having a huge deflationary effect on the economies of many emerging nations.
Malaysia's sovereign wealth fund has almost gone under after a series of bad bets against the dollar. There is thought to be another troubled dollar short coming out of Hong Kong worth $900 million.
This is forcing countries to liquidate their US Treasury Bonds to cover local losses.
Further exacerbating the situation has been the crash of the price of oil, which has turned producing countries from suppliers to takers of liquidity to the global credit markets. Even after last year's monster rally, oil is still trading at 60% below the 2011 peak.
The net net of all of this is to increase the risk of surprise blowups overseas, both by banks and the private borrowers. This will increase the volatility of financial instruments everywhere.
The Bank for International Settlements is an exclusive club of the world's central banks. It is based in Basel, Switzerland (great swimming in the Rhine there), with further offices in Hong Kong and Mexico City. Its goal is it to coordinate policies among different nations.
The BIS was originally founded in 1930 to facilitate payment of German reparations following the Versailles Treaty ending WWI.
As a regular groupie on the central banking scene, I have been reading the research publications for many decades.
It All Started Here in Versailles
Google (GOOGL) makes bucket loads of money and even makes Facebook's (FB) business model look dwarfish.
Total revenue in 2017 came in at more than $110 billion, up 23% YOY and almost three times larger than Facebook's annual revenue of $40.65 billion in 2017.
It's easy to comprehend why the big keep getting bigger if you understand the basic trajectory of technology companies.
A new report from the search consulting firm Adthena chronicled the flow of ad dollars into digital e-commerce and found that retailers are spending 76.4% of total ad budget on Google shopping ads.
Last year was a record-breaking year for total digital ad revenue, and this year the industry is slated to grow another 20%.
Young people aren't watching television as they used to and are more comfortable using computers, tablets, and smartphones to gorge on their entertainment and work.
By 2020, digital ads will comprise 44.6% of total ad revenue as cord-cutting by consumers accelerates and broadband streaming becomes the norm across all of America and the world.
Mobile is the triumphant victor here as the majority of dollars will migrate to smartphone platforms.
China and America will overwhelmingly make up the bulk of digital ad spend, and Europe will remain a distant third.
Last quarter, Alphabet missed Wall Street expectations on the bottom line failing to reach earnings per share (EPS) targets of $9.98. The $9.70 miss wasn't a total failure but disappointing enough for Alphabet shares to nosedive.
Alphabet has positioned itself perfectly for the future and has many irons in the fire.
Google's ad business remains its go-to segment totaling $27.27 billion in revenue in Q4, a main driver of outperformance.
Cost per click (CPC) decreased slightly less than what analysts expected, but that was the trigger for a quick dip in share prices even though Alphabet beat on the top line.
In total, it is immaterial if Alphabet misses slightly on this metric. And, coincidentally, Alphabet is changing the way it calculates ad fees by switching over to cost per impression (CPI), which charges advertisers for raw viewing of an ad.
This pricing mechanism will create higher margins that slightly suffered last quarter because advertisers now are charged for users not clicking an ad as well.
(CPC) has been eroding for years. Alphabet attributes the slight dip to the widespread migration to mobile and the importance of YouTube ads, which yield lower rates than desktop ads.
Alphabet's "other revenues" segment, including its burgeoning enterprise business, hardware sales, and app store Google Play, posted $4.69 billion in revenue, bringing total Google revenue to $31.91 billion in Q4 2017.
Google search, the premier legacy business in tech, still comprises 85% of total revenue. Crucially, the cash mountain procured aids in capital allocation. Alphabet heavily reinvests back into different parts of the business or M&A.
Certainly, it has laid some eggs such as the Google glasses and its attempt at social media through Google+, which flamed out, too.
Many of these new projects originate from the 20% of work time that is allocated to free-spirited entrepreneurship. This initiative has harvested benefits spawning from Google news and other supplementary projects.
Alphabet's innovative qualities feedback into their core product as well, but management understands it needs to evolve to meet the capricious needs of users.
Google founders Sergey Brin and Larry Page thirst for a fresh injection of vivacity into their business and added several outside valuable pieces that include YouTube, Motorola, and Nest Labs for around $17 billion.
These growth engines will fit nicely under the umbrella of firms that Google has collated.
The cloud segment has become a "billion dollar per quarter business." It is dwarfed by the ad revenue but is still the glue that holds the firm together because of the heavy reliance of big data storage to power its firm.
The cloud is still a small sliver of the business and trails Amazon (AMZN), and Microsoft's (MSFT) cloud businesses, but Google drive cloud platform was "the fastest growing major public cloud provider" in 2017.
Apple (AAPL) has even subcontracted Google to store iPhone data on its Google cloud. I bet you didn't know that.
The cloud will continue to gain momentum for Google. Developing the best search engine in the world makes the company specialists in harvesting data because refining a search engine takes an extraordinary amount of data to fine-tune the user searches to perfection.
There are a few headwinds Alphabet is coping with, predominantly traffic-acquisition costs (TAC) as a percentage of revenue will continue to rise, but the increase in velocity will taper off by mid-2018.
Google's total (TAC), which includes funds it pays to phone manufacturers such as Apple that integrates its services, such as search, hit $6.45 billion, or 24% of Google's advertising revenues.
The rising cost of finding eyeballs will squeeze margins.
Another bogey on the horizon is Amazon's foray into the digital ad sphere. It possesses the quality of data to claw away market share and could damage the comprehensive duopoly that Alphabet enjoys with Facebook.
Large cap tech is competing with each other in almost every critical industry guided by the invisible hand of a massive treasure trove of big data. This is unavoidable.
Alphabet's other gambles such as smart-home hardware maker Nest Labs and health-care company Verily are bets on the future as all big tech firms position themselves to compete in a myriad of emerging industries.
These products aren't expected to harvest profits for years and lost Alphabet a combined $500 million last year.
There are a few companies that are perfectly aligned with the direction of future business and technological development, and Alphabet is one of them.
Whether the autonomous vehicle subsidiary Waymo or its smart-home investment in Nest Labs, Alphabet is diversified into most of the cutting-edge trends moving forward.
If the sushi hits the fan with its up-and-coming segments, Alphabet can always fall back on what it knows best - selling ads.
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Quote of the Day
"We want Google to be the third half of your brain." - said co-founder of Google and president of Alphabet, Sergey Brin.
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
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
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
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
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
Global Market Comments
April 4, 2018
Fiat Lux
Featured Trade:
(LAST CHANCE TO ATTEND THE FRIDAY, APRIL 6, INCLINE VILLAGE, NEVADA, GLOBAL STRATEGY LUNCHEON),
(WHY YOU SHOULD CARE ABOUT THE LIBOR CRISIS), (DB),
(ARE YOU A FINANCIAL ADVISOR LOOKING FOR NEW CLIENTS?)
Come join me for lunch at the Mad Hedge Fund Trader's Global Strategy Update, which I will be conducting in Incline Village, Nevada, on Friday, April 6, 2018. An excellent meal will be followed by a wide-ranging discussion and an extended question-and-answer period.
I'll be giving you my up-to-date view on stocks, bonds, currencies, commodities, precious metals, and real estate. And to keep you in suspense, I'll be throwing a few surprises out there, too. Tickets are available for $218.
I'll be arriving at 11:30 AM, and leaving late in case anyone wants to have a one-on-one discussion, or just sit around and chew the fat about the financial markets.
The lunch will be held at the premier restaurant in Incline Village, Nevada, on the sparkling shores of Lake Tahoe. Those who live there already know what it is. The precise location will be emailed with your purchase confirmation.
I look forward to meeting you and thank you for supporting my research.
To purchase tickets for the luncheons, please click here.
