Mad Hedge Technology Letter
July 30, 2018
Fiat Lux
Featured Trade:
(INSTAGRAM TO THE RESCUE),
(FB)
He did it.
Facebook CEO Mark Zuckerberg decided it was time to pull the plug and reset.
After the data leak scandal, Facebook's torrid rise from the pullback of $157 to $219 was one of the best trades of the quarter.
Management felt this was the perfect time to snatch breathing room to fix the faults weighing down the business.
No doubt the daily pounding of negative stories crucifying Zuckerberg in the press took its toll.
Painting a picture of an out-of-touch-with-reality villain, stacking his cash in a luxury Palo Alto estate, did not sit well with Zuckerberg.
Flat North American daily active users (DAU) growth and a slight dip in European usership caused by General Data Protection Regulation (GDPR) was baked into the pie.
Investors already knew that.
Facebook even increased its average revenue per user in North America to $25.91 per user from $23.59 the quarter before.
There were many positives from the earnings report.
Revenue clocked in at $13.23 billion, slightly lower than expectations but nothing to cry your eyes out over and still a 42% YOY rise.
Then came the guidance.
In one word - cataclysmic.
Facebook dropped off a cliff in the aftermarket trading session sliding as much as 24%, a haircut of $150 billion of market share in a span of just an hour.
In all reality, the run-up to such towering levels ignited fears of acrophobia after a nine-year bull market leaving tech as the strongest pillar driving equities higher.
Profit taking was swift.
The same dilemma presents itself with many other top-quality tech stocks trading at all-time highs after similar parabolic moves up because the expectations are excessive.
Facebook rather chop down the tree now than face the music next quarter or the quarter after that, especially in a tech sector transforming at the speed of light.
Management said revenue growth rates would deteriorate "as much as high single digit percentages" in the second half of the year.
Uttering this one-line reversed investor's vertigo in Facebook shares.
This raises the question, has social media peaked?
No, social media is morphing with its users' needs and desires into something that might not look like the "traditional" social media of yore.
Instagram is the new growth driver for Facebook and could produce 20% of revenue by 2020.
Instagram is what Facebook was years ago with robust user growth and solid engagement numbers.
Facebook announced that comprehensive users totaled 2.5 billion users, which include Facebook, WhatsApp, and Instagram platforms.
Instagram's unit is expected to eclipse $8 billion in revenue in 2018.
The reset is code for Facebook's management believing the days of 40% revenue growth is over.
Decelerating into the 30% range is not game over for the stock.
It was bound to happen.
If you told most companies annual revenue would climb by 30%, they would be dancing in the streets.
Users' preference for a story-driven social media experience has made standard Facebook a relic.
Instagram is dynamic and a social media favorite for young adults and youth.
Videos and photos posted vanish in 24 hours catering toward the attention span deprived youth, while also shuttering out all the side bar noise streamlining the visuals.
Its sleek formatting is perfect for the mobile screen at a time when the migration to mobile is picking up a full head of steam.
It's the modern day social media of 2018 and betting the farm on this asset going forward is a risk worth taking.
Investors must remember when Facebook became popular and generated astounding growth numbers. Quality smartphone cameras, high-quality video performance, augmented reality, and photo editing apps weren't at the tip of the users' fingertips yet.
They are now.
Instagram is the response to that, incorporating all these new mechanisms to cater toward the new technology infiltrating our smartphone platforms.
When Millennials want to stay in touch with someone, they ask for an Instagram hashtag first and are shocked if you don't have one.
That never used to happen before.
Welcome to 2018.
The metrics reinforce the move to monetize Instagram.
Instagram recently surpassed the 1 billion monthly active user (MAU) number, up from 500 million in June 2016. Just only recently as September 2017, numbers were strong at 800 million.
Facebook does not disclose ad revenue, but many industry specialists believe Instagram could pull off a sensational year with revenue increasing 70% YOY in 2018.
Maintaining the 5% MAU growth won't happen forever as Facebook proved the past few quarters.
The metric maturation has unfolded the past few quarters forcing Facebook to focus on bumping up the average revenue per user.
Striking while the iron is hot makes even more sense and that means throwing all of its weight behind Instagram.
Facebook is not growing its users in the developed world and they need a response.
This is it.
Certainly, the 2018 version of social media is Instagram.
Social media will morph again in the future, who knows what it will look like, but when it happens, the eyeball migration will happen even faster than the monumental pivot to Instagram.
The network effect will ensure the ad dollars and usership will traverse over to Instagram. In some ways, Facebook is a legacy business in the throes of reinventing itself.
Lowballing next quarter's estimates was a shrewd move.
Notice the time horizon of companies turning into legacy companies is quickening, reinforcing cash-rich tech companies to bet big on a few projects in anticipation of market demand for a hot new industry.
Hits or misses are common, or if you are SoftBank's Masayoshi Son, just invest in all of them. Can't go wrong with that.
This trend speaks volumes of the innovation percolating throughout the corridors of Silicon Valley and why the American tech sector is the crown jewel of the American economy.
And we haven't even talked about WhatsApp yet, the chat messenger that Facebook pocketed for $19 billion in 2014.
WhatsApp has 1.5 billion MAUs and 450 million DAUs.
Brian Acton, the co-founder of WhatsApp, quit in disgust as Zuckerberg piled on the pressure to manipulate data in the same way Facebook has been doing for years.
This departure is the go ahead signal for Zuckerberg to start selling ads on the ad-less WhatsApp platform.
Ka-ching!
WhatsApp is next in line to be monetized after the Instagram pivot, and will harvest a whole new income stream channel for Facebook boosting the stock.
This is not a dead company by far, but tech companies must recalibrate as their cash cows become stale. It's the nature of the tech environment we have thrust ourselves in whether we like it or not.
What to do about the stock?
Allow the stock to show some consolidation around these levels. A strong support level is just below at $160.
We could get around that $160 level if we get a few analyst downgrades, which could be in the cards the next few days.
A long-dated, deep-in-the-money call spread incorporating strike prices around $140 would be worth pulling the trigger on if Facebook can demonstrate it can stay above the technical support.
Facebook has set itself up for an earnings' beat next quarter, as the deterioration it forecasts seems implausible to the extent management described it.
Management wants to shake out all the crud before the next move up commences.
We are entering into a new phase of Facebook. And Facebook has the brute resources and innovational prowess to readjust itself in a tech environment that has remarkably changed since 2017.
Facebook's New Lifeline
________________________________________________________________________________________________
Quote of the Day
"Computers are like bikinis. They save people a lot of guesswork," said former Chicago White Sox baseball player Sam Ewing.
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
July 27, 2018
Fiat Lux
Featured Trade:
(LAST CHANCE TO ATTEND THE FRIDAY, AUGUST 3, 2018,
AMSTERDAM, THE NETHERLANDS GLOBAL STRATEGY DINNER),
(STOCKS TO BUY ON THE OUTBREAK OF TRADE PEACE),
(QQQ), (SPY), (SOYB), (CORN), (WEAT), (CAT),
(DE), (BA), (QCOM), (MU), (LRCX), (CRUS),
(ORIENT EXPRESS PART II, or REPORT FROM VENICE)
So, how will the trade war end? It could be the crucial trading call of 2018.
"That which can't continue, won't," I paraphrase the noted economist Herbert Stein. I think that logic neatly applies to our global trade wars today.
In 1970, some 25% of world GDP was accounted for by international trade. Today it is 52%. Germany has been the powerhouse, with trade growing from 25% to 80%, largely through exploding auto exports. Trade growth in the U.K. has been pitiful as the old colonial ties loosened, improving only from 40% of GDP to 52%.
In the U.S., trade has grown from 10% to 25% of GDP during this time. It is far lower than the rest of the G7 nations because of the massive size of its domestic economy.
Still, placing restraints on 25% of U.S. GDP, or about $5 trillion, is quite a big hit. Think an imminent recession, quite possible a severe one. The $13 billion in subsidies offered the agriculture sector is but a drop in the bucket. It would be like killing off the goose that laid the golden egg.
Trump has a weak hand, which is growing weaker by the day. It is just a matter of time before he folds. Not to do so would entirely wipe out the benefits of the December tax package, yet still leave the U.S. government with $2 trillion in new debt. It is a perfect money destruction machine.
My bet is that Trump will claim victory at some point soon, regardless of what transpires on the negotiation front. Take the trade war away, and stocks will immediately jump 10%. That's what the stock market thinks, with NASDAQ (QQQ) at an all-time high, and the S&P 500 (SPY) just short of one. Stocks are trading over the medium term as if Donald Trump doesn't exist.
Which stocks should you buy when trade peace breaks out? Buy those that have suffered the most. The ags have to be at the top of your list, such as Soybeans (SOYB), Corn (CORN), and Wheat (WEAT), the worst hit. The old industrials such as Caterpillar (CAT), John Deere (DE), and Boeing (BA) also have to be a priority.
In the technology area you have to rotate out of the FANGs and into chip stocks, the worst performers of the sector this year. Perhaps this is what the market is shouting at us with the horrific one-day decline in Facebook (FB) yesterday. China relies on the U.S. for 80% of its chips and all of its high-end graphics cards.
China's canceling of the QUALCOM (QCOM) takeover of its NXP Semiconductors shows to what extent it is willing to retaliate in the tech area. Chip stocks to buy for the rebound should include Micron Technology (MU), Cirrus Logic (CRUS), and Lam Research (LRCX).
Even if the trade war ends tomorrow, business conditions will never be the same. Confidence in American reliability will never completely recover. Sure, Trump will be gone in 2 1/2 years. But what if he is replaced by someone worse? Trading with the United States now incurs a level of political risk not seen since the War of 1812, when Washington burned.
But no trade war is certainly better than a trade war if you are a trader or investor.
Telling the Captain How to Steer the Ship
If you ever need someone to owe you a big favor, make sure it is the world's best hotel.
That is what I discovered when I checked into the legendary Cipriani Hotel in Venice, Italy. I had booked its cheapest room at $1,500 a day. Due to a screwup on the reservations, I learned to my great distress that I could stay only one night.
The good news was that the hotel graciously offered me a free upgrade to its presidential suite, a two-bedroom palace stuffed with 18th century antiques, exquisite Murano glass chandeliers, and its own private pier and driver.
All of this was a bargain for $12,000 a day. Would you care for a $1,000 complimentary dinner for two? And, oh, seniore, could we please cover the cost of the rest of your entire stay in Venice at the Hotel Danieli, a 16th century palace that was the city's other trophy hotel? Total value of these freebies: $18,000.
Thank you Orient Express!
Thus, my stay in Venice was off to a spectacular and serendipitous start. They say, "See Venice, and die." That's because so many drop dead when they get the bill.
Feel like a continental breakfast for two with cappuccino for $100? It was all worth it, as breakfast on the roof of the Danieli was one of those once-in-a-lifetime, bucket-list-type experiences.
Watercraft churned by in the hundreds, including ancient gondolas, wheezing, smoky old vaporettos, water taxis, inflatable dinghies, and even sailboats. I fought the seagulls for the butter patties, which if not eaten immediately, melted in the heat.
Squeezing my way through the crowded alleyways of this enchanted Renaissance city, I caught a snapshot of the global economy.
The only Americans I saw were either young hedge fund traders wearing Rolex watches, or technology moguls cashing in this year's bubblicious prices. The rest were clearly scared off by the price tag.
The Japanese were still there in force. But the groups included many single spinster women in their 30s and 40s escorting their parents, unable to get married in an economy that has shown almost no growth in two decades.
They were joined by large tour groups from the up-and-coming economies of China and Brazil, their leaders barking out orders and leading the charge with large umbrellas or flags.
The super yachts of the Russian oligarchs lined the waterfront, conspicuous with their obscure Caribbean flags of convenience.
Extended Arab families that included two, three, or even four wives, and uncountable children in designer togs could be spotted in the best restaurants, the women laboring in their burkas in the 95-degree humid heat. It seems that oil even at $75 a barrel will cover every bill and excuse any excess.
I have been coming here since 1968, and am never disappointed. I made my ritual stop by Harry's Bar for a champagne Bellini, and strolled past the American Express office where I used to pick up my mail during my wild and reckless, pre-Internet youth.
I made a pilgrimage to Quadracci's on the Piazza San Marco, where my grandfather used to sip espresso with another young ambulance driver named Ernest Hemingway during WWI. Family legend has it that Hemingway modeled his Italian driver friend on grandpa, who in the book Farewell to Arms gets killed.
That night, I had the concierge send a speedboat around to my room to take me across the lagoon to the Casino at the Lido. An Arab at my blackjack table was losing $50,000 a hand and sending out hugely negative vibes, so I moved.
I just wanted to let you know where the money for your $4 a gallon gasoline was going. As I was playing merely to see who was there, I gave my winnings to the dealer, who gave me a big grazie. It seems that Italians are lousy tippers.
On my way back, I stood in my powerboat alone, holding on to the cabin and racing across the water at 40 knots in the darkness, wearing my white dinner jacket and bow tie, the wind blowing through my hair, thinking life is good and feeling every inch the James Bond.
I better come up with some new trades to pay for all of this. I mentally prepared myself for my strategy luncheon the next week in Amsterdam.
To be continued.
"If you can't make yourself loved, make yourself feared," said Mayer Amschel Rothschild, founder of the banking dynasty.
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
July 26, 2018
Fiat Lux
AMAZON SPECIAL REPORT
Featured Trade:
(SO WHERE DID THOSE AMAZON EARNINGS REALLY COME FROM
AND WHERE ARE THEY GOING?),
(AMZN), (WMT)
Mad Hedge Technology Letter
July 26, 2018
Fiat Lux
Featured Trade:
(THE TRADE WAR'S COLLATERAL DAMAGE),
(SWKS), (ACIA), (CRUS), (XLNX), (ROKU), (SQ)
